Among the myriad issues that new businesses must face, tax planning is one that often fails to receive proper attention. Some entrepreneurs are too intimidated by the prospect of figuring out tax liability, and others are simply too busy to deal with the documentation and record keeping required for accurate accounting.
Regardless of the demands your new business may present, it is critical to have a basic understanding of business taxes and how your expenses may affect your tax bill. This article highlights the importance of documenting tax deductible expenses.
Documenting your expenses is important in three respects. First, it helps you take advantage of the deductions allowed by the tax code. The U.S. Tax Code allows new business owners to deduct a number of start-up expenses such as marketing, professional fees, and training. The code also allows deductions for ordinary and necessary operating expenses such as office rentals, cell phone bills, and business lunches.
Second, accurate documentation helps your tax preparer in justifying such deductions, and in some cases, taking advantage of additional deductions of which you may not have been aware. The deductions for your business trips that morph into vacations may not be allowed under the tax code. As such, clear documentation can certainly help in the event the IRS audits your business. Finally, if you do not document your expenses, you may lose the right to deduct them when your taxes are due. This could result in an expensive tax bill that could hamper your growth.
Tax planning is about more than merely keeping track of expenses. Having the appropriate corporate structure can help maximize your business planning options and ease your tax burden. For example, the tax liability of an LLC is based on each member's adjusted gross income; whereas a corporation is taxed at a corporate rate that varies based on the company's profits. This could lead to very different taxes even with the same income. Members of an LLC making a $175,000 profit could be taxed at 15 per cent, where a corporation with the same $175,000 profit could see a 39 per cent tax rate. An experienced attorney can explain how these variables can affect your tax bill and advise you on the best structure for your business.
