Simplifying 2024 Startup Taxes: A Complete Guide

If you’re looking for advice regarding startup taxes, you’re in the right place. Whether you are bootstrapping your company or a rapidly growing VC-funded startup, it is Cleer Tax’s mission to help you get your business finances in shape. Cleer Tax works with startups of all sizes to help them pay the least amount in taxes while keeping preparation fees low to maximize cash flow. However, while Cleer Tax can do the hard work for you, having some knowledge can further simplify the process. Thus, we have created this comprehensive online tax guide aimed at helping startups get ready for tax return preparation time.

How Much Startup Taxes Will I Owe?

This is often the main question founders have when seeking tax advice for startups. Most times, the answer is less than you think. But this is not always the case, as a number of factors will come into play. In order to have an idea of what your tax liabilities will be, many different facts must be considered, such as where the company is located, where the customers are located, and the type of business model.

While U.S. C-Corps currently have a 21% flat rate income tax, how the taxable income is calculated is nearly as important as the tax rate for determining how much you will actually owe.

There are many choices when it comes to entity type, accounting methods applied, and what deductions and credits may be available to take. Having an understanding of these elements will help you determine the best option for you and your business.

Understanding Different Types of Entities

How you form your business can greatly impact taxes, financing, the complexity of your life, and how professional you come off to your customers and investors. There are a number of different ways to structure a business around tax considerations for startups. At Cleer Tax, we can help you to find the best approach to take and file your taxes to maximize your savings with any business structure. 

C-Corp

Having a business structure that protects the owners from personal liability is very important, especially to investors in the startup world. Delaware corporations are often requested by angel investors and venture capitalists who want maximum liability protection as investors in a startup. Many people mistakenly think Delaware C-Corps are formed for tax benefits, but they are actually more common because they have the strongest laws protecting corporate investors. C-corps also play a role in tax planning now because they are often more tax-advantaged than other entity types after the Tax Cuts and Jobs Act lowered the corporate tax rate to a flat 21%.

S-Corp

An S-Corp is not a separate entity type, but rather a tax election that any corporation can make under “Subchapter S” of the Internal Revenue Code. S-Corp elections are popular for small self-funded startups who want to pass through income to the owners without the double taxation that can occur with C-Corps. This entity type is often chosen by sole proprietors to reduce their self-employment tax obligations by treating part of their business income as related to company growth rather than their personal assets. S-corps must file annual taxes, but taxes are paid on shareholders’ personal tax returns rather than at the company level.

LLC

Limited Liability Companies (LLCs) are a common entity type, but they are not a tax classification on their own. Every LLC will default to being treated as a disregarded entity if there is one owner or as a partnership if there are two or more owners. The benefit of LLCs is that they have liability protection similar to a corporation with less of the annual paperwork and formalities of maintaining a corporate structure. 

Partnership

Partnerships are the default treatment if you go into business with another person and earn money, regardless of whether you sign a partnership agreement or not. Many people do not realize that starting a business with their friend will create a separate business entity without needing any kind of government registration. Partnerships report their income separately, but taxes are paid on the individual partner’s tax return.

Disregarded Entity

Businesses that only have one owner default to being considered a disregarded entity, meaning they are filed on a schedule inside the owner’s return. For U.S. individuals, this is filed on Schedule C within the personal return. For partnerships and corporations wholly owning an LLC, this will be reported as income within the business tax returns. For foreign owners of a U.S.-based company, an information return disclosing ownership and certain monetary transactions will need to be filed on Form 5472 and included with a U.S. corporate tax return.

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Types of Taxes a Startup Will Have

When starting a company, it can feel overwhelming to keep up with all the paperwork. You want to focus on your business, but all these other items can be distracting and time-consuming. One big aspect to understand is that not all startup taxes are created equal. Understanding the types of taxes you will have to pay to the IRS is the first step in getting your finances under control.

