Jul 3, 2013 Article #233 Author: Peter S. Muffoletto, C.P.A.
There are a number of issues to consider when contemplating the opening a business, some of those being the type or form of business; the federal, state, and local government regulations to be aware of, and the type of accounting method to consider best for your new enterprise are just a few of the myriad of issues that you must deal with.
After figuring out what it is that you will be doing in your new endeavor whether that be a new restaurant, surf shop, or the multitude of thousands of other entrepreneurial ideas that you may consider, one of the most important decisions is the form of business you will be conducting the enterprise.
The most common types are sole proprietorship, partnership, corporation, S corporation and Limited Liability Company.
Each type requires different tax and accounting methods, and it is important that you consider carefully what form your business will take as the costs, and tax implications of this decision are critical.
The type of business will determine the taxes that will be imposed on the business, and you personally.
The general types of business taxes are personal and or corporate income taxes, or in many cases both – the dreaded double tax!; self-employment tax, employment taxes, excise taxes, and sales taxes.
Taxes are substantial in our society with federal, state, and local governments all wanting to share and impose taxes in your success, or lack thereof, either way, they are there to assist in sharing in your endeavor by taxing what you do which makes it highly important that you fully consider the form of entity that you will conduct business.
To that end the federal government wants to know everything about your new entity and will even issue you an Employer Identification Number (EIN) so that it can tax you, and your employees. The state will also provide you with identity numbers for payroll and sales taxes, as will many local governments so that they also can share in your new idea. Failing to register with each of these government entities that may have jurisdiction over your business, all of whom are there to assist in carving out some portion of your money for themselves can and will have extreme negative effects should you ignore their rules governing the conduct of your business.
The government wants to know how you are doing therefore they require you to keep accounting records. Maintaining good records will help you figure out how much you owe the government when the time to file your business tax forms at the end of the year arrives, and parcel out some portion of your cash to each of them. We assist you in the development of a record keeping system, and to assist you in avoiding a good portion of what “they” want from you. We will design and utilize that system to plan in advance your tax and financial position so as to find the most tax efficient approach possible while being compliant with the overwhelming myriad of tax rules and regulations that you will be facing. We specialize in doing just that!
The recordkeeping system will help track deductible expenses and support all the items you report on your tax return. Good records will also help you monitor your business’ progress and in the preparation of the entity financial statements that outsiders, investors, and the banking community may require of you. We can assist in designing an appropriate accounting system for you.
Each taxpayer and business is required to maintain a consistent recordkeeping and accounting system. The method, which is the set of rules that determine when to report income and expenses is critical. The most common methods are the cash, or the accrual method, but other systems exist.
Under the cash method, income is reported in the year received and expenses deducted in the year or period paid.
Under the accrual method, generally income and expenses are reported in the period the earnings occur which does not necessarily mean the same period that the funds showed up. The same is true under the accrual method as to expenses.
The reporting methodology that is employed will determine in large part the amount and timing of the taxes that you will be required to pay to the taxing authorities. They even have auditors that will come to assist you in determining later if you did it correctly. Should you make any mistakes or interpret your transactions in any manner that they consider inappropriate they will be happy to assist you in finding the right path to compliance and provide you with a billing, known generally as an assessment, and to which they will add extreme penalties and interest should they find you have failed your test as a compliant taxpayer.
Should you disagree they even have set up a highly complex process of appeal that can lead you years later with extreme expense to do so to an enormous room, some call these courtrooms, with a very self-important and ominous individual that will rule as to who was and wasn’t right – generally they decide in their own favor despite the fact that these individuals, generally referred to as tax court judges, and very expensive to visit, are supposed to be unbiased as to their decisions, but the reality is that in part their compensation come from those very taxes you maybe disputing.
Our emphasis at Muffoletto & Company is to provide you the proper guidance and understanding of the system so that you avoid taxes to the extent that the law allows, and to do so such that you avoid meeting these very helpful people that the government has employed to “help” you.
Should you have questions relating to these matters, tax, financial, and accounting issues, give us a call at (818) 346-2160. You can also visit us on the web at www.petemcpa.com!