What are dividends and how are shareholders who receive dividends taxed? How is the basis of property determined for property acquired by gift? What is the generation-skipping tax and how is it calculated? What excise tax is imposed on the early withdrawal from retirement plans and how can it be avoided? How is the gain or loss determined on the sale of a capital asset? What are the tax consequences and reporting requirements upon the sale of a principal residence? What are the rules for deducting home office expenses? How is the source of income determined? What are the reporting requirements with respect to independent contractors? Which taxpayers are exempt from paying real estate taxes?

Does incorporating a small business start-up offer tax breaks?

Does incorporating a small business start-up offer tax breaks?

Keep in mind that most corporate tax benefits flow to profitable, established corporations, not to start-ups in their first few years. For example, corporations can offer more tax-flexible pension plans than sole proprietors or partnerships, but few start-ups have the cash flow needed to take advantage of these tax breaks.

Similarly, the ability to split income between a corporation and its owners -- thereby keeping some income in lower corporate tax brackets -- is effective only if the business is solidly profitable.

In addition, incorporating adds state fees, as well as legal and accounting charges. So unless you are sure that substantial profits will begin to roll in immediately, you may want to hold off incorporating your business.

I am thinking about setting up a consulting business with two of my business associates. Do we need to have partnership papers drawn up? Does it make any difference tax-wise?

If you go into business with other people and split the expenses and profits, under the tax code you are in partnership, whether you have signed a written agreement or not. This means that you will have to file a partnership tax return (Form 1065) every year, in addition to your individual tax return.

Even though a formal partnership agreement doesn't affect your tax status, it's essential to prepare one to establish all partners' rights and responsibilities vis-à-vis each other.

Is it safe and sensible for me to keep my own books and file my own tax returns?

To keep your own books, consider using a check-register type computer program such as Quicken Home & Business or Quickbooks (by Intuit) to track your expenses. If you are doing your own tax return, use the companion program, TurboTax.

To make sure you're on the right track, it's a good idea to run your bookkeeping system by a savvy, small business tax pro. With just a few hours of work, he or she should help you avoid most common mistakes and show you how to dovetail your bookkeeping system with tax filing requirements.

When your business is firmly in the black, consider hiring a bookkeeper, to take care of your day-to-day payables and receivables, and an outside tax pro, to handle your heavier-duty tax work. Not only are a tax pro's fees a tax-deductible business expense, but chances are your business will benefit if you put more of your time into running it and less into completing routine paperwork.

Copyright © 2006 Nolo

Copyright © 1994-2006 FindLaw, a Thomson business

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

View Previous Months' Selections