Income Tax

Income tax is what most people think of when they think of taxes. Once a year, Uncle Sam takes a cut of your hard-earned money. Corporations are taxed at a flat 21% rate on net income – meaning the income left over after all expenses are taken. However, there are many credits and income items with preferential tax treatment that make it more complex than that. But that is what Cleer Tax is here for — to figure out what is needed to get the most out of filing your startup taxes. 

State Income Tax Nexus

The question of whether you owe sales tax or not has a completely different set of rules for nexus within different states. After the Wayfair v. South Dakota Supreme Court ruling, the issue of sales tax has become far more complex in the last few years. As of the beginning of 2021, only two states tax service businesses, Hawaii and New Mexico, but the definition of what is a service and what is a product has been slowly becoming more vague.

Many areas that used to be considered services a few years ago, such as SaaS, digital software, and even services sold on online marketplaces, now are the fodder of complex sales tax laws enacted to specifically rope these entities into local taxation. These regulations are constantly changing, so be sure to look for the most recent legislative updates when mapping your startup tax considerations. Much has changed in the last year, so a significant portion of the information available online is outdated.

Registered Agent

When your corporation is formed in a certain state, you are required to have a registered agent in that state who is willing to accept the service of papers if you are in a lawsuit. This isn’t a tax requirement, but we often have clients who use a registered agent’s address for tax purposes, as well.

Franchise Taxes

Many states have a franchise tax that requires a separate annual filing and payment to that state. The most notorious is Delaware, which has a complex annual corporate franchise tax formula that can spit out some astronomically high taxes owed if filed incorrectly. Most other states have franchise taxes that are rather modest and based on assets or a flat rate, but it is something to keep in mind and beneficial to check the rules of each state you do business in.

Penalty Taxes

Most tax penalties are based on the amount of startup taxes owed, and the penalty amounts increase relative to this. However, there are some exceptions around international information returns, notably Form 5472, Form 5471, Form 8938, and FinCEN 114 (FBAR) reports. Form 5472 is required to be filed for reporting U.S. financial transactions of a foreign owner of a U.S. corporation and for every Foreign-Owned Disregarded Entities (FODEs), meaning U.S. LLCs owned 100% by a foreign person or company. For C-Corps, this is only required when the foreign shareholder makes or receives payments to the US corporation, but for FODEs, this is required every year, even if there are zero transactions.

The penalty for not filing Form 5472 is $25,000. This is a very difficult penalty to get waived if it is assessed; thus, it is best to always file tax returns on time. Form 5471 is the tax return filed to report activities of a foreign subsidiary of a U.S. company, and arguably the most complex tax form under current U.S. tax law. This form carries a hefty $10,000 fine for failing to file or making mistakes. Form 8938 and FBAR must be filed every year for reporting foreign bank accounts when held by a U.S. company or subsidiary. This form also has a $10,000 minimum fine for failing to file correctly.

Getting Your Startup Finances Organized

Getting organized is the first step in getting the most advantageous tax treatment for your startup. Until you know the amount of startup taxes are owed, you won’t know how much savings you need. Ideally, you should set up a system that allows you to stay organized throughout the year to make accurate projections of your future tax liabilities.

For many clients, we offer bookkeeping setup services to help create a custom chart of accounts and get everything synced with your business bank account.

Speaking of bank accounts, it is critical to form separate bank accounts for business and personal use to help simplify the filing of your startup taxes. Sometimes, it can even be helpful for splitting different aspects of your business spending. Keeping business and personal finances separate is critical to keep you from commingling funds, which, if you ever get audited, will help keep your personal finances from coming under scrutiny.

Balancing the Sheets

Balance sheets are crucial to running a business, as they can give you an accurate snapshot of the financial health of your enterprise. Balance sheets are frequently required for borrowing funds. Additionally, preparing personal balance sheets every so often is important to know where your overall investments stand.

