Tax Guide for New Business Owners
Congratulations on starting your new business. The first thing you'll need, preferably even before you're open for business, is a bookkeeping system. I discussed this a bit in the introduction to this section, but it deserves a bit more detail here.
You have a number of options, depending on how complex your business is and how much money you have to spend. You can outsource part or all of the work, or you can buy software and do it yourself or have an employee do it.
For income tax purposes, any system which accurately records your income and expenses will do, so long as you have the receipts and cancelled checks to back up your claimed expenses. In other words, a simple handwritten list may be all you need.
For tax purposes, I need at least four things:
- A list of your capital purchases during the past year. This includes equipment, real estate, and anything else that will be used in your business. The list must include a short description of the item, the date you put it in service for your business, and the amount you paid for it, including shipping, tax, etc.
- The amount of money you received during the year.
- A categorized list of your expenses for the past year. Example: Rent, $3000, Office Supplies, $400. (If you're using it correctly, you may have software which will print an income statement which will do nicely.)
- A depreciation schedule. If this is your first year in business, you won't have one yet. I'll start one for you. If it's not your first year, you may have one with your last tax return. If not, it can be extracted from the series of tax returns since you started your business. It's difficult or impossible to reconstruct without all the necessary information.
But as your business grows, that will probably not be enough. You'll probably need to invest some money.
There are two basic methods of accounting: cash basis and accrual basis. If an accountant does your books, they'll be on the accrual basis. If you're doing them yourself, they're probably on a cash basis. You can find extensive articles on the difference elsewhere on the Internet. Suffice it for right now to say that they yield different results. IRS will accept either. But other taxing agencies are not so flexible. If you have sales tax, in California at least, you'll need to prepare those returns on an accrual basis. Most small-business accounting software will give you the choice between cash and accrual methods.