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12 Tax Issues for Startups to Watch

Scott Gerber
Scott Gerber

A little preparation can save hours – and bills. Here are some things to remember.

There are so many factors for new startup companies to consider. Between planning how to handle management, hiring, buying, marketing, restructuring and all of the other facets of a new startup, the issue of taxes can often be placed on the backburner.  

The key is to set aside time to learn what common tax issues plague businesses similar to yours, to avoid making the same kinds of mistakes. After all, a little well-researched information can go a long way in preventing any taxation-based unpleasantness later on.

Below, 12 members of Young Entrepreneur Council (YEC) discuss ways to avoid tax problems that many startup companies experience. Here's what they advise you consider:

1. Form a proper structure from the beginning

"An LLC is an easy way to have the losses offset other ordinary income of the shareholders, but might not be the best structure long term. If a startup seeks funding, most investors and VC funds prefer a C Corp. It offers investor protection, the 1244 small business stock provision, where a loss can offset ordinary income, and the 1202 gain provision, which excludes 50 percent of cap gain if held five years." – Vincenzo Villamena, Online Taxman

2. Separate personal and business expenses

"Speaking from experience, I can tell you that not separating your personal and business expenses from day one will cost you a lot more down the line. It'll make tax filings much harder and costlier because you'll have to go through every receipt with a fine-tooth comb, instead of simply building a report from your business banking and credit card accounts and handing it over to your accountant." – Amine Rahal, Little Dragon Media 

3. Get it right the first time

"Although the business setup takes time, do your research and decide on the best federal and state structures for you. Redoing it all later takes far more time and effort than doing it right the first time. If you're not sure, invest in expert advice from an accountant. You'll get your investment back later in both time and tax savings." – Stephanie Wells, Formidable Forms

4. Don't forget about payroll taxes

"Startups facing payroll-related tax issues might end up paying steep penalties. Besides, not filing or paying taxes related to payroll intentionally is a federal crime. The IRS can come after you even if your startup is registered as an LLC or a corporation. Avoiding this problem is easy. Pay your state and federal payroll taxes in a timely manner, within three days of issuing payroll checks." – Derek Robinson, Top Notch Dezigns

5. Seek home office deductions

"Many startups will try to deduct a home office for tax purposes and it's been an issue for some time with the IRS. In order to get a deduction for a home office, your home office must be a separate office used solely for business purposes. Be sure to check the requirements for deducting a home office and what records you should keep first." – Chris Christoff, MonsterInsights

6. Consider real estate property tax

"Before starting a new business, keep in mind that the area in which you want to build may have high real estate property tax that can raise your own operating costs. Even cities that have a business-friendly tax rate can still have higher than average property tax rates or other hidden taxes, such as a road tax. Before you build your business, make sure you are aware of your city's tax laws." – Shu Saito, Godai Soaps 

7. Hire consultants with proper agreements

"Often, as the head of marketing for many organizations, I was tasked with managing consultants and their work. Even though they were task focused, I would end up having to expense everything. This creates a problem for the business because it is expensed on my behalf and not seen as a service-level agreement. Make sure you have agreements in place before the work starts to avoid issues." – Sweta Patel, Silicon Valley Startup Marketing 

8. Hire experienced tax professionals

"Based on experience, I can tell you that our tax code is very confusing. The only way to truly understand how to apply it to your business is through experience, so lots of burgeoning startups struggle with this aspect of their business. My advice to them is to bring an accountant or another tax professional onto your team as early as possible to get a handle on your finances and taxes." – Bryce Welker, Accounting Institute for Success 

9. Understand your tax credits and write-offs

"There are so many write-offs and deductions available to startups that they might not know about. We use one called an R&D tax credit which allows us to get a deduction on our R&D expenses, which as everyone knows is pretty heavy during the early days of a startup. Take one hour to do a paid consultation with a tax consultant to figure out where you can save." – Andy Karuza, FenSens 

10. Properly document all income and expenses

"Many startups fail to document all of their income and deductible expenses. Use an accounting software like Quickbooks to easily and accurately document all income and expenses for your business. And check out the IRS website for a list of all the transactions and documents you should be keeping track of." – Blair Williams, MemberPress

11. Keep an eye on taxable perks and bonuses

"Startups are more likely than traditional enterprises to think outside the box with nontraditional perks and bonus structures – but they still need to ensure they’re staying inside the lines of tax code." – Sam Saxton, Paragon Stairs 

12. File 83(b) elections

"If you purchase stock that vests and do not file an 83(b) election, you will pay income tax on the difference between the price paid for the stock and its fair market value when it vests, even if you do not sell the stock at that time. In contrast, if you make an 83(b) election the income from the stock is recognized at the time of the stock purchase date rather than when the stock vests." – Doug Bend, Bend Law Group, PC

Image Credit: 88studio/Shutterstock
Scott Gerber
Scott Gerber Member
Scott Gerber is the founder of Young Entrepreneur Council (YEC), an invite-only organization comprised of the world’s most promising young entrepreneurs. In partnership with Citi, YEC recently launched BusinessCollective, a free virtual mentorship program that helps millions of entrepreneurs start and grow businesses. Gerber is also a serial entrepreneur, regular TV commentator and author of the book Never Get a “Real” Job.