Tax Tips for 2022 New Business Owners
Starting a business is a big step! As a new entrepreneur, you are allowing yourself to have autonomy in your business plan. However, a business involves paying taxes and quarterly tax payments. A single misunderstanding can lead to an increase in IRS audits. That is, an increased IRS audit can cause a significant increase in tax bills.
To start you off on the right track, here are some necessary tax tips for 2022 that can be helpful to you in managing your business.
1. Determine and Register Your Business Structure
As a new business owner, you must figure out Business Structure. Whether or not it’s a sole proprietorship, limited liability company (LLC), S corporation, and C corporation; the size of your business impacts your tax payment.
Most new businesses are registered as sole proprietorships where a single business owner conducts the business. As a sole proprietor, you will use your name for business operations. Besides, as a sole proprietor, your social security number can be used as a tax ID number. To file taxes as a sole proprietor, you will fill up a 1040 form and file a schedule C to claim all your revenue and business deductions on your tax returns.
An LLC is the 2nd most common way to register your business. Single-member LLCs are taxed similarly to sole proprietors. In the case of multiple LLCs, your business can be taxed as a partnership or a C corporation.
C Corporation comprises shareholders, officers, directors, and employees. C corporations are required to pay taxes at the company level. Hence, the shareholders in C Corporation pay personal taxes on any dividend received. Since this taxation happens both for the company and its shareholders; it’s called ‘double taxation.
On the other hand, S Corporations are not required to pay both business and individual levels. Shareholders only report business income, expenses, losses, and deductions on their tax returns.
2. Your Business Operation Should not be Treated as a Hobby:
If you are thinking of running your business as a side gig or hobby, your expenses or losses will not be taken into account by the IRS. In that case, make sure to write up a professional business plan, and document your marketing and management efforts. Your transaction accounts and profit graph will convince the IRS to substantiate tax deductions.
3. Understand Your Deductible Expenses
As you start a new business, you will naturally incur a lot of expenses. It’s necessary to understand which expenses can be easily deductible. One of the biggest ways to make deductions is by claiming business-related items as an expense. Such as stationary expenses, machinery expenses, medical and dental expenses, etc.
Apart from that, the general startup costs include- rent, payroll, taxes, professional services, utilities, logo design, website design, down payments, permits, and licenses. All these expenses are eligible for tax reduction. The IRS allows you to deduct up to $5,000 in business startup costs when the total startup cost is less than $50,000. If the cost exceeds $50,000 your allowable deduction will be reduced by the overage.
However, the other deductible tax expenses include- marketing, payroll, utilities, commercial lease, accounting, legal services, insurance, shipping and delivery costs, retail packaging, home office deduction, etc.
4. Keep Proper Records of Transactions
You must keep a proper recording of your business transactions. Maintain invoices and receipts and organize them accordingly. An organized record of transactions makes the tax report process much easier. To avoid errors, you can use accounting software.
5. Pay Estimated Quarterly Taxes
If you as a business owner owe tax more than $1000, you are required to pay quarterly estimated taxes. For a year or two of tax payments, you can use the previous year’s income to estimate your tax payments. Contribute to your year-end accounts by filing Form 1040. The estimated quarterly taxes are paid on April 15, June 15, September 15, and January 15. 90% of the taxes you owe need to be paid throughout the year. Late payments are subject to charge.
6. Hire an Accountant
The bookkeeping of your business transaction can be a time-consuming process that can divert your focus from your business operation. So to reduce the hassle, hire an accountant for your business. A CPA tax consultant can help you by providing tax consultancy and bookkeeping services which will provide you more time to focus on your business.
These are all the tax tips for 2022 that can help you as a new business starter. Hope your new business project turns out great. For any kind of support, contact Ahad&Co, the best CPA in NYC.