Paying taxes is an integral aspect of doing business. Your business’ tax obligations depend on various factors, including the size and geographic scope of your operations. As your business expands, chances are, your tax obligations will also increase.
As you map out your business’ long-term growth, it is essential to plan for the taxation changes that may accompany it. Without a solid tax plan, you may find your business facing tax compliance issues and financial penalties that threaten the health of its operations.
To help you stay on track, here is a brief overview of four crucial tax considerations for growing businesses.
Venturing into New Locations
Your business may expand into new locations (counties, states, or even internationally) to facilitate its growth. This could mean launching operations in a new county, a new state, or even a new country. Your business may expand by physically setting up new offices or factories, or it may sell its products and services in new locations via established distributors. Whatever the case, your business will be liable for taxes under the new locations’ tax jurisdictions.
Expanding into new states and countries may attract the following taxes:
- Income taxes
- Sales taxes
- Employment taxes
- Self-employment taxes
- Sales taxes
Your business’s new tax obligations will depend on the laws in the new location. For example, sales tax rates vary from state to state, and a few states don’t charge sales tax at all.
Expanding a business usually requires increasing your costs to accommodate new growth. For example, you may need to renovate your current facilities, open new office locations, buy new equipment, and employ and train more people. In many cases, the purchases you make to expand your business can be deducted from your total taxes owed.
The IRS classifies tax-deductible business expenses as either operational expenses or capital expenditures. Operational costs may be fully deducted from your taxes in the same year you purchase them. They include assets that you use within the same year you pay for them, such as office supplies and employee wages.
On the other hand, capital expenditures are assets that will provide value for longer than one year, such as new facilities, machinery, vehicles, or research and development efforts. While capital expenditures are tax-deductible, you must gradually deduct their value over a period of years to reflect the assets’ depreciation.
Ideally, your business should try to take advantage of these tax opportunities as it plans for growth. An experienced tax professional can help you assess your upcoming costs and identify opportunities to save on taxes.
Internal Tax Reporting Capabilities
Many small businesses struggle to file their tax returns. Unfortunately, tax preparation only becomes more complicated as your business grows, and it is important to ensure that your internal tax and accounting systems are up to the task.
Scalability and automation are the most important considerations when optimizing your internal tax processes. Scalability means that the system should be flexible and versatile enough to accommodate new solutions, such as more employees and new tax reporting software.
Automation is also crucial because it minimizes errors and speeds up the tax preparation process. In contrast, manual tax and accounting systems are prone to errors and take up valuable resources such as time and labor.
Tax Credits & Incentives
Various tax jurisdictions offer tax credits and incentives to attract new businesses to their communities. Some credits and incentives are fixed, while others are negotiable. A trusted tax professional can help you identify locations with favorable tax environments and evaluate how expanding to these locations could benefit your bottom line.
As a business owner, you must make many challenging decisions as your company expands. It’s important to make tax planning an integral part of your decision-making. Your company’s tax situation can have a significant impact on its long-term growth and success. As such, it’s a good idea to thoroughly research how your business’ growth plans will impact its taxes, in addition to seeking the guidance of a tax professional.