Avoid "Business Start-Up Regret" - Copy 1

Dec 19, 2013 | By: Michael Blanchard

In 1967, Cat Stevens released a song about the pain of love called “The First Cut is the Deepest”. It is sung as man haunted with regret as his past choices hamper his ability to achieve happiness in a promising new relationship.

We occasionally work with business owners that face a similar, although not as lyrically compelling, situation with their taxes. Hoping to save money as they start a new business, they put off seeking advice about taxes and often file their first return on their own. Only when the business is off and running do they come in to seek out professional guidance.

As we examine their filings, we often find ways we can correct mistakes on prior returns (generally, there is a three year window that you can call a "do-over" with the IRS). However, there are some critical things that occur with the first tax return that cannot be fixed easily, if it all.

Here are a few of the common ones:

Start-up costs:

Proper treatment of the costs of forming your business and preparing to open your doors can impact your tax burden. Depending on your other income and plans for the business, you can choose to deduct them in one year or spread them out over time. Occasionally, people even think that they don’t need to file a return until they have actually made a profit. This belief is false—which can lead to late filed returns, another significant source of regret …..and penalties.

Fiscal year:

For most business start-ups, December is the only choice for the ending of your tax year. Sometimes, though, you can choose a different month that fits with your cash flow cycle. (Contrary to popular belief, you don't choose your year-end when you file for your Employer Identification Number with the IRS. The choice is made when you file the first return.)

Method of accounting:

Accountants love accrual accounting. (In college they taught us not to dwell on the fact that it is pronounced "A cruel accounting".) However, for most types of businesses you can benefit substantially from using the cash method for your tax reporting. For example, let's say at the end of the first year of business, your business is growing and your customers owe you $100,000. Even if you collect every dime of your accounts receivable in the first week of the new year, cash basis accounting means you won't have to report it until the next years' return. Total combined tax rates for businesses in Oregon can now exceed 45%—would you rather write that tax check right now, or use it to grow your business through the next year?

Depreciation methods:

Starting up a business usually means that you are spending money now on equipment. But, you must deduct the cost over several years. This is called "depreciation", and the choices you make in the first year can have a serious impact on your cash flow.

Although “The First Tax Return is the Deepest” would not make a catchy song title, it is an important point to remember. These are just a few of the many items that we take into account as we work with start-up businesses. At the end of the song, Cat says that he needs someone to “help me dry the tears that I’ve cried”. While we can certainly be on hand with a box of tissues, we would rather add value by helping you plan to launch your business in a tear-free environment.

We offer free initial consultations that can help regret from getting in the way of your business success. Call to talk with one of our local experts at 503.390.7880.