The Tax Man cometh: Four tax prep tips for startup businesses to start using now

John Weaver, a CPA and tax expert at BerryDunn for Boston.com writes: Even if you aren’t yet turning a profit or showing revenue in your business, you need to pay attention to managing your taxes so that when the money arrives, you haven’t painted yourself or your partners into a corner. With so many other things that never seem to be finished, planning for and filing your tax returns can give you the satisfaction of completion. You can organize, prioritize, execute, and above all, finish if you’ve done some reasonable planning. Here are four pieces of advice for getting it done.

One: Get your stuff together.

It is essential to gather your tax information and assemble it in some way that will be understandable to you, your accountant, and the IRS if they choose to make a visit to you two years from now. You can organize your data with a standard software package such as Quickbooks. Or, many start-ups just summarize their activity on a spreadsheet. But remember, a software program is only as good as the person using it, and a spreadsheet with too many colors, pointers, footnotes, and formulas is daunting. Keep it simple. Good rule of thumb? You should be able to explain to a child what you’ve done or how you’ve organized things. Make absolutely sure you have receipts and other documents to substantiate what you are reporting. You would not believe how many tax return deductions have been overturned due to lack of proper supporting documents.

Be sure to segregate your business expenses from personal expenses. Without the proper documentation for each expense the IRS can disallow your deductions. This is a year-round activity and creating the right habits now can save you money and heartache for many years.

Two: It’s complicated.

Understand the filing requirements for your business. Have you changed the structure of your company? Gone from an LLC or S-corp to a C-corp to accommodate new capital? Make sure the investors understand the tax implications of this change. In an S corporation or LLC, for example, business owners report the entity’s gain or loss on their own personal tax return. In a C-corp, they do not.

Know the implications of your ownership structure and situation. Make sure you can clearly document who owns or owned what portion of the company during each portion of the year. This may significantly affect how you prepare the tax return, depending on what type of return you are filing.

Know what’s deductible and by whom. In some entities, owners may have different amounts of capital invested, or may have invested their capital according to different terms and therefore would treat any losses differently on their personal tax returns. That is, if they even get to deduct those losses at all. This in turn depends on how the organization is structured, and how much money they have invested, and how they invested it. Be aware of your owners’ expectations. This will affect your financial results a few years down the road when you try to sell the company.

Perhaps you aren’t even required to file an income tax return with the IRS. How about with your state, or any state, or even many states? What about 1099s, W-2s, 941s, or annual reports? You’ll need some professional assistance to help you figure out what to file or address since the implications can be significant.

Three: Choose wisely.

Filing your first income tax return has long term implications for your business. On it, you are making elections which will affect every tax return to follow. For example, you must elect whether to report your taxes as a cash-method taxpayer, or an accrual-method taxpayer which create significant future implications. Once you’ve made an election, depending on the election involved, it might be easy, or not so easy, to un-do or change it. Other first year elections can address how you report research and development expenses, how you depreciate any new property or equipment, or how you recognize revenue. By the way: In a due diligence situation, filing the required tax returns properly always is and always will be a very big deal.

Four: Know Your Dates and Get it Done.

Most importantly, don’t fall behind on filing your returns. Failure to file reports properly and on time can lead to costly penalties and turn into a time-consuming problem to clean up afterwards. You didn’t get to where you are by dithering over decisions; decide what you need to do, move on it, and don’t look back.

Plan ahead just a little bit. Don’t assume your accountant can take your information from you in early March and produce a tax return by March 15 (the filing deadline for corporations). If you want a tax return filed on time, or in a reasonably timely manner, let your accountant get a head start on it. This leads to greater efficiency, which leads to a better relationship, and maybe even a lower fee.

Even if you file the tax return yourself, it’s better to do it early, when things are still fresh in your mind, rather than racing to do it later when you have many, many other pressing things to do. Once it’s done, don’t fuss with it. You’ve got a good tax advisor and, if you’ve asked the right questions, then you are probably doing the right things. There’s a great sense of relief at accomplishing any task successfully and moving on to the next one. Now you can get back to growing your business. After all, that’s the whole point of this. And it’s much easier to do that without unfiled tax returns hanging over your head.