New business owners may find the following five IRS tax tips helpful:
1. Business Structure. An early choice to make is to decide on the type of structure for the business. The most common types are sole proprietor, partnership, limited liability company, and corporation. The type of business chosen will determine which tax forms to file.
2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax a business pays depends on the type of business structure set up. Taxpayers may need to make estimated tax payments. If so, use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from a checking or savings account.
3. Employer Identification Number (EIN). Generally, businesses may need to get an EIN for federal tax purposes. Search “EIN” on IRS.gov to find out if the number is necessary. If needed, it’s easy to apply for it online.
4. Accounting Method. An accounting method is a set of rules used to determine when to report income and expenses. Taxpayers must use a consistent method. The two most common are the cash and accrual methods:
a. Under the cash method, taxpayers normally report income and deduct expenses in the year that they receive or pay them.
b. Under the accrual method, taxpayers generally report income and deduct expenses in the year that they earn or incur them. This is true even if they get the income or pay the expense in a later year.
Get all the basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center.
Millions of people enjoy hobbies that are also a source of income. From catering to cupcake baking, crafting homemade jewelry to glass blowing — no matter what a person’s passion, the Internal Revenue Service offers some tips on hobbies.
Taxpayers must report on their tax return the income earned from hobbies. The rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five tax tips to consider:
- Is it a Business or a Hobby? A key feature of a business is that people do it to make a profit. People engage in a hobby for sport or recreation, not to make a profit. Consider nine factors when determining whether an activity is a hobby. Make sure to base the determination on all the facts and circumstances. For more about ‘not-for-profit’ rules, see IRS Publication 535, Business Expenses.
- Allowable Hobby Deductions. Within certain limits, taxpayers can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
- Limits on Hobby Expenses. Generally, taxpayers can only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
- How to Deduct Hobby Expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See IRS Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.
- Use IRS Free File. Hobby rules can be complex and IRS Free File can make filing a tax return easier. IRS Free File is available until Oct. 16. Taxpayers earning $64,000 or less can use brand-name tax software. Those earning more can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website.
By Debby Winters
When looking at your end-of-year checklist, you may be asking if now is the best time to change your business entity. It’s actually a great time to do so, especially if you want to start a new year fresh as a corporation.
Benefits to Incorporating Before the End of the Year
Incorporating now means that you start the new year as a new business structure. You may have operated as a sole proprietor previously, but you’ll start out with a corporation or LLC in the new year.
This makes your taxes a lot easier to deal with. When you incorporate mid-year, you have to file two tax forms the following year:
- one under your social security for the portion of the year you were a sole proprietor;
- one under your employer identification number.
Since no one like filing double the tax forms, why not convert now? Also, some states require that corporations and LLCs pay a franchise tax fee. Converting at the end of the year may equate to savings in franchise tax.
The Delayed Filing Option
This is a fantastic option to ensure that your corporate business structure is ready to roll at the start of a new year. You file your application for a corporation or LLC now and delay the incorporation date until the new year. So if, for whatever reason, you want your corporation to start on Jan. 17 (maybe that’s your business’ anniversary), you have control over that date. As long as your paperwork looks good, you’ll be set to go live with your new business structure on the date you set.