Including a balance sheet on a tax return is not required for partnerships or corporations with gross income under $250,000 and assets under $250,000 for corporations or $1,000,000 for partnerships. Businesses with over $10,000,000 in assets must file Form M-3. Year-end balances one year must always be the starting year balance for the next, and any discrepancies need to be explained. Thus, even if you haven’t yet reached the stage where it is required to report your balance sheet to the IRS, it is a good idea to keep track of your finances every year so that you have the beginning-of-year balances correctly maintained when you do reach that level of reporting.

Assets

The top half of the balance sheet is what is considered assets, or positive elements of what the business owns. The main items that are accounted for here are cash, amounts owed to the business, and physical goods and property owned minus any depreciation amounts. Intangibles, such as goodwill or intellectual property that has been purchased, can also show up on the top of the balance sheet. Values of property, such as real estate or vehicles, are reduced by depreciation amounts with the asset side. Biological assets, such as trees and farm animals, can also be listed here. Intangible assets. such as patents and trademarks or goodwill from purchasing a business, also belong in the asset category.

Liabilities

The lower half of the balance sheet contains liabilities, or what the company owes to others. This lower half must balance with the top half and end in the same amount, which is why it is known as a balance sheet. Additionally, this lower half includes business liabilities, such as loans the company owes to others and retained earnings. For tax purposes, the liabilities section also contains shareholder equity or capital contributions. This can be a tricky balance sheet subject.

Once a corporation is formed, a complex decision must be made about how shareholders want to inject capital into the company. Capital contributions can be made directly to the company to increase the basis, but having more than one owner can create problems of unequal contributions. Thus, additional stock is often issued in exchange for capital contributed, or the amounts are treated as loans from shareholders, with formal agreements drawn up in either case.

Cash Accounting

Cash accounting is most likely what you will use when owning and running a small business, at least at first. This type of accounting will match up to what your bank balances show most closely and minimize confusion come tax time. With cash accounting, your income is reported when the payment is received, and expenses are reported when paid; it’s all very straightforward and makes it much easier when filing startup taxes.

Accrual Accounting

Accrual accounting is a bit more complex to learn how to use, but it shows more accurately how much money your business has earned. With accrual accounting, you report income when the sale is made, i.e., when the contract is signed, and expenses when they are used rather than when they are paid.

Because there is no way to have large payments in one year that are used in other years, this means that some of the spikes in income and expenses are balanced out a bit, giving a more even depiction of earnings. This can help simplify the process of filing startup taxes.

For example, under accrual accounting, if you pay a year’s worth of insurance on October 1st and your tax year ends December 31st, you would only report ¼ of the amount paid on your current year’s tax return. If you paid the same insurance payment on a cash basis, then in most cases, you would deduct the full amount on your current year’s return.

As far as startup taxes go, this can be a disadvantage when applied to expenses but can offer a big advantage when applied to income, especially for companies who sell using crowdfunded pre-sales in a prior year.

Under the current law, corporations are required to use accrual accounting unless they fall under the qualified small business rules available for most businesses with gross receipts of less than $25 million that are not considered a tax shelter. There has been a big increase in the exception amounts in recent years, meaning fewer businesses are forced to change to the complexity of accrual.

Hybrid Accounting

Some businesses also use a hybrid method when filing startup taxes, which is not really a separate accounting system but a combination of accrual and cash accounting. There is no single system of hybrid accounting; often, a combination of cost, GAAP, and managerial accounting methods is used.

As there is no standard system, companies are able to improvise a bit in how they report income and expenses. The main item of importance is that rules are established and maintained from year to year.

The hybrid method can provide a number of benefits, mainly in that there are no hard and fast rules for how the accounting is done. Hybrid accounting also gives a good micro and macro view of the company’s finances, allowing clear decision-making and planning to be done.

Determining a Tax Year

One aspect that influences how you run your business and when you need to prepare your startup taxes is whether you are organized on a calendar year or a fiscal year. A calendar year is the year ending December 31st that most individuals use. A fiscal year can be elected for most business entities if a good reason exists and can allow that business to end its tax year at the end of any month. C-corps can easily make this election, but other entity types must show a legitimate business reason as to why a fiscal year represents a more natural tax year for them.

