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Taxes can feel daunting, probably because of how important they are. Not only are there several forms that you need to keep track of and file, but how you do your taxes can also affect how much funding you may be able to obtain, as well as what your budget looks like for the year.
Understanding the relationship between taxes and funding is crucial if you want to take your business to the next level. In this blog post, we’ll start by going over two ways that business taxes are linked to business budgets and funding. Then, we’ll dive into some tips on how you can approach your tax planning and strategy.
Your Business Taxes and How They Impact Funds
Taxes affect your budget
First, a refresher. Business taxes are the money you pay to the federal and state governments based on your company's earnings. The more money your business makes, the more taxes you'll have to pay.
Of course, how much money your business makes on paper can differ depending on what your business expenses and activities look like for the year. Knowing how much you owe is important for planning out your budget, and of course, for getting the right amount in on time (no audits or penalties here).
Taxes affect your funding applications
In addition, filing your taxes matters if you’re planning on applying for business funding. Your tax returns, in addition to bank statements, are a way for the lender to verify that you’re in business, as well as what your annual revenue and profit numbers look like.
So, even if you haven’t made much money in your business yet, it’s best to file if you’re planning on growing and seeking funding later on.
This process can feel overwhelming, especially if you're new to the process. If you want to be sure that you make informed financial decisions, it's a smart move to team up with a trusted accounting firm.
Don’t Pay More Than You Have To: Tax Credits and Incentives
What are tax credits?
Tax credits are a valuable tool for businesses of all sizes, as they can help reduce your tax bill and free up funds for other business expenses. In addition, the government offers a variety of tax credits designed to incentivize certain behaviors deemed beneficial for the economy, the environment, or society as a whole.
For example, if you hire new employees from certain groups, you may be eligible for tax credits that can offset some of the costs associated with recruitment, training, and payroll. These people could be veterans, people with disabilities, or low-income individuals.
Similarly, if you invest in research and development to create new products, processes, or technologies, you can claim tax credits. They can help cover some of your expenses and encourage innovation in your industry.
What are incentives?
Incentives, on the other hand, are benefits or rewards that the government or other organizations offer to encourage certain actions or behaviors. They can come in many forms, such as grants, loans, tax breaks, or different types of financial assistance.
One common type of incentive is the opportunity to receive grants or loans from the government or other organizations for specific projects or investments. For example, suppose you wanted to expand your business to a new region or industry. In that case, you may be eligible for grants to help cover some of the costs associated with that expansion.
Moreover, some governments offer tax incentives for businesses that invest in renewable energy, promote economic development in underserved areas, or hire workers from certain groups.
While you shouldn’t necessarily plan all your business activities around tax credits and incentives, seeing which ones are available and taking advantage of them if they make sense can give you a competitive edge. These opportunities can help you save money and grow your operations.
Know Your Business Structure and Use the Right Tax Strategy
Your business structure refers to the legal form that your business takes, such as a sole proprietorship, partnership, corporation, or LLC. Each type of business structure has its own unique tax implications.
It's important to understand how your business is classified and how that affects your taxes. You may even decide that it’s worth speaking to an expert about the best structure for your business.
For example, if you operate as a sole proprietorship, you are considered self-employed and are responsible for paying self-employment taxes on your business income. On the other hand, if you work as a corporation, your business is taxed as a separate entity. In that case, you may be able to take advantage of certain deductions and credits not available to sole proprietors.
You may have more flexibility if you operate as an LLC, as you can be taxed as a sole proprietor, partnership, or corporation. Note that an LLC is not a taxable entity.
Choosing the right tax strategy can also have a big impact on your bottom line. A good one can help you save money and increase your profits, while a poor one can result in unnecessary expenses and missed opportunities.
Know How Much You Owe and Prepare in Advance
You need to be proactive in preparing for financial changes that could impact your business. This is especially true when it comes to taxes, as unexpected tax bills can take a toll on your cash flow and make it harder to secure funding or grow your business. Not to mention, unexpected bills can be stressful!
One way to prepare for this is to develop a budget and cash flow projection that considers your expected tax liabilities. This way, you will avoid surprises and ensure that you have enough cash on hand to cover your expenses, pay your taxes, and pursue growth opportunities.
In addition to preparing for tax changes, it's also important to be strategic in managing your finances more broadly. This includes monitoring your cash flow, staying on top of your accounts receivable and payable, and developing a plan for managing debt and securing funding when needed.