Many early-stage founders feel they don’t need to worry about taxes for their tech startups since they are incurring losses, however, tech startups have exposure to taxes in many ways so without careful planning and consideration, you could leave your company vulnerable to these and also leave valuable tax credits on the table at the same time. The following are tips for U.S. based founders who are organized as Corporations or LLCs.
1) Organize Your Bookkeeping
Having your books in order is the first key step to make tax time painless. If you are a pre-seed founder that has received some early traction from a Kickstarter campaign or received funds from a pitch competition or a government grant (NSF-SBIR etc.) it is imperative that you understand the total revenue and expenses that have been received by your company to see whether you may have any tax exposure. Also if you are incurring losses - these losses can be carried forward indefinitely under recently passed tax law so it is key to stay organized. There is no shortage of options and we usually recommend founders use a cloud-based solution like Quickbooks Online or Xero as far as accounting systems go and work with a CPA or bookkeeper to assist with getting the books in order as doing by yourself can be an onerous task. Most early-stage tech companies are unique in that they track their books on the accrual basis of accounting for both financial reporting and tax purposes. This can further complicate the recordkeeping process as you would need to ensure your accounts receivable and accounts payable have been correctly recorded as of year-end. Other common errors we have seen in the past are investments incorrectly labeled as revenue which could have huge tax ramifications. The key with bookkeeping is to get into good habits early and often and stay on top of your bookkeeper and CPA so your company doesn’t get lost in the shuffle. You as a founder are ultimately responsible for your books even if you hire outside help so keeping everyone accountable is extremely important.
2) Preparing 1099s and Other Year-end Reporting
Any contractors you pay over $600 in a calendar year need to be issued a 1099-MISC form. To do this you will need to have your contractors complete a W9 form where they provide you with some key information to prepare the year-end 1099’s. 1099’s are due to your contractors by January 31st, 2020. If you are using a payroll service like Gusto or Justworks they have a contractor module included in there that can help with this process. Intuit also has a pretty streamlined process if you are using Quickbooks to get the 1099’s processed electronically. With those of you who are using payroll systems remember that you may be paying some of you contractors such as lawyers, accountants, consultants outside of that system so to capture them as well you will need to issue them 1099’s separately or opt out of the payroll system’s 1099 process, and process them all from one place.
3) State Franchise/Income Taxes and Estimated Taxes
Most early-stage tech companies that are planning to fundraise from outside sources usually incorporate in Delaware. Delaware has an annual tax requirement that is based on assets and the number of outstanding shares issued. If you owe more than $5,000 in Delaware taxes you may be required to also pay in taxes to them quarterly. In addition to Delaware, many tech companies have locations all around the U.S. Your startup probably needs to register to do business as a foreign corporation in those States and pay the relevant corporate taxes which for loss-making companies could be based on gross receipts (revenue), total assets (cash, inventory, etc), or other fixed dollar minimum taxes. These taxes may also be due quarterly so it’s important to be cognizant of the deadlines if you are required pay and file.
4) Sales Taxes and Nexus Issues
If you have been collecting sales taxes you usually need to remit these taxes either on a monthly or quarterly basis, however, some states like New York accept an annual return if your sales tax collection is more sporadic and for a low-dollar-amount usually under $3,000 (in NY).
An annual tax filing also helps start the Statute of limitations so the States where you are doing business have a time limit usually 3 years to inspect your records if they disagree with your filings. More details here for New York-based tech founders.
How do you know whether you should be collecting sales tax in any particular State? Nexus is the connection your business has with a particular state. There are many different ways that nexus can be triggered including physical presence (office or inventory), sales volume, remote employees, affiliates, click-thru nexus (website),
Due to the highly publicized South Dakota vs Wayfair Supreme court case States can now mandate remote sellers to collect sales tax even though they have no physical presence in the State. This is a game-changer for out-of-state sellers and can impact small businesses based upon how much business they are doing in a particular State. There are some good guides and sales tax advise given by software companies such as Avalara and TaxJar. E-Commerce companies in particular need to keep a keen eye on this area. I usually advise founders to run reports in their e-commerce platforms to understand which States they have the most sales volume in. Once you understand that you can manage your risk exposure by making sure you are compliant with all laws in the States where the majority of your sales are.
5) Do You or Your Business Have Any Foreign Bank Accounts or Foreign Presence?
Be aware of the Report of Foreign Bank and Financial Accounts (FBAR). A United States person (Citizen or Resident) that has an aggregate value of all foreign financial accounts that exceed $10,000 at any time in a calendar must file this report. Learn more here. Failure to file the FBAR report can lead to penalties that can be draconian. The Foreign Account Tax Compliance Act (FATCA) requires foreign banks to disclose to the IRS whether any US persons have a bank account at their branches. This means that the IRS will soon know whether you have a foreign bank account, whether you like it or not – so I recommend discussing this issue with your CPA if you feel it may have an impact. The tax deadline for the FBAR is April 15th.
