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Many small businesses, including every American business with employees, need to be uniquely identified by the Internal Revenue Service according to the tax code. To get this number, you first have to fill out Form SS-4 for the IRS. Not only is this form important for your taxes, but potential lenders and investors often request it.

What Is Form SS-4 Used for?

Form SS-4 is used to obtain an Employer Identification Number (or EIN). Form SS-4 is 1 page and requires pretty simple information to put together.

Form W-9, which requests the taxpayer identification number of a taxpayer, is different from Form SS-4. While W-9 can seek certification of an EIN, Form SS-4 is used to actually apply for an EIN.  

What Is an Employer Identification Number?

An EIN is a unique number that identifies your business with the IRS. It is similar to an individual’s Social Security number, except that you aren’t issued a card like your Social Security card. The IRS created the EIN system in 1974.

Does My Small Business Need an EIN?

The IRS has a simple checklist for if your small business will need an EIN. Most small businesses that aren’t sole proprietorships will likely need an EIN.

If any of the following questions apply to your small business, you will need an EIN:

• Do you have employees?
• Is your business structured as a corporation or partnership?
• Do you file tax returns for Employment, Excise, or Alcohol, Tobacco, and Firearms?
• Do you withhold taxes on non-wage income paid to a non-resident alien?
• Do you have a Keogh plan (an uncommon retirement plan)?
• Is your business involved in any of the following types of organizations: trusts, IRAs, Exempt Organization Business Income Tax Returns, Estates, Real estate mortgage investment conduits, nonprofit organizations, farmers’ cooperatives, or plan administrators?

If you answered “yes” to any of these questions, you should fill out SS-4 and submit it to the IRS.

Using Form SS-4 To Obtain an EIN

Applying for an EIN with the IRS is always free. Beware of any services or websites that claim you must pay to receive an EIN. You can apply for an EIN online, which is similar to filling out Form SS-4 but without the physical paper.

To apply for an EIN through fax or mail, though, you will have to fill out Form SS-4.

You can do this before opening the doors to your business if you know your company will need one.

“If you are thinking about setting up a business, IRS Form SS-4 is a critical step to take because it’s your business’ unique identifier to the IRS. This number is linked to bank accounts and many other aspects of your business,” explains tax preparer H&R Block.

Whether applying online or with Form SS-4, the application must list the name and taxpayer identification number (that is, the Social Security number, EIN, or Individual Taxpayer Identification Number) of the true principal officer, general partner, grantor, owner, or trustor. The IRS calls this person the “responsible party,” and the person “controls, manages, or directs the applicant entity and the disposition of its funds and assets,” the IRS says.

The IRS requires you to keep the information up-to-date on your Form SS-4 in regards to your company and the responsible party. Changes can be submitted using IRS Form 8822-B.

“Keep the Form SS-4 information current,” the IRS continues. “Use Form 8822-B to report changes to your responsible party, address, or location. Changes in responsible parties must be reported to the IRS within 60 days.”

Once accepted by the IRS, you will receive a notice from the agency.

How to Fill Out Form SS-4

Filling out Form SS-4 is straightforward, and the information required for the 1-page form should be easily available. While the specifics of how you fill out the form will depend on your business, structure, and industry, you generally are providing identifying information for your company and the responsible party filling out the form.

Expect to provide information like:

• The business’s name and address
• The responsible party’s name and taxpayer identification number
• Structure of business
• The date your business was created
• Your reason for applying to the IRS for an EIN
• The number of employees that work at your business
• Your business’s main activities
• The main types of products and/or services your business offers

How Lenders Use Your Form SS-4

Beyond registering with the IRS, you will likely also need to have your Form SS-4 handy when applying for business loans.

Form SS-4 shows that your business is officially verified with the IRS and, therefore, the United States government. Your SS-4 notice and EIN are both important to have in hand when you go about applying for commercial loans. 

