Taxes are one of life’s necessary discomforts. One that all business people must grapple with. Like a trip to the dentist or planning your estate, thinking about taxes is something you should do regularly but tend to avoid until it’s too late.

Of course, this is the wrong approach. Once tax preparation time comes around, it’s often too late to make changes that create significant improvements.

Good tax planning means thinking about taxes before tax time rolls around. Startups are often in the fortunate position of being agile enough to make structural changes and build good tax habits from the very beginning. 

But what’s the difference between tax planning and tax preparation? And how can your startup tackle your taxes on offense?

Tax Preparation

Tax preparation and filing is simply the act of preparing and submitting tax returns and documentation for the regular deadlines.

While tax preparation is a critical part of running a business, it’s not actually where the big impacts are made. By the time your accountant is preparing your startup’s taxes, many variables are already fixed. 

Indeed you have some flexibility when it comes to taking the proper deductions, claiming certain credits, and how you treat certain revenues and expenses. But the big impacts are going to come out of a thorough tax planning process. 

An accountant experienced with startups can help you make sure your tax planning is done properly and to your advantage. These experts can probably also save you money and improve your cash flow. They’ll ensure that you’re claiming all available credits, taking the maximum allowed deductions, and checking that the business is properly structured for your specific situation and long-term goals. 

Tax Planning

What is Tax Planning?

Where tax preparation is more of a reactive activity, tax planning can be extremely proactive. Tax planning is the act of looking into the future and making educated decisions that benefit the business based on the existing tax rules and business goals. 

However, this is something that most business owners aren’t prepared (or able) to do on their own. A tax expert who is focused on startups is much more likely to have a good grasp of the ins and outs of our complex tax codes. 

They’ll also understand the different requirements and advantages of different business structures. And can help you make the best tax decisions for your business, all with the goal of saving you and your company money. 

A Regular Exercise

Ideally, tax planning is a year-round activity. Meeting regularly with your tax advisor (or whenever major changes occur) will ensure you’re capturing the latest developments and can adjust your tax planning accordingly.

Why Do Tax Planning?

While the criminal laws are pretty straightforward, tax laws are full of credits, exemptions, and loopholes. Competent planners know these laws inside and out and are happy to help you save your company money while ensuring you’re operating within the law. 

Entity Structure

For example, different legal entity structures are taxed differently. Some entities, like LLCs and S-Corporations, are referred to as “pass-through” entities. This means the company elects to pass income and losses directly to shareholders for federal tax purposes. Others (like a C-Corporation) are taxed separately from the owners.

Both types of entities have benefits and drawbacks, but each can have a major impact at tax time. 

Credits and Deductions

There are a multitude of credits and deductions available to businesses. One of the most useful is the R&D tax credit. The R&D tax credit rewards established businesses and startups alike for investing in research for new products and solutions. Additionally, there are credits and incentives for improving energy efficiency and implementing other green technologies.

Often, certain cities or states will grant exemptions for certain sectors and locations to encourage companies to establish a local footprint. 

Things Change 

As your business grows, your team might too. But as you hire more people, your payroll reporting requirements will also change. You might need to offer benefits or stock options that can have complicated reporting requirements and tax implications. 

How you handle these dynamic situations can have a major impact on your quarterly tax bills. Creating a plan with your tax expert can save you money and improve your startup’s cash flow by optimizing your tax liability. 

Tax Planning vs Tax Preparation for Startups

Startup taxes can present tricky problems for even the most capable founders to solve. 

Frankly, most companies aren’t equipped to handle this task all on their own. But you need more than just someone to prepare your taxes every quarter. 

You need a tax expert to make sure your business and operations are set up to optimize your tax situation so that you’re paying the right amount over the long term. You’ve got to take advantage of all available deductions, credits, and loopholes. 

Founder’s CPA and their tax experts can help. If you’re wondering how your tax strategy measure’s up, set up a free consultation with one of our startup tax experts. 

Curt Mastio
Post by Curt Mastio
Jun 11, 2024 10:00:56 AM
Curt Mastio started Founder’s CPA in 2017 and currently serves as the Managing Partner of the firm. After obtaining both his Bachelor’s and Master’s degrees in accounting from the University of Illinois in Urbana-Champaign Curt started his career in Big Four public accounting. Shortly thereafter Curt served as the Chief Financial Officer of Storage Squad began his stint as an Adjunct Instructor at Northwestern University’s Farley Center for Entrepreneurship and has been teaching Accounting & Finance to undergraduate students for 6+ years. In his current role Curt oversees strategy, operations, and business development at Founder’s CPA. Further, Curt has experience working directly with 200+ startups and small businesses providing accounting, tax, and outsourced CFO services. His industry expertise lies in the SaaS, Blockchain, Marketplace, and Fintech industries. He has served as a key advisor working directly with startups that range from pre-revenue to companies generating over $30 million dollars a year in revenue. Lastly, he serves a key role working directly with the firm’s clients that have collectively raised over $200 million in venture capital funding to date. Curt is also an active advisor, mentor, and investor in the startup ecosystem. He has facilitated numerous workshops, webinars, and presentations to incubators and other startup-centric organizations. He is also an active mentor for Techstars in both Chicago and Iowa. Outside of his daily professional duties Curt is actively involved with Beat the Streets Chicago and was a founding member of its Young Professionals Board. His efforts in both leadership and community involvement were recognized when he was awarded the Illinois CPA Society’s Outstanding Young Professional Leadership Award in 2020. He was also a panelist at their annual conference in 2022 where he spoke about his experiences starting and operating a public accounting firm. He maintains an active Certified Public Accountant designation that he obtained in 2014. Outside of work, Curt can be found spending time with his friends & family including his dog Rufus. His hobbies include golf, boating, cooking, reading, and attending sporting events & concerts.