Running a startup requires wearing many different hats. In all the excitement of building a team, creating a brand identity, and introducing new products to the market, it can be easy for startup leaders to forget about taxes. However, this mistake can have dire consequences. Tax mistakes can easily expose you to penalties and future problems with the IRS. It is important for startups to prioritize tax planning from the onset and maintain tax compliance as they grow. Keep reading to learn about the common business startup tax mistakes and how you can avoid them.
Choosing the Wrong Legal Entity
Choosing your company’s legal structure is one of the most crucial decisions you will make when setting up your business. This decision will affect how you file the taxes, as well as how much you pay. You can register your new startup as a limited liability company, sole proprietorship, partnership, C corporation, or S corporation. You can avoid creating additional problems by carefully researching the advantages and disadvantages of every legal structure. Knowing the taxes associated with each business entity will help you make an informed decision.
Lack of Proper Records
Remember that you should only claim business tax deductions if you can prove you actually spent the money on whatever you claim. Many entrepreneurs neglect to keep proper expense records throughout the year and start scrambling to get receipts when the tax season is near. The best way to avoid this is by going digital. You can make things easier for you and your bookkeeper by scanning and uploading receipts and other documents to the cloud. Invest in dedicated apps that will transcribe information for every receipt and ensure you have expense records for at least six years from the date of filing your returns.
Combining Personal and Business Finances
In the early days of your company’s development, it may be tempting to combine your business and personal finances. However, this can cause confusion when it comes time to file taxes, and you may end up making costly mistakes or owing more than you expected. In the worst case scenario, your business could be stripped of its corporate status. Mixing your business and personal finances makes it far more difficult to determine which expenses are related to your business or tax deductible. Over time, the inability to account for reimbursable expenses can cause you to miss out on significant tax savings. You can avoid this mistake by establishing a financial account for your new business from the start and maintaining separate records for all your business transactions.
Not Deducting Business Expenses
If you have a startup but are not deducting your business expenses, you are missing out on an opportunity to save money. Generally, deductible business expenses must be both “ordinary” and “necessary,” according to the tax code. There are several vital deductions that startups can take advantage of. They include bank fees, meals, training program costs, home offices, and research and development. The best way to ensure you capture all the essential startup tax deductions is by researching before the tax season and working with an experienced tax professional.
Not Consulting the Experts
Tax mistakes can get your business into trouble, but the guidance of an experienced tax expert can save you time and stress while ensuring the accuracy of your taxes. Most company founders believe that handling back-office tasks such as accounting and bookkeeping on their own will help them save money. However, if you lack proper expertise and training, it will cost your business in the future. It is best to talk to tax planning and preparation specialists to handle all your startup tax needs. You will enjoy peace of mind knowing that a professional is carefully managing your business taxes.
Proper Planning is Key
Tax requirements can be cumbersome, and compliance may seem intimidating. Despite a startup’s best efforts to maintain accurate bookkeeping and accounting records, things may still go wrong if you are not diligent. Efficient tax planning, preparation, and filing need a proper strategy from the onset. By avoiding these mistakes, you can keep your business tax compliant and prevent future problems with tax agencies.