Lenders look at your EIN and Form SS-4 much in the same way your Social Security card is used to verify your identity in the US. It also shows that your business is based in the U.S. 

Remember, unlike your Social Security number, no card is issued when you receive an EIN. Your Form SS-4 notice serves the same purpose as a Social Security card, which is why lenders will want to see a copy of it. 

If you need a copy of your Form SS-4, contact the IRS Business and Specialty Tax Line.

Knowing the market value of your business is important for many reasons, even if you aren’t thinking about selling anytime soon. By determining your business’s market value, you get a sense of what your company is worth beyond just income statements and balance sheets.

How Do You Determine the Value of a Small Business?

Book value basically takes your balance sheet and values your company based on your assets minus your liabilities. Unless you are planning to liquidate, this isn’t a good way to calculate business value. In fact, you shouldn’t really consider assets when calculating a market value. A buyer won’t be interested in purchasing your company just to sell off your vehicles, property, and equipment—they will be interested in producing revenue from your company year over year.

Present value calculates your business’s value based on past and present data, like annual revenue. Most rule of thumbs methods of valuing a business calculate a version of present value. This can give you a good basic understanding of how much your business is worth.

Market value, in the end, is the most important number if you want to sell your business—this is the value that a buyer will pay for your business. While calculating the present value of your business can give you a baseline, the market value will ultimately be decided by—as the term suggests—the market.

What Is the Rule of Thumb for Valuing a Business?

Both methods require looking up either the SDE multiple or the percentage of revenue averages for your specific line of business. These multiples can be impacted by the size of your business and your location.

Percentage of Sales Method

To calculate your business value according to the percentage of sales method, start with your total revenue for a year. Then you must look up the average percentage of sales values for companies in your peer group. You can calculate your market value by using the percentage of your sales.

If the average market value of bars in your area is 30% of annual revenue and your bar brought in $1 million in sales last year, the market value of your bar is $300,000 according to this method.

SDE Multiples Method

Your SDE doesn’t show your value in itself—that is where the multiple comes in. The SDE multiple is an industry standard that is between 0 and 4. Based on your industry, it estimates what your company is worth by multiplying your SDE by the multiple number.

If your SDE was $100,000 last year and your company’s SDE multiple is 2.5, the value of your business according to this method is $250,000.   

How Much Is the Average Small Business Worth?

This multiple, though, is probably inaccurate for most small businesses because industry, location, customer base, and intellectual property are much more important than the average value of all small businesses in the country.

A trendy startup could be worth $1 billion on the market, while a mom-and-pop dry cleaner will be worth much less. This is why the average value of small businesses doesn’t mean much.

How Much Revenue Should a Small Business Have?

According to the US Census, the average American small business without employees, i.e. 1-person operations, earned about $47,000 in annual revenue. Businesses with 5 to 9 employees average just over $1 million in annual sales. The average revenue increases along with the number of people employed.

Remember, though, that revenue is not the only factor when determining your business’s value. Your intellectual property, market share, and other factors can significantly bolster your business valuation.  

When you file your taxes as a small business owner, you can deduct depreciation from your gross income through Section 179. As your business assets’ value lessens over time through use, so too can your company’s value, meaning you’d recoup less if you were to liquidate or sell your business. The IRS compensates business owners for depreciation through tax deductions at a rate set through MACRS. 

The Modified Accelerated Cost Recovery System (MACRS) is a depreciation calculation adopted in 1986 that is primarily used for tax purposes. Through this system, business owners have a set amount they can deduct, unifying the process across all companies and industries. 

Through the MACRS system, an item has higher levels of depreciation during the first few years and lower levels of depreciation as its ages. This process allows business owners to recoup the cost of their assets faster by front-loading tax deductions from depreciation.

