Launching a startup is thrilling, but any errors on your taxes could slow down your efforts right away. Because the U.S. rules for taxes are complicated, you could end up losing a lot or facing heavy fines if you miss them.
In this guide, you’ll find out why tax planning matters for startups, learn the main tax points every founder should consider, know when to hire a professional, watch out for common mistakes, and learn how to maximize your savings. Look for an EDD audit lawyer, who can help you with the taxation.
Why Should You Have a Perfect Tax Strategy from Day One
- JPMorgan Chase reports that almost all, or 83%, of startups struggle due to cash flow issues, often because of surprise payments in tax bills.
- Good tax planning saves you money, keeps you clear of IRS issues, uncovers hidden tax breaks for R&D, and readies you for investors who ask questions about your finances.
- For example, by forming a C-corp in Delaware, you could cut your tax bill by over $10,000, improving your finances and increasing chances of growth.
Learn These Tax Provisions for Startups
Tax breaks have the potential to make a big difference for startups.
- New startups with under $5 million in sales can receive up to $250,000 in R&D Tax Credit, covering costs for project developers, building prototypes, and cloud usage.
- Business income passed through LLCs and S-corps can receive a 20% deduction through the Qualified Business Income deduction.
- You can currently take full benefit of this tax deduction when buying equipment for up to $1.16 million under section 179.
- Owner income from Delaware C-Corps is taxed twice, yet these companies attract venture capital; LLCs and S-corps are not double-taxed, but both types make capital-raising more difficult.
- A sole proprietorship is easy to start, but the owner has no protection from debts.
Should You Go for A Professional Tax Person?
If you don’t bring in complicated profits over $100K, haven’t too many employees, and you find it easy to use bookkeeping and tax apps, go ahead and handle your taxes without help.
You should still use a professional if you have received funding, do business in several states, are eligible for R&D credits or NOLs, or need stock options appraised according to 409A rules.
Many people spend between $2K and $5K on CPAs who specialize in startups, which usually leads to saving five times that amount on taxes and deductions. Hiring a tax auditor CDTFA will surely help you in the long run.
Tax Disasters That You Must Avoid
If you don’t use Form SS-8 to correctly classify workers, the IRS could penalize you up to $5,000 per person, so use the form for better protection. Missing state nexus rules can lead to paying back taxes and fines in more than 30 states, and Avalara helps manage this process.
Improper 409A valuations might result in paying a penalty tax of up to 20% on stock options; Carta or Scenic Advisers make sure your valuations comply. Consult with an expert before taking any vital call.
