Nine Tax Considerations for New Business Proprietors

When embarking on the journey of starting a small business, many entrepreneurs choose to begin as sole proprietors. If you're planning to launch your venture as a sole proprietorship, it's crucial to have a comprehensive understanding of the tax considerations involved. Here, we present nine important factors to keep in mind:

1. Unlock the potential of the pass-through deduction: As your business generates qualified business income, you currently have the opportunity to claim the 20% pass-through deduction, subject to certain limitations. This deduction is taken "below the line," meaning it reduces your taxable income, rather than being deducted "above the line" from your gross income. Even if you choose not to itemize deductions and instead opt for the standard deduction, you can still take advantage of this deduction. It's worth noting that this deduction will only be available until 2025 unless Congress decides to extend it.

2. Report your income and expenses using Schedule C of Form 1040: Regardless of whether you withdraw cash from your business, the net income will be taxable to you. Your business expenses are deductible against your gross income, not as itemized deductions. If you have any losses, they can generally be deducted against your other income, with special rules applying to hobby losses, passive activity losses, and losses from activities in which you weren't "at risk."

3. Fulfill your self-employment tax obligations: In 2024, you'll need to pay self-employment tax, which consists of Social Security and Medicare taxes. The rate is set at 15.3% on your net earnings from self-employment up to $168,600, with a Medicare tax of 2.9% applying to the excess. Additionally, a 0.9% Medicare tax (bringing the total to 3.8%) is imposed on self-employment income exceeding $250,000 for joint returns, $125,000 for married taxpayers filing separately, and $200,000 in all other cases. It's important to note that self-employment tax is separate from income tax, but you can deduct half of your self-employment tax as an adjustment to your income.

4. Stay on top of quarterly estimated tax payments: Mark your calendars for the due dates of quarterly estimated tax payments in 2024 – April 15, June 17, September 16, and January 15, 2025.

5. Enjoy the benefit of deducting 100% of your health insurance costs: As a business expense, you can deduct your entire health insurance costs. This means that your deduction for medical care insurance won't be subject to the rule that limits medical expense deductions.

6. Explore the possibility of deducting home office expenses: If you operate from a home office, perform administrative tasks there, or store inventory or product samples at home, you may be eligible to deduct a portion of certain expenses. These expenses can include mortgage interest or rent, insurance, utilities, repairs, maintenance, and depreciation. Additionally, you might be able to deduct travel expenses from your home office to another work location.

7. Maintain meticulous records of your income and expenses: It's vital to keep complete and accurate records of all your business-related income and expenses. This will ensure that you can claim all the tax breaks you're entitled to. Pay extra attention to expenses like automobile, travel, meals, and home office expenses, as they are subject to specific recordkeeping rules or deductibility limits.

8. Be aware of increased responsibilities when hiring employees: Hiring employees comes with additional responsibilities. For example, you'll need to obtain a taxpayer identification number and withhold and pay payroll taxes.

9. Consider establishing a qualified retirement plan: Establishing a qualified retirement plan can bring numerous advantages. Contributions to the plan are deductible at the time of contribution and are only taken into income when withdrawn. You may want to explore options like a SEP plan, which involves minimal paperwork. Alternatively, a SIMPLE plan is available to sole proprietors and offers tax advantages with fewer restrictions and administrative requirements. If a retirement plan isn't feasible for you, you may still be eligible to contribute to an IRA.

If you require further information on the tax aspects of your business or have any questions about reporting or recordkeeping requirements, reach out to us.

Our marketing endeavors have successfully led businesses to claim the Employee Retention Tax Credit, resulting in some individuals mistakenly receiving refunds. Fortunately, the IRS now allows individuals to voluntarily return a portion of the funds before any collection procedures are initiated.