Comprehensive Guide to Startup Tax Essentials

Does Your Startup Need to File a Tax Return?

First, let’s address one of the biggest questions founders have: If my startup didn’t earn any revenue, of if my company lost money, do I still need to file a tax return? Yes! Any startup that received an Employee Identification Number (EIN) must file a tax return.

Kruze is a leading startup tax provider, serving hundreds of VC and seed funded startups. Our clients have collectively saved over one hundred million in taxes through our R&D tax credit work, and our clients have been acquired by leading public technology companies like Apple, Workday, Cisco and others - proving that our tax and compliance work is of the highest standard.

The next most common question we get is, can a founder DIY their tax work. In general, the answer is no. Here are some reason you should rely on a professional tax preparer that understands startups:

• Preparing and submitting returns is time-consuming. It’s not as simple as filling out a form and mailing it to the IRS, and your time is limited.
• R&D expenses may not be fully deductible. Congress has passed legislation that can make even unprofitable startups that conduct a lot of R&D owe taxes.
• Mistakes can be expensive. You don’t need any startup tax compliance issues. You could end up with fees and penalties. More importantly, these types of problems can affect due diligence, which could affect your funding or any acquisition.
• Deductions and credits are available, even for unprofitable startups. One big example is the R&D tax credit. If you have employees and you’re doing qualified research and development, you may be able to reduce your payroll taxes! But you’ll need help to properly document your research activities.
• Exits have heavy tax diligence. Kruze manages the tax due diligence for our clients. When major public technology companies purchase startups, tax diligence is no joke, and the acquiring company will require the founder to attest to pages and pages of tax and compliance standards - that’s where Kruze really shines. Our team of CPAs and IRS Enrolled Agents constitutes one of the largest groups of startup-focused tax providers on the planet.
• Businesses owe different taxes than people do. Depending on your startup’s structure and where you do business or have employees, you may have tax obligations in multiple states, including franchise taxes, sales taxes, income taxes, and payroll taxes.

Now that you know why professional preparation is important for startups, you can use our online tax return cost calculator to estimate how much your startup’s tax return would cost. Next we’ll look at the steps founders should follow to make sure your preparation goes smoothly.

What tax forms does your startup need to file?

Below you’ll find a list of tax forms that Delaware C-corporations may need. Please note that if your startup isn’t a C-corp, the IRS requires different forms. You may not need all of these forms; a qualified tax preparer like Kruze can guide you through this process. You can download a PDF of this list.

