DISCLAIMER: This article is for informational purposes only and does not constitute legal or financial advice, nor is the content represented as being all-inclusive, correct, complete or up-to-date. No one should rely on any information contained in this article and should, instead, consult with qualified legal and tax professionals for personalized guidance.
Entrepreneurs are often referred to as risk-takers because getting to success often requires unconventional thinking and execution. However, there are aspects to running a business that require a more conventional and by-the-book approach — an important one being tax planning and preparation. Of all the responsibilities we juggle as entrepreneurs, from growing our business to managing people and day-to-day operations, taxes can sometimes be one of the more complex and burdensome aspects of our responsibility. This is why understanding and implementing accurate and efficient tax strategies for entrepreneurs is crucial to optimizing your financial situation and ensuring your business is running with compliance.
Over the years, I’ve learned some practical strategies to navigate the complex world of taxation. In this post, I’m sharing my top four tips for tackling taxes to benefit your finances, help you stay compliant, and bring you peace of mind.
1. Consult With a Tax Advisor
For those embarking on their entrepreneurial journey, seeking advice from a tax advisor is paramount. A tax advisor can shed light on the frequency of tax payments you need to submit, the states where sales tax applies, and how to organize your financial records accurately for seamless tax filing. Working with a tax advisor early on can prepare you for unforeseen pitfalls and help you spot eligible business deductions to offset your taxable income.
Finding the right tax advisors is essential for entrepreneurs to navigate the complexities of taxes and optimize their financial situation with accuracy. Here are four key tax advisors every entrepreneur should consider working with:
Bookkeeper:
A bookkeeper maintains your financial records, ensuring accurate and organized data for tax reporting. Having clean and well-maintained financial records is crucial for efficient tax preparation.
Financial Advisor:
A financial advisor can assist entrepreneurs in creating long-term tax-efficient investment strategies which align with their business and personal financial goals.
Certified Public Accountant (CPA):
A CPA is a licensed professional with expertise in accounting and tax laws. They can provide valuable guidance on your business’s tax planning, financial statements, and overall financial management.
Tax Attorney:
A tax attorney specializes in tax laws and regulations, providing legal advice on complex tax matters. Having a tax attorney by your side can be particularly beneficial during audits, tax disputes, or dealing with intricate tax issues.
Inaccuracies in tax reporting can lead to interest penalties, and overpaying taxes might deprive your business of essential cash. So, collaborate with a tax advisor to ensure accurate reporting and adherence to tax accounting rules.
Pro tip: Open a separate business bank account or credit card to expense from. Charges made on personal credit and debit cards can get lost over time. Having a separate account for your business sooner than later will allow you to stay organized.
2. Maximizing Deductions and Expenses
Understanding the importance of identifying all allowable business expenses is key. You can significantly reduce the taxes owed by getting clear on what can be expensed and what cannot. Allowable business expenses will net against any income you bring in, reducing the taxes owed on any net profits.
Allowable expenses are especially important at the beginning of your journey. Expenses related to doing business — like airfare, meals, and car rides — can be costly as you meet with potential investors, vendors, suppliers, and partners. Many entrepreneurs pay out of pocket for business-related expenses and eligible expense deductions offer an opportunity to catch up financially. (Small expenses add up quickly!) Here are a few other expenses that should be accounted for:
Home Office:
If you work remotely, the setup and maintenance of your primary home workplace may be eligible for tax deductions. Portions of your rent, mortgage interest, and utility bills support the success and operation of your business, so be sure to talk with your tax advisor on how to accurately account for these home office costs.
Education and Development:
Attending a conference or taking a learning course relevant to your business may qualify as a tax deduction. Continuing education and networking can enhance your development as an entrepreneur and in certain instances, these related expenses can reduce your tax bill.
Research and Development (R&D):
Research related to creating, enhancing or designing goods or services for your business may be eligible for tax credits. From product materials to hiring a scientist for lab reviews, there are several areas where R&D tax credit can apply. If your business is active in R&D, consult with your tax advisor to determine the applicable tax credits and deductions your business may be eligible for.
Avoid missing deductions or documentation by saving your receipts and keeping them organized to substantiate your claims.
