Five Tips for Starting a Business

Understanding your tax obligation is one key to business success. When you start a business, you need to know about income taxes, payroll taxes and much more. Here are five IRS tax tips that can help you get your business off to a good start:

1. Business Structure. An early choice you need to make is to decide on the type of structure for your business. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you file.
2. Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. If you do, you can use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from your checking or savings account.
3. Employer Identification Number (EIN).  You may need to get an EIN for federal tax purposes. 
4. Accounting Method.  An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.
5. Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. You’re eligible for the credit if you have fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities. 

 Source: Internal Revenue Service

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Using QuickBooks - Categorizing with Classes

If you need to classify by categories your income and expenses in QuickBooks, the solution is using classes. Classes help you track financial results by categories such as business unit, location, etc. This is a way to identify related data. Classes are used in transactions. Classes let you organize transactions into any categories you want. Classes also come in handy for tracking the allocation of functional expenses that nonprofit organizations have to show on financial statements. You can have a subclass of each class that you create.

Before you can assign classes, you have to turn on QuickBooks' class-tracking feature. In the QuickBooks Pro, you can turn it on: Edit - Preferences - Accounting, and then click the Company Preference tab. 

You can create two classes in QuickBooks for your business: location 1 and location 2. Each time you enter a transaction, it will assign one of two classes. Another example is if you have two or more vehicles in your company and you would like to know how costs for repairs, fuel, and so on. You need to set up a class for each vehicle and apply those classes to your QuickBooks transaction entries for repair, fuel, etc.

QuickBooks comes with reports specially designed for tracking class-based transactions such as Profit & Loss by Class, it  can be found in the Reports menu, under Company & Financial. You can find more reports on Report Center.

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Cash and Accrual Method - Tax Implications

Regardless of whether method of accounting you use, you need to check which option allows you for deferring taxable income to a subsequent tax year and accelerating deductions to the current year.
The cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. With the cash basis of accounting method, you record income when you actually receive payment from customers and have the cash in hand. Similarly, you record expenses when you write a check and the cash leaves your bank account. This method does not recognize accounts receivable or accounts payable.  Many small business prefer to use the cash basis of accounting because it is simple to maintain. 
In the accrual accounting, expenses and revenue are matched, providing a company with a better idea of how much it is spending to operate each month and how much profit it is making.With the accrual method, income and expense are recorded when they are obligated to be paid. So, if you make a sale, you record it as income on the date of the sale, not when you actually pay for it. And you record an expense the day you incur the expense, even if you don't actually pay for it until a later date.By calculating accounts receivable and accounts payable, you'll have a clearer picture of profits for any given period.
Of course, you will have to pay taxes during one year or the next, but you can strategize to the best of your ability to decrease your liability as much as you can.

We can help you to figure out which method is best for you.

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Accountable Plan - Tax savings

You can have significant tax saving for both the company and employees when you use an accountable plan in your business for certain expenditures.

How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: 

• An accountable plan, or 
• A nonaccountable plan. 

If you make the payment under an accountable plan, deduct it in the category of the expense paid. For example, if you pay an employee for travel expenses incurred on your behalf, deduct this payment as a travel expense. If you make the payment under a nonaccountable plan, deduct it as wages and include it in the employee's Form W­2. 

An accountable plan requires your employees to meet all of the following requirements. Each employee must: 

1. Have paid or incurred deductible expenses while performing services as your employee, 
2. Adequately account to you for these expenses within a reasonable period of time, and
3. Return any excess reimbursement or allowance within a reasonable period of time. An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. 

An accountable plan is a reimbursement arrangement adopted by the company that requires employees to substantiate their business-related expenses to the company within a reasonable time (no more than 60 days from the date of the expense) and to refund to the company any excess advances within a reasonable period (no more than 120 days from the date of incurring or paying the expense); no advances can be made more than 30 days prior to the time of the expense.

With an accountable plan, reimbursements are not reported as income so the employer avoids payroll taxes and W-2 reporting. The employer deducts the business expenses. The employee does not have any income to report and does not have any expenses to claim as miscellaneous itemized deductions. Not having additional income means that adjusted gross income is minimized; this in turn may increase eligibility for certain tax breaks and/or avoid triggering certain phase-outs or additional taxes.

There is no IRS form used to adopt an accountable plan. The law does not even require that an accountable plan be in writing. However, formalities count when it comes to accountable plans. It’s wise to put the terms of the plan in writing. Corporations should add the adoption of accountable plans in their minutes. It is most important to operate an accountable plan in accordance with its terms.

We can help you to set up your accountable plan

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