• 720 – Quarterly Federal Excise Tax Return. If your startup owes excise taxes (which are due on certain goods, services, or activities) you’ll need to file form 720 for each quarter of the calendar year.
• 940 – Employer’s Annual Federal Unemployment (FUTA) Tax Return. Most employers pay both a FUTA and a state unemployment tax.
• 941 – Employer’s Quarterly Federal Tax Return. Any business with employees will file this form every quarter to report income taxes and payroll taxes that you withhold from your employees’ wages, along with Social Security and Medicare payments.
• 944 – Employer’s Annual Federal Tax Return. Form 944 is like Form 941, but it’s used for the smallest businesses, with income of $1,000 or less. These businesses use this form to report federal withholding and FICA tax, and can also calculate their Social Security and Medicare tax liability.
• 1095-B – Health Coverage. This form is used by companies to report to the IRS the individuals who are covered by health insurance.
• 1095-C – Employer–Provided Health Insurance Offer and Coverage. This form is used to report any full-time employees (one month or more of the calendar year) of Applicable Large Employers (ALE).
• 1099 – Information Returns. Form 1099 is a collection of different forms (including 1099-NEC, 1099-DIV, 1099-INT, and 1099-MISC) used to document different types of payments made by a startup to businesses or individuals that aren’t employees. You’ll fill out these forms with the correct information and send copies to the payee and the IRS.
• 1120 – U.S. Corporation Federal Income Tax Return. Form 1120 is the starting point for most professionally funded startups, which should be incorporated as DE-Corps. You’ll use this form to report income, gains, losses, deductions, and credits, and to calculate any liability.
• 1125-E – Compensation of Officers. This form is used to provide a detailed report of deductions for compensation of company officers. It’s applicable to startups with more than $500,000 in total receipts.
• 1125-A – Cost of Goods Sold. If your startup has sales and is reporting a deduction for the cost of goods sold, you’ll need this form.
• 1128 – Application To Adopt, Change, or Retain a Tax Year. This form is used by startups to change their tax year. Most companies follow a calendar tax year (and we encourage you to do that as well so you don’t miss deadlines), but if you’re changing your fiscal year, you’ll need this form. If you want to know our opinion if you should change your fiscal year, read click here.
• 3115 – Application for Change in Accounting Method. This form is used to request a change in your accounting system. All startups should use accrual accounting, but many start out using cash accounting. To change, you’ll need to complete Form 3115.
• 3800 – General Business Credit. Form 3800 is used by startups to claim any business credits. If you’re claiming credits carried over from prior years, you will need to document those carryovers.
• 3921 – Exercise of an Incentive Stock Option. This form tells the IRS which of your shareholders received incentive stock options (ISO) and part of their compensation. You’ll need to file Form 3921 for every employee that exercises an ISO, and missing deadlines or failing to file means your company could face fines.
• 4562 – Depreciation & Amortization Deductions. You’ll use this form to claim deductions for depreciation and amortization, elect to expense certain property, and provide details on any business use of property or automobiles.
• 4797 – Sales of Business Property. If your startup sold or exchanged property or capital assets or disposed of capital assets, you’ll need this form.
• 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations. US citizens and residents who have ownership in foreign corporations are required to file Form 5471.
• 5472 – Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business. The long title tells you how Form 5472 is used – it’s filed by foreign individuals or corporations that own more than 25% of a startup.
• 5884 – Work Opportunity Credit. Startups can use Form 5884 to claim the Work Opportunity Tax Credit if they employ people from specific groups, including qualified veterans, summer youth employees, former felons, and others.
• 6765 – Credit for Increasing Research Activities. If your startup engages in qualified research and development activities, Form 6765 is used to document your expenses so you can receive the Research & Development Tax Credit.
• 7004 – Application for Automatic Extension. This is a big one – Form 7004 is used to request an automatic 6-month extension to file your business income tax return.
• 8829 – Expenses for Business Use of Your Home. This form is used if you work at home, so you can deduct legitimate expenses from your startup taxes. Note that the IRS scrutinizes Form 8829 very closely, since it’s often abused.
• 8832 – Entity Classification Election. This form is used by companies to choose how they will be classified for federal tax purposes, such as a corporation or partnership.
• 8941 – Credit for Small Employer Health Insurance Premiums. Businesses with fewer than 25 employees, with an average full-time salary of less than $50,000 annually, can use Form 8941 to apply for a tax credit for health insurance premiums. Very few startups qualify because of the average salary requirement.
• 8949 – Sales & Other Dispositions of Capital Assets. This form is used to reconcile amounts reported on IRS Forms 1099-B or 1099-S with your startup tax return.
• 8992 – U.S. Shareholder Global Intangible Low-Taxed Income (GILTI). Startups that are developing significant intellectual property (IP) in foreign countries will use this form to report income that’s earned overseas by US-controlled corporations.
• SS-4 – Application for Employer Identification Number (EIN). This form is self-explanatory; new businesses use Form SS-4 to apply for the nine-digit number that the government assigns to businesses for tax filing and reporting.
• W-2 – Wage and Tax Statement. Every employer who pays employees must file a Form W-2 for each employee.
• W-3 – Transmittal of Wage and Tax Statements. This form is a summary of all the wages you paid to employees during the year, and reports the combined employee income to the IRS and the Social Security Administration.
• W-8 – Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). W-8 forms are a group of forms that document income for any non-resident aliens your startup pays or employs. There are several different W-8 forms, used in different circumstances, and they can be extremely complex.

