5 Important Tax Season Tips for Startups

It’s tax season and a good time for business owners to take a look at their accounting system, tools and processes to make sure they’re doing everything they can to maximize income and minimize taxes. Startup founders and small business owners generally concern themselves with growth and fundraising rather than assessing their accounting needs, says Meredith Tucker, a manager in entrepreneurial services at Miami-based tax consultancy Kaufman Rossin. But without a solid base, a new business can get into trouble pretty fast.

“Big ideas, funding and growth are sexy; accounting isn’t,” says Tucker. “Even though things may be going a mile-a-minute, a business still needs its foundation in place, or else there will be big problems later on.” Startups and small businesses that haven’t maintained their financial records in the right way could wind up tangling with the IRS or paying more than necessary in taxes.

It’s too late to do much about 2014 but there’s plenty of time to make sure your business is in good shape for the 2015 tax season. Here are some of Tucker’s suggestions:

1. Make sure your startup has a good bookkeeping system in place. “There’s been a revolution in accounting software, especially for startups. It used to be that folks would buy QuickBooks and use that, and although that’s still the industry standard, it’s not for everyone,” says Tucker. “There is FreshBooks, which is especially suited for very small businesses and sole proprietorships, and Xero, for slightly bigger businesses.”
2. Establish a relationship with a certified public accountant. Find a CPA you trust and meet with them to discuss which bookkeeping software is right for you and get advice about how to structure it for your business. “You don’t have to hire them to do your monthly bookkeeping, but meeting with a CPA for a couple of hours that first month is a smart use of your money,” says Tucker. A CPA will also help you categorize business expenses so you can get the most advantageous tax treatment. “Certain buckets have certain tax advantages,” she says. “You might bury some of your expenses in a bucket in your accountant would never think to look, and that could have had advantageous tax treatment.”
3. Use the company card for purchasing–it is the best way to separate business and personal spending. If you do pay a vendor or make a business purchase with your personal credit card, make sure to keep track of it as an out-of-pocket expense. “Do it when it happens—don’t wait, otherwise you’ll forget about it and won’t get to claim the expense,” says Tucker.
4. Set up a retirement plan inside your company. “I know that startups are often starved for cash, and young entrepreneurs, especially, aren’t thinking about retirement, but these plans are tax deductible,” she says. You’ll get a business deduction for having a retirement plan and you’ve have added a benefit to your compensation that will be attractive to potential hires.
5. Put money aside from the company’s earnings to pay estimated taxes throughout the year. “We see entrepreneurs that just stick their head in the sand all year and then come April they are robbing from Peter to pay Paul, taking from the current year’s profits to pay last year’s taxes. You don’t want that,” says Tucker. “It’s a vicious cycle.”