Understanding Your Business Tax Plan: Part 1 of 3

There are so many business taxes that it is important to understand the general categories of business taxes and how they will affect your business.  For more information on the five states to form your business with the lowest amount of business taxes, see our most recent blog post on the best five states with no to lowest business taxes.



Your Initial Tax Plan  (Four Parts): There are three basic generally recognized elements to structuring your initial overall tax plan.  You will need to answer these questions BEFORE you file for your Employer Identification Number, (EIN).For that reason, you should consult with your tax and/or legal professional prior to proceeding any further in your business.

1. Category of Trade: Upon filing your EIN, the IRS requires you to declare your category of business.  Naturally, this presupposes that your business in engaged in a specific category of trade such as financial services or marketing with the sole motive or purpose being that of business profit.
2. Business Entity Type: A consultation with your tax and or legal professional should made as to whether your business should be formed as a sole proprietorship, partnership, limited liability company, (LLC) or corporation.  There are distinct advantages to each formation and of course attorneys universally agree that if significantly reducing your liability is the goal along with other various tax benefits, the LLC or corporation should be strongly considered.
3. Accounting Method: Again upon the filing of your EIN, the IRS will require that you declare your accounting method type.  While certain business types can utilize special accounting methodologies, it is generally accepted as standard accounting practice by tax professionals for businesses to choose from amongst either cash or accrual methods.  While some businesses under certain circumstances can use a hybrid approach, you will definitely want to consult with your tax professional as to which system you should be using.
4. Tax Year: This is simply the calendar period to which your taxable income will be calculated.  The IRS allows businesses to select either the calendar year option or the fiscal year option. The calendar year means that you are choosing your taxes for the current year to end December 31st while the fiscal year means that your tax calendar will end at any month that you chose other December.

The above four items should and much be considered prior to engaging in business.  While there are forms to change the above four elements of your initial tax plan assuming that you are an existing business, you can as well make changes as needed and appropriate in the future if you are a new business and thus are not locked into place.