A huge majority of Americans establish their own business to generate another income stream for themselves and to attain financial independence. However, starting a new venture can be an overwhelming process particularly if one has no experience operating a business. Training programs and business seminars can be helpful in building and operating the business once it is established. However, these tutorials only focus on the operational details of the business and not the legal compliance aspects which are equally important. Having a knowledgeable accountant at your side to help you deal with the financial and reporting requirements is crucial to the success of your endeavors.
You can claim your business expenses as deductions on the income tax returns as long as the business is operational. Business owners are faced with the burden of proving that the business has started its operations if the IRS conducts an examination of their tax returns. If they fail to provide sufficient proof, the IRS will classify the business as a hobby and disallow the deductions.
What do you need to do so the IRS will not disqualify your business deductions? For one thing, you need to establish a profit motive. Under the Internal Revenue Code, a profit motive is presumed if you earned income in any three out of five business years. To show you have an actual and honest profit objective, the following steps should be undertaken:
Step 1 – Incorporate Your Business
Incorporating your business is necessary to separate your personal affairs from your business entity. The incorporation process will also get your business recognized on the state level. You can establish your business as a corporation or a limited liability company by completing the necessary documents required by the Secretary of State’s office in your state. Both entities are good structures for doing business in all 50 states.
Step 2 – Obtain Federal and State Tax ID Numbers
After incorporating your business, it is necessary to obtain a federal tax ID number from the IRS. This procedure is mandatory since the IRS requires every corporation to be identified by its unique number. This number can be obtained by logging onto the IRS website and applying for a Federal Employment Identification Number. After obtaining a federal tax ID number for the business, you must obtain a state tax ID number for the business as well. This is necessary so you can report and pay sales and franchise taxes the business might owe to the state. The proper way to obtain and complete this form varies from state to state. Some states require this document to be completed online while others expect the small business owner to obtain the form from the State’s Department of Revenue website. A small percentage of the states send the form to you once you become incorporated.
Step 3 – Open a Business Bank Account
To further establish your profit motive, you need to open a bank account in the name of the business. A large number of banks will generally allow business owners to open small business checking accounts for free. Other banks will charge maintenance and other fees for opening and maintaining the business bank account. Some banks have an overdraft protection attached to your checking account which will be helpful in jumpstarting your business.
Step 4 – Open a Merchant Account
Opening a merchant account with a credit card provider will help put your business on a higher level. The merchant account will enable the business to accept credit cards and provide you with more cash flow thru quick deposits into your checking account. This account will be linked to your checking account and money will be deposited into your checking account through ACH transfers.
Step 5 – Telephone Line and Listing
Obtain a telephone line in the name of the business and have the number listed on major phone directories such as 411 and Super Pages. This will make it easy for potential banks and lenders to find your business. Not only will it play a major role in increasing your business credibility, it also makes your business accessible to people who might be in need of your products and services.
Step 6 – Dun and Bradstreet Number (Duns Number)
Register the business with the major business credit bureau, Dun and Bradstreet. The bureau will provide your business with a unique ID number known as a Duns number. To allow potential vendors, customers, banks and lenders to review your business, the bureau will provide your company with a credit rating which gives a big boost to your business image. The Duns number is a great way to improve the value of your business and it encourages customers, lenders and other companies to work with your company.
Step 7 – Company Website
The increasing role of the internet in our society today makes it important for your business to establish a strong presence on the Internet. Create a good website and link it to major search engines to allow the public to find your business at the touch of a button. Utilize various social media sites to increase the public’s awareness of your business and its products. This helps legitimize the existence of your company in the eyes of the IRS.
Step 8 – Maintain Good Corporate Records
It is important to maintain good records for your business. The following are some important records that should be updated at all times:
· Bank Statements
· Bookkeeping Statements
· Source Documents
· Corporate Records
· Corporate Resolutions
Make sure you have complete and accurate records of all the transactions of the business so you have the necessary tools needed to defend your profit motive and the deductibility of your business losses in an IRS examination. Maintaining these documents can be tedious but the necessity of these documents to the life of the business can prove to be vital during different cycles of production.
Step 9: Start Making Money
The day your business opens its doors will also be the day your expenses become fully deductible. You will be able to claim all the expenses ordinary and necessary for the business as soon as it becomes operational. Until then, your expenses are treated as start up or organizational expenses amortized over a fifteen year period under the Internal Revenue Code.
The IRS looks at the manner in which you carry on the activities of the business, your expertise and that of your advisers, the time and effort you expend on the business, your success in carrying on similar or dissimilar activities and your financial status in determining if your intent is to earn a profit. If you are starting a business and you need more information on this, please schedule an appointment with your tax advisor as soon as possible.
Please feel free to contact The Tax Club if you would like to schedule a free consultation at 866-840-1829 x5438
