Essential Tax Strategies for Year 1 of Operations
Classify the money you put in the business as owner loans, NOT as equity
By classifying the funds as loans, you are giving yourself the ability to repay once the business has sufficient cash flow. In addition, all owner loans should be repaid prior to taking compensation.
Hold off on taking compensation
If possible, it is always best to hold off on taking compensation in year one. By not taking compensation, you are retaining the cash flow in your business, building reserves, and increasing year one profitability.
Slow down on deductions
If a start-up, you are opening your doors with $0 revenue. You are starting with just the goodwill and reputation you have built from past experiences. As your business becomes more well known and respected within the community, your revenue and profitability will surely follow. By pushing deductions into future years, you will be deferring expenses to a future period when your income will be greater and taxes will be higher. One method of deferral is through depreciation. By electing a longer and slower cost recovery method for your fixed asset purchases, the deduction will be spread over a longer period vs. the typical accelerated method.
Skip the December distributions, and instead, take one in January
Distributions taken from the business are reflected in the equity section of the business’s balance sheet. By holding off by a matter of days, you are shifting the decrease in the business’s equity from your December balance sheet, which is what is reflected on tax returns and financials, to the following tax year. Your balance sheet will present in a healthier light by managing your equity in this way. This will also carry a significant benefit with your banking needs.