Is your startup eligible for R&D tax credits?

The research and development (R&D) tax credit is a government-sponsored incentive that encourages businesses to engage in R&D activities within the US. Startups can offset up to $500,000 in expenses starting in 2023. The credit can even benefit startups that are losing money – if you’ve got employees on your payroll, your company can use the R&D credits to reduce the amount of payroll taxes you pay. This is a great way to cut your burn rate.

Calculate your potential credit

These changes reduce the immediate value of the credit for many startups, but it still has value to help you save on payroll taxes and reduce your burn rate. To find out how much your R&D tax credit could be, you can use our credit calculator.

What documents will your accounting firm need to complete your startup’s tax returns?

To make filing your startup taxes as smooth as possible, you’ll need to know what documents you need. Ideally, you should be assembling this information throughout the year, so you aren’t scrambling to produce it at the last minute. Here’s a downloadable checklist to help you get started. You may not need all of this information, or other documentation may be required based on your company’s industry and financial situation.

Corporate Information

• Type of entity, such as C-Corp, S-Corp, or LLC
• Incorporation certificate
• Articles of incorporation
• Employee Identification Number (EIN) letter
• Startup’s legal name and address
• List of state registration numbers
• Name, address, title, and Social Security numbers (SSNs) of company officers
• Detailed capitalization table listing name of each shareholder, percentage of shares held, and type of shares (preferred or common)
• Information about any foreign subsidiary
• Information about any change in structure, such as a merger/acquisition
• Name and title of company officer who will sign the return’s electronic federal tax payment system (EFTPS) and any state online login credentials

Financial Documents

• Method of accounting, either cash or accrual
• Financial statements, such as income statement, balance sheet, cash flow statement, and general ledger
• Payroll data, including W-2s, tax returns, and per-state allocations for remote employees
• Revenue data, including per-state allocations for states where you have revenue
• Property data, including per-state allocation of any fixed assets
• Estimated tax and tax paid for prior year
• Amount of any refund(s) applied to prior year taxes
• Information about any tax credit received, including R&D tax credit
• Cryptocurrency transactions
• All 1099s issued by the entity
• Any sale of business assets or company stock
• Accrued expenses
• For startups incorporated during the tax year, any start-up and organizational expenses

Prior Year Returns

• All prior year’s returns, both federal and state
• Any depreciation claimed in earlier years
• Net Operating Losses (NOL) from earlier years
• Any correspondence to or from the IRS or state tax authority, including any adjustments made to prior returns that could affect later returns
• Prior year overpayments
• Estimated tax payments
• Extension payments

How to Select the Best Tax Services for Your Startup

VC-backed companies have very different tax services needs than traditional small businesses. Because VC-backed startups often lose money, they need to be more focused on staying compliant, saving the founders time so they can focus on building the business, and maximizing tax credits that work for unprofitable startups - and ignoring those that are really only for companies that make money. Here’s how to identify the best tax services for your startup’s unique needs.

Understand Your Tax Preparation Needs

Assess Complexity: The first step in choosing a tax service is to assess the complexity of your startup’s financial landscape. This includes evaluating revenue streams, funding rounds, R&D activities, and multistate operations. Additionally, if your startup plans to raise later-stage VC funding or aims to be acquired by a major public company in the next 5 to 10 years, the complexity increases significantly. These goals require meticulous tax preparation and due diligence to ensure that your financial records withstand the scrutiny of potential investors and acquirers.

Identify Services Offered: Look for tax services that offer a comprehensive suite of solutions, including tax preparation, compliance checks, R&D tax credit claims, strategic tax planning, and due diligence preparation. The ability to provide a one-stop solution for all your tax needs, especially in preparing for critical financial events like fundraising and acquisition, is a hallmark of a great tax service provider.

Evaluate Expertise in Startup Taxation

Specialization: Opt for a tax service that specializes in working with startups. A firm with a deep understanding of the startup ecosystem, including the intricacies of VC funding rounds and the acquisition process, will be more adept at identifying tax-saving opportunities and navigating the specific challenges startups face during tax preparation.

