Starting a new business is a dizzying undertaking, made of equal parts excitement and responsibility. There are a seemingly endless number of things to take care of, boxes to check and hoops to jump through on your way to becoming established and successful. However, along the way many startups fall into the trap of overlooking one of the most necessary components of well-founded business: proper record keeping.
Too often startup leaders wait until the last minute to look after their financial statements and end up overwhelmed and out of time. While we recommend hiring an accountant (or at least consulting one) to tend to your records and help you develop an organized system for now and for the future, one of the best ways you can help your own cause is by saving money and avoiding unnecessary tax penalties.
Here are a few of the most common tax mistakes startups make.
Choose the Wrong Legal Entity
When it comes to choosing your company’s legal structure, there are many ways you can go about it. You can decide to use sole proprietor, partnership or one of any number of corporations for your startup. There is no “right” choice, just the option that best fits your particular needs, as each comes with its share of advantages and disadvantages. For instance, many startups begin as sole proprietorships and over time find themselves paying through the nose in self-employment taxes.
Familiarizing yourself with the state and federal tax laws associated with each type of entity, or speaking with a tax professional who already is, will help you get started on the right foot.
Not Tracking Expenses Correctly
By now you are no doubt aware that getting your company up and running is not cheap. From the get-go, you are allowed to deduct all ordinary and necessary business expenses, such as mileage, event fees and office supplies. But if you do not keep track of these expenses as they add up throughout the year, you are going to miss out on some serious savings.
Devise a system to keep track of your expenses and store your receipts. For the technologically savvy, there are plenty of apps available that can help you track expenses, record mileage and even photodocument receipts. For the more old-fashioned, keep a travel log in the glove box to record your miles and an airtight filing system for your financial statements.
The point is, find a system that works for you and stick with it. If the IRS ever decides to come knocking, you’ll be thankful you did.
Not Paying Quarterly Taxes
Getting your business operational is hectic. The IRS realizes this and wants to give you a free pass on your quarterly taxes during your first year. After that, however, you should be settled in and ready to estimate your taxes every 3 months based on an accurate taxable profit estimate. Though it is not a legal requirement that you pay your taxes quarterly, it is a good practice to get used to and it may help you avoid nasty penalties and associated interest costs.
Getting in the habit of paying quarterly develops your foresight and planning skills, helping you put aside a certain percentage of your revenue to respect your tax obligations. Trust us, on top of all the other responsibilities associated with a startup, you do not want to add the shock of a full year’s worth of taxes in one lump sum.
Running a business is tough enough without many stressful deadlines, the complicated tax codes and regulations you are required to adhere to. Let us help you make sure you are playing by the rules and on the right track to reaching your business goals. Contact us today to schedule an appointment.