A startup’s journey is never easy because you have to start from scratch. Limited funds are perhaps the biggest concern that you will have in mind. There is much more that will keep you busy, from hiring resources to managing operations, planning strategies, and more. Tax issues are easy to overlook because you may think that you can handle them later.
But this is the worst mistake that any entrepreneur can make because dealing with the IRS is the last thing that you would want to do when you are new. Even worse, you may have to face tax penalties that can topple your budget completely. Avoiding tax penalties, therefore, should be your top priority. Here are some tips that can help you avoid them for your startup right from the initial stages.
Have a proper structure right from the start
The tax treatment for a startup depends on its structure, whether it is a sole proprietorship or partnership firm, LLC or C Corp. Get started with some in-depth research to understand how taxes work for different types of setups. This will probably help you decide which one works the best for you. If you are doubtful, seek advice from an expert lawyer or accountant. After all, you would not want to face penalties or end up with the wrong structure just because of a lack of awareness.
Properly document your financials
As a startup, you may not really understand the tax implications of improper or incomplete financial accounts. Failing to document your incomes and deductible expenses can land you in a major problem with the IRS. Moreover, you will need to submit these documents as a part of your tax returns. If you skip them, your startup may not be able to claim the rightful deductions or worse, may even face an IRS audit.
Calculate your taxes properly
Another essential tip to follow for avoiding a tax penalty for your startup is always calculating the taxes properly. Be careful about claiming deductions and avoid mathematical errors in the returns as well. Substantially underestimating your taxes or being negligent with them is a major red flag for the IRS and can land your business in trouble.
Always file your returns and pay taxes on time
Every business needs to be very particular about adhering to tax return and tax payment deadlines. As a startup, you may not take things seriously and even think about filing for an extension. If you miss the deadline, the IRS will find you and you may end up with a major expense. Rather than being burdened by fines and penalties, the smartest move for a startup would be to always file your returns and pay taxes on time.
Onboard a tax attorney whenever needed
Startups are likely to be confused with tax norms. Further, you may also experience some issues due to a lack of awareness. The best approach would be to hire a seasoned tax lawyer who can provide complete solutions for your tax problems from start to end. In fact, you should be proactive enough to hire them for preventing any issue in the first place. Right from guiding you about the company structure to helping you with filing returns, paying taxes, and more, they can help you avoid penalties in every possible way.
Don’t forget about payroll taxes
Preventing penalties as a startup involves many aspects and filing your payroll taxes is one of them. Since you will have employees on board, evading payroll taxes is regarded as a federal crime. Even if you do it unintentionally, you can still get stuck with huge penalties. Avoiding these problems is as simple as paying your payroll taxes in a timely manner and according to the IRS guidelines.
Seek home office deductions correctly
If you are operating your startup business from your home office, you are entitled to claiming home office deductions. However, you must do it properly otherwise the IRS may penalize you. For getting this deduction, you need to prove that you have a separate home office that you use solely for business purposes. Ensure that you check all the requirements and have proper records before claiming the deduction. Seek expert advice if you are not sure.
These tips can be highly useful for new businesses when it comes to avoiding tax penalties. You must absolutely follow them because you would not want to pay heavy penalties in any case. The best approach is to seek expert guidance because you may not really know about the nitty-gritty of avoiding tax issues as a new business.
