On average, startups in the US have a lifespan of around 5 years. The key to efficient cash flow management is understanding your obligations and opportunities for tax planning at every stage during that time period. Startup Tax Planning provides entrepreneurs with an overview of what they can expect from their accountant throughout this process.
“Cash flow startup” is a term that has been recently coined. It refers to the process of planning for your company’s cash flow. This includes not only planning for the short-term, but also planning for the long-term. Read more in detail here: cash flow startup.
Small business owners understand that a higher-than-expected tax bill may throw their cash flow management off, which is something no one wants to happen. However, properly predicting your tax payments may be challenging, especially if you’re busy operating a business. Furthermore, tax rules are subject to change from year to year.
According to Paul Gevertzman, CPA, a tax partner at Anchin, Block, & Anchin in New York, “many small company owners have no clue what they will owe in taxes until it’s time to pay them.” “This may be because they aren’t dealing with an accountant or aren’t giving the accountant any data until just before tax time.”
There are a variety of additional reasons why small company owners are caught off guard by their tax bills. According to Gevertzman, owners may monitor earnings and losses in ways that vary from the manner needed for tax purposes. Or they may have deducted certain expenditures that, in reality, must be capitalized (or depreciated over many years) for tax reasons since bought goods are utilized for more than a year.
Whatever the cause, being unprepared may result in a recurring cash flow problem. You may break the loop and guarantee money are flowing as expected by integrating tax forecasting into your cash flow management plan.
Every small company should take the following four tax preparation steps:
1. Recognize your tax responsibilities.
Certain kinds of taxes are often overlooked by business owners. “Sales and use taxes, for example, are among the most frequently overlooked due to the growth of online commerce,” says Dane Dickler, tax and business services partner at Marcum LLP. “If your business has clients in areas where you don’t have a physical presence, you may be liable for collecting and remitting sales and use taxes to those states. You may also be liable for paying sales tax if your business acquires goods from out-of-state vendors that do not collect it.”
“It becomes extremely complicated since each state has its own set of rules,” Dickler explains.
Furthermore, according to Gevertzman, some towns have location-specific taxes that company owners may be unaware of. The commercial rent tax in New York City, for example, is only levied on renters in specific areas of Manhattan and only on rentals paid over a specified yearly level. “Most renters who move into an area subject to the tax or whose rents have risen are ignorant of the obligation,” he adds. “And if the unwitting owner fails to file the appropriate tax forms, the statue of limitations will not run, allowing the jurisdiction to collect the concealed tax all the way back to the beginning.”
Also, according to Rick Norris, CPA in Los Angeles, owners of sole proprietorships or partnerships often neglect to include the self-employment tax to their income taxes. He explains, “This is the Social Security and Medicare tax that is typically paid by an employer for a regular W-2 employee.” “However, since you are the employer in a sole proprietorship or partnership, you must pay all of this tax.”
2. Set away tax money on a monthly basis.
It’s tempting to spend all available funds to operate and expand your company, but doing so means you won’t have enough money when taxes are due, creating a cash flow problem. Instead, put away the proportion of your monthly income that you owe in taxes in a digital savings account that you may use only for taxes and earn interest on.
“Pay the taxes with each paycheck beginning in January if you are a S company owner receiving a salary,” Norris advises. “By doing so, we may avoid having to catch up on a significant sum later in the year. If you run a limited liability company or a sole proprietorship, set aside a part of each profit for a tax savings account and learn to live on the net profit. Then, when your anticipated taxes are due, pay them from this tax-deferred account.”
Think about salary withholding taxes or sales taxes as “trust fund taxes,” according to Gevertzman. You’re only a trustee who manages these money on behalf of others. Never treat them as if they were your own or your company’s property.
3. Check your predictions on a regular basis.
Even if you meticulously put aside money for taxes, you may find yourself paying the IRS more than you anticipated. Are you having a better-than-expected business year? It’s wonderful to make earnings you hadn’t expected, but you may be in for a cash flow shock. Using tax forecasting, you can stay on top of your predictions throughout the year.
“The trick is to come back to it frequently,” Dickler adds. “While many small company owners have a basic understanding of their tax obligations, things may rapidly alter. The more often a small company owner examines interim financial accounts, the more accurate the tax obligation estimate will be, and the less likely they will be surprised.”
Norris makes several tax estimates for his customers throughout the year to verify that their tax expectations match their income. “The first is around May, after the filing of the tax return,” he adds. “The second is in November, and then in December, there’s a brief look beneath the hood to verify sure withholdings or anticipated taxes are still in line with expected income.”
4. Enlist the assistance of others
The tax law in the United States is thousands of pages lengthy and constantly changing. That’s not even taking into account state and local tax laws, which are always changing.
Because there is so much to keep track of, many company owners hire tax experts to assist them. Gevertzman advises, “Get the finest tax expert you can afford.” “Keeping up with all the intricacies and constant tax law changes is difficult enough for experts. Allowing a professional to assist you with taxes will allow you to focus on what you do best—running your company.
When tax season arrives, knowing your tax responsibilities and preparing ahead for taxes may help you save money and minimize stress. This proactive strategy will assist you in better controlling cash flow and focusing on other areas of company management.
Learn how Spark Business® solutions may assist you in preparing for tax season.
This is not intended to be tax advice. Before making any tax-related decisions for yourself or your business, you should always speak with your accountant or financial advisor.
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The “cash management” is a topic that has been on the forefront of many people’s minds lately. The article will discuss how to manage your cash flow in order to ensure you are not overpaying taxes.
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Frequently Asked Questions
How do startups manage cash flow?
A: Startups need to find ways of generating revenue. It is important that they have a defined plan on how this will be done, and focus their efforts accordingly. They can do so by for example using advertising or one-time fees.
Why tax planning is important while setting up a new business?
Why is it important for startup business to come up with monthly cash flow?
A: When a company is still in its startup phase, its critical to have enough cash flow so that the business can survive. Without any money coming in or going out, this would lead to death of the company and loss of all investments made into this start up business.
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