How to Calculate MACRS Depreciation

• Start with the original value of the asset—or what you paid for it if you bought it new.
• Determine the item’s class based on its useful life. You can only deduct the item for the number of years during the expected recovery period set out by the IRS. (There will be more on finding your class and the IRS MACRS guidelines later on.)
• Choose your depreciation method. You can use the straight-line depreciation method or declining balance method with different rates depending on your asset and MACRS guidelines. 
• Note your MACRS depreciation convention—or the period when you started to use the asset. This can fall into mid-month, mid-quarter, and half-year conventions for IRS calculations.
• Determine what percentage you can deduct using the graphs listed in the IRS MACRS tables.   

To calculate MACRS depreciation, you can use an online calculator to determine how much you can deduct. The right calculator can guide you to make sure your information is accurate by asking specific questions related to your assets. 

What Can You Learn From the IRS MACRS Guidelines? 

The IRS also explains what can and cannot be depreciated and how to handle repairs or improvements to the asset. The entire guide is more than 100 pages long, including a glossary of terms and an index of specific topics.  

One of the most useful sections of the MACRS guidelines is Table B-1 toward the end, which breaks down the various types of equipment that can be deducted on your taxes, its expected class life, and the recovery period in years. 

For example, buses have an expected class life of 9 years and a recovery period for MACRS in 5 years. Meanwhile, sheep and goats for breeding have a class life of 5 years and take 5 years to recover.  

Depending on the nature of your business, you can focus on a few key charts set out by the IRS to determine your depreciation amount and guide your MACRS calculations.  

Why Should You Use MACRS Depreciation?

First, it is easier to prove to the IRS how you reached that deduction amount. You can use their charts and formulas to prove your request is fair and accurate—which will protect you in the event of an audit. 

Furthermore, the IRS wants you to recoup the cost of your investment faster. They favor deductions during the first few years so you can get your money back. This can help your company if you invest in expensive equipment that otherwise limits your profits or buying power. 

Learn More About Other Depreciation Methods

Get to know the resource section offered by Lendio to become better informed about bookkeeping and asset management

All businesses, from self-employed freelancers to Fortune 500 corporations, spend money. You might have to pay rent, buy inventory, pay employees, buy a desk lamp, or purchase heavy machinery—or even a new building. These expenses lower your company’s overall profit margin, so it’s critical to pay close attention to how you’re spending money.

Not all expenses are considered the same in the small business world. Some expenses, like rent and wages, are regular and recurring. Generally, these everyday purchases are considered operating expenses. Others, like the purchase of a vehicle or property, happen once and then last your business a long time. These are known as capital expenses.

The terminology can be misleading—if you drive it every day, isn’t a new car an operating expense? Probably not. Knowing the nuances of operating expenses and capital expenses is important for every small business owner.

Furthermore, differentiating between the 2 categories becomes paramount when preparing financial statements and filing your business taxes.

Operating Expenses

The list of operating expenses is vast and ever-expanding—office supplies, equipment leases, travel, some types of taxes, utilities, and insurance are all considered operating expenses because you spend the money in order to conduct regular business. Wages are operating expenses, although they might be calculated into your COGS depending on your business.

Capital Expenses

Property, equipment, and vehicles are common capital expenses. Expanding or adding value to an existing asset, like through a building expansion, could also be a CAPEX.

Instead of recording capital expenditure on your profit and loss statement, you list CAPEX as assets on your balance sheet.

Importantly, many capital expenses—like vehicles—depreciate in value over the usable lifespan of the asset. This depreciation over a fixed period of time, usually monthly, is recorded as an expense on your profit and loss statement. Overall depreciation is recorded on your balance sheet and subtracted from the value of the asset.

While many CAPEX are tangible entities, like buildings, some intangible purchases can be considered CAPEX, particularly patents.

Why Are OPEX and CAPEX Categorized Differently?

Sometimes you can choose how you want to categorize an expense. If you buy a car outright, for example, it’s a CAPEX, but a lease for a vehicle is an OPEX.

