Fernway DiarySM

Feb 07, 2022

For founders trying to get their venture off the ground, tax considerations often take a back seat to the more pressing concerns of day-to-day operations, growth strategies and fundraising efforts. Taxes may not be a priority for a company not yet generating revenue or profits in the early stages of its growth. Failing to strategically plan for tax implications that may arise at a later date can often result in significant operational hurdles, tax inefficiencies, non-compliance issues or missed opportunities down the road. Here are a few aspects startups should generally consider:

Entity structure: Organizing a company’s legal structure has different tax implications depending on the type of entity chosen. It is important to consider a startup’s long-term goals when selecting the appropriate type of entity rather than what might be most expedient at the outset, because it can be difficult to change entity structure after the fact. Startups should consult legal and/or tax professionals to fully understand the advantages and disadvantages of sole proprietorships, partnerships, C corporations, S corporations, vs. LLCs, and the tax benefits/costs under various scenarios before proceeding.

Business deductions: Business deductions are a potential minefield of avoidable errors. Many mistakes occur when owners don’t familiarize themselves with the rules of what is and is not allowed. Some are obvious, such as not writing off purely personal expenses against the business, while others can be confusing or more nuanced. Startups may easily claim deductions that aren’t allowed or fail to deduct allowable expenses without a full understanding of the applicable regulations. Just as critical is reliably and clearly tracking expenses. Startup should use an effective accounting software to record business transactions so potential deductions are not overlooked.

Quarterly taxes: Paying quarterly taxes is a prudent idea, even when it is not required. Meeting a startup’s tax liability periodically throughout the year is easier than paying it all at once annually, while the penalties for missing a mandatory payment can be steep. Although there are methods for calculating the appropriate amount to pay in estimated taxes to avoid penalties for underpayment, the wisest course is to engage a tax professional. They can help estimate annual taxes and provide accurate information on filing deadlines, allowing startups to include projected tax amounts in budget planning.

1099s: When startups use contractors to provide services rather than taking on the expense of hiring regular employees, they must file 1099-NECs to report compensation exceeding $600 per individual in a calendar year. Companies should require every contractor to fill out a W-9 when they are first engaged to ensure that the proper identifying information is in hand for timely filing of 1099s. For any given tax year, Form 1099-NEC must be filed by January 31 of the following year; if the deadline falls on a weekend or holiday it is moved to the next business day. Penalties apply for late filing or for neglecting the requirement completely, so startups should prioritize handling this correctly.

Bookkeeping and accounting: Like entity formation, a company’s bookkeeping and accounting methods should be chosen with long-term growth in mind. All financial transactions should be accurately recorded as they occur to facilitate reporting, tracking expenses, and meeting tax filing deadlines. Startups have many various accounting software options to choose from; in selecting one, they should ensure their preferred platform includes functionality appropriate to their industry and individual business needs.

Professional tax help: When cashflow is tight, startups often delay or minimize engagement with professional advisors on tax matters. Engaging a tax expert early, however, can help early stage businesses ensure they are compliant with all applicable regulations; able to put in place a structure that aligns with their overall growth/exit strategy; and minimizing current/future tax obligations at the local, state, federal and international tax level.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:

The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.