Behind every strong business lies a strategic growth plan. Whether it’s focused on investments or operational expansion, long-term success is directly linked to your business’s aspirations. A key part of this is understanding the tax implications that come with growth. Without proper planning, you could face unexpected liabilities that undermine your financial goals.
In this blog, we’ll explore key things to consider when scaling, including depreciation, optimizing tax credits, and managing state and federal liabilities.
Tax Considerations for Different Vehicles of Growth
Whether you’re investing in new equipment or expanding your service offering, good planning can help you reduce your tax liability.
If you’re investing in terms of business equipment or assets.
- Section 179 Deduction: This is a valuable option if you want to reduce your taxable income quickly. With Section 179, you can expense the full cost of qualifying equipment (up to a certain limit) within the same year you purchase it. This means that you essentially accelerate the depreciation deduction. For 2023, the maximum deduction available is $1,160,000, with a total equipment purchase limit of $2,890,000.
- Bonus Depreciation: If your total equipment purchases exceed the Section 179 limit, or if certain assets don’t qualify under Section 179, you could turn to bonus depreciation for another way to reduce your tax liability. It allows you to deduct 100% of the cost of eligible property in the year it’s placed in service. This applies to both new and used equipment that meets specific IRS criteria.
If you’re physically expanding your business.
- Deductibility of Expansion-Related Expenses: Costs that are directly tied to business expansion, such as renovating facilities, are generally deductible. However, some capital improvements, like major building upgrades, structural additions, or new construction, may need to be depreciated over time rather than expensed immediately. Consult with a tax professional in this regard.
- Tax Credits for Job Creation: Many states, like California with its New Employment Credit, or New York with the Excelsior Jobs Program, offer tax credits to businesses that create jobs or invest in economically disadvantaged areas. Additionally, Opportunity Zones also offer federal tax incentives for capital gains invested in these areas.
- Tax-Deferred Retirement Accounts: Contributions to employer-sponsored plans, such as Solo 401(k) plans, are tax-deductible, which can free up more business cash flow in the short term for reinvestment.
- State and Local Tax Implications: A nexus, or legal connection to a state, may trigger sales tax obligations. In this instance, you may be required to collect and remit sales tax there. Conducting thorough due diligence on the tax rules of each jurisdiction is essential to ensure compliance and avoid unexpected liabilities.
How you finance growth also matters.
- Debt Financing: While interest on debt is typically tax-deductible, there are limits, especially for larger businesses. Section 163(j), generally caps the deduction at 30% of your adjusted taxable income (ATI).
- Equity Financing: Doesn’t offer interest deductions, but safeguards you from repayment obligations that come with taking on debt. This can result in a stronger balance sheet and improved financial stability.
Beware These Common Tax Pitfalls
From ensuring compliance when entering new markets to carefully considering how you structure mergers, the following oversights can derail growth.
- Don’t forget to register for local taxes: When you enter a new jurisdiction, ensure you register for applicable state taxes, which can include sales, income, and other industry-specific taxes.
- File your taxes on time. Just as tax obligations vary per state, so do filing deadlines. Staying on top of these rules is key to avoiding costly compliance errors.
- Merging? Structure the deal right. The way you structure your deal is crucial as some expansion transactions can lead to unexpected taxes or missed opportunities for deferring gains. For example, improperly handling stock or asset acquisitions may result in immediate taxation which could’ve been staggered if otherwise structured. Consult with your CPA in this regard.
- Employ professional help. Some things are better left to the experts. By working with an experienced tax professional, you can be strategic about minimizing taxes while ensuring compliance.
At Fusion CPA, we can help you. From reviewing your growth plan to implementing the most effective tax strategy, we ensure your business maximizes tax savings while staying compliant. Contact us today!
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.
