Reviewing your taxes probably doesn’t rank very highly when it comes to ways to spend a summer day. And if you only recently filed, you’re probably even less interested. But a little smart planning now will make tax time, well, less taxing come year end.
Your Mid-Year Tax Review
What should you be looking for?
1. Get professional advice. Don’t wait until late in the year when everyone’s frantically trying to book and the best ones don’t have availability.
2. Determine whether your business structure still makes sense. It may be time to incorporate or form an LLC. LLCs benefit from “pass-through” taxation, potentially lowering your taxes. Requirements vary from state to state though; so make sure you meet the requirements for the state(s) your business operates in. Or, if you envision raising VC funds soon, consider converting to an S-Corp. You’ll avoid “double taxation (likely not an issue right now, but could make a big difference once you’re cash flow positive)” by reporting business income and losses on your personal tax returns. Get legal advice and go over what-if scenarios with your tax professional before making any changes.
3. Make sure you have all your receipts. Not being able to document expenses is not only an indicator of poor financial controls, it’s also like painting a big bullseye on your front door for auditors. Take some time to comb through what you have, matching payments to receipts, and/or ask for duplicate copies if you’re missing any for large purchases. Also, take a look at our previous post, Keeping Track of Your Startup Expenses.
4. Double-check estimated payments. The due date for making Q3 2014 estimated payments is September 15. Be sure your payments track your expected tax liability. If revenues are ahead of plan and that looks to be sustainable based on your budget and financial projections, increase your estimated payments to avoid an underpayment penalty later on. If revenue is short of what you’d planned for, you could opt to apply those payments to next year’s tax liability or reduce the amount of your remaining estimated payments for the second half of this year so that you retain cash.
5. Hunt down those W-9s. Nothing’s worse than having to scramble at the end of the year to match W-9s and collect all the required information from multiple contractors. Review your agreements now and confirm that you have complete records for each and every contractor. Not filing 1099s or properly categorizing contractors can lead to stiff penalties; especially with the IRS’ increased scrutiny of contractor payments.
6. Review your employee withholding. Employers are required to collect federal income, social security, medicare, and unemployment taxes from employees. This is a good time to check that you’ve been properly calculating and collecting these while you still have time to make some course corrections before year end.
7. Review state tax deadlines and required collections. The deadline for extension of time to file is September 15 for most states, but there are some exceptions. Also check that your payroll deductions for state (and any local) income taxes are accurate. Be aware of state sales and use tax filing and payment deadlines: these vary from state to state as do the types of good and services subject to it. For a look at what can happen if you don’t stay on top of these, read this article from the Denver Post Business.
8. Prepare for federal tax deadlines. If you filed for an extension of time to file, in most cases the deadline for getting your return in is September 15. You’re likely to be in the same boat as a lot of other business owners, so don’t wait until the last minute to review and finalize your returns with your accountant/tax preparer.
9. Time large expenses. Certain payments can be deducted as expenses rather than having to be capitalized. Whether you’re using cash or accrual (GAAP) basis accounting, this might mean expediting some expenses so that you realize the tax benefit of deducting allowable costs when filing this year’s taxes. There are limitations to and restrictions on deductions, so be sure to check with your tax professional.
10. Stash cash. Making contributions to a retirement plan can offer entrepreneurs significant tax breaks. If you don’t yet have a retirement plan for your small business, October 1 is the deadline to establish a Simple-IRA. It is worth doing, not only for employee morale, but also because employer contributions are tax deductible.
A final note and something you should be doing all year, year in and year out: always segregate your business expenses from your personal ones.
Have a tax question? Tell us about your startup tax concerns in the comments section below or contact Early Growth Financial Services for a free 30 minute financial consultation.
Glenn McCrae is Early Growth Financial Services’ Chief Strategy Officer. He is a CPA, with extensive experience working with early-stage companies. His expertise spans capital raising (from seed stage to IPO), strategic analysis of business opportunities, business development, financial analysis, and corporate governance. He previously held the roles of VP of Finance and CFO in several dynamic organizations including: a non-profit, a real estate firm, and a broker-dealer.