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