As trusted advisors, we are asked by entrepreneurs to consult with them on the myriad of tax issues related to the startup phase of a new business enterprise. Before we discuss any tax issues, it is imperative that resources and time are dedicated to understanding how the business will operate. Questions to be asked are: “what kind of goods or services will be provided?”, “what is the anticipated market audience?”, “how will the new business be capitalized or funded?” In summary a solid business plan must be prepared first.
Once you have your business plan in hand, a discussion of the tax issues can be commenced in a more advanced, focused way.
If there is an initial list of issues to be concerned about, below would be the starting point:
- Formation – Most closely-held operations operate for tax purposes as pass-through tax entities such as an S Corporation, Partnership, or Limited Liability Corporation.
The C Corporation, on account of lower tax rates has become now a more attractive business alternative, especially for startups that do not expect to make substantial distributions to its owners. With a C Corporation comes the additional tax benefit of the potential exclusion from federal tax of some or all of the gains resulting from the sale of Qualified Small Business Stock (QSBS).
- Startup Costs – Certain costs of starting up your business may be currently deductible. Startup costs are incurred for creating or investigating an active trade or business or other expenses incurred before the beginning of an active trade or business. Depending on the activity, a taxpayer can deduct up to $5,000, with the balance being amortized over a 15 year period.
- Research and Development Credit – If the new company has gross receipts under $5 million and it incurs certain research and development costs, the company can elect to deduct up to $250,000 per year of federal research and development tax credits toward Social Security and Medicare payroll taxes.
- Stock Options – Options based compensation is common to many startups, especially in e-commerce enterprises. As many startups need to attract employees but have limited resources, the use of options instead of cash to compensate employees and service providers could be considered. In addition, options based wages can be used to calculate the research and developmental tax credit.
- State and Local Taxes – States are becoming more aggressive in asserting corporate income, sales tax and other non-employee withholding requirements. States continue expanding the definition of the types of products and services subject to sales tax.
Each new enterprise is unique in its mission, ownership, structure, and customers. The Tax Warriors® at Drucker & Scaccetti can assist you in starting your business in the most tax efficient manner.