The Taxing Process of Business
Uncle Sam puts the fear of God into just about everyone who receives income or revenues. When the Tax Man cometh, it’s not to be taken lightly.
Businesses are wise to prepare before launching when it comes to how to treat taxes on federal, state, and local levels. As you’re starting or upgrading an ecommerce venture, the pressure to focus on marketing and aesthetics is intense. But do yourself a favor and make sure your financial ducks are in a row.
If you can’t yet hire a professional accountant, pay attention to these basics of doing business. You will be liable for taxes on profits you make at the end of each business year. Typically, the formula for determining taxable revenues is this:
Sales = Total Revenues
Beginning inventory plus merchandise/items purchased during the year, minus your ending inventory, are represented as your Cost of Goods Sold (COGS).
Unsold inventory at the end of the year, valued at cost (not anticipated retail value), equals your inventory.
YOUR PROFITS EQUAL TOTAL REVENUES MINUS COGS.
The government will collect taxes on your profits only, so make sure they are calculated accurately. Depending on the corporate structure you have chosen, you will experience asset protection and a separation of personal and business assets and liabilities. This is where an accountant becomes essential. You may be shortchanging yourself by overpaying taxes, and the IRS will not graciously correct your errors if it doesn’t benefit them.
The following are corporate structures in order from the lowest value of asset protection to the highest:
Sole proprietorship. Going it alone is okay for small, fledgling businesses with uncomplicated factors. You will file a Schedule C with your personal tax return and not face an extra burden of filing a separate business return.
Single-member LLC. Not materially different from the sole proprietorship with the exception of some personal asset shielding. File a Schedule C form with your personal tax return.
Multi-member LLC. You have the option of filing a partnership tax return, using a form 1065, or a Small Corporation tax return (form 1120-S).
Partnership. For partnership firms, a form 1065 is prepared, and all net income flows through to the partner’s personal tax returns.
E-Commerce firms typically don’t involve multi-partner structures at the outset. It’s likely you are observing a sufficient tax reporting process. But if you reach a growth spurt, or happen upon an opportunity to merge with another vendor, consider the potential tax benefits of a partnership or a multi-member LLC. A small business tax professional or accountant can advise you of the advantages and drawbacks.
One last tip, and it’s a big one: decide early to envision your business as on pace to grow, acting accordingly. Set up a reliable, comprehensive business management system with an accounting app that covers sales, inventory, depreciation, accounts receivable and payable, and the ever-essential “miscellaneous” category. Your tax preparer can’t find deductions for you without your help.
Once the business and taxation plan is in place, you are free to unleash creative energy and turn your online store into the next new viral sensation.