“Nothing is certain except death and taxes” – made famous by one of America’s founding fathers, Benjamin Franklin. 200 years later, it still rings true, even for Startups with NO activity. All Startups structured as a C Corporation need to file annual tax returns. There are many myths for founders regarding accounting and taxes for their startups. Let’s dispel some of the most common myths, today.
Myth #1: I’m pre-revenue – I don’t need to worry about taxes
This is a common misconception. If you are a C Corporation, which most funded startups are, you need to file Form 1120 with the IRS every year even if there is no activity. There may also be additional reporting requirements with various states you are located in. Failure to file is a disclosable event during due diligence and could put future fundraising at risk.
Myth #2: It’s okay to file your Income Tax return late
The corporate tax deadline is April 15th but can be extended very easily to October 15th, if additional time is needed to file. Accountalent will file your Startup’s extension for FREE. We don’t want to see any startup file late. For companies with foreign subsidiaries or foreign shareholders, there is an automatic $10,000-$25,000 IRS penalty for filing late. Further, you run the risk of not taking advantage of the refundable research and development tax credit only offered to startups that file on-time.
Myth #3: You cannot claim the Research and Development (R&D) Tax Credit
The majority of startups Accountalent works with qualify for the R&D Tax Credit. The R&D Credit is a gift from the IRS. If you are building new products, you get a tax deduction and a tax credit for the same expenses. More importantly, since most startups are not profitable, you may qualify for the “refundable” version of the R&D Credit.
This means that the IRS will send you a check in the mail for the amount of the refundable portion of the credit. This is valuable cash that can help extend your runway. As of tax year 2023, you may be eligible for up to $500,000 in refundable credits. Accountalent offers a comprehensive R&D Study product that uses technology to keep the price extremely low (lowest in industry), so you keep as much of the credit as possible.
Myth #4: You can manage all finances in excel at an early stage
This issue happens time and time again – your investors ask for a copy of your financial statements, and you realize you don’t have anything to send them. Scrambling at the last minute to try and pull together a set of financials is costly and inefficient. By setting your startup up for success from the beginning, you will have financial statements at the ready for investors, 409A valuations (required for employee stock compensation), taxes, and your own internal use to track runway, burn rate, and other metrics. Our bookkeeping team can help you scale from early stage through exit, starting as low as $199/month.
Myth #5: You do not need to charge Sales Tax
Many states now require companies to charge sales tax on SaaS and other products/services sold or delivered via the internet. There are 50 very different sets of rules and there can be personal liability for Officers. CA, NY, NJ, MA, and WA are among the most aggressive states.
At this point you understand the criticality of ensuring your Startup’s books are in order, effective Day One. However, don’t fret if they are not. Cleaning up the books and tax situation today will be easier than waiting until tomorrow – sooner the better. And it should not cost you an arm and a leg.
There are many founder-friendly law firms, registrants and accounting firms that will not charge by the hour for these services. Accountalent is happy to point you in the right direction.
About the Author – Accountalent is the Go-To tax and accounting solution for 5,000+ Startups. As trusted tax and accounting experts focusing solely on startups, they are here to make your finances easy to understand. Their focus is on income tax compliance, R&D Credits, and bookkeeping. For more information, please visit Accountalent.com or schedule a call here.
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IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
It's easy to think tax breaks are just for large corporations, but this article proves there are plenty of tax benefits for startups. Definitely going to talk to my Tax Accountant more about this!