5 Tax Considerations Startups and Entrepreneurs Need to Think About

If you’re an entrepreneur who’s about to launch a new venture, a startup accountant can help you identify steps that will potentially save thousands in taxes and other expenses. 

There’s no shortage of planning tips for new businesses, and that’s particularly true when it comes to advice on how to avoid overpaying taxes. It’s hard to know exactly where to focus or what considerations will be the most beneficial for your business.

This is why it is essential to put tax planning near the top of its priority list. Here are five tax considerations to think about as you prepare your business for success!

R&D Tax Credit

Will your company be developing something new, be it a physical product, software, or even a process? Will you be substantially improving an existing product or process? If so, you may be eligible for the federal Research and Development Tax Credit.

The R&D Tax Credit is a dollar-for-dollar credit, up to $250,000. It was introduced as an incentive for companies to innovate and is offered across a number of industries. It’s widely available and the credit is not just for companies that employ scientists and focus on R&D.

If you are eligible, you may even be able to deduct some expenses related to claiming the credit as an added bonus. 

Because you can claim the credit and include deductions, it’s important you work with your startup accountant to ensure you are following the rules and regulations and meeting all of the requirements of the R&D Tax Credit. 

Section 1202

Section 1202 of the Internal Revenue Code allows for investors who took risks on investing in small businesses to be excluded from paying taxes on any capital gains realized on the stock. 

If you sell or exchange qualified small business stocks (QSBS) that you’ve held for more than five years, you may be able to exclude anywhere between 50% to 100% of the capital gains from taxation. However, it limits it to eligible gains larger than $10 million or 10x the taxpayer’s cost basis of the stock they’d be receiving the exclusion for. 

To qualify for exclusion, you must meet these requirements: 

  • Gross assets below $50 million when the stock was issued
  • Classified as a domestic C-corporation
  • At least 80% of assets were used in active trade or business
    • This can include legal, financial, engineering, architecture, or actual services, artistic or athletic performance or lessons, running a hotel, restaurant, etc. 

Because of the limitations and complexity of Section 1202, this is an area where the help of a knowledgeable startup accountant will be valuable.

Due Dates

For individuals, there aren’t too many tax due dates to think about, just April 15 and possibly estimated tax dates. 

When you start a business, there’s more to keep track of. Depending on how you structure your business entity and how you define your fiscal year, your returns may be due on some other date. If you have employees or contractors, there are deadlines for delivering 1099s and W-2s.

In addition, any states you’re required to file in will have their own deadlines. If you miss these due dates, there are fees plus interest on the unpaid taxes, along with the possibility of other penalties. In some cases, you can file for an extension, but if you owe taxes you’ll have to pay interest. 

A startup accountant will ensure you are filing and paying on time to keep unnecessary tax expenses to a minimum.

Expensing vs. Capitalizing Costs

Some business costs have to be expensed, some have to be capitalized and with others, you have a choice. 

Expensed costs hit your income statement in the year they occur. They directly reduce your profits and your tax bill. 

Capitalized expenditures add an asset to the balance sheet, and the depreciation is an expense on the income statement over multiple years. Capital costs create different taxation, and many types of capital expenditures are eligible for special tax treatment under a tax code that often changes.

The decision on when and how to capitalize is one with a lot of factors. A good startup accountant keeps track of the latest IRS regulations and can help you to manage capitalization to your advantage.

A Startup Accountant Can Walk You Through Entity Structures

Should you form as an LLC, an S-corporation, or a C-corporation? It’s one of the most important decisions you’ll make, and it determines, among other things, how you’ll be taxed.

  • A C-corp is taxed as a corporate entity. This means the corporation pays taxes, and when you realize personal income from corporate profits, you pay individual taxes as well. This is referred to as double taxation.
  • An S-corp is a pass-through entity. That means it doesn’t pay taxes, but its profits go directly to the owners as personal income, and they pay personal taxes. S-corp owners receive a W-2. There are significant restrictions about who can qualify as an S-corp.
  • An LLC is also a pass-through entity with characteristics of both a partnership and a corporation. There are few restrictions on who can form an LLC. Profits pass through to the owners, and owners pay individual tax. They do not receive W-2s.

If you haven’t selected a business structure yet or are thinking about restructuring, consult with a startup accountant. They will point you in the right direction and ensure you are properly managing your taxes.

Turn to a Startup Accountant to Guide You Through Tax Considerations

Most new business owners are focused on their customers and the products or services they plan to deliver. It’s hard to find time to sit down and work through tax considerations, even though they can save you a lot of money.

This is why partnering with an experienced startup accountant will work to your advantage. They’ll ensure you are paying as little as possible and making the best decisions for your business. Pasquesi Partners has experts who will walk you through startup accounting considerations. Schedule a call to find out how we can help!