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With so many factors to consider when beginning a startup business, such as purchasing, marketing, and hiring, it’s easy to place issues like taxes on the backburner. However, if you don’t take the time to familiarize yourself with common tax issues, you could run into big problems.
A little well-researched information about taxes can avoid any trouble later on. Here are four things you need to know before you do your startup’s taxes.
Set Up the Right Legal Structure for Your Startup
The legal structure of your startup business determines which taxes you have to pay, and how you go about paying them. Types of legal structures include sole proprietorship, partnership, limited liability company, C-corporation, and S-corporation.
By forming a proper structure from the start, you will know how it affects your taxes before you have to complete your first year’s tax forms. Choose a business structure that allows you the best tax benefits, and don’t overlook the various types of taxes you might have to pay.
They can include income tax, self-employment tax, estimated tax, employer tax, and excise tax. Consult a tax professional to help you determine the legal business structure that’s right for your startup.
Hire a Tax Professional
By hiring an experienced tax professional, you will not only gain assistance in knowing what structure to set up. You will also have help at hand for every element of doing your taxes. It may cost money to employ an accountant, but every good business needs to be on top of its finances and taxes.
So, hiring a professional can save you money in the long run. Of course you can do it on your own using Google Sheets but it’s very time-consuming. Things like understanding tax codes can be very confusing for individuals who are not experts, so it’s advisable to bring an accountant or another tax professional onto your startup’s team as early as possible.
It’s best to hire a Certified Public Accountant, as you can be sure he or she is highly-qualified to give you the best advice. These experts have to complete a CPA exam course before they can become qualified. There are various CPA exam courses available. You can find out more about them at BeatTheCPA.
Identify Eligible Deductions for Your Startup
Once you have started business operations, you need to identify the tax deductions and write-offs for which your startup is eligible. Too often, startup businesses do not make the most of these benefits, for the simple reason that many are unaware of the deductions they can receive.
Many everyday business expenses are tax-deductible. Standard deductions include equipment and supplies, marketing expenses, business travel, health insurance premiums, and even meals and entertainment expenses. Furthermore, your new business may be able to deduct up to $5,000 of its startup costs when those expenses result in the creation of a viable business.
Those expenses include the costs of creating your business entity, organizational expenses, and legal fees. By keeping your financial records up-to-date all-year-round, it will be easy to identify eligible tax deductions.
Do Not Misunderstand Important Elements
If you are unsure of how some of your business decisions affect your taxes, be sure to check. For instance, many startups use home offices as their business bases. You may think it’s simple to deduct a home office for tax purposes, but it can be more complicated than it seems.
Your home office must be a separate space that is used solely for business purposes. The IRS does not allow an office-cum-bedroom. If you’re eligible for a home office deduction, you can arrive at the figure by calculating your home office’s square footage along with expenses for items like insurance, mortgage interest, and utilities.
Hiring employees can also bring new tax challenges. A commonly misunderstood area is correctly classifying your workers. If an auditor discovers you have misclassified your employees, you could face serious financial consequences.