If your business has foreign founders/shareholders or foreign branch/subsidiaries there are additional tax form requirements including Form 5471 (Information return of U.S. Persons with respect to Certain Foreign Corporations), and Form 5472 (Information return of a 25% Foreign-Owned U.S Corporation or a foreign corporation engaged in a U.S. Trade or Business. Failure to file these forms on time have serious penalties starting $10,000 for each form that isn’t filed or not filled out correctly.
6) Founders - Speak to Your CPA Before the End of the Year
Having a conversation with your CPA before the end of the year can save you a lot of time and hassle and mentally prepare you for tax time. As a CPA I’m buried in work from January through April and can be often difficult to do any meaningful tax planning during that time. Having a conversation with your CPA in the fourth-quarter of the year gives you time to understand all of your tax obligations and plan your cash-flow accordingly. To schedule a time to speak with me before the end of the year use link to my calendar.
On November 14, Akshay Shrimanker of Shay CPA P.C. participated in a panel discussion about accounting and artificial intelligence hosted by Michael Guthammar inside the offices of 24SevenOffice. The panel also included 24SevenOffice CEO Stian Rustad and Westmusa Inc. President Ann-Christine Westerlund, and lasted for about two hours.
Rustad started off the evening by giving background information on his firm, which he founded in Norway back in 1997. He spoke about their unique cloud-based approach, as well as their plan to expand in the United States and other countries. He also touched on the benefits of using artificial intelligence for accounting and bookkeeping, which he feels is the future for the industry as humans can be too error-prone.
The discussion then followed after Rustad's presentation, with Guthammar asking related questions to fellow panelists Shrimanker and Westerlund.
Shrimanker first explained about Shay CPA P.C. and our services to everybody in the room, before transitioning to the importance of artificial intelligence. He mentioned how some of our clients are already using artificial intelligence for various purposes such as security, pattern recognition models, autonomous vehicles, and risk management.
He also talked about both the positives and negatives of the increased use of artificial intelligence. For instance, it can get the work done faster but fees might increase as a function of lower-order tasks being automated, and higher order tasks being more valued such as analysis and planning.
He summed it up by explaining artificial intelligence requires more access to inputs and sensory information to truly reach its potential, and it's going to take some really charismatic people to make people buy into it.
The discussion wrapped up around 8 p.m., and some light snacks and drinks were served to attendees.
QUALIFIED EMERGING TECHNOLOGY COMPANIES (QETCS)
Are you an early stage technology startup based in New York State? If so read about the tax incentive below that is available. The company doesn’t necessarily need to be incorporated in New York to qualify as most early stage tech companies are setup as Delaware C-Corps. The tax deadline is November 30th of each year to file or recertify. If you would like to learn more about the incentive and need help with the application forms please contact us for assistance. The information below was sourced from the Empire State Development website and the New York State Tax Department.
A QETC is defined as a company located within New York State, whose primary products or services are classified as emerging technologies under Public Authorities Law section 3102-e and whose total annual product sales are $10 million or less.
A company which has Research & Development (R&D) activities in New York State and whose ratio of R&D funds to net sales equals or exceeds the average ratio for "all surveyed companies classified as determined by the National Science Foundation" in its most recent Survey of Industry Research and Development, or any comparable successor survey as determined by the New York State Department of Taxation and Finance and whose total annual product sales are $10 million or less.
Emerging technologies may include:
TAX CREDITS FOR QETCS
Qualified Emerging Technology Employment bCredit
A refundable tax credit of $1,000 per new full-time employee (i.e. employees in excess of 100% of base year employment level), available for one three-year period (i.e. the year the credit is first claimed and in each of the next two years) provided minimum employment levels are maintained.
Qualified Emerging Technology Company Capital Tax Credit
QETC investors are allowed a credit equal to a percentage of each qualified investment in a qualified emerging technology company that has been certified by the Commissioner of Taxation and Finance as follows:
Qualified Emerging Technology Company Facilities, Operations and Training Tax Credit A taxpayer that is a QETC and has no more than 100 full-time employees, of which at least 75% are employed in New York State; has a ratio of research and development funds to net sales (as referred to in Public Authorities Law section 3102-e) which equals or exceeds 6% during its authorized taxable year; and has gross revenues, along with the gross revenues of its affiliates and related members, not exceeding $20 million for the taxable year immediately preceding the year the taxpayer claims this credit may earn a refundable tax credit equal to the sum of the following three components:
Source: New York State Empire State Development.
If you are interested in applying for your company to be part of this program the tax deadline is November 30th of each year. An application must be completed every year to remain in the program. If you would like to learn more about the incentive and need help with the application forms please contact us for assistance.
Clarification of Qualifications for Qualified Emerging Technology Company (QETC) Tax Credits
Application for Certification of a Qualified Emerging Technology Company.
