As your startup grows, it is more important than ever to understand and take care of your tax responsibilities. Smart tax planning, especially for companies looking for a CPA in Seattle, WA, can have a big effect on your bottom line, giving you more money to spend on growth and new ideas. Let us look at some important ways to lower the taxes your startup has to pay.
Table of Contents
Understand the tax landscape.
Before getting into specific plans, it is important to understand the most common types of taxes that may affect your startup:
- Federal income tax: All businesses in the US have to pay federal income tax on their proceeds.
- State income tax: Businesses that operate within the borders of most states are subject to their own state income tax.
- Local taxes: Some places may charge extra taxes, like a sales tax or a property tax.
- Employment taxes: If you have workers, you have to pay payroll taxes like Medicare and Social Security.
Choose the right business structure.
How your business is set up can have a big effect on how much tax you have to pay. Here are some popular arrangements and how they affect taxes:
- Sole proprietorship: It is easy to set up, but you do not have any safety from personal responsibility. You report both profits and losses on your own tax return.
- Partnership: A partnership is like a sole company, but there is more than one owner. Partners split up profits and losses and report them on their own tax forms.
- Limited liability company (LLC): Protects you from personal responsibility and gives you tax options. You can choose whether to be treated as a single proprietorship, a partnership, or a separate business.
- Corporation: A corporation is a different legal body that has its own tax duties. The company has to pay corporate income tax on its earnings, and owners may have to pay personal income tax on bonuses.
Getting advice from a tax expert can help you figure out the best format for your startup’s needs.
Leverage tax deductions and credits.
Your tax bill can go down with a lot of different refunds and savings in the tax code. As a new business, here are some important tax breaks and credits:
- Tax breaks for business costs: You can write off most normal and necessary business costs, such as rent, utilities, pay, and marketing costs.
- Tax credit for research and development (R&D): If your company does R&D work, you might be able to get this credit.
- Claim for Section 179 expenses: With this claim, you can immediately write off the cost of buying certain business land as an expense.
- Tax breaks for home offices: You might be able to write off some of the costs that come with running your business out of your home.
Tax efficient financing strategies.
The tax you have to pay may also depend on how you pay for your new business. These plans should help you:
- Bootstrapping: If you pay for your business yourself, you will not have to pay interest, which is what you do when you borrow money.
- Debt financing: You can often subtract the interest you pay on business loans. This means that you pay less tax on your income.
- Equity financing: These loans do not give you tax breaks right away, but they can help your business grow in the long run.
Some additional tax considerations.
A lot of startups move to states and towns that offer tax breaks, like lower rates and tax returns. Startups that want to do business in another country need to know the tax rules of that country. Capital gains taxes can be lowered by making plans for how to leave the business, especially if it is sold or goes public.
Startups can lower their tax bill by learning about taxes, choosing the right business plan, taking advantage of tax breaks and credits, and financing the business well. However, tax rules are complicated and can change at any time, so it is best to talk to a CPA.
