How do startups treat their startup costs?
Starting a new business can be costly, although startup costs can be viewed as an investment in your future success. The good news is that startup or pre-opening costs, defined broadly as expenses incurred before the company begins actively conducting business, are generally tax-deductible.
Examples of startup expenses include fees paid to a lawyer or accountant to explore various business entity types, the cost of incorporating or organizing a company with the Secretary of State or other business authority, and the expenses of leasing or purchasing office, warehouse, or production space. In addition to these larger expenditures, you may also be able to deduct smaller costs, such as the cost of gas spent driving to scout locations or expenses associated with your market research to find the target audience for your company's products or services.
The tax treatment of startup costs can be complex. The IRS classifies most such expenses as capital expenditures, which are long-term costs that can be recovered through depreciation. Keep detailed records of all of the expenses you incur when starting your business, and contact a Rocket Lawyer network attorney or a tax professional for help to ensure you get the full tax deduction and depreciation for any startup expenses you paid.
Which records are best for a new business to keep?
Accurate, thorough recordkeeping for your business is crucial for keeping tabs on your company's finances as well as for legal and tax purposes. Knowing what money your company brings in -- and what it spends -- can go a long way in streamlining the tax reporting and filing process. These records can also be invaluable if your business is later audited or the subject of a lawsuit.
To a certain extent, the types of records a new business may want to keep depends on the nature of the business. In general, it is best to maintain the following:
- Gross receipts. Document all of the money coming into your business. This includes cash register tapes, deposit information for cash and credit sales, receipt books, invoices created, and 1099-MISC forms.
- Purchases. Keep documentation of items you purchased and resold to customers, if applicable. This may include invoices, credit card receipts/statements, cash register tapes, and canceled checks or proof of electronic payments.
- Expenses. Keep detailed records of expenses you incur related to the business. These receipts and similar records support the business deductions and credits you may claim for the tax year.
- Travel, transportation, entertainment, and gifts. If you intend to deduct any of these types of expenses, keep detailed documentation to support your deductions.
- Assets. Maintain documentation of things like furniture, machinery, and equipment used in the business, including the acquisition date and source, purchase price, cost of improvements (if applicable), and selling price.
- Employment taxes. If you have one or more employees, keep all employment-related records, including employment tax documentation, for at least four years.
- Additional tax records. If your business is required to pay sales taxes or franchise taxes, be sure to keep documentation to support your calculations of amounts owed and payments made.
Ultimately, the burden of proving that your income and expense records are accurate is on you, as the business owner. The good news is that the method you use for recordkeeping is largely up to you. Many small business owners use electronic accounting tools with scanned copies of sales slips, receipts, deposit slips, canceled checks, and invoices, while others keep paper documents in files. Either approach is generally okay as long as you are keeping all required records and they are organized in a way that you can locate them if and when needed.
How much are self-employment taxes?
Entrepreneurs and small business owners whose net earnings from self-employment are $400 or more for the year are required to pay self-employment taxes, which represent both the employer and employee portion of Social Security and Medicare taxes.
Self-employment taxes can add up quickly. The tax rate is currently 15.3%, which consists of 12.4% for Social Security (OASDI) insurance and 2.9% for Medicare. All of your wages, tips, and other earnings are subject to the 2.9% Medicare portion of the self-employment tax. If you have wages and tips from other employment that total at least $142,800, the 12.4% Social Security portion is unlikely to apply to you. However, the Medicare rate still applies. In addition, some high-earning small business owners may be required to pay 0.9% in additional Medicare taxes.
In order to avoid a large tax bill at the end of the year, your self-employment taxes may be due on a quarterly basis along with your estimated income taxes. Self-employment tax calculation can be complex. You may want to consider working with a tax professional who understands small business taxes and can help you prepare your taxes, especially if this is your first year filing taxes as a self-employed business owner.
When is the tax filing deadline for business owners?
Most startup businesses share the same federal tax filing deadline as individual taxpayers: April 15 (although in 2023, the tax deadline is April 18). This is generally true for sole proprietors, single-member LLCs, and C-corporations using a fiscal year ending December 31, as the tax deadline is the 15th day of the fourth month following the end of the tax year.
However, some types of business entities, including S-corporations and most partnerships, are required to file tax returns by the 15th day of the third month following the end of their tax year. So, for businesses with a December 31 fiscal year end, tax returns are due by March 15. However, if your S-corporation's fiscal year ends October 31, then your tax return is due by January 15.
Be sure you understand the tax deadlines that apply to your business, file by those deadlines to avoid paying unnecessary penalties, and seek guidance when needed. If you have more questions about your small business or self employment taxes, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.