Have you decided to launch your own startup? Great! There's nothing like being your own boss.
But just like Uncle Ben pointed out in Spider-Man, "With great power there must also come great responsibility." While a startup’s mission may be different from a Marvel superhero’s, one weight to bear as a founder is managing your taxes.
To stay on top of your finances, you should think about your startup tax liability and have a well-laid-out plan when you get to tax time.
If you don't, your startup could end up paying more than its fair share of taxes. That undue tax burden could result in financial strain on your startup, making it difficult to grow. The good news is that a startup tax plan can help ensure you don't pay anything more than what you owe to the IRS.
Read on to learn more about how to set up effective tax planning strategies for your business.
What Is Tax Planning?
By definition, tax planning is when you gradually and diligently track and organize your finances so you can maximize your company's tax savings when tax season rolls around.
Your startup likely has a long list of expenses that you can write off as tax deductions. You may even qualify for certain tax credits or exemptions to help support your business growth. By tracking your finances effectively and using the right planning strategy, your company can enjoy significant tax savings.
5 Effective Business Tax Planning Strategies To Implement
Follow the five planning strategies below to reduce your overall tax burden and achieve tax efficiency.
1. Close Your Books Monthly
Many companies only close their books quarterly, semi-annually, or even annually. However, this can lead to several issues such as difficulty identifying errors, managing cash flow, and meeting tax filing deadlines. Closing your books monthly gives you the following advantages:
- Time – If you wait until the end of the year to close your books, the process will likely be cumbersome, stressful, and time-consuming — you'll need to find receipts, conduct research to determine whether you qualify for tax credits, and comb through a year’s worth of invoices and other financial documents. If you stay on top of your monthly closings, the process will be far less overwhelming.
- Tax Savings – You’ll need receipts and supporting documents to justify your tax deductions. If you wait for quarterly, semi-annual, or annual closings, you may lose track of the documents you need.
- Accuracy – If you’re accounting daily and closing your books every month, you'll have a closer eye on individual financial transactions. This will help ensure that your records are accurate at all times.
2. Meet With Your Tax Advisor Frequently
Let’s face it: the United States has one of the most complex tax codes in the world. As a result, it’s a good idea to bring an expert into the fray. The end of the year isn’t the only time you should seek tax planning services — instead, set a schedule to meet with your startup tax advisor regularly.
Your tax advisor can point out what you can do throughout the year to reduce your tax burden. They can also help you create effective tax planning strategies and hold you accountable to them.
3. Create An Action Plan For Meeting Deadlines
It’s important to meet all tax filing deadlines. When you file your tax return late, the IRS will charge you interest and penalties on top of any tax balance you owe.
A good action plan for meeting these deadlines includes:
- Daily, weekly, and monthly systems for tracking and categorizing expenses
- A process for collecting and filing receipts
- Strategies centered around tax credits you've discussed with your tax advisor
- Weekly reconciliation events to keep your books in order
- A schedule that includes specific deadlines and a list of related action items
4. Determine The Best Tax Credits And Deductions For Your Startup
You can save money on your taxes by taking advantage of tax deductions and credits. However, there is no cookie-cutter solution for the specific tax savings opportunities your business will qualify for.
Here are a few things to consider:
- Standard or Itemized Deductions – As a business owner, you’ll need to choose either standard or itemized deductions. The standard deduction is a predetermined amount of funds that the IRS allows you to claim automatically. Itemized deductions let you claim more, but you'll need receipts and other supporting documents to back up those claims. Consult with your tax professional to determine which will be most advantageous for your business.
- Tax Credits – There are several different tax credits to consider. For example, if you're in the research and development phase, you may be eligible for the R&D tax credit.
- Other Potential Tax Savings – Other tax savings may also be available to you. For instance, you can deduct up to $5,000 of your start-up costs and up to $5,000 of your organizational costs in your first year of business. Speak with your tax advisor to make sure you’re not leaving any cash on the table.
5. Make The Most Out Of Depreciation
Depreciation is an accounting strategy used to allocate the costs of assets over time. In some cases, depreciation shows losses, resulting in a minimal tax burden for your company. For example, every year you drive a company truck, it loses value. You can claim those losses as deductions, resulting in a lower tax burden.
Why Is Tax Planning Important For Startups?
Tax planning is important for any type of business but there are some serious benefits for startups. Here’s why:
- Tax planning lets you save on your taxes by making small adjustments on an ongoing basis. For example, after speaking with your tax advisor, you may find that with a little more R&D spending, you'll qualify for a tax credit that could cover a major portion of your expenses. You could save a significant amount of money by making that small change in advance.
- Developing a tax strategy ahead of time helps ensure you have all the documentation you’ll need to take advantage of write-offs and deductions at the end of the year.
- Implementing your tax plan throughout the year saves you time, energy, and stress, making filing your taxes easier.
Get Expert Help With Your Business Taxes
Startup taxes can be difficult to manage, but they don’t have to be. The job is much easier when you take advantage of the right tools.
First and foremost, use up-to-date accounting software so your books are always in tip-top shape. And don’t forget to regularly speak with a tax expert to ensure you’re doing everything you can to reduce your tax burden throughout the year.
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