New Business Choices

Helping You Make the Right Choices for a Successful Business

Not sure where to start? No problem! Just fill out our Needs Analysis form, and we’ll be happy to help.

What We Do for You:

New Business Choices

• Choice of Entity
• Choice of a Tax Year
• Choice of Accounting Method
• Key Choices for Start-Up Costs
• Tax Choices for Equipment Purchases
• Backing Up Those Tax Choices

Choice of Entity

Selecting the appropriate business structure is a crucial decision for any entrepreneur. It impacts everything, from liability protection to tax obligations. Let’s explore your options:

Sole Proprietorship:

• • Simple to form: No formal paperwork required.
  • Tax-friendly: Business income and losses are reported on your personal tax return.
  • Unlimited liability: You are personally responsible for all business debts and liabilities.

Partnership:

• • Easy to form: Generally, no formal paperwork required.
  • Tax-friendly: Income and losses pass through to partners’ individual tax returns.
  • Shared liability: Partners share responsibility for business debts and liabilities.

Limited Liability Company (LLC):

• • Liability Protection: Protects personal assets from business debts.
  • Flexibility: Can be taxed as a sole proprietorship, partnership, or corporation.
  • Simplicity: Relatively easy to form and manage.

Corporation:

• • Strongest Liability Protection: Separates business and personal assets.
  • Tax Implications: Corporate taxes, potential double taxation, and more complex structure.
  • Formalities: Requires more paperwork and ongoing compliance.

Need further assistance in choosing your business entity? Check Out an Exclusive Special Report from the Bradford Tax Institute → The Guide to Choosing the Right Entity for Your Business

Choice of a Tax Year

Determining your business’s tax year is crucial for financial reporting and tax compliance. We’ll help you choose between:

• Calendar Year: January 1 to December 31.
• Fiscal Year: 12-month period ending on the last day of any month except December.

Choice of Accounting Method

The accounting method you choose significantly impacts how your business reports income and expenses for tax purposes. We’ll help you navigate the pros and cons of each approach:

• Cash Method:
  • Income is reported in the year it is received.
  • Expenses are generally deducted in the year they are paid
  • Prepaid expenses must generally be deducted in the year to which the payment applies.
• Accrual Method:
  • Income is generally reported in the year it is earned, even if not received until a later year.
  • Expenses are deductible in the year that all events have occurred to determine the liability and the amount of the expense, and economic performance has occurred [IRC Sec. 461(h)].
  • For property or service expenses, economic performance is deemed to have occurred when the property or services were provided.
  • Special rules apply to various types of income and expenses.

Small Business Exception:

• Businesses with average annual gross receipts of $1 million or less can use the cash method even if they produce, purchase, or sell merchandise.
• Qualifying businesses can choose not to maintain inventories, even if they do not switch to the cash method.
• If a business chooses not to keep an inventory, it deducts the cost of items in the later of the year they are sold or the year they are paid for.

Larger Business Exception:

• Applies to businesses with average annual gross receipts of $10 million or less.
• Generally available to businesses, such as electrical and plumbing contractors, that sell related products along with the services they provide.

Key Choices for Start-Up Costs

Launching a business often involves significant upfront expenses. These start-up costs cannot be deducted as ordinary and necessary business expenses. Instead, the business has two options:

• Amortize the Costs:
  • Spread start-up expenses over time for tax purposes
  • Potentially reduce initial tax burden
• Capitalize the Costs:
  • Add costs to the tax basis of your business
  • May be beneficial for long-term tax planning

Start-up expenses include:

• Business investigatory expenses
• Expenses of setting up the business
• Pre-opening costs to get the business up and running

Examples of typical start-up costs:

• Market research and analysis costs
• Consultant and professional service fees
• Travel and other costs for locating distributors, suppliers, and customers
• Employee training costs prior to launch
• Pre-opening advertising costs

Tax Choices for Equipment Purchases

Businesses often require significant equipment purchases. New business owners have two options for recovering these costs:

• Annual Depreciation Deductions: Spread the cost recovery over the equipment’s useful life.
• Up-Front Expensing Deduction: Deduct the cost in the year of purchase.

Recent tax law changes have expanded the expensing deduction for 2003 through 2007:

• Deduction Limit: Up to $100,000 of eligible property (previously $25,000 for 2002).
• Phase-Out Threshold: No reduction unless the cost of eligible property exceeds $400,000 (previously $200,000 for 2002).
• Eligibility Cut-Off: Only if the cost of qualifying property exceeds $500,000.

Note: New businesses face a limit on the expensing deduction:

• Taxable Income Limit: The expensing deduction cannot exceed the taxable income from active business operations during the year.
• Impact on Start-Ups: New businesses may gain little benefit from the expensing deduction in their first year of operation due to this limit.

Backing Up Those Tax Choices

Making informed tax decisions is only the beginning. We’ll help you implement robust record-keeping systems to support your choices and ensure compliance:

• Separate Business and Personal Finances:
  • Set up dedicated business accounts
  • Implement clear policies for expense categorization
• Comprehensive Receipt Management:
  • Develop a system for organizing and storing receipts
    Leverage digital tools for efficient record-keeping
• Consistent Income Reporting:
  • Establish clear protocols for recording business income
    Implement checks and balances to ensure accuracy
• Audit-Ready Documentation:
  • ​Create an organized system for storing all relevant tax documents
  • Maintain detailed logs for vehicle use, home office expenses, and other key deductions

Navigating the complexities of business setup and tax planning can be daunting, but you don’t have to do it alone. Our team of experts is dedicated to helping you make informed decisions that set the stage for long-term success.

Ready to take the next step? Contact us today to schedule a consultation and discover how we can help turn your entrepreneurial vision into a thriving reality.