Robert Garcia, CPA, runs a firm that helps entrepreneurs with accounting and tax preparation. Follow #IhaveaCPAguy on Instagram and Facebook, where he shares tips for early-stage startups facing tax season.
Let’s talk about the most common questions I get from startups about taxes. One of the most asked questions startups ask is whether they need to file if they had no revenue.
I didn’t make a profit last year. Do I still need to file?
Yes! All seed-stage startups or businesses that have received an EIN letter from the U.S. government must file a tax return. Even if your letter arrived on December 31, 2022, you would still need to file a return for the year.
Even if you lost money in 2022 or had $0 in profits, your startup should still file federal and state returns for three reasons. The first, of course, is because the government requires you to file.
You’ll also have the opportunity to benefit from your 2021 losses. The current tax code allows businesses to use past losses to offset future taxes. If you become profitable in the future, you can use your 2021 losses to offset some future tax liabilities in profitable years.
Lastly, all investors will require due diligence before deciding to invest. You don’t want to show that you’ve “forgotten” to follow laws since noncompliance can be a deal breaker.
When are tax returns due for startups?
Startup tax returns are due April 18, 2023. You can file an extension with the IRS until October 16. If your business is structured as a corporation, LLCs and S-Corps tax returns are due March 15.
Here’s a timeline with the most important dates for 2023:
- January 31: Send 1099s to contractors and W2s to employees. E-file 1099-NEC forms with the IRS for nonemployee compensation on this date also.
- January 31: File Form 8809 for a 30-day extension to file W2s and 1099-NEC for nonemployee compensation.
- January 31: Send 1095-B and 1095-C forms to employees.
- April 18: C Corp Form 1120 Income Tax Return is due but can be extended to October 16.
What deductions can I claim as a startup founder?
If you’re starting a new business, you can deduct up to $5,000 of your startup costs plus $5,000 of your organizational costs as allowable business expenses for the year you launch your business.
The eligible costs for business startup tax deductions include market research expenses, marketing and advertising expenses, employee training, and professional fees associated with establishing your business structure and organization.
Be sure to track and report the money you spend on your business, including:
- Software and app subscriptions
- Contractors and freelancers you hire
- Licenses and memberships
- Advertising and marketing
- Office supplies
- Business insurance
- Meals, travel expenses for business meetings and trips
- Legal and professional fees
- Costs for renting office space
- Professional development costs
If your total startup costs are less than $50,000, startup and organizational costs are considered capital costs for tax purposes. The IRS considers these expenses as long-term assets because you’re investing in the future of your business.
Consider tax savings or tax-triggering events
As a startup, you need to know about three potential tax savings or tax-triggering events.
- Filing your returns with losses helps produce net operating losses that can be used in future years to help offset future tax liabilities.
- If you trade your company’s stock for services, you might have created a taxable transaction (a high tax bill) for the person providing those services.
- Suppose you’ve been granted stock and are subject to vesting. In that case, you may want to consider the 83(b) election that allows you to pay ordinary income tax when it was granted versus the date it vests, saving you on future tax liability.
What to look for in a tax returns preparer
So what should you look for in a tax preparer for your startup’s tax returns?
Make sure yours has experience in your industry or sector, for starters. Check the person’s qualifications on the IRS Directory of Federal Tax Return Preparers with Credentials and Select Qualifications. This directory helps taxpayers find a tax return preparer with specific qualifications who is accredited and licensed.
Finally, ensure the tax preparer has a Preparer Tax Identification Number, which paid preparers must include when they sign your tax return. And never sign a blank tax form!
Choose your tax return preparer wisely because taxpayers are responsible for all the information on their income tax returns, no matter who prepared it.
The featured image is of a tax withholding form on a desk. Photo by Kelly Sikkema on Unsplash