IRS Publication 583, Starting a Business and Keeping Records, is the IRS’s short orientation guide for new business owners. It walks through the decisions and duties that come with opening a business: whether the activity is a business at all, getting a tax ID, picking a structure and an accounting method, keeping records the IRS will accept, and meeting filing and payment deadlines. The publication is brief, but the rules behind it carry real money. A missed estimated payment or thin recordkeeping can cost more than a year of tax prep fees.
What follows is a practical read of what Pub 583 tells you to do, with the 2026 figures where they matter.
Is It a Business or a Hobby
Before Pub 583’s other rules apply, the IRS wants to know whether you’re running a business or pursuing a hobby. A business exists to turn a profit. A hobby is something you do because you enjoy it. The distinction controls what you file and what you can deduct.
The IRS weighs several factors: how much time and effort you put in, whether you keep businesslike books and records, whether you depend on the income, whether the activity has made a profit before, and whether appreciating assets could produce future profit.1Internal Revenue Service. Here’s How to Tell the Difference Between a Hobby and a Business for Tax Purposes No single factor decides it.
If the activity is a hobby, you still report the income, but you cannot deduct any of the expenses against it. The miscellaneous itemized deductions that used to allow hobby expenses to offset hobby income have been permanently eliminated.2Internal Revenue Service. Hobby or Business: What People Need to Know if They Have a Side Hustle Hobby income is fully taxable with zero offset. If a side project is generating real revenue, treating it as a business with proper records and a genuine profit motive is worth the effort.
Getting an Employer Identification Number
Pub 583 tells new owners to get an Employer Identification Number from the IRS. An EIN is the business version of a Social Security number. You need one if the business hires employees, operates as a partnership or corporation, files employment tax returns, or maintains a Keogh retirement plan. A sole proprietor with no employees can technically use a personal Social Security number, but banks, vendors, and state agencies often require an EIN anyway, and using one keeps your SSN off business paperwork.
The fastest route is the IRS online application, available Monday through Friday from 7:00 a.m. to 10:00 p.m. Eastern. The number is issued immediately at the end of the application. The responsible party must have a valid Social Security number or ITIN, the business must be in the United States or a U.S. territory, and the IRS limits issuance to one EIN per responsible party per day.3Taxpayer Advocate Service. Getting an EIN There is no fee.
Business Structure and Which Return You File
Your structure decides which form carries your business income to the IRS.
A sole proprietor reports income and expenses on Schedule C, which attaches to the personal Form 1040.4Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) This is the simplest setup and the most common for one-person operations.
A partnership or multi-member LLC files Form 1065 as an informational return. The partnership itself does not pay income tax. It issues a Schedule K-1 to each partner showing that partner’s share of income, deductions, and credits, and the partners report those amounts on their personal returns.5Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income An S corporation works similarly, with income flowing through to shareholders on K-1s.
Gross business income counts every form of payment: cash, checks, electronic transfers, property, and services. If a client pays you by handing over equipment worth $3,000, that $3,000 is income at its fair market value. Where both parties have agreed in advance on the value of bartered services, the IRS generally accepts the agreed value.6Internal Revenue Service. Publication 583 – Starting a Business and Keeping Records
Choosing an Accounting Method
Pub 583 requires you to pick an accounting method when you file your first return. Once picked, you generally cannot change it without IRS permission. The two main choices are cash and accrual.
Under the cash method, you record income when you actually receive it and deduct expenses when you actually pay them. Simple, and it fits most small businesses. Under the accrual method, income is recorded when earned and expenses when incurred, regardless of when money moves. A landscaper who invoices a client in December and gets paid in January would book that income in December on accrual, but in January on cash.
Most small businesses can use cash. The IRS requires accrual only when average annual gross receipts over the prior three years exceed the inflation-adjusted threshold under Section 448. The statutory base is $25 million, indexed for inflation since 2018, which puts the 2026 threshold around $32 million.7Office of the Law Revision Counsel. 26 U.S. Code 448 – Limitation on Use of Cash Method of Accounting Anywhere below that line, cash is almost certainly the right pick.
