Selling products or services brings revenue into your new business. It’s your bread and butter if you will. Without income, your company can’t pay its expenses, and you can’t pay yourself. However, the more money you make, the more money you will owe to the government. So how do you hang on to your hard-earned dollars? How do you lessen your tax burden? Or, at the very least, how do you prepare for it? Well, there are a few tax planning strategies for startups that you could consider. To protect the money you make in your business, I’ll give you five strategies I encourage my clients to use. But I challenge you to work with your tax professional to know if these are right for you… you never know, he might help come up with a few more.
Special thanks to Chris Mahan of Mahan & Associates LLC: Healthcare Business Professionals for his contributions to this article.
In business, your ultimate goal is to make money. Nobody starts a business hoping to lose money. It just doesn’t happen, folks. You want to optimize your top line revenue and protect your bottom line dollar. Therefore, you hire professional advisors to help you. Most importantly, you lean on your CERTIFIED FINANCIAL PLANNER™, your tax or business attorney, and your CPA or tax professional to optimize your business’s performance. Working with these individuals is one thing. Getting these individuals to work together is another. However, if you can facilitate a coordination amongst those three advisors and yourself, you can run a profitable business AND save money in tax liabilities. Then, rather than asking how much you owe in taxes, you’ll know how to run your business to save for tax liabilities.
I’ve heard countless clients say they despise the IRS, and they hate taxes. Yet, paying taxes is inevitable. Everyone who lives in the United States must pay some form of federal, regional, and local taxes. Benjamin Franklin, one of the nation’s founding fathers even quipped, “In this world, nothing can be said to be certain, except death and taxes.”
Since you have to pay taxes, don’t just do it; do it well. Find ways to keep as much money in your business as possible. Implement one or all of the following tax planning strategies to protect the money you make in business.
First, you can use the rules and regulations in the tax code to your advantage. By definition, the tax code is “a federal government document, numbering thousands of pages that details the rules individuals and businesses must follow in remitting a percentage of their incomes to the federal or state government.” Essentially, the code regulates what the government charges and what the populace owes.
Although its sheer size and complicated verbiage intimidates most people, utilizing the tax code can be beneficial to business owners. In fact, it can be an incredible wealth building opportunity if business owners assess it and build their business operations around it. You see, the government is constantly passing new tax rules, regulations, and laws. Inevitably, opportunities for planning appear. If you and your professional team of tax advisors can utilize those loopholes, then you can minimize your tax liabilities legally and immensely.
Additionally, the majority of the tax code is written to show business owners and individuals on how to reduce their taxes. Only a very small portion of the code tells you what you’re going to have to pay. Technically speaking then, the government is giving away its secrets, and they’re available to you! By working with professionals who understand the code, you can legitimately minimize your tax liabilities.
If you’re depending on professionals to help you minimize and prepare for your business’s tax liabilities, invest in a good account management system. Either purchase bookkeeping software that will calculate many of your tax liabilities for you, or hire tax professionals to do the bookkeeping for you. Better yet, purchase the software system your bookkeepers use, and import your data into their system. That way, they can double-check the entries you’ve made for accuracy and help you stay compliant with the tax code.
Besides providing you with checks-and-balances, a good accounting software system can generate monthly, quarterly, and yearly income and expense reports for you. Not only can Clear Financial Reports Entice Business Buyers, but they can also help you anticipate upcoming tax liabilities. You and your tax professionals can use the reports to monitor your profits and loses. Knowing what your taxes could be ahead of time can help you save up the money you’ll owe. Or, it will help you know what adjustments you need to make before the end of the year to reduce what you’ll owe.
When you’re paying people to prepare your taxes, you expect them to “prepare” your tax returns based on information you bring them from the previous year. However, when you’re paying people to plan your tax liabilities, you can expect them to do more than compile data and place it in correct boxes and lines.
First of all, your tax planners should be actively looking for ideas to save you money. They should demonstrate mastery of the tax code and know how to apply its advantages to your business. While you can make suggestions and ask questions about ways to reduce tax liabilities, your tax planners bear the ultimate responsibility to find and apply tax savings and tax advantages to your financial statements.
Secondly, your tax planners should be proactively forecasting your tax liabilities throughout the year. They should be reviewing your current financial statements periodically so they can prepare you for any upcoming liabilities. Furthermore, they should customize a tax plan for you to reduce those liabilities as much as possible. Hold them accountable. Expect them to keep you informed so that you aren’t caught off guard when your taxes are due. Ask them to create strategies with you and for you to help you reduce liabilities.
While you have the right to ask your tax planners to work for you, they have the right to expect certain things from you, too. If you ask them to project your upcoming tax liabilities, you must promptly and periodically provide them with your current financial reports and statements so they can do that. Go back to point #2. Invest in a good accounting software to make your job easier and to make your tax planners’ job easier. Use a system that produces reports quickly and accurately. Don’t throw a shoe box full of receipts at your tax planners on February 15 and expect them to project what you’ll owe by February 20. Send them balance sheets and income and expense statements throughout the year so they can project what you’ll owe the following March 15th.
Additionally, give them as much information about your accounts and financials as possible. Even consider consulting your tax planners before you make a major financial decision. Did you sell a house this year? Have you bought a car? Are you paying for a child’s college tuition? Do you have any interest in purchasing new equipment for your business? Your tax planners can’t work with information they don’t have. They’d much rather receive too much information from you than too little. They can always set aside data they don’t need, but they can’t produce data they don’t have.
Furthermore, follow the advice your tax planners give you. If you’re paying them to develop strategies to reduce your tax liabilities, then trust them enough to follow their advice. Don’t ask them if you should purchase new equipment if you don’t plan to listen to their suggestions. Don’t demand tax projections from them if you haven’t bothered to send them your financial statements. Hold yourself accountable just as you hold your tax planners accountable.
Finally, avoid tax schemes to protect the money you make in business. If your neighbors or friends tell you they’ve saved millions of dollars in taxes, check out their stories. Don’t believe everything you hear. Do your own due diligence because if it sounds too good to be true, it probably is.
Put tax strategies to the sniff test. When you hear about an out-of-the-box strategy, ask for two or three references you can call who have utilized the strategy. Then, have your tax planners review the strategy. Have them talk to your financial planners and your attorneys, too. Remember, coordination amongst your advisors is the best way to create tax reduction strategies and to prepare for any upcoming tax liabilities.
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