Examples of businesses where a fiscal year makes sense would be a ski resort, as the calendar year-end is in the middle of its busiest season, making it difficult to gauge the profit of the business at that time. Also, when it is the busy season for ski resorts, it does not make sense to spend time on accounting, and workers’ contracts are normally not complete until the end of the season.

Retail businesses also commonly choose a fiscal year, as providing accurate inventory calculations as of December 31st is often challenging during the busy holiday sales season, and the various lines of clothing they sell have different schedules coinciding with seasonal spikes in sales.

Ending a business in March, June, or September for a fiscal year is common, as this lines up easily with payroll filings. Most publicly traded corporations try to choose a date to end their fiscal year that will show higher last-quarter earnings, as this seems to excite investors and usually falls in line with what the IRS considers a natural tax year.

When are Taxes Due?

Federal taxes are due in the middle of the fourth month following the tax year end for corporations. For companies using the U.S. calendar year, this typically means mid-April. For state taxes, there are a number of different due dates, depending on the state. Delaware Franchise Tax is due March 1st each year for corporations. Download our free calendar plug-in to add to your own Google calendar to track this.

Income

All income that flows into your company should be reported on your tax return as gross income. This is a key piece of advice for startup taxes. If you receive money on a 1099-k, even if there is a good explanation why the money should not be reported as income, it is a good idea to include these funds and back it out later.

Deductions

Very few areas in tax law give you the bang for the buck that deductions can. Yet, there is no one-size-fits-all solution for deductions. Just about any expense can be deductible under the right situation, as long as the intention behind running the business is to turn a profit and that expense has a legitimate business purpose. The general rule for when something is deductible is what the U.S. tax code refers to as “ordinary and necessary.” If the expense you refer to is ordinary in your line of business, and if it is necessary to your earning income, then it is likely that it is deductible.

Startup Employee Payroll

Somebody has to do the work in every business, whether it’s you or someone that you hire. When it is time to expand your startup and hire help, all you need is just a little bit of knowledge to avoid a whole lot of trouble. As far as how that worker will get paid, there are several possibilities; keep reading to learn the advantages and disadvantages of the various ways of handling employment.

Who Is An Employee?

First, it is important to discuss who exactly is considered an employee. If you hire someone to work in your home or business, you supply the tools they use to work, and direct how the work is done, then they are an employee. If you hire someone come to work for you, but they run a business that they market to the public offering similar services, provide their own tools, and set their own schedules, then they are probably considered an independent contractor.

This may sound simple, but in reality, this line can be vague at times, leading to many lawsuits and state legislation in recent years trying to figure out where this line is drawn in the digital age. The general rule boils down to how much control you have over what the worker does.

Working as an independent contractor doesn’t just benefit the business, it also allows workers to deduct their expenses against their income. This means they pay far less startup taxes than they would otherwise, so many appreciate and prefer this arrangement.

When hiring independent contractors, it is important to define this properly through clear contracts with workers using the appropriate terms. Independent contractors should never be referred to as employees in communication of any sort. Also, be forewarned that no matter how much you document, if you are trying to disguise employees as independent contractors, eventually, you will get caught.

The IRS allows employees to file a statement with their tax return stating that they were not an independent contractor but rather an employee. If they do this, they are allowed to only pay half of their Self-Employment tax with the return when filing, meaning you will get a bill in the mail for the other half!

Independent Contractor

If you have someone working for you and they fall under the independent contractor rules, then you would need to file Form 1099 on their behalf if you paid them over $600 in that tax year. Form 1099 must be filed by February 28th for paper forms or March 31st for e-filing the documents. If you file more than 250 of these forms, you are required to electronically file. The form must be provided to the worker by January 31st. As independent contractors are expected to file their own tax return where they pay Self-Employment tax, you are not required to withhold any taxes on their wages.