Proven Track Record: Seek out tax services with a proven track record of success with startups, particularly those that have successfully navigated later-stage funding rounds or acquisitions. Testimonials, case studies, and referrals from other startups can provide valuable insights into a firm’s capabilities and effectiveness in managing complex tax preparation and planning.

Technological expertise: Look for tax services that leverage the top automated accounting and fintech programs. By using the potential of advanced technologies like AI, CPAs with startup expertise can deliver services more effectively and efficiently, which saves your startup both money and time.

Consider the Approach to Tax Preparation

Proactive Planning: The best tax services for startups adopt a proactive approach to tax preparation. This involves not just preparing and filing your taxes but also planning ahead to minimize your tax liabilities and maximize potential credits and deductions. This proactive planning is particularly important for startups eyeing significant financial milestones like VC funding or acquisition.

Transparency and Communication: Effective communication is key to a successful partnership with your tax service provider. They should be transparent about their processes, keep you informed at every stage of tax preparation, and be readily available to answer any questions you may have, especially regarding due diligence and financial planning for major business events.

Assess the Cost

Transparent Pricing: Transparency in pricing is critical when choosing tax services. Understand the fee structure upfront to avoid any surprises. A reputable tax service will provide clear pricing based on the complexity of your tax situation and the services you require, including those related to preparing for VC funding or acquisition.

Startup Taxes Key Terms

Why Hire a Startup Tax Accountant Who is a CPA?

Choosing an experienced CPA firm to be your startup tax accountant is a solid idea for a number of reasons. Working with a CPA firm for your startup not only simplifies financial management but also offers the benefit of representation before the IRS, something only CPAs, attorneys, and enrolled agents are authorized to do.

Plus, with a full-service team of GAAP and tax accountants in-house, Kruze can handle your books, complex tax issues, and IRS representation, you save a lot of time. Many founders don’t realize how much coordination happens between startup tax accountants and the company’s bookkeeper, but keeping that all in the same firm saves the founder time. Plus, when it comes time to arrange due diligence for that next venture capital round - or a big M&A exit - you’ll only have a single accountant to call to coordinate the process.

What documents are needed to complete a startup’s tax return?

You will need the following documents in order for our accounting team to complete your return:

• EIN Letter from the IRS (this is the Employer Identification Number letter that the IRS created for you when you requested an EIN for your company.)
• Vital Business Statistics
  • Business Address
  • Shareholder SSN/Address info
• Prior Year Tax Returns (Federal and States)
• Local Tax Returns (if any)
• Financials
  • Full year Balance Sheet
  • Profit & Loss Statement
  • General Ledger
• Capitalization Table

Our web application makes it easy for you to share these files with us; simply login and upload the documents as you go through our tax software onboarding flow.

California Franchise Tax

Any business or startup that is doing business in California will get hit with the California Franchise Tax. So if you have employees, an office in California, or revenue in California, then you likely own this fee.

When is the California Franchise Tax due? April 15th. And don’t expect any helpful postcards or notifications from the state of California!

How much do is the California Franchise Tax for startups? If you are an early stage company operating at a loss, then it’s likely that the California Franchise Tax will only be about $800. There are a few variables that could make this a little higher, but for most startups (unprofitable companies, that is), you’ll pay $800. If you are profitable, make sure you do work with your CPA to calculate this fee correctly.

Delaware Franchise Tax

All Delaware incorporated companies have to pay an annual Delaware Franchise Tax - including startups. This expense has nothing to do with profitability, or even revenue - you have to file if you are incorporated in DE.

When is the Delaware Franchise Tax due? March 1st.

How much is Delaware’s Franchise Tax for startups? If you haven’t raised that much money, maybe half a million in seed financing, then you are likely to owe not more than $1,000. If you’ve raised $10 million in venture capital, then you likely own about $4,000. We help our early stage clients calculate their Delaware Franchise Tax, so if your CPA isn’t helping your startup with this then you should consider getting a CPA who is used to working with funded companies.

