Entrepreneurs Guide to Tax Planning for Startups

Tax planning is the analysis and arrangement of a person’s financial situation in order to maximize tax breaks and minimize tax liabilities in a legal and efficient manner. Tax rules can be complicated, but taking some time to know and use them for your benefit can change how much you end up paying (or getting back) when tax season rolls around in April. Here are some key tax planning and tax strategy concepts to understand before you make your next money move.

#1 Utilize the tax code.

First, you can use the rules and regulations in the tax code to your advantage. By definition, the tax code is “a federal government document, numbering thousands of pages that details the rules individuals and businesses must follow in remitting a percentage of their incomes to the federal or state government.” Essentially, the code regulates what the government charges and what the populace owes.

Although its sheer size and complicated verbiage intimidate most people, utilizing the tax code can be beneficial to business owners. In fact, it can be an incredible wealth-building opportunity if business owners assess it and build their business operations around it. You see, the government is constantly passing new tax rules, regulations, and laws. Inevitably, opportunities for planning appear. If you and your professional team of tax advisors can utilize those loopholes, then you can minimize your tax liabilities legally and immensely.

Additionally, the majority of the tax code is written to show business owners and individuals on how to reduce their taxes. Only a very small portion of the code tells you what you’re going to have to pay. Technically speaking then, the government is giving away its secrets, and they’re available to you! By working with professionals who understand the code, you can legitimately minimize your tax liabilities.

#2. Increase Your Tax Deductions

Your taxable income is what’s leftover after you’ve determined your AGI. You have a choice here: You can either claim the standard deduction for your filing status, or you can itemize your qualifying deductions. But you can’t do both.

  • Itemized deductions include:
  • Expenses for health care that exceed 10% of your AGI
  • State and local taxes up to $10,000, or $5,000 if you’re married and file a separate return. You can substitute sales taxes you paid for income taxes if this is more beneficial for you.
  • Property taxes
  • Personal property taxes such as car registration fees
  • Interest on mortgages of up to $750,000, or $375,000 if you’re married and filing separately, provided that the funds are used to “purchase, construct, or make substantial improvements” to your primary or secondary residence
  • Casualty and theft losses that result from a nationally declared disaster

One key tax planning strategy is to keep track of your itemized expenses throughout the year using a spreadsheet or personal finance program. You can then quickly compare your itemized expenses with your standard deduction. You should always take the higher of your standard deduction or your itemized deduction to avoid paying taxes on more income than you have to.

#3. Have the appropriate paperwork.

This may seem simple, but having the right paperwork is essential to filling your taxes correctly. This paperwork should include the proper reports that have been analyzed by an advisor. All of this should be organized so that in the chance of an audit, everything is easily accessible for reference.

#4. Invest in accounting and bookkeeping systems.

If you’re depending on professionals to help you minimize and prepare for your business’s tax liabilities, invest in a good accounting system. Either purchase small business bookkeeping software that will calculate many of your tax liabilities for you, or hire a local tax professional to do the bookkeeping for you. Better yet, purchase the software system your bookkeepers use, and import your data into their system. That way, they can double-check the entries you’ve made for accuracy and help you stay compliant with the tax code.

Besides providing you with checks-and-balances, a good accounting software system can generate monthly, quarterly, and yearly income and expense reports for you. Not only can Clear Financial Reports Entice Business Buyers, but they can also help you anticipate upcoming tax liabilities. You and your tax professionals can use the reports to monitor your profits and losses. Knowing what your taxes could be ahead of time can help you save up the money you’ll owe. Or, it will help you know what adjustments you need to make before the end of the year to reduce what you’ll owe.

#5. Avoid Additional Taxes

If at all possible, avoid taking early withdrawals from an IRA or 401(k) retirement plan before you reach age 59 1/2. The amount you withdraw will become part of your taxable income, and you’ll additionally pay a 10% tax penalty.

The Bottom Line

Tax preparation and planning can help you avoid stress when the deadline comes around to file your taxes. If you have a plan in place and the help of a trusted and experienced advisor, you can file your business taxes with confidence. This is a year-round process of tax preparation and can be segmented into manageable steps.

Limitless Investment and Capital’s Certified Business Tax Professionals

Getting to the tax planning party early is recommended. The more mindful you are throughout the year will reduce your stress and help keep your business organized. We highly suggest this to all of our partners. If your company does not currently have a tax advisor and trusted CPA, now is the time to find one who is well-versed in your industry. Since your taxes can make a financial impact on your business, it’s critical to go to someone with experience. Contact us today to get started.