Among the myriad of issues new businesses tackle, tax planning is one that commonly falls through the cracks. Some entrepreneurs may just be too intimidated by the prospect of figuring out tax liability. 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 next year. This post 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, including 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 discover additional deductions you may not be aware of. Further, 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.
Tax planning is more than just about keeping track of expenses. Having the appropriate corporate structure can help maximize your 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%, where a corporation with the same $175,000 profit could see a 39% tax rate. Therefore, an experienced tax attorney can help you solidify these variables and advise you on the best structure for your business.