Startup Tax Return

How much should a startup expect to pay for a tax return?

After analyzing thousands of startup tax returns across many industries, Kruze Consulting developed a calculator to estimate startup tax return costs. You can find it on our website, and we invite you to visit the site and try it out.

As a benchmark, a straightforward Series A tech company can expect to spend around $2,000 for their annual return. However, your cost may vary. Startup tax return costs are generally based on four factors, which we cover below.

First, are you a seed, Series A, or Series B company? Your stage of fundraising has a direct impact on the return cost.

Second, what industry are you in? A marketplace, a SaaS, and a Fin-tech company can expect different tax return costs. For example, a Fin-tech or marketplace can be more expensive than just say a plain vanilla SaaS or tech company.

Third, where do you have payroll? Rent? Sales? The answers to these questions will determine where you have “nexus,” and the concept of a nexus is important because it determines which state or states you will need to file a tax return in. The more states, the more costly.

Last, what is your volume and complexity? Do you have a lot of transactions or just a few? Are you complex with several international components or do you have a parent or subsidiary companies? The answers to these questions determine the workload required, and the price will go up a bit as volume and complexity increase.

1099 IRS Forms

1099s are an IRS form due each year by January 31st.

Who your startup needs to give this tax form to depends on how much you’ve paid your cash-basis contractors during the previous year, and what type of contractor they are. Specifically, anyone who is not a corporation and was paid over $600 in aggregate will need to get a 1099.

So LLCs and sole proprietors (often contractors like marketing contractors, some lawyers, and landlords), paid over $600 during the previous year, will require a 1099. If you are unsure what type of contractor you have been working with, have your startups send them a W-9 to complete.

Remember, 1099s are due by January 31st, and your startup must provide one to any non-corporation you paid over $600 in the previous year.

1120 IRS Forms

Most folks only think about the annual Form 1120 Tax return, but there’s actually a ton of taxes and tax deadlines for Delaware C-Corps.

And Yes, even bootstrapped pre-revenue startups must pay taxes. You might not be subject to Income Taxes (which are based on profitability) but you will still be subject to a wide variety of other taxes which aren’t always connected to Revenue.

5471 IRS Forms

One tax requirement that’s complicated and hard to understand is for US citizens and residents who have ownership in a foriegn corporation. These people are required to file IRS Form 5471, Information Return of US Persons with Respect to Certain Foreign Corporations.

5472 IRS Forms

More and more businesses are operating on a global level, even small businesses and startups. In recognition of that fact, the IRS requires US businesses that have foreign ownership, or foreign businesses that do a significant amount of business in the US to file Form 5472. The form discloses information about reportable transactions, and is submitted along with IRS Form 1120, your annual tax return. Form 5472 differs from Form 5471, which is used for US citizens that have ownership in foreign corporations.

6765 IRS Forms

Form 6765 is an IRS Form, under IRS tax code U.S. Code § 280C, that is the “Credit for Increasing Research Activities” - and informally known as the R&D Tax Credit Form. This tax form can help startups save up to $250,000 on their payroll taxes; that amount doubles to up to $500,000 per year starting in the tax year 2023 thanks to the Inflation Reduction Act. The Research and Development tax credit basically rewards companies for conducting research and development activities within the United States.

W-8 and FATCA IRS Forms

The Foreign Account Tax Compliance Act (FATCA) places significant tax filing requirements on startups with foreign assets, employees, and contractors, and that’s the reason for Form W-8. FATCA is an extremely complex piece of legislation that was designed to fight tax evasion by Americans with financial assets held outside the U.S. Enacted in 2010, FATCA requires all U.S. taxpayers, even those living abroad, to report foreign assets to the IRS if they exceed specific thresholds. In addition, foreign financial institutions (FFI) and non-financial foreign entities (NFFE) are required to report the assets of any American clients, or they’ll face a 30% withholding penalty on some payments from the U.S.