OPEX vs. CAPEX on Financial Statements

“While OPEX are line items in the expense category on a cash flow statement, CAPEX are typically found under the heading ‘Investment in property, plant, or equipment,’” e-commerce company Shopify explains. “CAPEX usually require a sizable financial investment and, for that reason, often need the approval of the company’s board of directors or shareholders.”

Categorizing your various expenses on the proper profit and loss statements and balance sheets is essential for understanding the overall financial health of your company—and will better position you to receive funding.

OPEX vs. CAPEX During Tax Time

“Through depreciation you recover the cost of the asset over its useful life,” says Manny Davis of AllBusiness. “The IRS has strict requirements as to how many years an asset must be depreciated over. Since these assets cannot be expensed 100% in the tax year they are purchased, it will lead to a higher taxable income amount for the company in the given year and therefore higher taxes.”

The IRS allows some CAPEX to be expensed in total and at once through Section 179. Because of specific situations like this, you should consult with a tax professional about your business taxes—even if you don’t regularly hire an accountant. Utilizing bookkeeping software like Lendio's software also helps.

When opening a business, you have a lot of choices to make—including the structure of your business or the business entity. One of the most common types of businesses is known as an LLC, or limited liability company. In addition to being one of the easiest entities to form and maintain, it also offers legal and financial protection to its owners. 

Keep reading to understand LLCs and why they are so popular. 

What Does an LLC Mean?

However, an LLC limits the liability to just the business assets. These assets include company profits, equipment, and inventory but do not extend to any personal assets outside the business.

An LLC is often used by business owners to protect themselves personally when they go into business. 

How Can You Start an LLC?

What Does an LLC Cost?

Along with a startup fee, you will need to pay an annual fee to maintain the designation. These fees also vary widely depending on where you live. In Missouri, there is no annual fee, though business owners still need to submit annual reports. In Maryland, business owners need to pay $300 annually.

Look up your filing fees before you decide to become an LLC so you can budget for the costs. 

What Is an Annual Report?

These annual reports are typically due around the anniversary date of formation. You can often find annual report templates online. 

When Should You Form an LLC?

You don’t have to file your paperwork in January to form your LLC. Some states offer a “delayed effective date” up to 90 days out. This means you can work through your paperwork in October or November for an LLC launch date of January 1. 

One of the key traits of an LLC is the separation between professional and personal accounts. If you plan to start a company, make sure you have a foundation of good bookkeeping to easily report your income and expenses. Use an app like Lendio's software, which offers free tools for small business owners. This can make establishing a business easier.

There are several methods to calculating depreciation, and business owners often want to find what works best for them—accuracy, convenience, tax-friendly. While the straight-line method might be easy, it doesn’t take into consideration how cared-for an asset is and how much work it performs. An item that is used constantly and rarely cared for won’t last as long (and will have a lower value) than a well-cared-for item or rarely-used asset. 

The units of production depreciation method works to address this principle by tracking how much an item is used and using that to determine its value. Get to know this depreciation method better to see if it is right for you. 

What Is the Units of Production Depreciation Method? 

With the units of production depreciation method, an asset’s value is based on how much it is used—or the number of units it has produced. This method is often used for manufacturing equipment that wears down over time as it produces more products. 

This depreciation method is popular in production-oriented industries because it can fluctuate based on machine demand for that year. For example, if a company works overtime to fill orders 1 year but then has downtime during another year, the depreciation amount is different because the assets were used less and therefore retained more of its useful life—value.

How to Calculate the Units of Production Depreciation Method

The units of production depreciation method is fairly straightforward to calculate. However, you will need to change the calculation annually based on the units an asset produced. You will also have to track how many units an asset produced to make sure your calculation is accurate. 

Start by calculating the Units of Production Rate (UPR):

• UPR = (Cost of the Asset - Salvage Value)/ Total Units that Will Be Produced Over Its Life

Naturally, this calculation is an estimate. You can’t predict how long an asset will last (especially machinery) and the number of units it will produce—but you can make an educated guess based on the IRS value expectancy and the production rate of similar assets.   

