Many businesses hire an accounting or tax adviser without experience serving businesses in their industry. This may lead to incorrect accounting reports or inaccurate tax returns costing your company potentially tens of thousands in taxes.
Having worked in Northern California my entire career I have worked with many companies in the technology industry. I have represented start-ups as well as publicly traded companies ranging from software to hardware. Other startups I have worked with include professional service firms, retail stores and restaurants.
Keeping up with constantly changing laws that startup companies face requires years of expertise dealing with complex tax issues. Experience matters. We are here to help.
Tax Issues for StartUp Companies
Startup companies face a myriad of accounting and tax issues. Richard Pon, CPA, CFP is here to help. Here are some issues your company may not be aware of:
Choice of business entity planning:
Which is right for your business? One answer does not fit all companies. Who are your owners? What is your exit strategy? Each company needs to take time to analyze the consequences to its owners.
In one success story, I advised on a business structure that avoided $10 million in capital gain income three years after the business started.
Debt versus Equity has different tax consequences to the company and the investor. Debt and equity may also differ if the investor is a foreign non-U.S. person.
Stock Based Compensation:
How will stock options impact your company and its employees? Equity compensation planning is important before your company offers equity to its employees. (NQ, ISO, ESPP, RSU, RS - I know the ABC song as well)
Nexus studies are needed to determine if you are subject to state income tax or sales tax collection in other states. Physical presence in a state is not always required.
For example, the June 2018 WayFair Supreme Court case may cause many businesses to file sales tax returns in 45 states as many states will adopt economic nexus rules forcing out-of-state businesses to collect sales tax. 35 states have economic nexus rules with many that began October 1, 2018. Companies may have sales tax liabilities to report under ASC 450 as a loss contingency.
California corporate taxation of subsidiaries:
Federal law does not impose tax on foreign corporations without U.S. activities. For multinational groups with corporations organized outside the United States, they may be subject to California income tax even though Federal consolidated tax returns exclude foreign corporations.
Although investors generally prefer accrual accounting, companies are not always required to use accrual method of accounting for tax purposes.
Technology companies often make significant use of outside “independent” contractors. A company’s classification of employee versus independent contractor may not be accepted by the IRS or state tax authorities. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker
Foreign Value Added Tax:
Most foreign countries impose a consumption tax called the Value Added Tax (VAT) which is not the same as a sales tax. Even without a physical presence in the European Union (EU), EU Value Added Tax (VAT) must be collected on business to consumer customers.
Many companies are aware of the Research & Development (R&D) tax credit. However, there is a plethora of tax credits that may be available to your business. For example, many states offer tax credits to video game developers.
Many companies don’t claim the R&D credit because they think the need to create new technology. R&D doesn't have to be new to the world. It just needs to be new to your company. Other companies pass on the R&D credit because they have no income tax. The R&D credit may help certain businesses offset their employer Social Security taxes even if they pay no income tax.
Examples of potential activities eligible for R&D tax credits include:
Developing new or improved technologies
Conducting requirements or scope analysis for a software enhancement
Evaluating and establishing functional specifications
Programming software source code
Testing software source code
Tax Services and Business Consulting for StartUp Companies
We offer tax preparation to startup businesses including:
Corporation income tax return preparation
S-Corporation income tax return preparation
Partnership income tax return preparation
Limited Liability Company (LLC) income tax return preparation
Sole Proprietorship tax return preparation (as part of your 1040)
State and local tax return preparation (such as San Francisco payroll tax and San Francisco gross receipts tax)
Individual income tax return preparation for business owners, officers and key employees
Form 1099 Independent Contractor reporting - which is now due January 31
Besides preparing your business tax returns, we offer the following tax planning services:
Choice of business entity planning - Corporation, S-corporation, Partnership, LLC, sole proprietorship
Which is right for your business? In one success story, I advised on a business structure that avoided $10 million in capital gain income.
Cost Segregation studies to maximize depreciation deductions.
A cost segregation may be beneficial when buying a commercial property or making substantial leasehold improvements to your business location. A cost segregation allows a business to depreciate a portion of its property over 5-7 years rather than over 39 years; thereby, increasing your depreciation deductions. A cost segregation can be made several years after you bought the property or constructed your leasehold improvements. Depending on the size of your property, a cost segregation can lead to significant additional deductions. In many cases, I have seen cost segregation studies lead to deductions over $250,000 resulting in tax refunds over $100,000.
20% Pass-through business deduction available to sole proprietors, independent contractors, partners and S-Corporation shareholders
Compensation planning for key employees including stock option and equity compensation planning (NQ, ISO, ESPP, RSU, RS - I know the ABC song as well)
Disregarded entity tax planning for LLC and corporate subsidiaries
Nexus studies to determine state income tax or sales tax liabilities
Mergers & Acquisitions (M&A) due diligence - watch out for hidden tax traps!
Employee benefits tax planning
City & County Local tax return preparation
Tax Credit Incentive analysis
Seminars for employees (basics of tax; stock option basics; employee benefit tax issues; basic financial planning)
Sales and Use Tax consulting
Tax Amnesty consulting
Besides tax preparation and tax planning, we offer the following business services:
Accounting policy handbooks
Human resource policy handbooks
Internal Control recommendations
Interim CFO services
Employee Benefits consulting
Risk management consulting
Partnership agreement planning
Buy versus Lease Planning