Most organizations that are hugely successful today, began as a start-up, often in someone’s home basement or garage. Since half of all new businesses fail within the first two years of business, clearly these organizations did it right. They found ways to persevere through tough times, accepted failures and learned from them, and ensured lawful execution of their business along every step of the way.
Amazon, the largest retailer in the world, started by Jeff Bezos in 1994, in his garage. At that time, Amazon was an online bookstore that was built on the tailwind of the rise of the internet.
Spanx, a favorite of many women across the globe, started by Sarah Blakey with just $5000 that she had in her savings account. She ran her company out of her apartment, and worked full time during the day as a fax machine sales representative, while she ran her new business from her apartment in the evenings.
And Google? Yes, Google too was started in a basement, and initial ideation for the organization took place in the dorm rooms of its founders.
So, what do these successful start-ups have to do with how to handle taxes? Well, all of these companies took the time to build processes and procedures that could be replicated and relied upon year after year. They also took the time to learn about new trends and to keep up with what was happening in the industry. Finally, they knew how to maximize their revenue and abide by all tax laws while practicing lawful tax avoidance (not to be confused with tax evasion).
Does it seem like a stretch that we are tying their success back to taxes? We don’t think so. While the Internal Revenue Service (IRS) is pursuing fewer cases of intentional tax evasion than in decades prior, it still exists. And the worst situation for a business is when they thought they were handling their taxes correctly, only to find out that they weren’t.
How to Handle your Start-Up Business Taxes and Stay in the Good Graces of the IRS
There are a variety of ways that businesses can get into tax trouble, and many of these situations can be avoided if businesses take the time to regularly and adequately organize their expenses and income. Making sure that financial statements balance every month with every line item typing back to an invoice or receipt is critical in ensuring an accurate and lawful paper trail.
1. Ensure you are accurately reporting your income
Deposits of more than $10,000 need to be reported to the IRS. Further, many companies look to avoid paying payroll taxes by paying employees cash, often referred to as under the table pay. But in reality, all income and expenses must be reported.
2. Avoid over-reporting your expenses
Businesses often over-report on their expenses by claiming spouse’s expenses for a business trip, claiming personal travel miles as business miles, or taking unjustified deductions for home office space. Another common practice is to claim personal expenses as business expenses. A smart way to avoid this is by keeping all personal and business expenses intentionally separate through the use of separate bank accounts and designated credit card for personal expenses and business expenses.
3. Avoid failure to report your taxes
Many businesses fail to report taxes, especially sales tax and payroll tax. These taxes are called “trust fund” taxes, because they are incurred from others, and are then held in trust by the business, to be reported and paid to the appropriate taxing authority. Knowingly and intentionally using these taxes to fund a business or cover personal expenses, instead of reporting the collection and paying when due, is tax fraud.
How Document Management Systems Create Value for Start-Ups
If you are the owner of a start-up, it is wise to work with a professional accounting firm to process your taxes. Not only can an accountant help make sure that you are properly following all tax laws, and receiving appropriate deductions, they can also help facilitate in the event of an audit. And sometimes, even though a start-up or small business owner doesn’t intend to commit tax fraud, they might not be fully clear on what they can and can’t do. Using an accountant can keep business owners out of legal trouble.
Many start-ups also invest in a document management system (DMS) to ensure that all documentation is stored and labeled for easy access by an accountant. In fact, the best DMS for accountants is one that can easily manage and save files, and that can use optical character recognition (OCR) to turn documents into searchable PDFs so that quick searches can be found successfully.
Additional benefits of a DMS include:
- Organize your files in electronic filing systems that are intuitive and easy to understand.
- Automatically scan and name documents based on their contents, and save them in the right file with one click.
- Integrates with the programs you already use, such as Windows desktop applications.
- OCR scans documents into searchable PDFs, can create PDFs from any file, and can even cut them apart or splice them together later, depending on various needs.
- Saves to any drive you want within your business network, without the complication of a database that can hold your files hostage and make your documents hard to find.
- Do all these things and more from a simple and single interface instead of having to access multiple systems for different purposes.
When tax time comes each January, your accountant will appreciate the opportunity to locate important files in one system easily. This means better accuracy in the completion of your taxes, which creates less legal and financial risks for you down the road.
Further, your completed tax documents from each year can also be uploaded into the DMS as part of your ongoing business documentation. This means that each year, you can quickly review your tax documents and then make a year over year comparison.