5 Tax Planning Strategies

Have you made the decision to launch your very own startup? Excellent! There's nothing quite like being in control of your own business.

To maintain a strong financial standing, it's crucial to consider your startup's tax liability and develop a well-structured plan for tax time.

Failure to do so could result in your startup paying more than its fair share of taxes. This unnecessary tax burden can place financial strain on your business, hindering its growth. The good news is that implementing a startup tax plan can ensure you only pay what you owe to the IRS, and nothing more.

What Does Tax Planning Entail?

Tax planning, by definition, involves carefully and consistently tracking and organizing your finances to maximize your company's tax savings when the tax season arrives.

Your startup likely has a wide range of expenses that can be deducted from taxes. Additionally, you may qualify for specific tax credits or exemptions that support business growth. By effectively managing your finances and implementing the right planning strategy, your company can benefit from significant tax savings.

5 Effective Strategies for Business Tax Planning

Adopt the following five strategies to reduce your overall tax burden and achieve tax efficiency.

Perform Monthly Book Closures

While many companies close their books on a quarterly, semi-annual, or annual basis, doing so can lead to various issues, including difficulty in identifying errors, managing cash flow, and meeting tax filing deadlines. Performing monthly book closures offers several advantages:

• Time: Waiting until the year's end to close your books often results in a cumbersome, stressful, and time-consuming process. It involves finding receipts, conducting research to determine eligibility for tax credits, and sifting through a year's worth of invoices and financial documents. Staying on top of monthly closures makes the process significantly less overwhelming.
• Tax Savings: To justify your tax deductions, you'll need receipts and supporting documents. Waiting for quarterly, semi-annual, or annual closures may lead to the loss of these necessary documents.
• Accuracy: By regularly accounting and closing your books every month, you'll have a closer eye on individual financial transactions. This ensures your records remain accurate at all times.

Regularly Consult with Your Tax Advisor

Considering the complexity of the United States tax code, it's wise to involve an expert. Seeking tax planning services solely at the end of the year is insufficient. Instead, schedule regular meetings with your startup tax advisor.

Your tax advisor can guide you on actions to take throughout the year to minimize your tax burden. They can also assist in creating effective tax planning strategies and hold you accountable to them.

Develop an Action Plan to Meet Deadlines

Meeting all tax filing deadlines is crucial. Filing your tax return late results in interest and penalties on top of any tax balance owed.

An effective action plan for meeting deadlines includes:

• Daily, weekly, and monthly systems for tracking and categorizing expenses
• A process for collecting and organizing receipts
• Strategies focused on discussed tax credits with your tax advisor
• Weekly reconciliation events to maintain organized books
• A schedule outlining specific deadlines and related action items

Identify the Tax Credits and Deductions for Your Startup

You can save money on taxes by leveraging tax deductions and credits. However, there is no one-size-fits-all solution for the tax savings opportunities your business qualifies for. Consider the following:

• Standard or Itemized Deductions: As a business owner, you must choose between standard and itemized deductions. The standard deduction is a predetermined amount allowed by the IRS. Itemized deductions offer greater savings potential, but they require receipts and supporting documents. Consult with your tax professional to determine which option benefits your business the most.
• Tax Credits: Numerous tax credits are available. For example, if your business is in the research and development phase, you may qualify for the R&D tax credit.
• Other Potential Tax Savings: Additional tax savings may be accessible to you. For instance, you can deduct up to $5,000 of startup costs and $5,000 of organizational costs in your first year of business. Consult your tax advisor to ensure you don't overlook any opportunities.

Maximize Depreciation Benefits

Depreciation is an accounting technique that allocates the costs of assets over time. In some cases, depreciation results in losses, reducing your company's tax burden. For example, as you use a company truck each year, it depreciates in value. You can claim these losses as deductions, thus lowering your tax burden.

Seek Expert Assistance for Your Business Taxes

Managing startup taxes can be challenging, but it doesn't have to be overwhelming. With the right tools, the job becomes much easier.

First and foremost, use up-to-date accounting software to keep your books in excellent condition. Additionally, regularly consult with a tax expert to ensure you're taking all necessary steps to minimize your tax burden throughout the year.