Handling business taxation for the first time is difficult for entrepreneurs more focused on operations than compliance. Yet lowering tax liabilities is a key component of managing overhead costs and maximizing profits. With some diligence upfront and ongoing strategies, founders optimize their tax situations.
Your corporate structure influences what taxes get paid and how much owners owe personally. Sole proprietors report business income and expenses on personal returns. Partnerships and S Corps pass gains/losses to members. C Corps pay taxes on earnings before shareholders pay dividends. Consult professionals on optimal structures for revenue, payroll size, ownership, and liability factors. Converting later is an option but still a hassle.
Track and deduct expenses
Deducting every allowable business expense lowers taxable income significantly. Keep immaculate records following IRS rules. Deduct supplies, contractor fees, equipment, employee costs, travel, vehicles, pensions, healthcare, and more. Taking questionable deductions risks audit issues if unable to substantiate so claim conservatively. Deducting losses during startup years offsets personal income temporarily. Tax credits directly reduce dollars owed. Federal credits relevant to small businesses include the Work Opportunity Credit, Empowerment Zone Credit, and Research Credit. Certain states also offer tax credits for hiring and operating locally often missed opportunity. File for applicable credits diligently every year. While conditions must be met, credits lower effective tax rates. The online platform is the right choice to grasp more detail.
Accounting tax year strategically
Cash basis accounting recognizes income/expenses when payments occur. Accrual basis accounts for all sales/purchases regardless of payment status. Weigh impacts on tax liability when picking methods. You also select fiscal year rather than calendar year as your tax year end. Shifting year end from December to say March grants extra time to pay first-year taxes. Business owners must prepay taxes quarterly based on projected liability rather than waiting to settle up at year-end. Paying quarterly also helps avoid underpayment penalties. Determine each quarterly payment based on last year’s numbers. Paying quarterly necessitates planning but ensures IRS obligations get handled responsibly over the year.
Look for opportunities to accelerate expense deductions into the current tax year while postponing revenue recognition as long as allowable. For example, large equipment purchases or inventory buildups lower the current-year tax burden. Just stay compliant with accounting rules and revenue recognition principles when strategizing timing. Retirement plans serve the dual benefit of prudent savings and tax reduction. Do the math to maximize contributions up to legal limits. While not always easy to change, different states and municipalities have varying corporate tax rates, deduction rules, credits, and filing obligations. Research regional differences when picking business locations. In certain situations, relocating or opening additional offices in lower tax geographies could save substantially long-term.
Hire accounting help
Work closely with business-savvy CPAs and accountants so taxes get handled accurately and advantageously from inception. Their tax expertise pays for itself in savings. Have them review your situation regularly for opportunities? Portraying income and deductions requires know-how. Skilled professionals ensure full compliance. Tackling business taxes may not be fun, but strategic planning from the start and working with professionals ensures you maximize deductions and credits legally to retain more hard-earned profits. Don’t leave tax money on the table.
