What Are The Federal Tax Laws For Starting A New Business?

The type of business you launch can determine the federal tax laws you deal with in growing a new business. It also determines whether your personal assets are at risk from company liability. Furthermore, the business may establish the tax level your company is at and which type of taxes you need topay.

Choosing Taxation 

Under federal law, you may choose to establish many types of legal entities, and each has a different tax bracket. The various business types each have advantages and restrictions, and each of these choices means the taxes against the profits and losses of the company are treated differently. Here are a few of your choices:

C-Corporation

A corporation is also known as the regular corporation. This entity is subject to something known as Corporate Income Tax. The income that is procured by the C-Corporation is taxed using the Corporate Income Tax Rates and this is done at the corporate level. The corporation income can sometimes also be subject to ‘double taxation’. This happens when the business income is further divided among the owners by paying out dividends. These dividends are taxable.

Sole Proprietorship

This legal entity is one where the entire business is usually owned by a single person. According to the IRS this entity is not taxable. The benefit of the sole proprietorship is that all the assets and liabilities are considered to belong directly to the owner.

Partnership

A partnership is generally not taxable as per the federal tax law. There is no separate differentiation for partnership income tax as is with corporate income tax. Whatever income is earned from the partnership is divided among the partners and that income is then taxed. All the income from the partnership has to be shown as distributed to the partners in order for the tax to be charged.

Limited Liability Company

An LLC is a separate entity which the state filing creates. According to the federal law the LLC owners have a certain liability protection which was initially only provided to the shareholders. These legal entities are considered similar to partnership firms when it comes to federal tax unless the choose to be treated as a corporation which is a rare scenario.

S-Corporation

The S-Corporation is an entity that has filed a special request to be treated as a partnership or even an LLC for tax purposes. This is the reason S-Corporations are not subject to what is called corporate income tax. The income for an S-Corporation is also passed through to the owners and then taxed.

If you need help deciding which of these is right for your business, there are groups such as GovDocFiling that has charts and explanations. Furthermore, they can help ease the stress of dealing with the IRS in forming an LLC or any of the other companies listed above. GovDocFiling can also help in obtaining a federal tax ID number.

Thinking Deductions

A little known fact is that ordinary expenses are allowed as deductions by the IRS if they are seen as necessary in your industry. Examples of some allowances are:

  • Equipment (leases and purchases)
  • Rent for brick and mortar or home office
  • Costs of providing healthcare to employees
  • Employee training
  • Advertising
  • Expenses associated with attending business related trade shows

Estimating Payments

You know the IRS wants to be paid the taxes owed when they are due. What you may not know is that business owners are obligated to pay quarterly estimated tax payments if they expect to owe $1000 or more for the entire year.

Knowing the Facts

With so many different possible business tax associated loopholes, it may be time to seek help to know what your new business tax obligations are. Information is only a click away.

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