If you’ve only recently started up, you might think that worrying about and planning for taxes is something you can do later, when your company starts earning revenue. If that’s the case, it could cost you. You need to think about taxes from the very beginning: both to avoid tax trouble later on, and to benefit from tax deductions.
To make sure you stay in the clear, avoid these all too common tax mistakes.
1. Not understanding your tax obligations
Unfortunately, ignorance of tax law is not an acceptable defense. Once companies have earned revenue, they also have recurring tax obligations. You need to know what tax compliance looks like for your company on both the federal and state levels plus municipal licensing fees, payroll taxes, 1099s and more.
2. Selecting the wrong legal entity
You could set up as a sole proprietor, partnership, or some form of corporation. While there are costs and benefits to every choice, there is no right or wrong answer—only the best choice for your company. Make sure you get up to speed on the advantages and disadvantages, including tax impacts, of each before you choose one.
3. Not bringing in a professional
Once you get established and incorporate, don’t let managing taxes distract you from your core focus: getting your company up and running. The other reason you want a professional tax advisor is so s/he can accept liability. Find a professional to handle your taxes and make sure you’re in compliance with all existing regulations. Choose wisely. Your choice of tax professional can have a big impact on your business.
It’s surprising how many entrepreneurs make the mistake of not keeping their business and personal finances separate. In the best case, this results in confusion. In the worst, you could be sued and forced to pay additional taxes. Your company could even be stripped of its corporate status. Set up business checking and savings accounts and credit cards and keep your financial records separate.
5. Passing up deductions
In addition to deducting certain “business start-up costs,” you can deduct all “ordinary and necessary” business expenses. This can include everything from work-related travel to office supplies to client dinners. You can even deduct fees for professional services and a portion of your expenses for rent and utilities if you work from home and maintain a dedicated home office. To get your maximum deductions, and maintain good records, track all your expenses as you incur them. Expensify is a good and easy to use platform.
6. Inadequate systems
It’s important to track all your financial transactions: from expenses to revenue earned, to billings, and more. At least 80 percent of our clients use Quickbooks because it is relatively inexpensive and easy to use. But there are many other systems—both software and cloud—available. Choose one that allows for dual entry accounting. Even more importantly, think long-term. You need a system that will accommodate you now, five years down the road, and beyond.
7. Skipping quarterly tax payments
Once you’ve made it through your first year in business, you’re on the hook for quarterly taxes. If you incorporated sometime during 2014, you would have filed a tax return in the beginning of 2015; then, in 2015, begun making quarterly payment, whether or not you’re structured as an LLC. A professional can help you estimate your annual taxes and keep you up to date with filings dates and details throughout the year. Even if you aren’t legally required to pay quarterly taxes, it’s a good idea to make the payments so that you spread out of the pain (and the financial hit) from taxes.
Staying on top of your startup tax obligations can be confusing to say the least. But with some advance planning and the right professional support, the process can at least be pain free.
A version of this post was originally published in Forbes.