Starting your own business or service can be an exciting, yet confusing time. To make it easier, we recommend working with us, as well as a financial planning team, to get off to a good start. We also recommend asking these ten questions to a professional:
#1: What should be in a basic business plan?
A business plan should outline each detail of your company including who will run it, how much you’ll charge, and what you expect to earn. Putting time into creating a thorough business plan is important. Work with your team to ensure your plan is accurate and represents your business well.
#2: Who will you need to pay taxes to?
Your local jurisdiction and state have specific taxation requirements. You’ll likely have to pay taxes on sales, but also costs associated with payroll. Ensure your accountant not only talks to you about who you need to pay, but payment deadlines as well.
#3: What is a projected cash flow for the business?
How much cash does your company need to keep on hand? The key here is to be able to anticipate how much it will cost you to operate your business. Most companies should not expect to have positive cash flow for at least a year, often longer. Your professionals can help you decide what your cash flow projections are.
#4: How much of an investment do you need to put into your company right now?
Your financial team can help you project the cost of setting up your new business. This will include costs related to establishing the physical business and paying for supplies. Your initial investment generally will be the highest amount put into the company by the founder, but it changes significantly from one company to the next.
#5: What is your break-even analysis?
This may be an important question to ask early on. How much do you need to make to break even? You’ll want to talk to your financial team about the timeline for this and what can be done to help ensure you break even as soon as possible.
#6: What liability insurance do you need?
While most tax professionals don’t offer recommendations here, having adequate policies to cover potential loss is important. Work with your team to ensure you have comprehensive protection to minimize risks against your company’s financial health.
#7: What will interest cost you?
Interest on loans is not something to overlook. You’ll want to ensure you have an accurate representation of how much you are paying in interest so you can make adjustments to pay off any borrowed debt sooner, make better decisions about borrowing, or factor in the cost.
#8: How will you manage payroll?
This is a very big component of starting up since it can be troublesome for most startups to actually know how to pay employees and meet all federal and state requirements. Working with a payroll provider is often the easiest option (and most financially secure since paying an employee to do this work tends to be more expensive).
#9: How can you reduce your taxes?
Tax professionals will work with you to determine if there are any routes to reducing taxation on your business including local incentives that may be available. You’ll also want to talk about projects taxes, investments that could reduce taxes, and having all possible deductions in place.
#10: What’s the right profit margin?
Working with a financial team often comes down to this question. How much should you charge to make the best profit possible while still ensuring your company can grow? It’s not a simple question, but having the right team by your side ensures it will be clarified as much as possible.
Make an appointment with Dagley & Co. to get your business off to the right start. We are here for you for any tax, payroll or accounting questions or issues you may have for your new business.
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As a CPA in Washington, D.C., I don’t have to look too hard to find someone with a startup. This is an area filled with innovated and connected people, but it also takes money to get startups going. The good news is at least some of that is tax deductible. Business owners, especially those operating small businesses, may deduct up to $5,000 of their start-up expenses in the first year of the business’s operation. This is in lieu of amortizing the expenses over 180 months (15 years).
Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the deduction, an expense also must be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.
As with most tax benefits, there is a catch: Congress put a cap on the amount of the start-up expenses that can be claimed as a deduction under this special election. Here’s how: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar start-up expenses exceed $50,000. For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)).
The election to deduct start-up costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.
On IRS Schedule C, Profit or Loss from Business (Sole Proprietorship), the deduction is taken as part of the “Other Expenses” in Part V. If the entire amount of start-up costs isn’t deductible in the business’s first year, use Form 4562 to amortize the excess amount over 180 months, beginning with the month that you start operating the business. For example, the $53,000 of start-up expenses in the prior example that couldn’t be deducted as an expense in the first year of business would be deductible at $294 per month ($53,000/180), beginning with the first month the business became operational.
Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest or research and experimental costs. Examples of qualified start-up costs include:
- Advertisements related to opening the business;
- Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
- Wages paid to employees and their instructors while they are being trained;
- Fees and salaries paid to consultants or others for professional services; and
- Travel and other related costs to secure prospective customers, distributors, and suppliers.
For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for or preliminary investigation of the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred while attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.
If you have any questions related to the start-up expenses election and whether it will benefit your business, please give us a call at Dagley & Co.
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