Once you have the UPR, multiply it by the number of actual units produced for that current year. 

Let’s use the example of a baker who makes doughnuts with a specialized machine. This is what the formula might look like. 

• (Machine Cost - Salvage Value)/Estimated Doughnuts Made Over Its Life x Doughnuts Made This Year
• ($25,000 - $500)/100,000 x 10,000
• $24,500/100,000 x 10,000
• 0.245 x 10,000
• $2,450

The depreciation for that year is $2,450. Now, if the baker makes more doughnuts the next year, the depreciation will be higher because there is more wear on the machine. Let’s say the baker made 15,000 doughnuts the following year. In this case, the depreciation would be:

• 0.245 x 15,000
• $3,675

Once you have the base formula for calculating units of production depreciation, you can estimate how much you lost in assets each year with relative ease. 

Pros and Cons of this Method

The main drawback of the units of production method is that you can’t use it to calculate your tax deductions for the year. This means it can’t be your only depreciation method of choice. Some companies use the units of production method for their internal accounting (or to report to shareholders) and then opt for a different method for their taxes. 

The units of production method also can’t be used for every piece of equipment. Not all assets can be tracked by what they produce. (You wouldn’t base the value of a computer on the number of emails it has sent or the total PowerPoint presentations it has created.) This means you could end up using multiple depreciation formulas for various assets internally, as well.

Finally, the units of production method isn’t predictable. You can’t easily estimate how your assets will change until you close your books and look at the number of units you produced. Your depreciation rates could fluctuate over time. 

While all of these cons are significant, many manufacturers still prefer this method of accounting for depreciation because the value of an asset is directly tied to production. Teams can track an asset’s value over time to get a clearer idea of how long it should remain functional. This allows them to budget for replacements if an item is wearing out or schedule maintenance after a certain number of units is produced. 

Learn More About Depreciation and Bookkeeping 

As you set up your accounts for your small business, consider the various options at your disposal for calculating depreciation. Using the units of production method might be ideal if you work in manufacturing, but it likely isn’t the only model you should use. 

A business entity refers to a type of business or the legal structure of that company. It does not refer to what that business does, the product or service it sells, or its industry. 

As you develop your business, you may decide to change entity types depending on your plans for growth. Learn more about what a business entity means and how you can choose the right one below. 

What Are the Different Business Entities? 

• Sole Proprietorship: A business run by a single person without shareholders or employees.
• Partnership: A business run with 2 or more owners, where all owners manage the company and share the profits. 
• Limited Liability Company (LLC): A company that offers liability protection to its owners. This entity is often used by individuals to differentiate their personal and professional accounts.  
• Corporation: A professional entity that has shareholders, a board of directors, officers, and (often) employees. This designation tends to be the largest option. 

What Are Business Entities Used For?

Can You Change Your Business Entity?

You can change your business entity status on your tax forms, but most states have a formal process to become an LLC or corporation. There are fees for forming LLCs and paperwork for some corporations. You will also have to submit annual reports to your state government if you operate an LLC or a corporation. 

Are Some Business Entities Better Than Others?

Knowing your options for the different business entities can help you launch your company with the right status for your tax needs. You can file correctly and potentially save money. As you launch your business, make sure you have organized bookkeeping and an accounting plan for your taxes. Consider using a free service like Lendio's software to keep your records in order. Our tools are here to help you.

An invoice is a document sent from a business to a customer indicating products sold or services executed (or agreed upon). 

The document will often include client and business information such as logos, addresses, and contact details in addition to transactional information like the type of products or services, quantities, and scope. The invoice is essentially a bill, and it will often include payment terms, timelines, and other information.

Keep reading to learn more about how to pay an invoice.

