Congratulations! You’re ready to start your own business. Before you start planning for your upcoming millionaire status, you may want to consider the various tax implications of beginning your new journey as a business owner.
Understanding the basic tax consequences, as well as the benefits, that come with creating your own business can save you lots of money, and headaches, in the long run. From business deductions to startup costs, not to mention the effect on state and federal income taxes, here are some of the most important tax implications of becoming your own boss:
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Mind your deductions!
Good news! Most business expenses are tax-deductible, which also means that you can use them to reduce your gross and taxable income. Translation: less taxable income, less taxes to pay!
However, you may want to keep in mind that not all business expenses are deductible. Make sure whatever business expense you claim as deductible should be legitimate. Additionally, incurring an expense merely because of tax reasons isn’t always justified. Consider other factors before deciding to spend money in your business!
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Startup Costs
Got startup costs? Well, you may be pleased to hear that you can actually deduct up to $5,000 of start-ups and organizational expenses in your first year of business. The only caveat is that if your start-up and organizational costs exceed $50,000, any amount over $50K will reduce this deduction.
Now what are start-up costs and organizational costs? Start-up costs are costs you incur before you start operating the business. These include market analysis costs, training costs, as well as travel and ad costs related to new customers, suppliers and distributors.
As for organizational costs, they are made of accounting and legal fees, as well as licensing fees and any other fees involved in forming the entity.
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Depreciation
If your business has assets with a useful life of more than one year, these are considered capital assets which must be written off, i.e. depreciated over time. What’s important to remember as you start your business is that depreciable capital assets may allow your new business to take advantage of the Section 179 election.
This election means that you could expense up to $1,000,000 starting in January 2018 as a result of the Tax Cuts and Jobs Act of 2017 for qualifying purchases of capital, up to a limit of $2.5 million. After 2018, these limits will be indexed to inflation. It’s a particularly profitable election for new businesses, as the money can be re-invested in the business and used to avoid incurring additional income taxes.
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State Income Taxes
When it comes to state taxes, keep in mind that each state has its own tax rates and regulations. Make sure to check in with your local and state governments to ensure that you’re in line with the rules.
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Federal Income Taxes
As you create your own business, remember that a lot depends on the type of business you’re starting. Whether you elect to have a partnership, sole proprietorship, Limited Liability Company (LLC), S Corporation, or C Corporation, your choice will determine how your business is taxed.
For instance, if you elect to operate your business as a partnership or S Corporation, the business profit or loss will be passed through to you as an owner and included on your tax return. Be mindful of these distinctions when picking your business type.
Now your turn: Have you considered all the tax implications of starting your own business?
To Your Success,
The Corporate Sister.