To switch methods later, you file Form 3115. Changes covered by the automatic change procedures require no user fee and are generally granted if you file correctly. Changes outside the automatic list go through the non-automatic process, which requires a user fee and individual IRS approval.8Internal Revenue Service. Instructions for Form 3115
Recordkeeping the IRS Will Accept
Pub 583 is blunt about records: they are the only proof that the numbers on your return are real. Claim a deduction, can’t produce the document, the IRS disallows it. Pub 583 wants records that are permanent, accurate, complete, and organized enough that anyone can trace a line item back to its source document.
Source documents are the paper trail: sales receipts, invoices, canceled checks, bank statements, credit card records, and written acknowledgments of transactions. These connect ledger entries to real events.
How Long to Keep Them
The general rule is three years from the date you filed the return, or two years from the date you paid the tax, whichever is later.9Internal Revenue Service. How Long Should I Keep Records? Records tied to business property run longer. You keep them for as long as you own the asset, then continue holding them until the statute of limitations expires on the return for the year you sell or dispose of it.6Internal Revenue Service. Publication 583 – Starting a Business and Keeping Records If you receive replacement property in a tax-free exchange, records on both the old and new property have to be kept until the new one is finally disposed of in a taxable transaction.
Electronic Records
Most small businesses keep records digitally, and the IRS is fine with that as long as the system meets basic integrity standards. Under Revenue Procedure 97-22, an electronic storage system must accurately transfer records from their original form, index them so they can be retrieved, and include controls that prevent unauthorized changes or deletions.10Internal Revenue Service. Revenue Procedure 97-22 Reproductions have to be legible enough that every letter and number can be identified without guessing. During an audit, you have to provide the IRS with whatever hardware, software, and staff are needed to find and reproduce any stored record. Let a software subscription lapse and lose access to your files, and the IRS treats those records as destroyed.
Startup Costs
Money you spend before the business actually opens gets special treatment. Market research, pre-launch advertising, travel to meet potential suppliers, and training employees are startup expenditures under Section 195. You can’t deduct them as regular business expenses because the business wasn’t operating yet.
Instead, you can elect to deduct up to $5,000 of startup costs in the year the business begins active operations. That $5,000 allowance shrinks dollar-for-dollar once total startup costs exceed $50,000, and it disappears entirely at $55,000. Anything you can’t deduct immediately is spread evenly over 180 months, starting with the month the business opens.11eCFR. 26 CFR 1.195-1 – Election to Amortize Start-Up Expenditures A separate $5,000 allowance with the same phase-out applies to organizational costs, like legal fees for forming an LLC or drafting a partnership agreement.
What You Can Deduct Once You’re Open
Once the business is running, an expense is deductible if it is ordinary and necessary for your trade. Ordinary means common in your industry. Necessary means helpful and appropriate, not essential. Rent, utilities, office supplies, advertising, insurance premiums, and professional services all qualify. Employee wages are deductible, but you have to comply with payroll withholding requirements to claim them.
Three deduction categories trip up new owners often enough to name individually.
Home Office
If part of your home is used exclusively and regularly as your principal place of business, you can claim the home office deduction. The simplified method pays $5 per square foot up to 300 square feet, for a maximum of $1,500, with no tracking of actual home expenses.12Internal Revenue Service. Simplified Option for Home Office Deduction The actual expense method takes the business-use percentage of your home and applies it to mortgage interest or rent, utilities, insurance, and repairs. More bookkeeping, often a larger deduction if you have real dedicated space.
Vehicle Use
You deduct business use of a personal vehicle one of two ways. The standard mileage rate for 2026 is 72.5 cents per mile, up from 70 cents in 2025.13Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents per Mile, Up 2.5 Cents Multiply by business miles driven; you need a log with dates, destinations, and purpose. Actual expenses lets you deduct gas, repairs, insurance, registration, and depreciation in proportion to business use, which can beat the standard rate for expensive vehicles with heavy business miles.
Travel and Meals
Travel expenses are fully deductible when you travel away from your tax home overnight. Airfare, lodging, rental cars, and transportation between destinations all qualify. Meals during business travel are deductible at 50% of actual cost with a receipt showing amount, time, place, and business purpose.14Internal Revenue Service. Income and Expenses 2 Entertainment expenses are not deductible under current law.