Tax Reporting for ISO and NQSO

In December and January of each year, startups often start to wonder what they should be doing with all of those employees and contractors to which they’ve given incentive stock options and non-qualified stock options (“ISO” and “NQSO”). There is a very important deadline for companies that have granted ISO’s or NQSO’s. The ISO and NQSO forms are due by January 31. Businesses only have a short window after the end of the previous year to make sure that you have the form for your employees and your contractors who have received this type of stock incentive.

Then, you need to know the difference between the two types of stock options—incentive stock options and non-qualified stock options. (If you want to go deep, read our stock options 101 for founders here.)

Incentive stock options (ISO’s): Your startup can only give ISO’s to employees! And if you have, you’ll need to fill out Form 3921. Your CPA can complete the form for you, or if you have a special subscription on Carta or Capshare, they can assist as well.

Non-qualified stock options (NQSO’s): NQSO’s can be given to either employees or contractors. For employees, you will want to adjust box 12 on their W-2 Form, and provide it to them by January 31st. You’ll. need to work with your payroll provider, perhaps Gusto or TriNet, to make sure the W-2 adjustment is done. For contractors, you’ll need to file Form 1099 Miscellaneous.

That is tax reporting for ISO’s and NQSO’s! Again, for ISO’s must have a Form 3921 filed, and for NQSO’s you want to adjust employee’s W-2 for and file Form 1099 Miscellaneous for contractors.

R&D Tax Credits

Many unprofitable startups are eligible to actually save money on their payroll taxes by taking advantage of R&D tax credits! The maximum amount an unprofitable company can save is $250,000 per year in payroll taxes, and that increase to $500,000 per year for the tax year 2023 - so that means that an unprofitable startup could theoretically save up to a quarter of a million dollars next year! It’s a big deal.

Kruze Consulting has conducted over 1,000 R&D tax credit studies that have saved our clients over $40 million in burn. In the most recent tax year, our clients got a check or payroll tax reduction on average between $50,000 to $60,000! Talk to our experts to see if your startup can cut its burn with these credits, and you can learn more about R&D tax credits for startups here.

What is an R&D tax credit and what does it mean for startups?

New tax laws now allow pre-revenue startups and unprofitable startups to save money on payroll taxes with R&D tax credits. That means you can cut your startup’s burn with an R&D tax credit study!

How do you get these tax credits and cut your burn? We recommend that you do an R&D tax credit study with Kruze. We are a specialized CPA that only works with funded startups. Our clients are collectively saving over $25 millions this year in payroll taxes - that’s a lot of burns saved.

How much money can you save with the R&D tax credit?

We recommend a full study to determine the actual amount that your startup will save, but here is the rough math that you can do to estimate your potential savings. Multiply your qualified R&D costs by 10%. The maximum savings possible per year is $250,000 - so if you have $2.5 million in qualifying R&D expenses you can save up to a quarter of a million dollars in payroll taxes. Note that the Inflation Reduction Act of 2022 increased the maximum amount to $500,000 starting in the tax year 2023. Not looking into these credits is one of the top tax mistakes startups can make!

Do Startup Investors Get K-1 Tax Documents

Since most startups are Delaware C-Corps, the answer is NO, the company does not provide K-1s to the investors. More detail:

K-1’s are the tax documents that reflect gains or losses from entities like LLCs, S-Corps, or partnerships. Those entities are nicknamed “pass-through entities” because they pass the gain or loss onto their investors and owners. So if you’re an investor in a local coffee shop, that’s probably structured as an LLC and they made some money this year or last year, you will get a K-1 because of the LLC corporate structure. And it’s a pass-through entity and you will have to report the earnings from the K-1 on your tax returns.

