Tax Tips for Small Business Survival

There are many aspects to starting a business but the most important aspect in my opinion is taxes.  As a business owner, staying on top of taxes will ensure the survival of your business.  Before opening your business you (as the owner) may want to consider which type of business entity is appropriate for you, such as, a sole proprietorship, partnerships, or corporations to name a few.  Each entity has different tax regulations or benefits accordingly, so choose wisely.  Filing for the federal income tax is a priority for any type of business.  Other types or taxes are: state income tax, employment tax, sales and use tax, and excise tax.  When first starting out, it will behoove any business owner to educate oneself or seek professional advice when handling taxes.  Also, the area that leads to common errors or even missing out on savings within the first year is depreciating assets. 

            Depreciation of assets or a write-off of an asset can be challenging.  Most fixed assets by law must be depreciated over what is considered its useful life. (Tax laws can be found at <www.irs.gov>)  One misunderstanding about depreciation is that some may believe depreciating an asset will provide money for its replacement.  This is incorrect, for only the revenue generated (or not) from the asset over its useful life can be used to replace it.  As for which method that should be chosen, it is up to the owner to pick what works for that particular company. For example, a new company choosing the straight-line method over an accelerated method ay be best according to Tax-Savvy for Small Businesses.  Due to fewer profits during the beginning stages of a business you may benefit from the smaller deductions by using straight-line depreciation.  Furthermore, keep any records of personal use vs. business use of certain assets such as a computer, so at least part of the asset can be written-off.  On the other hand, you may choose to not write-off the asset over its useful life and declare the asset under Section 179.  For example, this allows the new business for its first year to expense the asset (in service) at full cost as long as it does not exceed $128,000 (as of 2008).  Be aware of the tax bracket you are in prior to claiming Section 179 because freeing up cash may push you into a higher tax bracket which equals paying more money.  Read about other qualifications and rules regarding Section 179 deduction in J.K. Lasser’s Small Business Taxes, 2008 edition.  You can find this book, along with tips and a free news letter at <www.BarbaraWeltman.com>. 

            Educating yourself about good book keeping and where you can receive help will ensure that you know about special tax reductions within the first year of business and most of all, save money.  First, if you can invest in yourself and take a few courses in accounting this may help your business save money.  Learning how to keep your books and records in order and learning the generally accepted accounting principles (GAAP) and the upcoming international financial reporting standards (IFRS) will improve your chances of reducing your taxes.  For example, good book keeping will reduce your time filling out tax forms, and enable you to pay your taxes on time. It is crucial to never file your taxes late and incur un-necessary penalty charges!  Also, if you choose to have your taxes done by a professional, and your records are already in order and accounting principles were followed, they will spend less time organizing and charge you less money.  Preparing taxes through tax software programs such as Turbo Tax may help decrease any confusion when filing but even with these programs you may still need professional advice.  Educating yourself about the various types of tax advisors will help in choosing which one is the best for your business.  Certified public accounts (CPAs) seem to be commonly hired by small businesses due to their significant training (licensed by the state) and advice.  Choosing a CPA from a smaller firm will less likely charge a high rate compared to a CPA from one of the “Big Four” accounting firms.  In order to get more “bang for your buck” and not just a number cruncher, go online to <www.cpadirectory.com> to find the right CPA to match your company’s needs.   

            Though filing taxes may be challenging for a small business owner, there are plenty of ways to get assistance and save money.  Educating yourself on the ever changing tax laws and knowing the basic accounting principles may seem tedious but it is a sure way to ensure the survival of your business.