From including your team in deductibles to researching specific exemptions, here are seven answers to the question, “What are your most helpful tax strategies that every startup founder needs to be aware of?”
- Offering Tax-Deductible Benefits to Employees
- Try the Interested Stockholder Tax Basis Adjustment (ISTBA)
- Hire an Accountant, Seriously
- Deduct Charitable Contributions
- Learn How to Categorize Workers
- Maximize R&D Tax Credits
- Look into the Qualified Small Business Stock (QSBS) Exemption
Offer Tax-Deductible Benefits to Employees
Every startup founder needs to be aware of the importance of offering tax-deductible benefits to their employees. Health insurance, retirement plans, and education assistance are just a few examples of the types of benefits that can be used to offset taxes.
Deducting these costs from taxes can help save a lot of money for your business in the long run. It’s also important to note that these deductions can be taken out before calculating taxable income, which can reduce the amount of taxes you owe significantly.
Offering these types of benefits to your employees is not only a great way to show them you care about their well-being, but it can also make a big difference in your company’s bottom line.
Shaun Connell, Founder, Writing Tips Institute
Try the Interested Stockholder Tax Basis Adjustment (ISTBA)
Understanding the tax requirements of a startup is essential for any business founder. One strategy worth considering is an Interested Stockholder Tax Basis Adjustment (ISTBA). This common option allows an investor in the business to receive a tax deduction on negative capital gains they suffered while participating in the startup.
After an exchange of stock, ISTBA allows the investor to adjust their individual basis by reducing it with losses, thus lowering their taxable income and protecting equity. Ultimately, understanding taxes associated with setting up shop from the initial stages will help to ensure long-term success and sustainability for every startup founder.
Michael Alexis, CEO, tiny campfire
Hire an Accountant, Seriously
I’m of the opinion that taxes, especially as a startup, are one thing that you really can’t afford to coast on with some upskilling and native knowledge. I’ve been there, and have had to learn how to do things like marketing, sales, etc., despite being naturally much more tech-oriented. But not doing your taxes correctly can spell doom before your business has had a chance to get off the ground.
Spending a bit of extra money on professional tax help, rather than trying to manage it yourself, is a must for at least your first major tax filing.
Kate Kandefer, CEO, SEOwind
Deduct Charitable Contributions
LLCs, sole proprietors, S-corporations, and partnerships can’t deduct charitable contributions as a business expense, but a business owner can claim contributions made by the startup as an itemized deduction on Schedule A of Form 1040.
That said, it’s always best to donate to charity due to a genuine connection or passion for the cause, not because you want a tax deduction. Charitable giving is about much more than receiving tax benefits, but it is wise to be aware of the tax strategy that comes with the act of selflessness.
Andrew Chen, Chief Product Officer, Videeo
Learn How to Categorize Workers
Although startups frequently hire independent contractors and freelancers to help them expand, they should be aware of the tax consequences associated with misclassifying these workers as employees.
It’s risky business to treat staff as independent contractors instead of employees, because of the potential for tax penalties and legal complications. A startup can avoid this problem by accurately identifying personnel as either employees or independent contractors. Worker independence, employer control, and the nature of the work all play a role in determining an employee’s legal classification.
Nely Mihaylova, Content Executive, Scooter Guide
Maximize R&D Tax Credits
Startup founders need to be aware of using the Research and Development tax credit. This is a way for businesses to offset their expenses for qualified research and development costs, helping them to reduce liabilities, minimize their tax risk, and increase their cash flow.
By leveraging this tax credit, founders can decrease their tax burdens and use the savings to fund further operations or specific investments in the business. It is important to be aware of how this tax credit can be optimized to maximum benefit, and services such as accounting professionals or tax advisors can help in the analysis and the legal processes required in the filing.
Filing the paperwork correctly and in a timely manner can make a difference in the savings achieved. Providing detailed and accurate information regarding research and development activities is essential in achieving full advantage.
Shawn Harris, CEO, UniqueGiftCards
Look into the Qualified Small Business Stock (QSBS) Exemption
As a startup founder, it’s important to understand tax strategies that can help you save money and maximize your return on investment. One such strategy is the Qualified Small Business Stock (QSBS) exemption.
Here are two key takeaways to keep in mind:
- QSBS allows founders and investors in certain small businesses to exclude up to 100% of their capital gains from the sale of qualified stock from federal taxes.
- To qualify for QSBS, the company must be a C corporation, the stock must be held for at least five years, the company must have gross assets of $50 million or less at the time of stock issuance, and the company must be engaged in an active trade or business.
By understanding and utilizing the QSBS exemption, startup founders can potentially save significant amounts of money on federal taxes. However, it’s important to work with a qualified tax advisor to ensure that you meet all the eligibility criteria and take full advantage of this tax incentive.
Will Strickland, Management Consultant