Taxes are one of life’s necessary discomforts. One that all business people must grapple with. Like a trip to the dentist or planning your estate, thinking about taxes is something you should do regularly but tend to avoid until it’s too late.
Of course, this is the wrong approach. Once tax preparation time comes around, it’s often too late to make changes that create significant improvements.
Good tax planning means thinking about taxes before tax time rolls around. Startups are often in the fortunate position of being agile enough to make structural changes and build good tax habits from the very beginning.
But what’s the difference between tax planning and tax preparation? And how can your startup tackle your taxes on offense?
Tax preparation and filing is simply the act of preparing and submitting tax returns and documentation for the regular deadlines.
While tax preparation is a critical part of running a business, it’s not actually where the big impacts are made. By the time your accountant is preparing your startup’s taxes, many variables are already fixed.
Indeed you have some flexibility when it comes to taking the proper deductions, claiming certain credits, and how you treat certain revenues and expenses. But the big impacts are going to come out of a thorough tax planning process.
An accountant experienced with startups can help you make sure your tax planning is done properly and to your advantage. These experts can probably also save you money and improve your cash flow. They’ll ensure that you’re claiming all available credits, taking the maximum allowed deductions, and checking that the business is properly structured for your specific situation and long-term goals.
What is Tax Planning?
Where tax preparation is more of a reactive activity, tax planning can be extremely proactive. Tax planning is the act of looking into the future and making educated decisions that benefit the business based on the existing tax rules and business goals.
However, this is something that most business owners aren’t prepared (or able) to do on their own. A tax expert who is focused on startups is much more likely to have a good grasp of the ins and outs of our complex tax codes.
They’ll also understand the different requirements and advantages of different business structures. And can help you make the best tax decisions for your business, all with the goal of saving you and your company money.
A Regular Exercise
Ideally, tax planning is a year-round activity. Meeting regularly with your tax advisor (or whenever major changes occur) will ensure you’re capturing the latest developments and can adjust your tax planning accordingly.
Why Do Tax Planning?
While the criminal laws are pretty straightforward, tax laws are full of credits, exemptions, and loopholes. Competent planners know these laws inside and out and are happy to help you save your company money while ensuring you’re operating within the law.
For example, different legal entity structures are taxed differently. Some entities, like LLCs and S-Corporations, are referred to as “pass-through” entities. This means the company elects to pass income and losses directly to shareholders for federal tax purposes. Others (like a C-Corporation) are taxed separately from the owners.
Both types of entities have benefits and drawbacks, but each can have a major impact at tax time.
Credits and Deductions
There are a multitude of credits and deductions available to businesses. One of the most useful is the R&D tax credit. The R&D tax credit rewards established businesses and startups alike for investing in research for new products and solutions. Additionally, there are credits and incentives for improving energy efficiency and implementing other green technologies.
Often, certain cities or states will grant exemptions for certain sectors and locations to encourage companies to establish a local footprint.
As your business grows, your team might too. But as you hire more people, your payroll reporting requirements will also change. You might need to offer benefits or stock options that can have complicated reporting requirements and tax implications.
How you handle these dynamic situations can have a major impact on your quarterly tax bills. Creating a plan with your tax expert can save you money and improve your startup’s cash flow by optimizing your tax liability.
Tax Planning vs Tax Preparation for Startups
Startup taxes can present tricky problems for even the most capable founders to solve.
Frankly, most companies aren’t equipped to handle this task all on their own. But you need more than just someone to prepare your taxes every quarter.
You need a tax expert to make sure your business and operations are set up to optimize your tax situation so that you’re paying the right amount over the long term. You’ve got to take advantage of all available deductions, credits, and loopholes.
Founder’s CPA and their tax experts can help. If you’re wondering how your tax strategy measure’s up, set up a free consultation with one of our startup tax experts.