Tax planning is crucial for start-ups

Failure to understand the rules can lead to lost deductions. Free workshops and ‘webinars’ hosted by government agencies are available.

November 08, 2010|By Cyndia Zwahlen

Tax planning may not seem like the most exciting part of starting a new business, but down the road when it saves a lot of money, the payoff can be exhilarating.

“Starry-eyed entrepreneurs who skip planning could get caught in the taxman’s net,” said Daniel D. Morris, a partner at accounting firm Morris & D’Angelo in San Jose.

Some budding businesspeople don’t realize they may have to file a tax return, even if they’ve not yet made a penny in revenue or even started formal operations.

For example, if a start-up registers as a limited liability company in California, a state income tax return will need to be filed along with an $800 payment.

New entrepreneurs, who might be working out of their homes, also have to be careful to document tax-deductible expenses, accountants said. If a budding businessperson is planning to write off car and cellphone expenses, for example, business versus personal uses of these items will need to be carefully tracked.

And many new business owners put off tackling tax issues because they are daunted by the topic and busy trying to get their products or services to market. About one-third of the start-ups Morris sees in his practice don’t become clients until after the tax year ends, giving them fewer options to cut their tax bills, he said.

Jewelry designer Sara Wilson, who made her first sale in July of the sorority logo necklaces she designs and sells on her Greek Girl Shop website, said she has yet to meet with a CPA and is not sure whether she should be paying federal income taxes quarterly or waiting until April 15.

“I wasn’t exactly business savvy when I started,” she said.

In defense of new business owners, it’s not easy to navigate the maze of federal, state, county and city tax rules when starting out, especially in situations that make it difficult to estimate how much income will be generated.

“It’s very difficult to plan tax-wise for your first year because you don’t know really where you are going,” said Linda Freeman, who started House Calls, a contractor referral and home-services consulting business, out of her Sherman Oaks home in February. “I don’t know what my tax liability will be.”

Different tax rules apply to different kinds of start-ups. And to make matters more confusing, California tax law doesn’t always follow the federal tax code.
Learning the ropes, including the exceptions, is important. For example, if an LLC or corporation is formed in California within 15 days of the end of the year and no revenue has come in, it won’t have to file a state return or owe state tax for that year, said Lynn Freer, publisher of Spidell Publishing Inc.’s California Taxletter in Anaheim.

She encourages start-ups to sign up for the free workshops and “webinars” hosted by government agencies.

The Internal Revenue Service’s website has a section for small businesses and self-employed people at http://www.irs.gov/businesses/small/index.html. And the agency’s taxpayer advocate service has an online toolkit with information for new business owners at http://www.taxtoolkit.irs.gov/tax-topics/businesses.

Source:  http://articles.latimes.com/2010/nov/08/business/la-fi-smallbiz-taxprep-20101108

Advertisements

2 Responses to Tax planning is crucial for start-ups

  1. […] This post was mentioned on Twitter by homepreneurs, homepreneurs. homepreneurs said: Tax planning is crucial for start-ups: http://wp.me/pNFA0-b4 […]

  2. If the IRS has placed a tax levy on you, it will seriously affect your credit standing and would either render sale of property difficult or impossible. Discharge a tax levy from your credit report should be a first priority for you, as you’re no doubt well aware. Please go to http://www.removeataxlien.com for more info.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: