Startup tax filing may not be the most exciting topic, but it is a formidable force in business. It’s essential to running a successful small business in the USA. Every dollar saved is a dollar reinvested into your small business.
For entrepreneurs new to the business world, navigating startup business taxes can be intimidating. And while they may not be the main act, think of them as the backstage crew, quietly running the whole production behind the scenes. Suppose you need to be better-versed with tax-saving strategies tailored for small businesses in the United States. In that case, you might throw your hard-earned money along the ride.
In the United States, small businesses account for a staggering 99.9% of all US businesses. They generated just under two-thirds (63%) of the new jobs from 1995 to 2021. However, many of these businesses still need to be made aware of the tax-saving opportunities they could avail of.
But don’t worry; learning about these strategies will feel like being handed the key to a treasure chest. The US tax system has hidden easter eggs that can save you money and make your entrepreneurial journey more thrilling. So, get ready to take charge of your financial future and make filing taxes for your startup business work for you, not against you.
Organizational structures & tax implications
Before diving into the nitty-gritty, choosing an organizational structure suitable for your small business is essential. How you incorporate your business is the first step in startup tax preparation and is necessary to determine your tax liability.
1. Sole Proprietorship
If you’re a solo entrepreneur, simplicity reigns supreme for you. You’ll enjoy complete control but also be personally liable for business debts.
Benefit: Sole proprietors report business income on their tax returns. It’s straightforward, with no separate startup taxation for the small business.
Partnerships are widespread for startups with multiple founders, allowing you to share the workload and risk with your partners. You choose how to divide the profits and losses, and partners can report their share of each on their tax returns.
Benefit: Partnerships offer pass-through taxation. This means that profits and losses flow through the partners’ tax returns.
3. S Corporation
S Corporations are an excellent option for small businesses looking to avoid the double taxation of C Corporations. As an S Corporate owner, you can enjoy limited liability while passing profits and losses directly to shareholders. However, you must pass the eligibility criteria, such as having a strict number of shareholders, being a US citizen, or passing residency requirements.
Benefit: S Corporations have pass-through taxation, similar to partnerships. You can avoid double taxation.
4. C Corporation
C Corporations offer a separate legal entity with limited liability to shareholders. However, it leads to double taxation at corporate and individual levels. At the same time, flexibility comes in structuring salaries, benefits, and ownership arrangements.
Benefit: If you plan to go public or attract outside investment, C Corporation should be the one for you.
Your structure choice depends on your business goals, the number of founders, and the level of personal liability you want to employ. Importantly, this sets the stage for your tax-saving strategies. Let’s break it down further.
Tax saving strategies for small business owners
These strategies are your holy grail for keeping more money in your business’s coffers. Some of these are tailored for small business owners, so why not make the most of it?
1. Keep clean records
Maintain meticulous financial records to always stay on top of your financial health. These document all your expenses, income, and transactions. When read right, they also inform you how to claim deductions and credits accurately.
2. Maximize deductions
Take advantage of deductions like Section 179, which allows you to deduct the business cost of equipment and property. Furthermore, you can also deduct expenses like rent, utilities, and interest on business loans. The IRS permits startups to deduct up to $5,000 in their first year of organizational and startup costs. Again, make sure you have receipts and records for everything.
3. Utilize tax credits
Find out the tax credits that apply to your business. For instance, the Research & Development (R&D) tax credit can reward small companies for innovation and product development. You can also opt for Work Opportunity Tax Credit (WOTC) by hiring employees from specific target groups.
4. Employee benefits
Contributing to employee retirement plans like 401(k)s can reduce your taxable income while creating an attractive employee package for top talent. Building Health Savings Accounts (HSAs) for your employees can also be a tax-efficient way to provide healthcare benefits.
5. Home office deductions
If you work from home or your small business is based out of your home, you might qualify for a home office deduction. This enables you to deduct home-related expenses like rent, utilities, and internet costs, depending on the size of your home office.
6. Deduct tax at the source
You must ensure your startup payroll tax filings are done correctly as an employer. Mistakes can cost you penalties. Familiarize yourself with tax obligations related to employee wages, Social Security, and Medicare. Opt for an HRMS system or outsource your payroll services if need be.
7. Limit cash payments
For business transactions, favor digital or checks over cash. Paper transactions are more complex to track and could invite the taxman’s eyes on you and your business. Keep the records as clean and digital as possible.
8. Employ family members
Hiring family members can be more beneficial than you think. You get to work with a family member while they’re paid well for their expertise.
9. Invest in business vehicles
Need wheels for your business? Turn it into an investment. Buying a vehicle can lead to substantial deductions, reducing your taxable income.
10. Stay informed about tax laws
The tax landscape is forever changing, so you must be on top of updates and changes to maximize your deductions and credits. If you need to be better-versed in tax knowledge, consider consulting with a professional who can help you navigate the world of taxes.
These tax-saving strategies are your businesses’ secret sauce to acing taxes for startups. Each opportunity is a goldmine for keeping more money in your business and propelling your business to tremendous success. A penny saved is a penny earned. With these newly gained insights, conquer the tax maze with a smile and make tax savings fun.
Want to know more about finance and accounting? Since 2006, Escalon has helped thousands of startups get off the ground with our back-office solutions for accounting, bookkeeping, taxes, HR, payroll, insurance, and recruiting — and we can help yours, too. Talk to an expert today.
This material has been prepared for informational purposes only. Escalon and its affiliates are not providing tax, legal or accounting advice in this article. If you would like to engage with Escalon, please contact us here.