5 tips to reduce your tax Liability on a new start-up

The entrepreneur sprit still continues to flourish across the country, despite the fluctuation of the economy and domestic or foreign disputes. The cold hard truth is that 25% of these new start-ups will fail in the first year. 46% of theses failures can be attributed to incompetence. Taxes, financing and record keeping, play a key role when things go wrong

  • Emotional Pricing
  • Living too high for the business
  • Nonpayment of taxes
  • No knowledge of pricing
  • Lack of planning
  • No knowledge of financing
  • No experience in record-keeping

Nonpayment of your taxes is a bill that is just not going to go away. Most new start-ups have all the best intentions in complying with their tax liabilities but cash flow can make that an unattainable endeavour. To help with this problem consider these five simple steps in reducing your new star-ups tax liability.

1. Choose the right kind of business. Once you have decided on the right kind of business, then it’s time to decide on the best form for your business. Whether you decide to incorporate into a C-corp, S-corp , LLC or a sole proprietorship, your decision will have a major and far reaching impact on your tax liability. This is a decision that should be only second to the type of business that you will proceed into. The decision on the type of entity will have a lasting effect on not only your taxes but other liabilities now and into the future.

2. Hire your children. If you decide to be un-incorporated then hiring your children can have real tax advantages. You can deduct what you pay them in wage expenses, thus shifting income from your tax bracket into theirs. Since wages are earned income there is no “Kiddie Tax”. If your child is under the age of 18, they will not have to pay Social Security Tax on the earnings. The earnings can also serve as a basis for an IRA contribution.

3. Watch your start-up costs. Generally, the costs of starting a new business must be amortized, that is, deducted over the years in the future. You can, However, deduct up to $5,000 of start-up costs in the first year you incur them, when this tax savings could prove particularly helpful.

4. Avoid the hobby-loss rule. There’s a no win scenario if the IRS determines your activity is a hobby rather than a for profit endeavor. If the IRS determines that you are actively involved in a hobby, you will still have to report any earnings as income, but there are restrictions on deducting expenses. Keep in mind, you will not be able to deduct a loss, greatly increasing your year end tax liability. You can avoid this by keeping separate checking accounts and having business related material, like business cards printed up.

5. Time receipt of self-employment income. Those who run their own businesses have a lot of flexibility at years end. To push the receipt of income into the following year, delay mailing bills to clients until late December so that payment is received after December 31. Or, pay business expenses before January 1 to lock in the deductions for this years tax liability.

All in all The tax Liability from your new start-up business may sound overwhelming, but garvey & garvey, llc CPAs can easily assist new business owners with establishing a method that is appropriate for them so that there are no unwelcome surprises when the tax year ends.

Click on the bag below to see 10 more tax saving ideas or download our free job costing work sheet.