Accounting for AI Startups: Unique Challenges and Solutions

Conventional startups tend to prioritize established business models when bringing products and services to market. AI startups are different, focusing more on innovative applications, financial data acquisition, and model training. Their business model must reflect a more innovation-driven one that considers SaaS, licensing and consulting. On this note, AI startups require capable, repeatable and high-performing accounting processes. Read on to learn more about these specialized accounting needs.

Why AI Startups Need Specialized Accounting Services

AI startups manage advanced technologies and unique revenue models requiring an innovation-driven business model. Innovation-driven business models focus on creating and delivering value to consumers through a more unique approach. They tend to be customer-focused, flexible and highly collaborative with external partners. Some examples of such models include revenue model innovation, platform business models and process innovation models.

Due to this enhanced complexity, there are also more complex tax and funding requirements, which thereby require more specialized accounting services. R&D tax credits, cross-border taxation and venture capital funds are all common with AI startups. AI startups also often have to manage multiple tax jurisdictions and various types of funding sources, from government grants to venture capital.

Key Accounting Challenges for AI Startups

AI startups face several significant accounting challenges, such as:

• R&D costs: From accounting software development to research labor, innovation-based operational models tend to invest a significant amount of capital into R&D. Rather than being fully deducted in the year incurred, R&D costs must be capitalized and amortized over 5 years for domestic costs and 15 years for international costs. AI startups may also qualify for R&D tax credits, which often apply to the design, development or improvement of processes, techniques, formulas or software that are technological in nature. A qualified accounting expert can help your startup navigate the amount of tax credits that you qualify for and efficiently process financial data related to these complex expenses.
• Complex taxes: AI startups also tend to have more complex taxes than conventional startups. Factors like IP taxation, cross-border taxes and revenue from foreign sources all add to this complexity. Additionally, tax laws may differ depending on where your startup is located.
• Revenue recognition: Subscription models and startups with long-term contracts must follow more specific revenue recognition requirements compared to conventional startups, per ASC 606. For example, many SaaS startups recognize revenue over a contract’s life using deferred revenue accounting, rather than upfront.

How to Structure Your AI Startup’s Accounting for Growth

Here’s a look at some practical ways AI startups can structure their accounting to facilitate growth:

• Chart of accounts: Structuring their chart of accounts (COA) to separate R&D, operating expenses and product/service revenues can help AI startups better keep track of their finances. COAs can help your startup record transactions in the right places, which can thereby help balance your books. It can also aid financial analysis, especially when leveraging technologies like natural language processing to automate routine tasks and improve reporting accuracy.
• Scalable financial systems: Cloud-based programs like QuickBooks and Xero can help grow your startup and provide greater financial transparency by automating recurring transactions and helping you maintain more accurate financial records. Today’s advanced solutions, including various AI tools, are also able to easily integrate with payroll systems and billing tools, offering real-time financial insights that can help AI startups make data-driven decisions quickly and efficiently.
• Tax compliance: Tax compliance tends to be more complicated for AI startups, especially those with complex VC funding requirements or international investors.

Funding and Financial Strategy for AI Startups

Funding and financial management are two important variables to propel your AI startup forward. Here’s a look at the funding options available and the importance of financial management and financial projections:

• Funding strategy: Venture capital and grants are two popular funding options that AI startups may pursue. However, there are accounting requirements associated with each that startups should be aware of. For example, requirements for VC funding involve robust record-keeping, financial reporting and a need to comply with regulations. Grant funding must demonstrate a need and align with your startup’s goals. Crowdfunding is another option. Across all options, understanding how to analyze financial data properly, you can make more informed decisions when pursuing different funding strategies.
• Financial projections: Solid financial projections and financial forecasting attract funding. The best types of forecasts that appeal to investors are those that cover and can clearly articulate cash flow, profit margins and break-even points.

Choosing the Right Accounting Partner for Your AI Startup

So how do you find the right accounting professionals for your AI startup? It starts with identifying someone who has experience in AI and the tech industry. A good accounting partner for your AI startup will understand your unique needs, have experience in AI/ML accounting sets and be able to suggest the right funding and financial strategy to propel your startup’s financial health forward. Additionally, with the increasing role of AI in accounting, having a partner who understands how to integrate automation and AI-driven financial analysis can give your startup a competitive edge.

That’s one of the key benefits of working with Graphite Financial for your AI startup’s accounting needs — our professionals are experienced in AI and SaaS finance, understand how to keep up with the future of financial planning, and also specialize in working specifically with startups and their sensitive financial data.

Graphite’s services — which include bookkeeping, tax filing, financial modeling, CFO services, bill pay and invoicing, fundraising, financial modeling and analysis, and more — are designed to serve your startup now and into the future as your long-term partner.

Navigating Financial Success in AI Startups

Specialized accounting services are essential if you want your artificial intelligence startup to grow and succeed due to the various financial complexities they face. For help managing financial complexities and tailoring services specific to help your startup evolve and gain market share, contact Graphite today. As a proven leader in the accounting profession and CFO services for AI startups, we’ll make sure your finances are properly managed and your startup is on a growth trajectory. Contact us today for more information and to schedule a consultation.

FAQs

What are the key accounting challenges for AI startups?

Ai startups operate on a model that must reflect a more innovation-driven one that considers SaaS, licensing and consulting. Enhanced complexity translates to more complex tax and funding requirements, which require more specialized accounting services. R&D tax credits, cross-border taxation and venture capital funds are all common with AI startups.

How can AI startups handle research and development costs for tax purposes?

R&D costs must be capitalized and amortized over 5 years for domestic costs and 15 years for international costs. AI startups may also qualify for R&D tax credits, which often apply to the design, development or improvement of processes, techniques, formulas or software.

What is the importance of revenue recognition in AI startups?

Revenue recognition, or the process of how you record and recognize revenue, is important for any startup. It’s a core accounting principle and an important part of bookkeeping that can help demonstrate credibility for your startup.

How can AI startups benefit from R&D tax credits?

R&D tax credits are designed to offset qualifying research expenses — and it can help your startup reduce its taxable income. How do you qualify for R&D tax credits? Your startup qualifies if you did something that led to the improvement of a product, process or software. What you do also has to be technological in nature. Qualified accounting teams can help you navigate R&D tax credits and determine how much you’re eligible for.

What are the best accounting practices for AI startups?

Some of the best accounting practices for AI startups include structuring a chart of accounts appropriately, developing a scalable financial system and ensuring tax compliance. Structuring a COA properly to separate R&D, operating expenses and product/service revenues can help AI startups better keep track of their finances. We also suggest using cloud-based programs like QuickBooks and Xero to help grow your startup, automate certain processes and provide greater financial transparency.

Why should AI startups partner with a specialized accounting firm like Graphite Financial?

Graphite professionals are experienced in AI and SaaS finance and also specialize in working with startups. Graphite’s range of accounting services — including bookkeeping, tax filing, financial modeling, CFO services, bill pay and invoicing, fundraising, financial modeling and analysis, and more — are designed to serve your startup now and into the future.