Now, the good news is most startups are Delaware C-Corps. They are incorporated in Delaware and they do business in California, New York, Texas, Massachusetts, etc. But they’re usually incorporated in Delaware because like Business Case Law is really well known in Delaware and Delaware C-Corps hold the gain or loss at the corporation level. They do not pass on that gain annually to their investors. Now you do experience again in a Delaware C-Corp when you have a realization, meaning the company was sold so the shares were sold or maybe you do a secondary transaction sell some of your shares to another investor, or you get a dividend or if the company goes out of business you get a tax write-off for that.

So that’s when these kinda things come into play for the owners or investors of a Delaware C-Corp but you are not gonna give those investors in a Delaware C-Corp a K-1 because again, the gain or loss is held at the entity level.

Best Time to Send a W9 if a Vendor Needs a 1099?

First, a W9 is a taxpayer information form that is on the IRS website. Technically, you should send this to all of your vendors. However, not all may need a W9. You really just need to worry about the vendors that are independent contractors, sole member LLCs, partnerships, etc. You don’t have to worry about S corps or C corps.

So when is the best time of the year to send out the W9 so that you can determine whether the vendor gets a 1099 or not?

I recommend sending the W9 out at two times:

Right when you start working with the vendor and you are about to pay them.

• Vendors are more responsive if their check is being held up for tax compliance.
• A good practice is to bundle it with any contract you sign, especially with an Independent Contractor who you are almost positive needs a 1099. Often vendors are not responsive, or you want to batch W9’s for efficiency. There is a tradeoff between stopping what you are doing every time you start working with a new vendor to send a W9.

January 1-10

• This is a good practice to send out W9’s to those for whom you do not have an up-to-date W9.
• This allows you to batch the process and achieve some operational scale.

Qualified Small Business Stock

Qualified Small Business Stock, or QSBS, is a tax benefit that can have substantial advantages to startup investors. Investors in companies that qualify can save up to $10M a year, or 10x their investment, in capital gains.

Basic QSBS requirements are:

• The company needs to be a Delaware C-corp company.
• It must have less than $50 million in net assets on a tax basis.
• The business must be in a hard science or innovation space.
• The stockholder must own the stock for at least 5 years.

There are some other nuances, so you need to consult with a qualified tax CPA for both the company and for the individual taxpayer.

Employee Retention Tax Credit for Recovery Startups

The ERC for Recovery Startups is a tax credit for companies founded after February 15, 2021 that can reduce payroll taxes by up to $100,000. This tax credit is a great tax incentive that startups should be using if they were recently founded. It was authorized under the American Rescue Plan Act of 2021, and is designed to help companies that were founded during the COVID crisis. If your startup tax accountant isn’t talking with you about this incentive, reach out to us ASAP!!

Dividend Tax Documentation

The process for distributing dividends to private company shareholders is fairly simple - if you understand the tax documentation process for dividends. When it comes to the correct process for the IRS, big points to remember include not forgetting to send 1099-DIVs to shareholders, and making sure you fill out the correct box on the form. Watch our video or read our in depth article on tax documentation for dividends.

Payroll Tax

Payroll taxes are imposed on employee wages and salaries, and is usually a percentage withheld by employers from employee pay or in some instances is paid solely by the employer. The tax is paid to the government on the employee’s behalf and is deducted from employees’ wages and salaries. Employers are responsible for deducting the correct amount of taxes from their employees’ paychecks, paying their own share of the taxes, and filing returns and depositing those funds with the appropriate government agencies on time.

Sales Tax - what do startups need to know?

Unprofitable startups can have sales tax liabilities in multiple states - if the startup has enough transactions, generates enough revenue dollars or has a “nexus” due to employees or other activity.

To make matters even more confusing, every state has its own, unique rules regarding what triggers this type of tax obligation. Learn more about state sales taxes for startups here.

Section 382

Section 382 is a part of the IRS tax code that limits corporations’ use of any net operating loss (NOL) to offset profits. Many startups have significant expenses before they become profitable, and as a result, can accumulate net operating losses and tax credit carryovers. Typically, when the startup starts generating profits, NOLs can be used to offset up to 80% of the company’s income, with some limitations, like Section 382. Section 382 was enacted to prevent corporations with taxable income from purchasing companies with large NOL carryovers and using the acquired NOLs to offset income. The calculation to determine if Section 382 applies to a situation is complicated, with several steps, and companies that are evaluating NOLs should consult tax professionals.

