Startup Tax Planning Guide

Many startups wait until the last minute to file their taxes, which leads to a greater chance of errors, being subject to an IRS audit, and missing out on R&D tax credits. A startup must have an organized plan well ahead of Tax Day. Our tax planning guide walks you through what should be done before you file your taxes.  

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1. Compile and Organize Documents

A company needs to gather several documents when it starts filing taxes. These include:

Form 6765

This is the IRS form startups must use to file for R&D tax credits. It consists of four sections:

• Section A: For businesses claiming the regular credit. Companies need to enter the amounts they paid for R&D activities. It equals 20% of the Qualified Research Expenses (QREs) over the calculated base amount. However, claiming this credit can get complicated depending on the business.
• Section B: This section is for the Alternative Simplified Credit (ASC). Companies filing for ASC will skip Section A and vice-versa if opting for the regular credit. This credit allows a business to claim 6% of its QREs and is generally less complex than claiming regular credit.
• Section C: After calculating the current year tax credit, this section is used for additional forms and schedules that require reporting based on a company’s structure.
• Section D: The final section is only used if a business makes the payroll tax credit election. Otherwise, it is skipped.

R&D Employee Form W-2s

Purchase Orders, Invoices, and Receipts

Blueprints, Patents, Designs, Prototypes, and Notes

Form 1099-NEC (if individual contractor)

Form-1099 NEC is used to report non-employee compensation. If an independent contractor’s services were used for R&D, all their payments must be reported on this form.

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2. Use the Tax Code

While the tax code can be complex, many startups are unaware that most of the tax code tells you how to minimize your tax burden. A relatively small portion of the tax code tells you what you will pay. Working with a professional with a thorough understanding of the tax code is essential to take advantage of it.

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3. Invest in Accounting and Bookkeeping Software.

Investing in high-quality accounting and bookkeeping software is a wise choice. Accounting software has many benefits, including improved accuracy, data protection, and more reliable reports.

When deciding on accounting software, you’ll want to ensure that the software has a good track record. Read customer reviews and testimonials to help determine whether a software program is suitable. Further, check the features you require. Some key features include:

• Profit and loss statement
• Balance sheet
• Expense tracking tool
• Time tracking tool
• Cloud support

Lastly, choosing accounting software that balances affordability with quality is crucial, especially for new startups. However, quality is more important than price, and it may be better to spend a little bit more on additional features that can save time.

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4. Know Your Deadlines

There are several dates to remember when filing taxes so your startup doesn’t miss deadlines and crucial tax breaks.

• January 15th – If expected to owe more than $1000 in taxes from self-employed income, make sure to file quarterly taxes for income earned between September 1st-Dec 31st.
• January 31st – Employers must file and issue W-2 and 1099-NEC forms.
• March 15th – This is the deadline for partnerships, multi-member limited liability companies (LLCs), and S Corporations. If you would like an extension, submit an extension request (Form 7004) and a deposit of the estimated tax payment for a filing extension until September 15th.
• April 15th – This is the federal deadline for C Corporations, single-member LLCs, multi-member LLCs (taxed as corporations), and sole proprietorships unless April 15falls on a weekend or holiday. In that case, the deadline is the following business day. Submit an extension request (Form 4868) by April 14th for a filing extension until October 17th.

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5. Write off First-year Costs of Starting a Business

Launching a startup is a costly endeavor. Fortunately, tax breaks are available for each step of starting a business, providing many opportunities for a company to reduce its tax burden.

a. Creating and Launching

One of the first tax write-offs you can qualify for is the business start-up tax write-off. This tax write-off allows new businesses to deduct up to $5000 of business startup and $5000 of organizational costs during the first year of operation. These costs cannot be deducted in advance. Organizational costs include the state and legal fees required to create a corporation or partnership.

b. Supplies

Most components essential to running a company can be written off. These include office supplies, vehicles, internet, business meals, and labor. A good rule of thumb to determine if something qualifies as a business expense is that it must be directly connected with the company, necessary, and paid or incurred during the year.

If a startup fails, capital expenses incurred when starting or purchasing a business can be deducted as a capital loss. However, personal and non-deductible are exempt from the capital loss deduction. Keeping records of all business expenses is crucial to ensure you receive the maximum tax deduction possible.

Planning for Tax Day allows businesses to save money, reduces the chances of errors, and provides greater peace of mind. We make preparing for Tax Day more accessible by completing the most difficult tasks and helping startups claim R&D tax credits. Sign up with us today!

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Sample Planning Schedule

Before the end of the fiscal year:

• Determine which business tax return you must file based on the business entity
• Find out whether your tax filing deadline is March or April 15th

January

• Gather business earnings and expenses and bank and credit card statements, and taxpayer identification number (TIN)
  • If you have a tax return from last year, use it to fill out some information to save time
  • Your TIN is your personal social security number if you are a sole proprietor. Otherwise, the TIN is the employer identification number (EIN)

• Determine applicable tax deductions and calculate them
• If applicable, issue W-2 and 1099 forms to staff

February

• Complete previous steps if not finished by the end of January
• File taxes