Employees

When your workers fall under the employee category, your life becomes a bit more complicated. You must withhold FICA taxes for Social Security and Medicare, federal and state tax withholding amounts, and federal and state unemployment tax. If you offer group medical or 401k plans, you will have more withholding requirements based on that.

Statutory Employees

There are a handful of jobs that meet the federal requirements for not being employees, but the employer is still required to withhold Social Security and Medicare taxes and, sometimes, pay unemployment taxes. This usually is just for delivery drivers, homeworkers who follow specific guidelines, and certain salespeople. If one of these applies to your business, I would recommend doing more research and getting a professional opinion before determining if you can have your workers perform their duties as independent contractors. This status is not commonly used these days but can provide substantial tax savings to your workers when structured properly.

Stock Options

Many startups entice talented workers to join them with lower current wages and the promise of future riches through stock options. While this can be great for attracting good talent, it can come with a range of challenges related to cap table management, 409a valuations, and the need to file Form 3921. Luckily, Cleer Tax can help your company navigate the complex rules to issue stock options in the ways most beneficial to your company’s long-term goals.

Foreign Workers

Services provided outside the U.S. are not taxable to the people who provide those services in the U.S., as they can only be taxed in their country of residence. Thus, foreign workers are usually categorized as independent contractors. There is no withholding on amounts paid for services by foreign contractors, and no informational returns are due at year-end. However, a U.S.-based company must document foreign worker relationships with contracts, invoices, and proof that the payee is not a U.S. citizen, such as a completed Form W8-BEN and copies of the passport of each payee.

Vesting Arrangements

It is common when starting a company to have a group of founders working on the project together. To protect each other from someone losing interest and dropping out, they often receive their ownership over a period of two to five years, also known as vested ownership. The problem with vested ownership is that it can be viewed as compensation when the interest vests because the IRS views it as earned for the founders’ continued efforts.

Thus, for U.S.-based founders, it is smart to file an 83(b) election within 30 days of entering the vesting arrangement so that you can escalate all vesting to remain as if it occurred when entering the arrangement. Keep in mind, though, that if the company has already received funding, this may create a tax burden as the company may already have a value at this time. Because of this, 83(b) elections are mostly used by very early-stage startups.

Forms Workers Must Fill Out

Independent contractors must provide a Form W-9 to disclose their tax information. If they don’t provide this, you must withhold backup withholding at 30% from each payment. Employees, on the other hand, must fill out Form W-4 for their tax withholding and Form I-9 to prove they are legally eligible to be hired. New hires must be reported to the state you live in, so if they have child support or other payments garnished from their wages, you will know to take that amount out. At the end of the year, Form 1099-NEC is used to report payments to independent contractors, and Form W-2 is used to report wages paid to employees.

FICA Taxes

Most employees don’t realize this, but they are paying over 15% of their wages to Social Security and Medicare taxes! This is because only half of what is paid shows on the employee’s paycheck, and the company pays a matching amount on their behalf. The Federal Insurance Contributions Act (FICA) tax income withholding limits continue to rise, with Social Security Tax being now 6.2% of wages up to $142,800 for 2021, and the employer must also withhold an additional 6.2% contribution up to the same limit from the employee’s paycheck.

Medicare demands an additional 1.45% tax from both the employer and employee; the employer is expected to act as a third party for this amount, as well. In addition to that, there is now a 0.9% additional Medicare tax on all wages over $200,000. There is one exception to the FICA tax. Children under 18 working in a business owned by one or both of their parents are not subject to Social Security and Medicare taxes.

Federal and State Withholding

To determine federal withholding amounts, you must have the employee fill out form W-4. IRS Publication 15 has tax tables that can determine how much to withhold based on the W-4 information. If your state has an individual tax, then there will be additional instructions for withholding. Contact your local franchise tax board to find out withholding instructions if you are unsure of when you need to file and with which forms. See the State Tax chapter for more information. 