Tax Credit

Tax credits are a dollar-for-dollar reduction in a tax, and a business can deduct the credit directly from taxes owed when certain conditions are satisfied. Refundable credits provides rebates of up to 100 percent of any amount that exceeds the tax liability, while nonrefundable credits only count against tax liability and do no offer refunds.Tax credits are offered by both federal and state governments, and state tax credits vary between states.

Tax Deduction

Tax deductions (often referred to as “tax write-offs”) reduce the adjusted gross income of a taxpayer, and can reduce the tax liability of a business or person. In general, the “ordinary and necessary” expenses required to run a business are tax-deductible, including things like rent, equipment and supplies, salaries, and other expenses. It’s important to keep records for any business-related expenses paid throughout the year, and to categorize those expenses into groups that match the IRS tax forms. A professional accounting firm can help your company set up an effective system to make sure you don’t miss any qualifying deductions.

Taxable Income

Taxable income is a taxpayer’s gross revenue minus any claimed tax deductions. A company is taxed on any profit made after all qualified deductions have been subtracted from gross revenues. A company’s gross revenue included income received from sales after any returns and discounts are subtracted, along with other income like investment returns, interest earned from bank accounts, and any profits from the sale of assets.

Best Reason for Startups to do Taxes on Time

There are many reasons why a startup should do its taxes on time, including tax compliance, which is crucial for VC funding. But the single best reason to do your startup’s taxes on time is to take advantage of the R&D Tax Credit. The R&D Tax Credit is a federal tax benefit that provides startups that develop, design, or improve products, processes, or software. Startups that are eligible for the R&D Tax Credit can take a dollar-for-dollar tax credit, which can be used to offset payroll taxes. So the earlier in the year you do your taxes and claim the credit, the faster you can start claiming the credit.

Startups should watch out for that GILTI feeling

Startups that are developing significant intellectual property (IP) overseas need to be aware of GILTI. Global intangible low-taxed income (GILTI) is income that’s earned overseas by US-controlled foreign corporations (CFCs), and the GILTI tax is a type of alternative minimum tax for foreign income earned by those CFCs. CFCs are defined as foreign corporations with US shareholders who own more than 50% of the foreign entity.

Reporting foreign income isn’t new – startups with international operations or ownership are required to file Forms 5471 or 5472. GILTI is related to Form 5471, which is filed by officers, directors, or shareholders of some foreign corporations to report US ownership and the foreign corporation’s activities.

What is GILTI?

The GILTI tax is intended to discourage startups and other companies from moving intangible assets, like copyrights, trademarks, and patents, and the profits earned from those assets, to other countries with lower tax rates than the US. While the TCJA cut the corporate tax rate to 21%, that’s still higher than a lot of other countries. Moving an intangible asset like a profitable patent to a low-tax country could help a company significantly reduce their taxes.

But don’t be fooled by the word “intangible” in GILTI. The actual calculation uses the CFC’s total income, so the tax isn’t specific to income from intangible assets. GILTI is defined as net foreign income after deducting 10% of the value of any foreign assets. As part of the Tax Cuts and Jobs Act (TCJA) of 2017, GILTI is taxed at minimum rates of 10.5% through 2025 and 13.125% thereafter.

Are Venture Capital Raises Taxable Events?

In the United States, when an early-stage startup sells shares to a venture capitalist, generally no taxes are due. This assumes that the VC purchases shares directly from the company, similar to how a stock market investor may purchase shares during a company’s Initial Public Offering.

There are times when a VC may purchase shares that could be considered taxable events, such as when an investor purchases shares from a founder, providing the founder liquidity and triggering a capital gain. In these instances, and when raising VC funding in general, we recommend working with an experienced CPA.