It’s tax season for seed-stage startup founders, and there’s a lot to know. At Countick Consulting, our tax experts work with early-stage companies through all stages of the tax process. Here are the most commonly asked questions we get from founders, and for any additional questions, feel free to contact us here. Countick.
first and foremost, do I need to file a tax return for my seed-stage startup?
Absolutely. All seed-stage firms and startups that have received an EIN letter from the United States government must file a tax return. Even if you received your letter in December 2022, you must still file a tax return for the year. The IRS expects you to file if you have any commercial activity, regardless of how early the stage of your business is.
If I have losses do I still need to file a tax return?
Yes! Even if your firm lost money or made no money in 2022, you still need to submit both federal and state returns for two reasons:
1) The government requires you to file, and
2) You will have the opportunity to profit from your 2021 losses. Under the existing tax rules, businesses can use past losses to offset future taxes. If you ever become successful, you can easily use your 2021 losses to offset part of your future tax liabilities in good years.
when are tax returns due for V.C and seed-backed startups?
The deadline for filing startup tax reports is April 18, 2023. However, you have until October 16 to file an extension with the IRS. The following are some of the most important dates:
- January 31: Send 1099s to contractors. Send W2s to employees. E-filing of Form 1099-NEC for nonemployee compensation is also required with the IRS on this date.
- 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.
- The C Corporation Form 1120 Income Tax Return is due on April 18. can extend to October 16.
My business is still in its early stages, will this year’s tax returns ever be significant for my company?
Yes, Once again, yes! If an acquiring company approaches you in the future, one of the first queries you’ll be asked will be, “Can you provide all of the company’s previous tax returns?” Due diligence will necessitate a potential acquiring company to ensure you comply with all laws, including filing the correct returns. Furthermore, your returns’ content will provide detailed information about your startup. Not having all the required tax returns or filing them incorrectly could complicate the acquisition process and even derail the purchase process entirely. When a startup’s financials don’t correspond to its tax returns, an acquirer’s due diligence flag goes up. The good news? filing on time, and with correctly-prepared returns can entirely avoid this scenario.
are investors interested in seeing tax returns from my company’s seed stage if I elevate series a, b, or c down the line?
Almost definitely. It’s common for sophisticated later-stage venture investors to ask for all of your company’s past tax returns to make sure it’s been legal and running well. Your returns also offer a crucial window into the startup’s financials. Anyone handling a venture capital check will want to examine your returns to confirm that your company is a great bet and that the money they invest in your business won’t be wasted or spent on penalties and fines.
what has changed this year? what changes to the tax laws should I be aware of?
The R&D Tax Credit will be increased from $250,000 to $500,000. This is one of the most significant tax adjustments in 2022. That is a significant increase; seed-stage firms will almost certainly require more eligible R&D expenses to receive the full half-million in tax credits from the IRS. We examined 626 startup tax forms and discovered that only 2.5% of early-stage firms qualify for higher credit. Seed-stage firms often require the same significant R&D investments as later-stage startups. However, seed-stage firms can still use the IRS tax credit to reduce their burn rates, even if they don’t qualify for the whole amount. Because the R&D tax credit covers payroll taxes, even losing startups can reduce their tax burden. Schedule a call with Countick experts to learn how much your startup can save.
Aside from those changes, the laws have remained unchanged since the Tax Cuts and Jobs Act of 2017, which reduced corporate tax to a flat 21% rate. This tax drop is still fantastic news for early-stage firms: assuming you anticipate being profitable soon, your startup’s tax rate will remain at 21% as profits climb. Each year, the IRS publishes materials explaining what’s new for businesses, and we’re delighted to address any questions concerning current tax updates.
what do I need to do to finish my startup tax return?
Organization is essential! Have your paperwork ready for your tax preparer so your return can be done quickly and easily. These include your EIN letter, articles of incorporation, cap table, and the Delaware letter that says when your startup was approved as a C corp. Make sure that your books are in order as well.
We suggest using a sound accounting system to track your business’s transactions. This will make it easy for your tax preparer to pull reports and finish your tax return. You can upload bank statements directly into Quickbooks Online, which is a great feature.
There are also great alternatives, like Xero and Wave. Your tax preparer will need your profit and loss statement, the balance sheet at the end of the year, the general ledger, and general information about your new business. On the Countick page of our website, you can fill out a general information questionnaire, set up a call with our tax team, and get your return.
is it necessary for me to pay or hire someone to arrange and file a return for my early-stage startup? can I do it on my own?
When it comes to corporate tax returns, it’s like going to court: you could be your lawyer, but there are good reasons why you shouldn’t. Professional tax preparers have to get licenses and go through training on every part of the tax code and the rules for filing taxes.
Our tax team stays up-to-date on the complicated rules and regulations that apply to business taxes, like the deductions and credits only available to early-stage startups. If you do it yourself, remember to do important things like check a box to get a payroll tax deduction, get the R&D tax credit, or make a choice that will help you in the long run. Putting money and time into getting your startup return done right can save you time and money in the long run.
what forms do I need to file a seed stage startup tax return?
