Founders – check out our tips below that can save your Startup thousands of dollars in Income Taxes, Payroll Taxes, Sales Taxes, and foreign taxes.
R&D Tax Credits:
Did you know that if your startup conducts R&D activities it can qualify for up to $500,000 in Payroll Tax Credits? The R&D credit application (form 6765) filed with a timely filed tax return can provide your startup with additional runway to either invest back into the company for a key hire.
Below are some handy definitions from the IRS on gligible startups and Qualified Research Expenses.
Qualified Research: Qualified research means research for which costs may be treated as section 174 expenses. The taxpayer must undertake this research to discover information that is technological in nature. Its application must be intended to develop a new or improved business component of the taxpayer.
Qualified Small Business: A qualified small business is a corporation (including an S-Corporation) or partnership with:
- Gross receipts of less than $5 million for the tax year and
- No gross receipts for any tax year before the 5-tax-year period ending with the tax year.
SAAS companies, check out our handy calculator which can give you more details about how much your Startup could potentially qualify for:
Estimated Tax Planning for your Tech Company and Employees
Making early payments this year can save your tech companies significant funds, as due to inflation adjustments the current estimated tax penalty is a whopping 7%, up from 4% earlier this year. These estimated tax penalties can also impact your employees’ taxes, so informing them now to increase their withholding or make estimated tax payments can save them significant taxes and ensure you have a happy workforce in 2023.
Speaking of a happy workforce – Giving them the tools and resources to manage their retirement planning can make all the difference when it comes to employee retention and morale. Partnering with financial advisors or your retirement plan and hosting a year-end tax planning session to review 401k, Roth vs. Traditional IRAs. This will also give them an opportunity to learn more about the tax implications surrounding their stock options and what they can do now to plan for any future exercises. Connected to this for later-stage startups that may have lost revenue/market share- revaluing your 409a valuation can help reduce the value of the company stock price and ultimately reduce the tax burden your employees will have if they decide to exercise their stock options. Learn more about 409a valuations here. If your company is using FSA/HSA’s there could potentially be some “use it or lose it” provisions so communicating to your employees now can help make crucial decisions before year-end to ensure they get all their claims in on time.
Sales Tax Exemptions:
Did you know that many States exempt purchases of tangible goods (computers, lab equipment) from Sales Tax if your Startup is conducting research & development activities? New York State is a great example of this. There are some strict rules around receiving exemptions – See below:
In New York: Purchases of tangible personal property for use or consumption directly and predominantly in research and development in the experimental or laboratory sense can be made without paying sales tax.
- Research and development in the experimental or laboratory sense means research that has as its ultimate goal:
- basic research in a scientific or technical field of endeavor;
- advancing the technology in a scientific or technical field of endeavor; • development of new products;
- improvement of existing products; or
- development of new uses for existing products.
Activities not eligible for the exemption include:
- testing or inspecting materials or products for quality control; • efficiency surveys;
- management studies;
- consumer surveys, advertising, and promotions; and
- research in connection with literary, historical, or similar projects.
Apply for Tax Residency Certificates:
Tax Residency Certificates (Form 6166) let foreign governments and tax authorities know that your startup pays and files taxes in the U.S. This is critically important for tech companies looking to grow in overseas markets. Without providing a tax residency certificate foreign revenue can be subject to mandatory foreign tax withholding and reduce your revenue significantly often killing any gross profits you hoped to have from scaling in a foreign market. The IRS is taking increasingly longer to issue these certificates due to backlogs the agency is facing. We commonly find that startups are holding onto large receivables and waiting for these certificates to be issued. If you plan to work with customers in foreign countries in 2023, applying for these residency certificates now will ensure that you can collect 100% of the revenue, and avoid having receivables on the books for months on end. Link to more info here.
1099 Reporting
The IRS has new Tax Reporting Requirements for platforms like Venmo/Cash-App etc. If you paid your team using any of these tools during 2022 you will need to exclude payments made using third-party payments when issuing 1099’s to contractors. We have more information on compiling your year-end tax reporting for employees/contractors here, especially when it comes to Incentive Stock Options, Interest, and Contractor reporting.
This leads to our next tip – which is to get your financials and bookkeeping in order. If you don’t regularly get your books updated now is the time to get that done. This will create peace of mind for tax time and ensure your filings can be prepared without major issues. For founders that have raised capital through SAFE Rounds, Convertible Notes, or a Priced Round having your investments recorded correctly on the Balance Sheet is critical. Beyond this having all of your revenue, spend management, and payroll systems connected your accounting system and syncing data will allow you as a founder to make decisions in real-time instead of waiting for your financials to be prepared. Check out our handy tips here on how to get this process started.
Finally speak to your CPA: Having a conversation with your CPA before the end of the year can save you time and hassle and mentally prepare you for tax time. As a CPA, I’m buried in work from January through April, and it can be challenging to do any meaningful tax planning during that time. Having a conversation with your CPA in the fourth quarter of the year gives you time to understand all your tax obligations and plan your cash-flow accordingly.
We love to help founders with all of the above – for any questions you might have, contact our team at ShayCPA.