Vanessa Kruze, CPA.
As a CPA working with a start-up company, I’ve seen just about every mistake a founder can make, from not filing a tax return to filing an unnecessary return. This is a list of the biggest mistakes I’ve seen and accountants should keep their clients away.
- Not filing taxes on time or not filing them at all. First of all, keep in mind that all startups must file state and federal tax returns annually, even if the company is not profitable. Also, late filing can result in fines, especially if the startup has foreign shareholders (startups with foreign shareholders can be fined up to $25,000 per document). there is). And the problem doesn’t stop there. Delayed returns show up during venture capital due diligence, which can affect funding, and merger and acquisition diligence, which can derail a deal. We spend a lot of time educating founders on the importance of timely filing, and we even offer downloadable calendars.
- Submit an unwanted Delaware return. Almost all venture-backed startups are incorporated as Delaware C Corporations for legal benefits. Also, founders often assume they need to file state returns, but most of the startups we work with don’t. They have not established a tax nexus in Delaware (that is, they do not earn income, pay salaries, or own property in Delaware). But they still have to file Delaware annual reports and pay franchise taxes!
- Required state filing is missing. This is the flip side of filing unnecessary returns and is one of the biggest problems we see with founders.Tax nexus is a concept that many startups struggle with, especially following changes in nexus standards. South Dakota vs Wayfair, and the rise of remote workers due to the pandemic. We educate founders on the importance of their nexus footprint, analyze sales by state, and publish a map of both income and sales tax thresholds for every state.
- Bookkeeping deficiencies and inaccurate records. Accurate and complete records are essential for preparing tax returns. And, as mentioned earlier, accurate state sales records are essential in determining a startup’s tax implications. Without accurate and up-to-date records, the likelihood of making mistakes or missing deductions increases dramatically, with potential penalties, interest, and audit risk. Mistakes in expenses or income can cause startups to overestimate or underestimate tax payments, and such errors can impact due diligence. As part of the onboarding process, we work with founders to establish accounting procedures and recommend technology solutions to streamline, simplify, and organize bookkeeping.
- A mix of business and personal expenses. Many founders start their companies with personal capital, but the mix of personal and business expenses can be a serious problem. Beyond potential ethical issues, that payments from his C-corp in Delaware may be considered taxable income and may result in paying taxes on income not received. explained to the founder. Founders must record and document personal funds transferred to the business or payments received from the business to show income on loans, donations, or tax returns.
- Forget tax credits and deductions. Tax laws are complex and founders are overwhelmed with running the business. It leads to missed opportunities to save money. The largest deduction overlooked is the research and development tax credit, which reduces the payroll tax burden. Even unprofitable startups can benefit from the R&D tax credit. We offer a tax credit calculator to help founders understand how much they can save on eligible R&D expenses.
- We do not use accrual accounting. Small businesses often operate on a cash basis, and many startups are starting that way. Moving from cash to accrual will give startups more visibility into their finances, and is the way investors and board members want to see it. Using accrual accounting is essential if a startup is planning to raise capital. If a startup changes its methods, it must file a Form 3115 to document the change with the IRS.
As trusted advisors, CPAs possess the knowledge and expertise to provide accurate and timely advice to clients on a wide range of tax and financial matters. We act as advocates for our clients and are uniquely positioned to help them minimize their tax burden by avoiding common tax issues like these.
Vanessa Kruze (CPA) is the founder and CEO of Kruze Consulting. Founded in 2012, her San Francisco-based firm works with over 700 start-ups to help with accounting, tax, finance, and human resources.