Now Is the Best Time to Prepare Your Small Business Tax

As workplaces and work-life balances have been readjusted in response to the pandemic, it increasingly feels like a new business is being launched anywhere around Connecticut. Not surprisingly, the latest figures reflect this changing reality.

According to the U.S. Census Bureau, between January 2021 and October 2022, nearly 23,600 people filed notices with the IRS indicating their intention to start a new business in Connecticut to raise wages.

Compared with the same period in 2018 and 2019, the number of applications increased by about 5,650, which was a 31% increase. Recognizing its newfound enthusiasm for entrepreneurship, Connecticut has simplified the administrative process of starting a business, introducing an online one-stop business checklist that takes an estimated 10 minutes to complete.

For new business owners, getting started is just waiting for the beginning of the possibilities. With the New Year fast approaching and tax season fast approaching, it’s fair to say that taxes can be a huge factor in the success of an organization, regardless of size, industry, and status.

For highly profitable companies, taxes cut into and take away a lot of profits. For struggling companies, taxes can be the coup de grace that crushes them. Large corporations often have the ability to hire professionals to lobby the government and get tax breaks, while small business owners rarely have that opportunity.

Therefore, the importance of utilizing tax saving strategies in the small business space cannot be underestimated. The consequences are magnified if the business owner is about to retire in the near future. Fortunately, there are strategies that can work where it matters — now and in the future.

Small and Medium Enterprises (SMEs) are businesses that meet specific requirements based on ownership structure, number of employees, revenue and respective industry. Nationally, this group of businesses is solid, with more than 32.5 million small and medium-sized businesses in the United States in 2021, accounting for 99% of all businesses in the country.

For tax purposes, the IRS does not explicitly classify SMBs, but instead lumps self-employed individuals and small businesses together. A small business is classified as any company with assets of $10 million or less.

For businesses in general, and small businesses in particular, tax planning can take many forms, but the ultimate goal is to minimize tax liability. Both individuals and businesses undertake this process to preserve wealth and ensure financial longevity. A tax saving plan is one that works properly to ensure that all elements of a business owner’s strategy work together to pay as little tax as possible, known as a “tax cut.”

Owning a small business can give individuals a lot of flexibility. Everything from how day-to-day operations are handled, to hiring practices, to payment deadlines, and everything in between can be set and changed in flux. Freedom to function as you please has many positive and negative consequences. The goal is to maximize the positives and minimize the negatives.

Small business owners have many key decision points, many of which have tax implications. That’s why a well-designed plan, with the small business owner’s goals and objectives driving the decision, is key.

The business structure of a new venture, how many employees to hire and what benefits to offer, whether to take out a loan to start a business or to help tide you over a challenging year or season – these are just a few of the decisions that will usually need to be made, all of which are possible have tax implications.

During COVID, a range of federal financial aid packages have been introduced aimed at helping businesses through particularly turbulent times – but could also have implications when it comes to paying taxes. The end of the year is also crucial for small businesses and their owners – and an excellent time to create a detailed tax plan for the years ahead to minimize avoidable tax liabilities.

All of these are reasons why business owners — especially first-time entrepreneurs — are best off consulting a professional. Financial advisors and wealth managers can provide valuable insights, such as how to ensure the financial stability of a company or a company-sponsored personal portfolio.

As with most things in life, it’s better to know sooner than later, and more than less. There is hardly a better way to build a solid foundation that will further the success of your business, and your prospects as a budding small business owner.

Certified Financial Planner and CPWA Professional Ben Fuchs is the founder of Fuchs Financial, with offices in West Hartford and Middletown.

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