Starting up your own venture may be a dream but you have to be prepared for an initial shock, just like it happens when you dive in icy waters. The workload is only half the challenge because you can expect to face several issues as well. To make things more complicated, many of them come out of the blue. One of these issues is startup taxes, which can be far more complex than you believe. Moreover, going wrong with them is risky as it can lead to trouble with the IRS, which is the last thing you would want to handle amid the other startup challenges.
There are good chances of encountering tax problems because these issues often end up on the backburner when entrepreneurs are occupied with the other aspects. Thankfully, being aware and prepared can save you hours, tax bills, and penalties. Moreover, it can keep you completely stress-free so that you can focus on growing your business. It makes sense to know the essential tax rules and stay ahead right from the day you start. Let us highlight the ones you need to be vigilant about.
Rule #1: Form a proper structure
Founders must have a clear idea about the structure of the venture, whether you want it to be a corporation or a limited liability company (LLC). For a corporation, you must also decide whether it would be a C corporation or S corporation because both have different tax forms. An LLC allows the losses to offset the ordinary income of the shareholders. C-corporation is taxed separately from its owners while S corporations pass corporate income, deductions, losses, and credits to the stockholders for taxation purposes.
Rule #2: Separate business and personal expenses
As a new entrepreneur, you may not understand the value of segregating your business and personal expenses. But not doing so can make your tax filing complicated, time-consuming, and expensive in the long run. With everything botched up, you will have to go through every single receipt with a fine-tooth comb rather than simply pulling out a report for filing your returns. Your accounting team will end up wasting long hours, which they could have devoted to more productive tasks.
Rule #3: Always stay ahead of the deadlines
Every taxpayer needs to respect the IRS deadlines and startups are no exception. Just because you have a hundred other things to handle doesn’t give you an excuse to miss deadlines. Have your accounting team working on the returns well before the deadlines so that you never miss out. If you expect an audit, seek guidance from an expert. It is advisable that you work only with the best tax attorneys who have the right solution to save you from legal hassles. New entrepreneurs often end up getting scrutinized because of inexperience and solid legal representation is the only way to get out of the fix.
Rule #4: Have all your documents in place
Many new businesses fail to document their income and deductible expenses because they do not have a proper process in place. Have an accounting team to handle the paperwork. Empower them with accounting software so that they can document the essentials accurately and quickly. These applications reduce the burden of the team and ensure that nothing is missed so that they have plenty of time to work on critical aspects of the business. Ensure that they check out the IRS website on a regular basis and maintain the details of the transactions and documents needed for taxation purposes.
Rule #5: Stay ahead of payroll taxes
For new businesses with small teams, it is easy to forget payroll taxes but the mistake can be expensive. You may end up paying steep penalties if you miss out on filing or paying taxes. In fact, doing so intentionally is a federal crime and the IRS would pursue you for it. The best thing to do is to avoid the issue in the first place. Just paying up the state and federal payroll taxes on time, within three days of issuing the payroll checks, will keep you clear of any liabilities.
Apart from following these rules, you need to stay on track with the basics such as accuracy of returns, claiming legitimate deductions, and understanding your tax credits. Ideally, you should hire seasoned tax professionals because startup taxes can get confusing at the initial stages. Moreover, you should also seek assistance from expert tax lawyers if there is a change of a dispute or legal issues with the IRS. An honest and proactive approach towards your taxes will keep you out of trouble.