Tax Implications to Consider When Starting a New Business

by Rhonda Anderson

What type of business am I starting?

Types of Business:

• Sole Proprietorship – Only Owner

  • File Form 1040 – Schedule C

  • Self-employment tax paid on net profit

• Partnership – Two or more partners

  • File Form 1065

  • Profit or loss is passed through to partners on Schedule K-1

  • Self-employment tax paid on net profit

• Limited Liability Company (LLC)

  • Single-member LLC file Form 1040 – Schedule C

  • Multi-member LLC – Form 1065 and Schedule K-1

  • LLC can elect taxation as a S-Corp or C-Corp – File Form 1120 or 1120S

  • Self-employment tax paid on net profit

• Corporation

  • File Form 1120

  • Corporation tax paid on profit and the shareholders on dividends (double taxation)

• S Corporation

  • File Form 1120S

  • Profit or loss is passed through to partners on Schedule K-1

  • Tax assessed at individual income tax rates – avoid double taxation

What accounting method am I using?

• Cash Accounting – Record income when received and expenses when paid

• Accrual Accounting – Record income when the service or goods are completed and expenses when incurred

Am I paying self-employment tax?

• Self-employed sole proprietors, members of partnerships are subject to self-employment tax at 15.3%

• If you pay self-employment tax, you get to deduct half from your taxable income on your personal tax return

What other tax deductions am I eligible for?

• Health savings account deduction

• Contributions to a SEP, Simple, IRA and qualified retirement plans

• Self-employed health insurance deduction

• Home office deduction

Do I qualify for the 20% deduction for pass-through entities?

• Some sole-proprietorships, LLCs, partnerships and S-Corps may be eligible for a 20% deduction on Qualified Business Income, QBI