Bookkeeping Tax Services for Startups

For VC backed startups, getting the best, startup focused bookkeeping tax services is a tremendous time savings - and an advantage when it comes to fundraising (and M&A) due diligence. Kruze has helped over one thousand early-stage companies with their accounting, and the results speak for themselves: our clients have collectively raised billions of venture funding and some have been acquired by leading technology companies like Apple, Workday, CISCO, Merck and others. 

DIY balancing the books while ensuring tax compliance is a serious challenge, especially for founders who need to focus on scaling their businesses. This is where startup specialized bookkeeping tax services come into play, offering a tailored solution that addresses the unique financial needs of startups.

The Essentials of Bookkeeping Tax Services

Bookkeeping tax services represent a comprehensive approach to managing a startup’s financial affairs. But what does this term really mean, and how do these services function? Essentially, expert service providers like Kruze combine the management of financial transactions (bookkeeping) with the strategic planning and filing of taxes. This really helps founders save time. In particular, it can get very complicated when a founder is coordinating financial diligence, and so having a single provider who can respond to all accounting, tax and financial questions is a tremendous time saver (and stress reducer!). And Delaware C-Corporations, the preferred structure for VC-backed startups, require specialized financial advice, which includes understanding the nuances of Delaware’s corporate tax regulations.

Integration of Bookkeeping and Tax Preparation

The core benefit of unified tax and accounting lies in the seamless integration of two critical financial processes:

Bookkeeping: This involves the regular recording of all financial transactions, including sales, purchases, payments, and receipts. Accurate bookkeeping is crucial for maintaining up-to-date financial records, which are essential for making informed business decisions. Companies playing the VC game should use accrual based bookkeeping, since this not only provides the founders with a way to measure their actual progress, but is also what VCs and other tech players expect. 

Tax Services: This encompasses tax planning and compliance, ensuring that a startup meets all its tax obligations correctly and on time. Proper tax management is crucial for avoiding penalties and optimizing tax benefits. Additionally, the Federal, and many state, governments have tax incentives and credits designed to encourage innovation and investment in technology research. Accounting partners like Kruze are experts at advising founders on these incentives. 

Again, as we’ve already mentioned, having a single provider for both of these really helps reduce the amount of time that a founder has to have to coordinate with service providers. If the tax preparer has a question about the books and the company is using multiple service providers, it’s up to the founder to facilitate those conversations, and unless the founder is an expert on taxes or books, these conversations can get quite complex! And during an exit, acquiring companies will want the startup to attest to the accuracy of their books and taxes. If different companies did each, then they may end up pointing fingers at each other and not taking responsibility for the tough diligence questions, leaving the founder to hope that the numbers are right - and taking liability for that!

Why Startups Need Specialized Bookkeeping and Tax Services

For startups, particularly those backed by venture capital, the financial landscape is really different vs. traditional small businesses. Navigating this environment requires not just any accounting solution, but one that is specifically tailored to the unique challenges and opportunities of the startup world. Given that most VC-backed startups are incorporated as Delaware C-Corporations, it’s essential to partner with an accounting firm like Kruze Consulting that has extensive experience and expertise in handling the distinctive challenges of this corporate structure.

Startup-Specific Financial Challenges

Startups face a unique set of financial challenges that set them apart from established businesses:

Rapid Scaling and Financial Complexity: As startups grow, their financial operations become more complex, requiring sophisticated management of their accounts and tax obligations. This includes the ability to onboard and hire multiple new employees a month, keeping track of projections and cash out dates, managing runway, etc.

Investor Scrutiny: VC-backed startups are under constant scrutiny from investors who expect transparent and accurate financial reporting. From board meetings to requests for audits, being a founder with professional VC money in the business is hard.

Compliance with Evolving Regulations: Startups must navigate a maze of regulatory requirements, which can be both time-consuming and prone to errors without expert guidance. Sales tax, new hires in different states, tax thresholds and credits - there is a lot going on. 

Delaware C-Corporation Complexities: A proficient startup accountant is well-versed in the unique requirements of Delaware C-Corporations, especially when it comes to navigating the complexities of the Delaware Franchise Tax, ensuring that startups don’t overpay (this is a common problem we see; visit our Delaware Franchise Tax Calculator page to learn more).

Section 174 - A Prime Example of Why Founders Need a Single Accounting Partner

The recent changes to Section 174 of the IRS tax code have introduced significant complexities for startups, particularly those engaged in research and development. Understanding and complying with these changes is crucial, underscoring the need for startups to have a unified team responsible for both the books and the tax work. 

Overview of Section 174 and Its Impact on Startups

Section 174 governs how companies may deduct qualified R&D expenses on their tax returns. However, it’s important to note that these rules apply solely to tax calculations and do not affect how R&D expenses are accounted for in accrual or GAAP financial statements. Startups now face new capitalization and amortization rules for R&D expenses:

Amortization Rules: Startups can no longer deduct 100% of their R&D expenses in the year they were incurred. Instead, they must amortize these expenses over five years for domestic R&D and 15 years for foreign R&D.

