5 Steps to a Small Business Tax Strategy

Small business tax strategy is not straightforward. Tax law is written in a way that leaves many avenues for interpretation. When considering your own strategy, follow a plan to simplify the process so you do not get overburdened during tax season. 

#1 Plan Ahead

Decide your strategy before you even start your business. Will you shoot for maximum deductions against all costs and hope you do not get audited? Or will you take a more conservative route, preferring to miss some deductions instead of facing penalties for over-deducting? This is the first question to answer, and it is a very personal one. Decide your philosophy on business tax and set your plan from there.

#2 Determine Capitalization Strategy

Small businesses have the option of deducting or capitalizing a number of expenses. With a deduction, you get to write off the cost of the expense immediately. When you capitalize, you get to write off maintenance and defer profits on the equity in the future. Most businesses prefer to deduct start-up expenses because they need the lowest possible tax liability early in their existence. You can choose your own route here, though, ultimately determining how forward-thinking your plan will be.

#3 Locate Tax Adviser

It is not advisable to go it alone 100 percent of the time with your small business taxes. First, there is a greater margin of error when you do not hire a third party. Second, you will lose valuable time you could spend elsewhere on your business while attempting to plan for your taxes. Instead of making these compromises, find an adviser you feel comfortable with based on both the cost and quality of services rendered. You may need an adviser with only limited involvement, and it is fine to elect this and pay limited costs. On the contrary, you may have a very complicated financial model, and you will be forced to have a more involved tax adviser.

#4 Prepare Books

Bookkeeping is perhaps the most important part of sticking to a tax strategy. If you have decided to be aggressive with your deductions, you will need to keep track of the expenses you plan to itemize with a great attention to detail. For example, if you are writing off a business lunch, you need to keep track of who you dined with, when you dined and what you discussed. With car expenses, you need to track exact mileage dates and times in addition to the purposes of your trip.

#5 Keep Records

Once you hand your books over to an adviser, you are not off the hook. You need to keep track of every decision made through your tax return process. This serves two purposes. First, if your adviser does something you did not explicitly approve of, you can prove you had no knowledge of the action. Second, if you ever switch advisers, you will have all the information needed to hand over to a new accountant. Do not trust that the positive relationship you have with your accountant today will last the lifetime of your business; always have an exit strategy.