Don’t forget to keep an eye on tax planning and tax consequences as you go along. When it comes to types and ways business owners get taxed, the list seems never ending.

Betting on a new business

Scott Clouse, CPA

Starting a business in the middle of a pandemic may strike you as a bad bet, but spring training is upon us so we thought we’d aim for the cheap seats. Even in good times, starting a business is a risky bet, but there are things you can do in the beginning that will improve your odds for success.

If you’re looking to buy an already established business, please consider a quality of earnings report as part of the due diligence process. Quality of earnings reports are common for purchases of $1 million and above but are sometimes skipped for companies valued for less. In these uncertain times, knowing your foundation is solid is worth the price of the inspection.

A quality of earnings report will look at revenue, earnings and working capital. The process starts with interviewing the buyer to better understand the transaction and scope the work to a point the buyer is comfortable with the transaction and can make an informed decision. The cost of a typical small quality of earnings report is around $5,000. Time and cost will vary depending on the availability of documents requested from the company’s current owners.

Don’t miss: It’s time to gather your 2020 tax documents

Deciding on a legal structure for your newly acquired or startup business is a big deal, not only from a legal and liability standpoint but also for tax considerations. We won’t get into all the options and consequences here but know that this should be a top priority when starting or acquiring a new business. This decision will heavily depend on your circumstances such as type of business, time horizon, exit strategies, whether you have employees, your compensation needs as an owner, current and expected future tax rates, etc.

Whether your company is new to you or a startup, keeping good records is imperative. There are many great accounting software packages that take the guess work out of this. Financial records produced on a timely basis are crucial for managing the business, decision making, lending needs, and tax preparation. Typical reports that your accounting software can produce that you should be very familiar with are the balance sheet, income statement and statement of cash flows. If you need help producing, fixing or analyzing these reports be sure to seek the assistance of a trusted professional.

One of your first endeavors as a new business owner should be developing clear key performance indicators (KPI). KPI’s are measurable data that tell you where you are relative to where you want to be and can help you establish a disciplined focus on the current health and potential growth of your company. You’ll want to focus on data that tells you:

  • Churn Rate – Percentage of customers that were lost in each period.
  • Burn Rate – Rate of negative cash flow.
  • Customer Acquisition Costs – How much time and money it takes to acquire customers.
  • Revenue Growth Rate – Month over month percentage increase in revenues.
  • Gross Margin – Percentage a product or service costs compared to the revenues a company earns from selling that product or service.

Don’t miss: Analytics for the New Year

Don’t forget to keep an eye on tax planning and tax consequences as you go along. When it comes to types and ways business owners get taxed, the list seems never ending. This is especially true for those operating a business in multiple states and in less favorable taxing jurisdictions. A typical list of taxes to consider would be payroll, sales, personal property, real property and income. This list is certainly not all inclusive. From a federal income tax perspective, here are a few items to consider:

Section 199A for deduction for qualified business income (QBI)

If you’re operating as a sole-proprietor or pass-through entity, your company may be eligible for a 20% deduction on income. Pass-throughs are Partnerships and S Corporations where income is “passed-through” to the owners who then pay taxes on the income instead of the company paying it. That income may be eligible for up to a 20% deduction on the owner’s tax return. There are qualifications and limitations so be sure you consult your Henry+Horne tax advisor to make sure you qualify.

Depreciation

Business owners have been blessed during recent years with a myriad of accelerated depreciation options. The Holy Grail of these has been Bonus depreciation. For qualified business assets with a useful tax life of 20 years or less, 100% expensing in the year the asset is placed in service is available. Think of machinery and equipment, furniture and fixtures, (some) autos, land improvements, computers and the list goes on. Bonus depreciation is scheduled to be scaled back after 2022.

Federal tax credits

Research & Development Tax Credit – Does your business aim to create or improve a new or existing business product or process? Is your business technological in nature? Are you or your employees working on complex technical matters with uncertain outcomes? You don’t have to fit the lab coat and science lab definition. Many businesses can qualify for this extremely valuable credit. A few industries that come to mind are manufacturing, construction and software development.

Work Opportunity Tax Credit (WOTC) – Federal tax credits of up to $9600 per employee may be available when hiring members of certain target groups such as veterans, felons and the chronically unemployed. Claiming the credit is not retroactive so the vetting of the credit should be part of your new hire process.

These are just a few items to consider to help put you on the offensive rather than always playing defense. There are lots of other things to keep in mind when starting a business. Henry+Horne is here to help you through all of them.

Scott W. Clouse, CPA, Manager, specializes in tax planning and compliance for high net worth individuals, partnerships and S Corporations. He can be reached at (480) 839-4900 or ScottC@hhcpa.com.