Instructions for Claim for QETC Employment Credit (PDF)
Claim for QETC Employment Credit (Form DTF-621) (PDF)
Department of Taxation and Finance
Empire State Development Homepage
Corporation Tax Resource Center
For more information, contact:
NYS Department of Taxation and Finance
W.A. Harriman Campus
Albany, NY 12227
Phone: (518) 485-2889
Photo credits: Campaign Creators (https://unsplash.com/@campaign_creat), Alex Kotliarskyi (https://unsplash.com/@frantic)
On Wednesday October 23rd, Akshay Shrimanker of Shay CPA P.C. conducted an accounting, finance, and tax workshop for early stage startups inside New Lab -- a coworking space in the Brooklyn Navy Yard which is home to over 130 startups and considered an oasis for entrepreneurs. The talk was presented to the H2 Accelerator -- an accelerator program that is sponsored by Shell and Toyota in partnership with NYSERDA. The program is led by Fraunhofer USA Center for Sustainable Energy Systems, Greentown Labs and the Urban Future Lab - NYU Tandon.
The workshop began around noon, with Shrimanker starting it off with a simple introduction to himself and a general background information about his firm.
He focused on the finance and accounting part of the workshop first, explaining the importance of basic financial planning such as budgeting, historical financial data, and estimating revenue and expenses. He also went over some key terms like MRR, ARR, Churn, COGS, and GAAP.
The workshop then continued with Shrimanker talking more in-depth about financial statements, which include things such as balance sheet, income statement, and statement of cash flows. Financial modeling was covered as well, where he went over six types of financial model drivers.
The first part of the workshop concluded with the talk of startup revenue recognition, which is key to generating accurate financial statements.
He then went over tax implications and planning, explaining why most early tech companies set up as either LLCs or C-Corps. Tax credits and incentives for tech startups were also discussed, as well as highlighting some of the key changes from tax reform that went into effect in tax year 2018.
Some of the important dates for startups in the upcoming 2020 tax season were picked out and analyzed as well, and Shrimanker brought up the benefits of Qualified Opportunity Zones -- a new incentive that is intended to promote investment in economically distressed communities.
R&D credit claim was also mentioned, which is a general tax credit that can help qualified startups to cover research and development costs in the United States. He thoroughly explained how to fill out IRS Form 6765, which is needed to claim the R&D Tax Credit to offset payroll taxes.
The workshop came to an end around 2 p.m. with a discussion of some inhouse and outsource options that startups can use to complete their accounting, bookkeeping, and tax compliance. He then went over some optimal tools to track revenue such as SaaSOptics, QuickBooks Online, and Financial Modeling with Excel Spreadsheets.
A Q&A session continued after the workshop, where Shrimanker answered individual questions from different startups in attendance.
We would like to thank the startup founders in attendance for asking some great questions and the NYU Urban Future Lab team including Rachel Fleischer and Joe Silver for hosting us. To learn more about the H2 Accelerator and Hyrdrogen innovation please visit the following site. https://www.h2refuelaccelerator.com/
Written by Tony Kyaw
Akshay Shrimanker, President of Shay CPA P.C., gave an accounting and tax workshop to small startups inside the Zahn Innovation Center at City College this past Thursday. The attendees to the workshop include Fitko, STEM Hive, Luxz, and Flora Mind -- who were all among the CCNY startups chosen to participate in the 2019 Zahn Accelerator.
Shrimanker started off the workshop by helping the founders understand their tax obligations and filing requirements. He also explained in-depth about different forms each startup need to file, as there were different types of startups in attendance such as C-Corps, LLCs,and not-for profit organizations.
There were discussions on various topics as well, such as why Wave Apps may be a more economical accounting system solution for pre-revenue startups rather than other accounting packages and why local banks are a better choice to work with than large commercial banks.
Shrimanker later touched on some important finance and accounting terms, before closing out the two-hour long workshop with a Q&A session for each startup.
To learn more about the Zahn Innovation Center and the companies that are involved please visit: http://www.zahncenternyc.com
Written by Tony Kyaw
Akshay Shrimanker, President of Shay CPA P.C., gave a two-hour business development workshop this Tuesday alongside Michael Maldonado of America’s SBDC located at Queens College. The workshop was held inside the Tech Incubator at Queens College and was aimed to educate small businesses that are looking to expand.
Maldonado started off the workshop by explaining basic business terminology, before moving on to key tips, useful tools, budgeting advice, and funding sources. He also went in-depth about why local community banks may be better suited for startups than commercial banks, as well as going through a list of alternative lenders.
He finished his part of the presentation by explaining the general criteria and disqualifiers of money lenders.
Shrimanker then took over the workshop to speak on improving the financial health of businesses. He first walked through the basics of balance sheets, which consist of assets, liabilities, and equity.
He then went on to talk about income statements, and explained in-depth about revenue, expenses, and net income/loss.
A small Q&A session was held between the presenters and attendees before the workshop came to a close around 2 p.m.
You can listen to the whole presentation by clicking this link.