STARTING BUSINESS

Your First 30 Days: An Essential Tax Setup Checklist for New Business Owners

Congratulations on starting your new business! The first month is a whirlwind of activity, but taking a few critical tax-related steps right away will set you up for long-term success and prevent major headaches down the road. Think of this as your 30-day checklist for building a solid financial foundation.

1. Get Your Employer Identification Number (EIN)

An EIN is a nine-digit number issued by the IRS for tax filing and reporting purposes. It’s like a Social Security number for your business.

  • Who Needs One? You will need an EIN if you operate as a corporation or partnership, or if you plan to hire employees. Sole proprietors must also get an EIN if they file for bankruptcy or plan to file excise or certain employment tax returns.
  • How to Apply: The fastest and easiest way is to apply online at IRS.gov/EIN. The number is issued immediately after your application information is validated. You can also apply by mail or fax using Form SS-4, Application for Employer Identification Number. International applicants can call a dedicated number (267-941-1099, not toll-free).
  • When to Apply: Apply early enough to have your number by the time you need to file a return or make a tax deposit. While the online application is immediate, applying by mail can take at least four weeks.
  • Important Note: You should only have one EIN for a single business entity. Applying for an EIN is a free service offered by the IRS.

2. Open a Separate Business Bank Account

This is one of the most important steps for sound recordkeeping. Commingling business and personal funds is a common mistake that can cause major problems, especially if you face an IRS audit.

  • Why It's Critical: A separate account makes it easier to track your business income and deductible expenses. It provides a clear record of your business transactions and simplifies preparing your financial statements and tax returns.
  • The Right Way: Open a dedicated business checking account as soon as you start your business.
    • Deposit all business receipts into this account.
    • Make all business payments by check or debit from this account.
    • Avoid writing checks payable to "cash". If you must, keep the receipt for the payment in your records.
    • Pay yourself by writing a check from the business account to your personal account.

3. Choose Your Tax Year

You must figure your taxable income based on an annual accounting period called a tax year. For most new businesses, this choice is straightforward, but it's an official decision you make when you file your first tax return.

  • Calendar Year: This is the most common choice. It is 12 consecutive months, from January 1 to December 31. You must use a calendar year if you keep no books or have no annual accounting period. If you've been filing personal taxes on a calendar year, you generally must continue using it for your new sole proprietorship or partnership.
  • Fiscal Year: This is 12 consecutive months ending on the last day of any month except December. For example, a fiscal year could run from July 1 to June 30. A 52-53-week tax year is also considered a fiscal year.
  • Making the Choice: You officially "adopt" a tax year by filing your first income tax return using that year. Simply applying for an EIN or paying estimated taxes does not lock you into a tax year.
  • Changing Later: Once you adopt a tax year, you generally need IRS approval to change it, which requires filing Form 1128, Application To Adopt, Change, or Retain a Tax Year.

4. Select Your Accounting Method

An accounting method determines when you report income and deduct expenses. You select a method when you file your first tax return, and you must use it consistently.

  • Cash Method: This is the simpler method. You report income in the tax year you receive it and deduct expenses in the tax year you pay them. Many small businesses can use this method.
  • Accrual Method: Under this method, you report income in the tax year you earn it (even if you haven't been paid yet) and deduct expenses in the tax year you incur them (whether you've paid them or not).
  • When You Must Use Accrual: You generally must use an accrual method if your business has an inventory of items for sale. Inventory includes goods held for sale and the raw materials used to create them. However, certain small business taxpayers may qualify for an exception.
  • Changing Later: Like your tax year, you must generally get IRS approval to change your accounting method once you've chosen one.

Taking these four steps within your first 30 days will establish a strong, compliant foundation for your business's finances, making tax time significantly less stressful.

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