From the start-up of your business, you need to set-up your financial records to capture all the data needed to run the business and to comply with all tax laws. Set up and maintain up-to-date records of all income, expenses, employment, payroll, sales, income, and franchise taxes. These records need to be organized so that you and your accountant can substantiate your tax filings.
IMPORTANT: Segregate your business transactions with a business bank account, debit card, and credit card, all separate from your personal bank account and cards.
IRS Form SS-4: All businesses must register with the IRS to obtain an Employer Identification Number (EIN). This number is necessary to set-up a business bank account, and will be used on all tax filings, both business income and payroll tax reports.
Accounting Methods: All businesses must use a consistent accounting method, a set of rules for determining when to report income and expenses. There are two accounting methods:
- Under the “cash method”, sales are recognized when payment is received, and all expenses are incurred when payment is made. An example is a handyman: he pays cash for his supplies and gets paid when he completes the work. Most small businesses prefer the simplicity of the “cash method”, but it must not be used if there are any accounts receivable or significant inventories (goods held for sale).
- Under the “accrual method”, sales are recognized when the revenue is earned, whether paid for or not, and costs are booked when expenses are incurred. An example is a painting company which incurs cost when their workers charge the paint at the supplier, and books sales when it bills the customer at the end of the job. If significant inventories are necessary to account for your income, you must use the accrual method for purchases and sales; you can still use the cash method for other items of income and expenses.
IRS Publication 334 - Tax Guide for Small Business: This is the essential guide for federal taxes that apply to sole proprietors, single member or multiple LLCs.
This publication outlines the accounting methods that apply for revenue, cost of goods sold, fixed asset depreciation, deductible expenses, and inventories. A table lists tax liabilities with forms and filing due dates.
IRS Publication 946 - Capital Assets and Expenses: Under Section 179, in 2019, $1,020,000 of qualified real property:
- Business machinery and equipment
- Business-use vehicles
- Business software
- Non-residential property renovation (including HVAC, roofs, fire protection, security) …may be written off, against taxable income, in the year the property is placed in service. This amount is permanent tax law and will be indexed annually for inflation. Capital expenditures for leasehold improvements, and for expenditures on qualified real property over $1,020,000, per year are depreciated, for taxes, over their useful life.
For specific tax guidance on other federal tax topics, refer to these IRS publications:
- IRS Pub 463 – Travel, Entertainment, and Auto Expense Guide
- IRS Pub 505 – Tax Withholding and Estimated Tax – required reporting
- IRS Pub 533 – Self-Employment Tax-Social Security/Medicare on self-employed income
- IRS Pub 535 – Business Expenses – deductible/non-deductible (start-up costs)
- IRS Pub 587 – Business Use of Home – how to calculate the deduction
Requirements: State and local tax compliance is complex, involving:
✓ Personal income tax – applied to payroll
✓ Municipal/school district income taxes – applied to payroll
✓ Commercial activity/Business receipts/income tax
✓ Unemployment insurance tax
✓ Workers’ compensation insurance tax
✓ Sales and use tax/vendor’s license - administered by state and county governments
✓ County property tax
Each state tax department has a one-stop gateway to information on rates, forms and filing dates.
- City of Cincinnati: Earnings tax, currently a 2.1% rate, must be paid both by business located in the city and their workers.
- City of Covington: Earnings tax, currently a 2.1% rate, must be paid both by business located in the city and their workers.
Other municipalities, counties, and townships where businesses are operating may have their own taxing requirements, which may be pertinent to your income or operation. Check with the applicable government agency.
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