New Business Startup Tips

I want to take this opportunity to thank each of our clients for their patronage in making this tax season another large success! We also sincerely appreciate all the referrals that we continue to receive from our clients. We realize that if we meet or exceed your expectations, you will be more likely to share our name with those you know and work with. Your referrals are always appreciated!

Now that the busy season is over, we continue to finalize returns that were extended. Tax season is obviously a unique time of year in our business as there never seems to be enough time to accomplish all that is needed or planned each day. We appreciate your patience in this process. We strive to provide personal attention and feedback to each of our clients as well as timely service.

Each year, I have numerous clients start a new business. For today’s post, I wanted to address a few tips for those who are thinking of starting a new business. There are things you can do to ensure that your new business has the best chance of success without too many pitfalls.

The first question I would have a client consider is whether their business idea meets the IRS standard of a business or if the activity might more accurately be labeled as a hobby. For a business to be deemed legitimate by the IRS, there must be a true profit motive and it helps to show revenue for the business. It is okay to show a net loss after expenses the first year and possibly in the second year. However, if your business reports a net loss for three consecutive years, the IRS will almost always question whether your activity is a hobby or a business. Their theory is that a reasonable business owner would not continue to operate a business at a loss year after year as that is not reasonable. It is also unusual for a business to show no revenue for consecutive years.

The next strong suggestion we would have is to keep accurate and timely financial records for your business. It is virtually impossible to guide a business to success if you don’t have reliable and timely records from which to make business decisions along the way. Additionally, having access to reliable financial records for your business will make complying the government tax filing requirements noticeably easier and stress-free.

Next, we nearly always recommend reporting your business activity on your tax returns using the cash basis of accounting rather than the accrual basis. The cash basis generally has you report revenue when received and expenses when paid whereas the accrual basis generally has you report revenue when it is invoiced and expenses when the liability is incurred without regard to when the funds flow. Most businesses that report less than $1 million in revenue per year can utilize the cash basis of accounting for tax reporting purposes.

We always make it a point to discuss with our clients what expenses would be considered legitimate business expenses for their business activity. It helps to discuss what expenses the client already has in mind as being a business expense and we often uncover additional business expenses that they may not have considered during these conversations. Some expenses that many business owners don’t think of are their cell phone service, their home internet service (assuming they operate out of their home) and business mileage. Another expense that is often overlooked is the business use of home deduction.

Lastly, we always discuss the most efficient business structure with our clients who plan to begin a business. In general, if a business anticipates showing net income of $10,000 or more in its first year, we discuss with them the benefits of electing S-corporation status for their business. We typically recommend that they form a limited liability company (LLC) and then elect S-corporation status with the IRS. Electing S-corporation status allows them to pay themselves a reasonable salary and minimize the self-employment tax burden that new business owners feel when they start out. Working for an employer, what many don’t understand is that the employer is paying half (7.65% of gross wages) the self-employment tax required with the employee paying the other half through withholding. As a business owner, you are required to pay both shares of this tax which is 15.3% of net income. Electing S-corporation status reduces this tax burden.

Let us know if you have questions regarding the proper steps to take in setting up a new business. We would love to assist you. Please contact us to set up an appointment. We offer a free initial consultation for potential new clients.

Mark J Weech, CPA