You know what they say about some of the constants in life – and taxes are certainly among them. You’ve got to make sure that you’re paying Uncle Sam. This is especially true if you’re a startup business, as the tax requirements are slightly different from if you’re more established. In some cases, they’re a bit more complex, underscoring the importance of understanding what you owe, what you can deduct, and some other fine details. In many cases, it makes sense to work with a professional accountant to ensure that you’re paying what you owe and maximizing the available deductions.

Consider this post your complete guide to startup taxes. Read on to learn more about everything you need to know:

The Complexities of Startup Tax Obligations

All businesses have to pay taxes. It’s the law. Taxes help fund public goods and services. They also help the government function. However, the complexities of taxes vary based on whether you’re an individual filing or a business filing. Startups, for instance, have to comply with a different tax code than established businesses.

So what are some of the things you should know about startup taxes? Here’s a look at some of the key factors:

• You can deduct startup costs, which can be wide-ranging. Startup costs can be anything from market research and analysis to scouting locations for opening the business. You can also deduct the cost of computers, desks, legal and accounting fees, advertising and training. What’s more is that you can spread out these deductions over multiple years rather than claim all of these deductions in the year that your startup opens for business or incurs the costs.
• You can amortize startup costs, or spread out certain expenses over time. Generally, you need to receive permission from the IRS to amortize costs over a certain period. Once the IRS gives the OK, it tends to be very difficult to change. Amortization is helpful if you don’t expect your startup to make income right away, as it can help reduce your startup’s taxable income in future years.
• Like all businesses, startups are still required to pay income tax, payroll tax, sales tax and more.
• Startups should be aware of some of the credits that may be available to them. One is the R&D Tax credit, which is available to any qualifying business that engages in activities to develop or improve products, processes, software, techniques and formulas.

All individuals and all businesses must pay takes, and startups are no exception. Failure to pay taxes and, at a minimum, you can expect a failure to pay penalty. If taxes continue to go unpaid, more serious consequences are likely, which may include a lien on the property or even jail time.

How to Determine Your Startup Tax Obligations

So how do you determine your startup’s tax obligations? Let’s just say that the government doesn’t exactly make it easy to do yourself. That’s why working with a professional accountant can be so helpful. A professional can identify your startup’s specific tax obligations, identify all the deductions and credits that it qualifies for and file everything on time and correctly. A professional can also help advise your startup on its startup costs and whether it makes more sense to deduct them in the year they are incurred or amortize them.

There are also various other factors to note that help determine your startup’s tax obligations. For instance, business structure is a big one. If your startup is an LLC, it’s going to have different tax obligations than if it were a corporation. LLCs tend to have more flexible tax options, while corporations have a flat tax rate, but more complex taxation as it pertains to dividends that must be paid to shareholders. Choosing the proper tax structure is another factor that a professional can assist you with. You can also change your startup’s business structure over time to meet any necessary operational and tax results.

Maximizing Tax Deductions for Your Startup

It simply makes sense for startups to maximize their deductions and any credits that they may qualify for every year they file their taxes. Doing so reduces what they’ll have to pay to Uncle Sam and can put more money back into growing the business, establishing competitive advantages and earning market share.

Keep in mind that one of the most significant deductions your startup can make involves the costs to get the business up and running. This includes everything from market research to furnishing any physical property to purchasing the tools, equipment and technology needed to do business. Some other common startup expenses you’ll want to keep in mind for deductions include any business investigation expenses, like surveys, market research and consultant fees. They may also include travel and entertainment costs to secure any initial partners or suppliers. Accounting and legal fees may qualify. So do any initial advertising costs. Also, be sure to take advantage of any tax credits that your startup may qualify for. Tax credits are nice in that they represent a dollar-for-dollar reduction of any taxes owed. Many startups may qualify for the R&D Tax Credit, if not right after they initially begin doing business, then perhaps at some point in the future.

One of the most important things that any business can do, let alone a startup, is ensure accurate record keeping. Accurate record-keeping is essential to securing any deduction claims or when filing for any tax credits. It can also help ensure accurate financial reporting and compliance with tax regulations. In addition to record-keeping just being a good business practice, it also helps if your startup is ever audited.

Important Deadlines and Filing Requirements for Startup Taxes

You don’t want to miss any tax deadlines. Failure to pay your taxes on time is likely to result in a penalty and then even more severe consequences if taxes fail to be paid on time. Regardless of whether you’re a startup or a more established business, Uncle Sam wants his money – and paying taxes isn’t voluntary.