Unemployment Taxes

Federal unemployment, or FUTA, is 6% of the first $7,000 paid to an employee. If you pay into state unemployment as well, then up to 5.4% of the State Unemployment Tax can be used as a credit against the federal FUTA, leaving just 0.6% to be paid into the feds. If your state has an Unemployment Tax, you are required to contribute to their withholding cutoff. If you hire a parent, child, or spouse, you are not required to pay FUTA taxes on their behalf. 

Employees With Tip Income

If your employees earn tip income, you must ask them to give you this information for you to withhold taxes on. You are required to file Form 8027 reporting this by February 28th of the following year. A credit in the amount of FICA taxes you pay on their tips is available as part of the general business credit.

Fringe Benefits

The rules for fringe benefits have become stricter and stricter as Congress’ way of trying to stop wealthy taxpayers from giving themselves tax-free advantages such as flashy vehicles and designer furniture — especially when these benefits are only provided to shareholder employees or executives. There are generally additional restrictions, and deductions must be carefully planned. The benefits provided to employees at this level are often considered income to include on the employee’s W2.

Depreciation

Depreciation is one of the most important methods of personalizing a tax return to be most advantageous for a company’s overall situation. It shocks me how often I review other preparer’s returns for startup taxes and see a total lack of depreciation, which is often to a huge disadvantage to the taxpayer.

What is depreciation exactly? Depreciation is the allotted time given by the government before a structure or item’s value is reduced to nothing and must be remodeled or rebuilt. Nothing in life lasts forever. Every object is considered to have a useful life period.  For example, 5 years is considered the lifespan of a car, 7 years for office furniture, 27.5 years for a rental house, and 39 years for a commercial building. In most parts of the country, houses last longer than this, but the depreciation amounts must be a “one-size-fits-all” solution and cover even the most shoddily built homes in tropical climates. 

There are two choices for the way depreciation can be accounted for – accelerated or straight-line. Most tax software defaults to accelerated depreciation. This depreciates property over the shortest time and gives the biggest deductions in the first couple of years, then fewer deductions later. There is also an alternative depreciation method available that can often be beneficial: straight-line depreciation. This uses a straight-line method to depreciate the property over a longer period of time by an equal amount each year.

If a business is not yet profitable, or if a taxpayer is limited in the amount of deduction that can be taken, alternative depreciation (meaning depreciation for a longer period of time) is a smart bet, as it saves more deduction for future years when larger deductions are needed.

Beyond choices related to lifespan, depreciation is calculated slightly differently for houses and goods. How it is deducted is based on when the item is placed in service. Houses are always depreciated on a mid-month convention, meaning they are placed in service in the middle of the month purchased. Depreciation on houses is always straight-line and the same for each year.

Goods are typically considered placed into service in the middle of the year. If many goods were purchased near the end of the year, then the depreciation for the current year must be considered placed in service on a quarterly basis. On the quarterly system, goods are depreciated starting in the quarter they were purchased in. This law is meant to limit companies from making a large amount of capital purchases in the last month of their tax year after forecasting how much tax they will pay.

One of many ways pay-offs of forecasting and tax planning year-round is that it allows business purchase decisions to be made throughout the year. This information can come in handy when purchasing your next vehicle. Car companies often have big sales near the end of the year, so keep in mind that your tax deductions may be limited if you buy the car at this time, depending on the type of vehicle chosen. Depreciation is always something worth weighing into the cost/benefit analysis of purchasing any large capital item.

Bonus Depreciation

Congress loves to pass special depreciation laws that allow greater amounts to be deducted in the year of purchase by small businesses. There has been a plethora of laws in recent years; the newest expands the bonus depreciation deductions available now to purchases made each year through the end of 2026. The current bonus depreciation gives a deduction of 100% of the purchase price of new property placed in service, encouraging new purchases. Bonus depreciation is only for brand-new property, not used equipment, and cannot be used for software purchases. Equipment, computers, appliances, and furniture are all items that usually qualify for bonus depreciation and are commonly used by startups.

