How Startups Can Ace Year-End Tax Planning
This post originally appeared here.
With the end of December rapidly approaching, putting off your year-end tax planning until “later” is a losing game. Startups in particular face unique tax planning challenges, including a lack of experience managing a thicket of tax rules and obligations (federal, state, local) and/or a lack of funds to dedicate to staffing an in-house accounting department. On top of that, tax planning has new wrinkles this time around thanks to 2017’s Tax Cuts and Jobs Act (TCJA) legislation.
So, where should you start? In my experience, getting a handle on these five areas is key to getting through tax season with the least amount of pain.
1. Start early.
Make sure you’ve scheduled time well in advance to meet with your accountant/tax professional. That way, you’ll avoid the year-end tax rush. You’ll also have more time to course correct, budget for an unexpectedly large tax bill and lay the groundwork for next year. Because time is money, when you meet with your tax preparer you’ll want to maximize the efficiency of your time together. Not only does a lack of organization drive up costs, it also takes precious time and focus away from running your business. That leads me to my next point.
2. Get organized.
Don’t wait until the last minute to start gathering those receipts, invoices and other relevant records. Now is the time to go through your calendar and other records and make sure you have receipts for large purchases, ordinary and necessary business expenses (including travel, supplies and money spent entertaining clients) and documentation for the revenues you earned and all your financial obligations. If you find there are gaps in your record keeping, you still have time to request backup copies.
3. Get informed.
The TCJA offers some attractive expanded deductions for businesses. It also includes new limitations. Benefits include a 20% business income deduction for companies set up as LLCs or partnerships (as long as they meet specific criteria) and special deductions for certain types of business expenses such as depreciation. On the other hand, the curtailing of some deductions such as using net operating losses (NOLs) to offset income and a new cap on the deduction for business meals may have negative impacts. Your tax professional can work with you to help you take full advantage of deductions that apply to your business and minimize the impact of new limits.
4. Take practical steps now.
There’s still time to reduce your tax liability before year end. This could mean accelerating big purchases so that you can deduct them on this year’s taxes, setting up and contributing to a qualified retirement plan for your employees so you can take the associated deduction on this year’s taxes, or (lawfully) deferring income, for instance by extending your payment terms, until after the end of the year.
5. Prepare for next year.
It might seem strange with this year’s season just beginning, but the best way to stay on top of tax season is to not let it sneak up on you. That includes knowing key filing dates such as the deadlines for paying your quarterly estimated taxes, making sure you’re keeping track of expenses and important financial transactions — if you haven’t done this already, invest in a good expense-tracking and reporting system — and building a relationship with an accountant, tax professional or CFO who has experience working with startups.
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