Receiving Invoices From Businesses

Every business handles invoicing differently. Some utilize invoicing software to streamline the management and tracking of paid and outstanding invoices, while others prefer creating and mailing an invoice by hand. Some businesses invoice with strict payment terms, while others provide more flexible timelines and payment options.

Simply put, you can receive many different types of invoices through various methods. While the invoice itself may be unique, there are only 2 channels to receive an invoice.

• Online: More recently, businesses are choosing to move their invoicing online for simplicity and cost savings. The most common way to receive an online invoice is via email. However, you’ll likely be directed to an online portal to pay that invoice. Many of these client portals will allow you to review and manage outstanding and paid invoices
• Offline: While online invoicing solutions are becoming more and more popular, some small businesses still prefer tangible invoices. You may receive invoices from local businesses by mail or in-person after a project is completed.

When Should You Pay an Invoice?

Paying bills on time is an important step in maintaining good relationships with businesses and vendors. If you’re frequently late on payments, the business may decide to charge you more—or to drop you entirely. If you operate in the business-to-business (B2B) space, losing a good vendor can cause bottlenecks and quality control issues throughout your business. So always pay your invoices on time.

Payment terms are often discussed before work is started and will often be outlined within the invoice. For many industries—especially B2B—it’s possible to have payment timeframes that extend weeks or even months after the work is completed or products delivered. You may also be able to negotiate discounts for up-front or early payments if the business struggles with cash flow or delinquent payments.

Most invoices will include phrasing like “payment date” or “net-payment terms” that indicates the deadline for paying an invoice. Net-payment terms are often used to express a timeframe or window to pay an invoice within. For example, if you have an invoice with net-15 terms, it means you have 15 days from the time you received that invoice to pay the balance.

If you received an invoice with no payment terms outlined, the typical timeframe of 30 days should be assumed.

How to Pay an Invoice Online

The physical process for paying an invoice online will vary based on the invoicing or payment processing software the business uses. Typically, it will flow like this:

1. Open the email with the outstanding invoice.
2. Look for a button that directs you to “Review and Pay Invoice.”
3. Confirm that all the information is accurate.
4. Find the button or area on the page that directs you to pay.
5. Input your credit card information or complete other payment method requirements.
6. Confirm that the payment amount matches the invoice and what you agreed upon.
7. Submit the payment and receive the receipt.

Paying invoices online is usually a seamless process. Best of all, most businesses allow for flexible payment methods. Some of the common ways to pay an invoice online include:

• Credit card payment: The most common way to pay an invoice online is by credit card. While most businesses will allow any type of credit card, you’ll want to confirm beforehand—some businesses do not accept credit cards like American Express or Discover because of their increased fees to companies.
• Bank transfer (ACH): Another popular method for paying an invoice online is to pull it directly from your bank account via ACH. If you can afford to pay with ACH, you can often use this fact to negotiate lower rates with businesses. ACH payments can save a business money on transaction fees, which can be quite expensive—especially on large invoices.
• PayPal payments: PayPal is another common way to pay invoices online and simply involves signing into your PayPal account within the payment processing step. To pay an invoice with PayPal, you’ll need to have an active and funded PayPal account or have it connected to your bank account.

How to Pay an Invoice Offline

If you received an invoice and are looking to pay it without using an online option, then you’re limited to a few methods. While not the most convenient, safe, or fastest way to pay invoices, offline payments usually include:

• Paying in person: You can often pay invoices in person—with COVID-19 restrictions, you’ll want to confirm this first. Typically, you can use a credit card, check, or debit card to pay a bill directly at the business.

• Paying over the phone: Many businesses will also accept payments over the phone, but this is not the most secure way to pay an invoice. The business will collect your credit card information over the phone and pay the bill manually.
• Paying by mail: You may also be able to write a check and pay your invoice through the mail. Again, this is not the safest or fastest way to pay a bill—and the customer may experience delays, which could cause your payment to arrive after the due date.