Section 179 Expensing

Small businesses also have a special depreciation deduction available to help them known as Section 179. The 2021 Section 179 deduction allows businesses who purchased less than $2.62 million worth of capital goods within the tax year to expense up to $1.5 million worth of goods they bought in the year they purchased them rather than depreciating them over many years.

The deduction cannot exceed the amount of income from the business. Section 179 deduction is available for most new and used goods placed in service, including certain software. With the bonus depreciation amounts increasing in recent years, it is less common to use 179 deductions, but good to keep in mind when purchasing used equipment or software that cannot be used for bonus depreciation.

One business strategy of Section 179 deductions has to do with leases on vehicles or business equipment. Since the IRS determined lease payments that have a nominal cost (often $1) to purchase the property at the end of the lease to actually be considered a sale, this means that you can lease property and take a full section 179 deduction in the year of purchase- often generating a tax savings larger than the first year’s payments. Of course, this means future payments are not deductible unless an interest portion has been determined. So, this type of deduction must be planned well with regard to future cash flow.

Listed Property

Certain items, such as cars and computers, have historically been purchased and placed in service in ways that have violated the spirit of the depreciation rules leading to them to be classified as listed property. By definition, listed property is property that can be easily used personally by employees.

This includes computers, entertainment equipment such as camera equipment, vehicles with gross weight of less than 6,000 lbs., and other transportation property, such as motorcycles and boats.

In order for listed property to be deducted at all, they must be used at least 50% for business purposes. Any personal usage is considered non-deductible when filing startup taxes, and all expenses must be allocated accordingly. If the listed property does not meet the primary use test of 50%, then it is not property that is eligible for Section 179 or bonus depreciation deductions.

Recapture When Sold

The rules for when you sell a property include that you must recapture “depreciation allowed or allowable.” This means that even if you don’t deduct depreciation when you sell the property, you still must pay tax on the depreciation you could have taken!

Amortization

Amortization is similar to depreciating an expense over the straight-line method. Certain expenses, such as business start-up costs and research and development costs, are eligible to be amortized and deducted over a number of following years. You can choose the amortization period for a corporation or partnership; any period up to 15 years is generally approved.

However, keep in mind that once you choose a period, you are stuck with that timeline for that item. Amortization is beneficial because it allows you to spread costs in a high-spending year to future years when the deductions may be needed more. This can be especially beneficial for startup costs and similar Section 197 intangibles, which include patents and branding costs, as usually, profit is nominal in the first year of a business.

Small Business Tax Credits

Tax credits can be especially valuable because you often get a higher value of tax savings for using credits than the dollar-for-dollar reduction of income that deductions provide. Some credits can even be taken in addition to using the same amounts as deductions. Some can even be taken against payroll taxes for small businesses that don’t have an income tax to offset with credits yet.

This can equate to huge savings on startup taxes, which also means that credits are areas ripe for audits, and the expenses used to calculate these credits must be carefully documented in anticipation of examination. Some common credits include the R&D credit, Community Development Credits, Disabled Access Credit, Credit for Small Business Pension Plan Startup Costs, Credit for Employer-Provided Childcare Facilities and Services, and Renewable Energy Credits. Please reach out to us if you have any questions about qualifying for these credits.

Simplify Next Year’s Startup Taxes

Now that you know the ins and outs of startup tax filing, you can be ready to take on your finances with confidence. However, remember that there’s a lot of work that comes with managing this, and you can always make it all easier with the help of Cleer Tax. Whether you’re looking for tax advice or need hands-on guidance with filing startup taxes, the Cleer Tax team is here to assist you every step of the way. Get in touch with us today to learn more about how we can make next year’s tax filing a breeze. 

Author Bio
David McKeegan
David McKeegan, the founder of Cleer.Tax is both an MBA and Enrolled Agent. As an entrepreneur and small business owner himself, he really understands the pain points that company owners and founders have in regards to tax compliance and having clean financial statements. What really differentiates David is his ability to distill complicated tax matters into layman’s terms, making the advice actionable and accessible to all.
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