It’s that time of year again: time to start working on those startup tax estimates—otherwise known as that time of year when you need to start getting your act together! If you engaged in mid-year tax planning, great! You’re ahead of the game. But, if you didn’t, you’ll want to start those estimates now so you can avoid any unwelcome surprises come tax time.
Even if your company didn’t have much of a profit (or any profit at all!) to show for the year, you still need to stay on top of your tax obligations. In the case that your company has no taxable income, you’ll want to try to maximize your losses, reducing the amount of book tax differences. And of course you want to make sure you file in time to stay in compliance.
Follow these steps to start the process of end-of-the-year startup tax planning:
1. Profit and loss analysis. Hopefully this isn’t the first time all year you’ll be checking out your profit and loss statement. Presumably you’ve been keeping track of all of your expenses and income throughout the year. Once you’ve confirmed that these numbers are current and reconciled, print out a current profit and loss statement, reflecting the year-to-date with a comparison to the previous year. Comparing your profit and loss statement to the previous year is key in understanding how your business is performing, both in terms of cash in and cash out. Note that whether you select cash or accrual accounting will depend on your reporting of income and expenses for tax purposes.
2. Project to year-end. Use the data in your year-to-date profit and loss statement to project your income and expenses out through the end of the year, factoring in any end-of-the-year seasonal impact.
For help with taxes and financial projections, contact Early Growth Financial Services.
3. Identify significant book tax differences. For example, the purchase of any capital assets will affect your tax liability, so make sure that transactions such as these have been captured in your financial statements. Fixed assets should show up and you should record depreciation. If you acquired fixed assets, you can take deductions for 50% of depreciation, plus the asset, plus the regular depreciation on the remaining basis. Make sure you’re not missing out on these types of tax savings.
4. Consider the impact of your business return on your individual return. Depending on your classification, all the things that impact on your corporate tax are going to impact on your individual tax as well. For example, if your business is classified as an S corp, profits are factored into your individual tax return, though not subject to self-employment tax. On the other hand, if you own a C corp, your company will incur and pay tax, separate from your individual and self-employment tax.
5. Consult with a tax professional. You can only get so far on your own when it comes to tax planning. Ultimately you need to work with a professional whose business it is to understand all of the most recent changes to tax law, all possible exemptions, credits, etc. Your tax specialist will be able to help you to identify what you can do to minimize your taxes for the year. Whether it’s AMT credits or capital losses, your tax professional will guide you through the tax planning process and identify factors that will directly impact your tax liability.
Have you started thinking about your taxes? Tell us about your startup tax concerns in comments below or contact Early Growth Financial Services for tax support.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with accounting, finance, tax, valuation, and corporate governance services and support. He’s a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.