For first-time entrepreneurs, accounting for business income, expenses and taxes may seem daunting especially if the business has inventory or fixed assets. This is because there are different rules regarding recognition of accounting and taxable income, along with deductible expenses.
Book vs. Tax Differences
When filing your return, you will likely have to complete Schedule M-1 which reconciles book to taxable income. In this section, you will report 50% of meals and entertainment rather than the full amount shown for book income along with a myriad of differences in deductible expenses. Another difference is start-up costs. Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs. Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation or partnership.
If you operate an S-corporation, LLC or another form of business with pass-through income reporting, you need only file an informational tax return with the IRS. The business itself doesn't pay taxes on income. Rather, the net income passes to the owners of the business, and they pay tax based on their share of the business income. While the income statement for the business will show a profit, no income tax transfers directly from the company to the government. However, the business may elect to make payments on behalf of the shareholders.
While there are differences between book and taxable income, recording your income efficiently is possible with the right accounting software and professional accounting advice. Contact me if you have a question and I can get you on the right path and potentially connect you with an advisor if it fits your business needs.