Business Assets
Buy something that lasts more than a year, like equipment, furniture, or a vehicle, and you generally cannot deduct the full cost in the year of purchase. You capitalize it and recover the cost over the asset’s useful life through depreciation. Section 179 and bonus depreciation both allow accelerated first-year write-offs for qualifying property, subject to their own dollar caps and income limits. If you’re buying meaningful equipment, this is worth walking through with a preparer before year-end.
Self-Employment Tax and Paying as You Go
Sole proprietors and partners owe self-employment tax on top of income tax. It covers both the employer and employee shares of Social Security and Medicare that wage earners split with their employer. The combined rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.15Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
The Social Security portion applies only up to the annual wage base, which is $184,500 for 2026.16Social Security Administration. Contribution and Benefit Base The Medicare portion has no cap. If combined wages and self-employment income exceed $200,000 (single) or $250,000 (married filing jointly), an Additional Medicare Tax of 0.9% applies to the excess.17Internal Revenue Service. Questions and Answers for the Additional Medicare Tax On $100,000 of net profit, the self-employment tax alone runs about $14,130 before you calculate income tax. This is what blindsides most first-year owners. Half of your self-employment tax is deductible as an adjustment to income on Form 1040, which reduces your income tax but not the SE tax itself.
Estimated Tax Payments
Because no employer is withholding, you pay as you go through quarterly estimated payments. You’re required to make them if you expect to owe at least $1,000 for the year after subtracting withholding and refundable credits.18Internal Revenue Service. Form 1040-ES – Estimated Tax for Individuals
For 2026, the quarterly due dates are:
- 1st payment: April 15, 2026
- 2nd payment: June 15, 2026
- 3rd payment: September 15, 2026
- 4th payment: January 15, 2027
You can skip the January 15 payment if you file your 2026 return and pay the full balance by February 1, 2027.18Internal Revenue Service. Form 1040-ES – Estimated Tax for Individuals Form 1040-ES calculates and submits each payment. The payments cover both income tax and self-employment tax.
If you underpay, the IRS charges a penalty on the shortfall for each quarter. You avoid it by meeting a safe harbor: pay at least 90% of the current year’s tax, or 100% of the prior year’s tax shown on the return. If prior-year adjusted gross income exceeded $150,000, the prior-year figure rises to 110%.19Internal Revenue Service. Underpayment of Estimated Tax by Individuals Penalty A brand-new business has no prior-year return, so the 90% current-year rule is the only safe harbor available. Estimating year-one income carefully matters.
Filing Deadlines and What Late Costs
Sole proprietors file Schedule C with Form 1040 by April 15. Partnerships file Form 1065 by March 15. S corporations file Form 1120-S by March 15. Missing a deadline triggers separate penalties for late filing and late payment, running at the same time.
For individual returns, the late filing penalty is 5% of the unpaid tax for each month or partial month the return is late, capped at 25%. If a return is more than 60 days late, the minimum jumps to $525 or 100% of the unpaid tax, whichever is less. Partnership returns have their own structure: $255 per partner per month, up to 12 months.20Internal Revenue Service. Failure to File Penalty A three-partner LLC that files Form 1065 six months late owes a penalty of $4,590 on the filing alone.
The failure-to-pay penalty is 0.5% of the unpaid tax per month, also capped at 25%. If both penalties apply in the same month, the filing penalty is reduced by the payment penalty amount, so the combined rate for the first five months is 5% per month. After the filing penalty maxes out at month five, the payment penalty keeps accruing on its own.21Internal Revenue Service. Failure to Pay Penalty Filing an extension avoids the late filing penalty but does not pause interest or the failure-to-pay penalty on any balance due. If you can’t pay in full, filing on time and requesting a payment plan cuts the monthly payment penalty in half, to 0.25%.
One reporting duty Pub 583 flags is worth putting on the calendar. If your business pays $2,000 or more to a nonemployee during the year, you report those payments on Form 1099-NEC by January 31 following the tax year. For tax years beginning after 2025, the threshold rose from $600 to $2,000.22Internal Revenue Service. 2026 Publication 1099 The IRS matches these against the recipient’s return, so skipping them tends to create problems for both sides.