Understanding the tax responsibilities that come with starting a business venture can save taxpayers money and help set them up for success. IRS.gov has the resources and answers to help people through the process of starting a new business.

Here are six tips for new business owners.

• Choose a business structure. The form of business determines which income tax return a business taxpayer needs to file. The most common business structures are:
  • Sole proprietorship: An unincorporated business owned by an individual. There’s no distinction between the taxpayer and their business.
  • Partnership: An unincorporated business with ownership shared between two or more people.
  • Corporation: Also known as a C corporation. It’s a separate entity owned by shareholders.
  • S Corporation: A corporation that elects to pass corporate income, losses, deductions and credits through to the shareholders.
  • Limited Liability Company: A business structure allowed by state statute. 
• Choose a tax year. A tax year is an annual accounting period for keeping records and reporting income and expenses. A new business owner must choose either:
  • Calendar year: 12 consecutive months beginning January 1 and ending December 31.
  • Fiscal year: 12 consecutive months ending on the last day of any month except December. 
    
• Apply for an employer identification number. An EIN is also called a federal tax identification number. It’s used to identify a business. Most businesses need one of these numbers. It’s important for a business with an EIN to keep the business mailing address, location and responsible party up to date. IRS regulations require EIN holders to report changes in the responsible party within 60 days. They do this by completing Form 8822-B, Change of Address or Responsible Party and mailing it to the address on the form.
  
• Have all employees complete these forms:
  • Form I-9, Employment Eligibility Verification U.S. Citizenship and Immigration Services
  • Form W-4, Employee’s Withholding Allowance Certificate

• Pay business taxes. The form of business determines what taxes must be paid and how to pay them.
  
• Visit state’s website. Prospective business owners should visit their state’s website for info about state requirements.

Share this tip on social media — #IRSTaxTip: Six tips for people starting a new business. https://go.usa.gov/xGQbg

IRS reminds taxpayers of the home office deduction rules during Small Business Week

WASHINGTON — During Small Business Week, Sept. 22-24, the Internal Revenue Service wants individuals to consider taking the home office deduction if they qualify. The benefit may allow taxpayers working from home to deduct certain expenses on their tax return. 

The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.

Qualifying for a deduction

There are two basic requirements to qualify for the deduction. The taxpayer needs to use a portion of the home exclusively for conducting business on a regular basis and the home must be the taxpayer’s principal place of business.

To claim the deduction, a taxpayer must use part of their home for one of the following:

• Exclusively and regularly as a principal place of business for a trade or business
• Exclusively and regularly as a place where patients, clients or customers are met in the normal course of a trade or business
• As a separate structure that’s not attached to a home that is used exclusively and regularly in connection with a trade or business
• On a regular basis for storage of inventory or product samples used in a trade or business of selling products at retail or wholesale
• For rental use
• As a daycare facility

The term “home” for purposes of this deduction:

• Includes a house, apartment, condominium, mobile home, boat or similar property
• Includes structures on the property, like an unattached garage, studio, barn or greenhouse
• Doesn’t include any part of the taxpayer’s property used exclusively as a hotel, motel, inn or similar business

Qualified expenses

Deductible expenses for business use of home normally include the business portion of real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance, and repairs. In general, a taxpayer may not deduct expenses for the parts of their home not used for business; for example, expenses for lawn care or painting a room not used for business.

Claiming the deduction

A taxpayer can use either the regular or simplified method to figure the home office deduction.

Using the regular method, qualifying taxpayers compute the business use of home deduction by dividing expenses of operating the home between personal and business use. Self-employed taxpayers filing IRS Schedule C, Profit or Loss from Business (Sole Proprietorship) first figure this deduction on Form 8829, Expenses for Business Use of Your Home.

Using the Simplified Option, qualifying taxpayers use a prescribed rate of $5 per square foot of the portion of the home used for business (up to a maximum of 300 square feet) to figure the business use of home deduction. A taxpayer claims the deduction directly on IRS Schedule C. Revenue Procedure 2013-13 (PDF) provides complete details of this safe harbor method.

Daycare facilities

Taxpayers who use their home on a regular basis for providing daycare may be able to claim a deduction for part of the home even if it is used as the same space for nonbusiness purposes. To qualify, both of the following requirements must be met:

• The business must provide daycare for children, people age 65 or older, or people who are physically or mentally unable to care for themselves.
• The business must have applied for, been granted, or be exempt from having a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law.

Additional resources

• IRS Publication 587, Business Use of Home (Including Use by Daycare Providers)
• Form 8829, Expenses for Business Use of Your Home

Back to Top