Immediate Impact: This change means that U.S. expenses now only contribute 20% toward reducing a startup’s tax bill annually (6.67% for international expenses).

This means that the bookkeeper’s accuracy in coding expenses is critical in getting the federal return done correctly, and that there may be a lot of back and forth between these two groups. You don’t want to have to mediate disagreements between multiple accounting firms - that’s a waste of your time as a founder, and requires serious accounting expertise!

Why VC-Backed Startups Want Accrual Based Bookkeeping

Investors and experienced founders expect startups to use accrual based accounting. Accrual-based bookkeeping, as opposed to cash-based accounting, is particularly critical for startups looking to accurately reflect their financial position and growth potential. It also helps founders position their company and explain their business’ traction - for example, getting revenue into accrual helps create accurate ARR numbers. Kruze Consulting recognizes this importance and expertly implements accrual-based methods for its clients.

Understanding Accrual-Based Bookkeeping

Accrual-based bookkeeping is an accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid. This method offers a more comprehensive view of a company’s financial health by including accounts receivable and payable. For VC-backed startups, where revenue and expenses often occur at different times, this approach provides a clearer picture of long-term financial performance.

Benefits for Growth and Investor Confidence

Realistic Financial Picture: Accrual accounting gives investors and stakeholders a more realistic view of a startup’s financial status. It shows the true revenue and expenses during a specific period, essential for gauging the company’s actual performance.

Better Decision Making: Startups can make more informed decisions with a clearer understanding of their financial obligations and resources.

Attracting Investment: Accurate and detailed financial records are key to attracting venture capital and other investments. Accrual-based bookkeeping aligns more closely with the expectations of sophisticated investors who seek transparent and detailed financial reports.

Bookkeepers Who Know Taxes Can Catch Tax Credits

While most tax credits are NOT applicable to VC-backed startups, identifying and utilizing the right ones can significantly reduce a startup’s burn rate. Kruze Consulting specializes in helping startups navigate the complex landscape of tax credits, ensuring they capitalize on every opportunity available to them.

Understanding Tax Credits for Startups

Tax credits are direct reductions in tax liability. This means that the amount a company owes to the IRS (or state agencies) goes down. And this usually only reduces corporate income tax, which means that companies that are losing money can’t really benefit. Thankfully, the government wants to encourage VC-backed startups to invest in research, and has a credit that actually helps reduce payroll taxes, cutting a startup’s burn. 

Top Tax Credits for Startups

While most startups may not be eligible for every tax credit, there are several key ones that can be highly beneficial:

• R&D Tax Credit: The most significant and commonly applicable credit for startups, especially in the tech and innovation sectors. The R&D tax credit can bring substantial cash benefits, up to $250,000 (doubled to $500,000 for tax year 2023), directly to a startup’s bank account. This is the best credit for VC-backed startups.
• Credit for Small Employer Health Insurance Premiums: Helps startups offset the cost of providing health insurance to their employees. However, this is really for companies that have employees making under $50k a year, so isn’t a good fit for most VC funded companies. 
• Work Opportunity Tax Credit (WOTC): Incentivizes the hiring of individuals from certain target groups who have consistently faced significant barriers to employment. This is hard to use for most early-stage, VC backed companies.
• State-Specific Credits: Various states offer unique credits, like the California R&D Tax Credit and the New York State Life Sciences R&D Tax Credit Program.

Our summary is that the R&D Tax Credit is really the most useful one for VC-backed companies, and having your books done by the same firm producing the credit analysis is a huge advantage. This will not only reduce the amount of time it takes for your to coordinate getting the credit done, it will also help you not miss expenses that qualify, as the bookkeeper can keep careful track of company R&D activities and make sure they get counted in the R&D study. 

The Synergy of Unified Bookkeeping and Tax Services

The integration of bookkeeping and tax services under one umbrella offers a streamlined and cohesive approach to financial management for startups. This synergy is not just a matter of convenience; it’s a strategic alignment that can significantly impact a startup’s efficiency and financial accuracy.

When bookkeeping and tax services are unified, the communication between these two critical financial functions becomes seamless. This integration allows for a more coherent and consistent financial narrative, crucial during times of fundraising, audits, or potential mergers and acquisitions. It eliminates the common issue of disjointed financial data, which can occur when different service providers handle bookkeeping and tax separately. For startup founders, this means less time spent coordinating between multiple parties and more time focused on their core business.

Moreover, a single provider overseeing all of your company’s accounting work ensures accountability. In situations where accuracy and speed of responses are paramount, such as during due diligence processes in M&A scenarios, having one responsible party simplifies the process and reduces the risk of discrepancies. This unified approach not only enhances the reliability of financial data but also provides founders with peace of mind, knowing that their financial management is coherent and integrated.

In essence, the combined power of bookkeeping and tax services, as offered by firms like Kruze Consulting, provides startups with a comprehensive, efficient, and accurate method of managing their finances. This synergy is particularly beneficial for VC-backed startups, where financial complexity and scrutiny are high, and the need for streamlined, accurate financial reporting is paramount.