Whether you’re considering a startup business or have already begun one, be sure you don’t overlook the important matter of taxes.
Experts strongly advise business owners to take time to look at businesses similar to theirs and research how they are handling taxes, including what structure they are using to establish their startup.
While many startups lean toward using the LLC structure, as it’s an easy way to have losses offset other income for shareholders, it may not be the best way to go, long term. Rather, a C Corporation can be an attractive alternative, especially for startups that don’t expect to make large distributions to its owners.
Under the C Corporation structure, a startup may have the potential for exclusions from federal tax on some or all gains from the sale of Qualified Small Business Stock, according to tax experts. Additionally, if your startup is seeking funding, many investors prefer a C Corp, as it offers them greater protections.
To ensure a much smoother experience at tax time, be sure to separate your personal and business expenses right from the beginning of your startup. Most advisors recommend investing in professional expertise to ensure you fully understand federal and state taxes, including payroll taxes, where steep penalties can be assessed if not filed properly.
Many startups seek home office deductions, however, keep in mind that to qualify, you must have a separate office within your home that is used solely for your business.
Real estate property taxes are another issue of which startups need to be aware. Keep in mind that these taxes vary greatly from city to city. When you are deciding where to base your business, be sure to familiarize yourself with that area’s real estate property taxes.
Tax professionals recommend adding a tax advisor to your startup team to aid in the understanding of tax credits and write-offs. Some costs incurred during the creation of the startup may currently be deductible. Depending on the activity, the taxpayer can deduct up to $5,000, with the balance being amortized over a 15-year period.
If a new company has gross receipts under $5 million and it has certain research and development expenses, the startup can chose to deduct up to $250,000 per year of federal R&D tax credits toward its Social Security and Medicare payroll taxes.
Keep state and local taxes in mind, as well, advisors say. States are becoming more aggressive in asserting corporate income, sales taxes and other non-employee withholding requirements on new companies.
And as always, if you have any questions about tax considerations for your start-up business, contact your tax advisor at Diamond & Associates, PC. We are here to help!