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Tax Strategies for Biorefining Startups

Helpful hints for business growth in the bioenergy sectors
By Deborah Sweeney | December 27, 2010

Biobased fuel and chemical firms are gaining increased public and scientific attention, driven by factors such as oil price spikes, the need for increased energy security and concern over greenhouse gas emissions from fossil fuels. As popularity increases, so does the demand for biofuel- and chemical-based products. As such, many firms are interested in circulating their products throughout the marketplace. As always, the tax implications of any business decision must be considered. Several strategies exist to make taxes and the cost of starting a company manageable and less expensive for these firms, and all small businesses.

No doubt the number of startup biofuel and chemical firms will rise as a result of the industry’s growing popularity. The Small Business Jobs Act, enacted by President Obama in 2010, helps these businesses in several ways. The startup expense deduction allows taxpayers to deduct up to $5,000 in qualified trade or business startup expenses. Startup expenses are defined as costs related to creating an active trade or business, or investigating the creation or acquisition of an active trade or business. For those businesses already established, the act contains an S Corporation Built-in Gain Period. A C corporation that converts to an S corporation, usually for tax purposes, now must hold appreciated assets for five years, rather than the previously existing 10 years, to avoid the tax on the appreciation at the highest tax rate (35 percent). Shortening the hold period by five years will help S corporations save on taxes for appreciated assets.

In terms of tax strategies, businesses should first find a tax-friendly business structure. The first step in reducing tax liability is to make sure that your business is structured as a tax-friendly entity. Some forms of business entities require that the business pay taxes on the money it earns throughout the year and that the business owner pay taxes on the income he or she receives. This results in a double taxation scheme that costs the business twice. Most types of business entities, however, do not have to pay double taxes, and any tax owed is paid by the owner who receives the income. When structuring your business then, make sure you choose a form of business that will avoid double taxation and help you meet your tax saving goals. 
   
Next, become an excellent bookkeeper and learn your deductions. Whether or not you have an accountant or a bookkeeper, maintaining extremely accurate records and learning the potential business deductions is key to paying lower taxes and avoiding a tax audit. Hiring an accountant to manage your taxes is a great idea and helps itemize expenses into the most tax efficient filing. There are many deductions for small business owners that the average entrepreneur may not even know about. This is especially true within the biofuel and chemical industries as the American Recovery Act amends several provisions of the U.S. Tax Code, expanding or providing new renewable energy incentives for businesses and utilities that produce or utilize renewable energy. These incentives generally take the form of tax credits for the production of electricity from and facilities that utilize wind, refined coal, geothermal, biomass, solar, and combined heat and power systems. Learn the list of deductions and, after that, write everything down. The combination of knowing what deductions are allowable and meticulous record keeping will make tax returns easier to manage.

Finally, make sure your taxes are done properly and on time. If for some reason you can’t have your taxes done by the deadline, filing an extension as soon as possible, and before the deadline, avoids any potential problems with the IRS. Making estimated tax payments too will reduce the burden when it comes time to pay the whole bill and will help guarantee that when that day comes, you will have the money available. If after all of your preparation, you don’t have money to pay your taxes, the IRS offers a variety of programs to help you out, including payment and settlement plans.

The recent enactment of tax incentives for alternative energy means potential for the biofuel and chemical industry. Firms seeking to circulate their products throughout the marketplace should consider creating a tax strategy in order to avoid unnecessary expenses so they can focus on maximizing profit and efficiency, thus resulting in success for their business.

Author: Deborah Sweeney
CEO, MyCorporation Business Services Inc.
(818) 224-7642
dsweeney@mycorporation.com

 

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