Poor tax planning is something that often proves costly for startup companies. When every dollar makes a difference in determining whether or not your startup is a success — you certainly don’t want to pay Uncle Sam any more than you owe.
Unfortunately, several startup tax myths still abound.
This article looks at the six most common startup tax planning myths to help you avoid falling victim to the pitfalls that these myths create.
Hopefully, you’ll then avoid them as you go about planning for tax season.
Myth One: Startup Costs Are Not Deductible
Any expense that your business incurs before you open up shop is considered a startup cost.
Since any business still piling up startup costs is not yet generating revenue, many people wrongly believe these expenses are not deductible. However, the truth is that many immediately deductible startup costs exist, while others can be depreciated over time.
Key Takeaway: Always record your startup costs and present them to your accountant to see what kind of deductions your company is eligible to receive.
Myth Two: An Extension to File Your Taxes Means You Have Extra Time to Pay the Taxes You Owe
Receiving an extension on the deadline to file your taxes only enables you to extend your filing date — it does not grant an extension on when the taxes you owe are due.
Key Takeaway: Penalties and interest will accrue every day that passes past the date your taxes are due. Whether or not you receive an extension to file, these fees happen, so it’s always essential to pay the money you owe on time.
Myth Three: You Are Not Liable for Penalties if Your Accountant Makes a Mistake on Your Taxes
Perhaps one of the most prominent startup tax myths is that startup owners are not financially responsible for any mistakes made by their accountants that might lead to penalties. But, unfortunately, this is not the case.
Key Takeaway: Even an honest mistake with no fault of your own can still lead to penalties that are your responsibility to pay. For this reason, it is essential to work with an experienced accountant who explicitly handles taxes for startups.
Myth Four: Incorporating Your Business Will Make You Eligible for More Tax Deductions
In many cases, forming a corporation can be a beneficial move. However, this is not inherently true in every instance.
The most significant benefit of forming a corporation or LLC is that it shields your assets from liability. In other words, if your corporation or LLC faces legal threats, only company-owned assets face litigation, and most of your personal assets are off-limits.
When it comes to tax deductions, though, many people are surprised to learn that sole proprietors and S Corps qualify for most of the same deductions as incorporated businesses.
Key Takeaway: Forming a corporation often cost thousands of dollars in legal and accounting fees. And corporations face complicated tax issues. For these reasons, classifying your business as a corporation (right out of the gate) isn’t always the best decision for many startup owners.
Myth Five: Purchasing Equipment is the Best Way to Reduce Your Tax Burden
Keep in mind that the entire point of striving for deductions is to save your company money. If you’re spending $100,000 on a new piece of equipment to save $20,000 in taxes, though, you still cost your company a total of $80,000.
Key Takeaway: While you should undoubtedly deduct every expense that you can, purchasing equipment for the sole purpose of creating a tax deduction is not a sound business decision. Instead, the best way to reduce your tax burden is through proper tax planning and working with a good accountant — not creating unnecessary expenses.
Myth Six: Overpaying the IRS Reduces Your Chances of Being Audited
You never want to pay the IRS any more than you owe.
However, some business owners feel that paying more than required is a surefire way to avoid an audit. In reality, though, overpaying on your taxes does not reduce the chance of a tax audit.
You will face an audit if the IRS feels that you have paid less than you owe.
Key Takeaway: Paying more than you owe offers no benefit compared to paying the amount you owe and comes with the obvious drawback of costing your company more than necessary.
Conclusion
Poor tax planning can be very costly for startup owners, whether it leads to fees and penalties or leads to you paying more in taxes than you should.
As you plan for the upcoming tax season, keep careful track of all your expenses, choose a startup-focused accountant to work with, and avoid falling victim to any of the common startup tax myths.
Pasquesi Partners understands the tax issues facing startups. We’ll help you navigate how to classify your business, set up detailed expense tracking, and file your taxes correctly. Schedule a free consultation with one of our experts.