3. Leverage accounting software
By adopting accounting software, like QuickBooks, early on, entrepreneurs can gain a competitive edge in managing their finances, making informed tax decisions, and ensuring accuracy and efficiency of records. User friendly accounting software may be a more accessible, do-it-yourself option if hiring a professional bookkeeper is not feasible. (Advancements in tech have allowed software to catch common errors, call out possible deductions, and file records accurately. Overall, incorporating accounting software into your business practices can be a game-changer because it’s like having a financial expert at your fingertips):
Saves Time and Effort:
Time is money and energy — two vital resources entrepreneurs can’t spare to waste. Automating financial tasks, like bookkeeping and data entry, can save valuable time and effort that should be allocated to growing your business.
Accurate Financial Records:
Accounting software helps maintain precise and up-to-date financial records, reducing the risk of errors and helping to ensure tax compliance. You can even link your business bank accounts to most accounting software to track expenses in real-time, to ensure you don’t miss any potential deductions to optimize tax-saving opportunities.
Real-time Financial Insights:
With access to real-time financial data, entrepreneurs can make informed decisions about their business’s financial health and potential tax implications. Most accounting software can create visual reports to give entrepreneurs insight into their spending habits and budgets throughout the year.
Easy Tax Preparation:
Come tax season, accounting software simplifies the tax preparation process by generating financial reports and organizing relevant data, making filing taxes less burdensome. You can easily transmit reports to tax advisors and preparers to help streamline the document gathering process.
4. Assess your budget for tax repayment
Investing in your business’s growth is essential, but effectively managing your tax responsibility is equally important. With the right planning and resources, you can stay on top of your tax obligations and spend less time worrying about the process. To help you effectively plan and save for tax repayment throughout the year, consider taking these four steps:
Estimate Tax Liability:
Create a business forecast and budget to estimate your quarterly net income, allowing you to reserve sufficient funds for tax payments. Business performance predictions aren’t always reliable, so assessing your business performance monthly is important. Leveraging the most current and realized financial data can help determine whether you need to reserve more or less cash for taxes.
Create a Tax Savings Account:
Open a separate account and regularly deposit a portion of your income for tax payments. Smaller deposits over time will save you the stress of paying a large lump sum during tax season. To make it easier, set up automatic transfers to your tax savings account for consistent contributions.
“Cash planning means carefully managing and predicting how much money comes in and goes out of your business. Accounting for all your business’s non-negotiable needs, including tax payments, is critical to ensure you have the right amount of cash to drive your business and stay tax compliant.” — Nancy Twine
Work with a Tax Advisor:
Let the experts guide you. Collaborate with a tax advisor to identify potential credits and deductions, optimizing your tax savings. Consulting with a tax advisor early on in your venture will help you understand how frequently you’ll need to pay taxes, in what state(s) you’ll need to pay sales tax, and how to organize your records to ensure you file your returns accurately.
Pay Estimated Taxes:
You can get ahead of tax repayment by making quarterly estimated tax payments. You can work with a tax advisor to calculate your expected income and make payments before tax season to avoid penalties and stay on top of your tax obligations. These incremental payments can automatically be scheduled and drawn from your account to save time and effort.
There was a year when implementing smart tax strategies significantly impacted my own business’s financial health. During that time, Briogeo was growing rapidly, and we outperformed our sales goals beyond what we could have ever anticipated. As our team ramped up marketing investments with the incremental cash sales we were bringing in, we stopped to reassess our budget and tax liability. From there, we adjusted our contributions to our tax savings account to reserve enough cash to pay a higher tax bill, to account for the increase in profits.
Additionally, with the ramp-up in sales and profitability, we negotiated an increase in our line of credit to help us cover additional taxes owed. This strategic move helped us maintain financial stability and growth momentum by reinvesting profits into our business and ensuring we were maintaining an appropriate amount of cash to cover our tax liability.
The Tax Takeaway
Taxes may seem daunting, but with the right approach, they can be managed effectively while optimizing your business’s financial health. Remember to consult with a tax advisor early on, maximize deductions, and stay aware of overlooked credits to minimize your tax burden. Balancing business growth with proper tax management can create a solid foundation for success as an entrepreneur. So, embrace the challenge of understanding taxes, and don’t hesitate to seek professional advice — it will undoubtedly benefit your venture in the long run.
How can implementing these tips benefit your business’s financial health? Share your insights in the comments!