1120, or U.S. Corporation Income Tax Return is the federal form that every C corporation must file. You’ll also have to fill out state and local forms specific to your business’s location and situation. This is just one more reason to hire a professional tax preparer.
what will it cost to have a professional prepare my startup tax return?
Most seed-stage startups can expect to pay $1,500 for a federal and one-state tax return if they work with Countick. If your new business needs to file taxes in more than one state, the cost will go up with each state.
will I get into trouble if I don’t pay the taxes for my new business?
Even if it’s not right away, not filing a tax return when necessary will probably catch up with you. As your business grows, the IRS and state agencies will need certain forms, like payroll filings, from you. At that point, they might notice that your business was supposed to file tax returns but didn’t that year.
Then you’ll have to file those late tax returns, and you may have to pay the penalty. If your startup was founded in 2022, there is an advantage to filing that initial tax return: you’re choosing to take a specific position that shows the year or basis on which your company started.
You have to submit a tax return to get those benefits. Also, if your startup lost money last year, you can use those losses to lower your tax bill in the future, as we said above.
To sum up, the most significant risks for a seed-stage company that isn’t making money and doesn’t file are:
- Penalties and the time it takes to get it done once you decide to comply
- Take advantage of government incentives to lower your burn rate (read more below).
- Slowing down a future fundraise: sophisticated, later-stage investors will request your tax returns, and if you don’t have them, they are interested to know how much it will cost to comply (and missing a basic business filing doesn’t make your management team look outstanding);
- Delaying or stopping Public-equity companies that buy startups have expert due diligence teams, and if your financials don’t match your returns, it’s a big red flag for them.
what about early-stage companies’ state tax returns? What should I know?
Most of our startup clients are C-Corps that file in Delaware, so if you have any questions about filing in that state, we’d be happy to answer them. As for the rules in other states, each one has its own. Our team can help you with all of them. The general rule is that you should file in a state if you have employees, do business there, pay rent there, or make $500,000 or more from your business there.
what are the most common errors reported by seed-stage companies?
At this point, the biggest mistakes are not filing, filing incompletely, or not checking certain boxes and making confident choices that will affect your future benefits. The payroll deduction is a big one to miss. If you need to check the correct box on the company’s annual return, your startup can only get a payroll deduction if an amendment is filed before the end of the year.
You can still be eligible to get the R&D tax credit, but you can only use it to reduce your taxes in the future. Remember that you could miss out on up to $250,000 in benefits if you mess this up, which could significantly increase your company’s burn rate. Here, you can find out more about the 1120, or U.S. Corporation Income Tax Return. We also notice companies file Delaware state returns when they don’t need to or fail to file returns in a state when they do need to. The biggest mistakes our founder clients make are needing more time to be ready, starting the process too late, and not having the company’s paperwork and books in order.
how should a company handle its costs in its early stages?
The most crucial tip for handling expenses is to make sure that all business expenses that are tax deductible are recorded in your accounting system and that personal expenses are kept separate. Ask your tax preparer if you have specific questions about grouping expenses or if an unavoidable expense counts as a business expense. The IRS says that expenses have to be “normal and necessary” for you to be able to claim them and deduct them from your taxes. If you or other shareholders have given the business money or spent personal money on its behalf, put these costs in the correct category so each shareholder can be paid back. If you need help deciding what to do, you can ask your tax preparer at any time during the year (especially at tax time).
does my startup need to create a K-1S?
K-1s are the tax forms that show how LLCs, S-Corps, and partnerships made or lost money. These are pass-through entities, meaning the owners or investors get the profits or losses. The majority of startups that raise seed capital are Delaware C-Corps. These kinds of new businesses don’t have to give their investors K-1s.
how can I save money this year on my taxes?
The R&D tax credit is one of the best ways for seed-stage startups to save money on taxes. It lets some businesses deduct a portion of their qualified research costs. Depending on the details, the credit can be up to $250,000 for federal and state taxes. The IRS has specific rules about finding qualified research activities and filing tax returns with the credit, so you’ll want to talk to your tax preparer in detail about this. Click here to learn more about the R&D tax credit, and feel free to ask us questions. The Inflation Reduction Act of 2022 will raise the maximum credit to $500,000, but that will only happen in the 2023 tax year.
The IRS puts this on its list of “dirty dozen” tax scams for a reason! – Startups do not get seed money from the U.S. Treasury.
If you are a seed, Series A, Series B, or another early-stage startup that spent money on research and development in the U.S. last year and met specific requirements, you may get a federal tax credit that lowers your payroll taxes. This is important for startups because they have to pay payroll taxes based on how much their employees are paid. This credit has helped save between $50,000 and $60,000 on average, even though it might be worth up to $250,000 a year. This benefit will be even more significant now that the Inflation Reduction Act will double it for the tax year 2023.
The article is an entire guide to tax returns for seed-stage companies. If you have any concerns about anything or need any guidance, feel free to contact Countick experts.