The key tax deadlines largely vary based on your startup’s fiscal year. For instance, many businesses use a fiscal year that begins in April and runs through March. If this is the case, then your business tax return would be due in June, or the 15th day of the third month following the close of your tax year. This differs from individual filers, where tax day always falls on April 15 of each year. If your business doesn’t use a fiscal year, it can generally expect to also file its taxes by April 15. There are some exceptions, however. For example, extended partnership and S-corporation returns are due in September, and extended C-corporation returns are due in October. Many startups may also elect to pay quarterly estimated tax payments throughout the year. These quarterly deadlines tend to be June 15, September 15 and January 15 in addition to the April 15 tax day.

It can be difficult for a startup to navigate all the deductions and credits that it qualifies for, let alone remember all the various deadlines and dates on the calendar. This is also where a dedicated professional tax advisor or accountant can help.

Managing Tax Risks and Compliance for Startups

Startups face several tax risks in the early days of doing business. Many of these are nothing more than simple errors, like incorrectly filing or being audited due to errors in tax filings. One of the best ways to avoid these errors is to double down on your startup’s documentation and record keeping. It can also be helpful to work with a dedicated professional to help your startup avoid some of these common pain points and ensure that you’re not paying out penalties for incorrect filing or having the stress of an IRS audit hanging over your business.

Accurate and thorough records are essential for any business, but perhaps more so for a startup based on some of the deductions they’re able to claim and the credits they may be eligible for. If your startup is ever audited by the IRS or receives an inquiry from any tax authorities, it’s always best to take the time to understand the full scope of the audit or request, prepare a response and respond on time and accordingly. A tax advisor or professional can help formulate this response to ensure you comply with IRS deadlines and provide all the appropriate documentation. A tax professional can also help your startup appeal any results that are determined after the audit or inquiry.

Take the Next Step with Graphite Financial

Professional tax help isn’t just helpful for startups, it could be essential. Graphite Financial is here to help. Thanks to our expertise in understanding startup taxes and knowing what deductions and tax credits young businesses qualify for, we’re well-positioned to provide our partners with high-quality, stress-free and highly accurate tax services to ensure compliance and maximize deductions.

Contact Graphite Financial today for more information and to get started. Schedule a free consultation with us.

Frequently Asked Questions

How can I determine my startup’s tax liabilities accurately?

Many different factors go into determining any startup’s tax liabilities, from how it’s organized to accounting for standard business taxes to adding up all the deductions that your startup may be eligible for. It can be a complicated process, especially when you consider that you can amortize some of the startup deductions that your business qualifies for. If you’re overwhelmed by tax liabilities or need assistance determining what you owe and what deductions you qualify for, it’s always best to work with a professional.

What are some commonly overlooked tax deductions for startups?

There are many deductions that startups can claim in the early days of their business. While some deductions are obvious and often claimed (i.e., computers, furnishings, etc.), others often go unclaimed. Things like market research, advertising, business investigation efforts, miscellaneous promotional efforts and more are all eligible. Additionally, startups may be eligible for the R&D Tax Credit and other qualifying tax credits.

What are key deadlines for filing startup tax returns and making payments?

Deadlines depend on various factors, such as how the startup is organized and whether it operates based on a fiscal year. In most cases, the deadlines are similar for startups as they are for individuals – taxes must be filed by April 15. If your startup is on a fiscal year, then taxes must be filed by the third month after the fiscal year ends. For instance, taxes are due by June 15 if a fiscal year ends on March 31.

What are the potential tax risks and consequences of non-compliance for startups?

The risks and consequences are the same for startups as they are for any type of business. Failure to pay taxes on time could result in fines. If taxes continue to go unpaid, it could result in further penalties, including jail time.

How can startups maximize tax savings through deductions and credits?

It all starts with knowing what deductions your startup qualifies for and what tax credits are available. That’s part of the value of working with a qualified tax professional – they can ensure you’re getting all the proper deductions and qualifying for all the credits.

What steps should startups take to ensure good standing with tax authorities?

Thorough documentation is key. It’s always best practice to ensure proper record keeping in the event that you ever receive an inquiry from the IRS.

Where can startup owners find professional advice and support for managing their tax obligations?

Work with a trusted tax advisor or tax professional for peace of mind that all obligations are being met. Taxes can be confusing, especially for a young startup.