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Launching a new business is often filled with equal parts of excitement and trepidation. It can even be overwhelming at times.
Because there are so many details involved, especially when it comes to startup taxes, you want to be extra careful.
Sales tax and your compliance with federal and state income tax laws creates extra challenges for most startup owners, and you want to avoid mistakes at all costs.
Below are six common tax mistakes startups make that you need to be aware of.
#1: Tax deductions: Startup costs
It costs a lot to get your new business started, but did you know some of those expenses are deductible?
Consider the things it costs you to begin your startup such as paying for market research, advertising, or travel to meet with new investors.
These items (up to $5000) are often deductible during your first year of business. If it goes over that amount, check with your accountant about rolling them into future years.
Many startups make the mistake of not taking this deduction – ask your tax preparer for more info.
#2: Tax deductions: Expenses
Another mistake startups make is not keeping receipts for expenses. Basically, if you don't have a receipt, don't try to deduct the expense to avoid any issues in the future.
For any travel and entertainment costs you are deducting over $75, you need the following:
What about those expenses under $75? We recommend you maintain the same record keeping for them.
In addition, if you're planning on deducting mileage, you also want to keep excellent records. Consider downloading an app that tracks your miles.
Documentation is your asset and remember that commuting is not deductible.
#3: Sales tax: Charging correctly
If you are selling products to customers, you want to avoid the mistake of not charging the right amount of sales tax. For example, you may need to charge city, state, and even county taxes.
In addition, you also want to be on top of your sales tax filing, so you don't incur penalties.
You are required to not only collect sales tax, but you must file tax returns and send the correct amount to the city, state, or county agency imposing it.
#4: Tax credit: R&D Tax
Many startups miss out on the R&D tax credit because of confusion surrounding the credit.
The term, research and development, makes many think of things involving science, but this isn't true.
R&D covers industries such as manufacturing, food services, utilities, architecture, and more.
The federal government has extended this tax benefit to include businesses of all sizes, so small startups have easier access to using it.
Consult with your tax experts to see if your startup is eligible.
#5: International Tax Compliance
For companies operating in the United States and internationally, the tax situation is often confusing.
But, you want to get this piece of the tax puzzle correct so you aren't paying too much in too many places.
Again, check with the company or people handling your taxes and accounting to be sure you are maintaining the proper records and filing taxes at the correct rate.
#6: Local and property taxes
Another area many startups make mistakes concerns property taxes.
If your company owns property such as a building, you must pay the correct property tax to your local taxing authority. This may be the city or the county where your building is located.
This tax is based on your property's assessed value just like the property tax you pay on your home.
If you ever sell your property, you'll need to consider property tax nuances.
Your startup taxes are a year long obligation and something you need to think about often – usually quarterly. It's not a once a year topic.
Avoid these six tax mistakes, and do your research on others, so you avoid any trouble with state and federal taxing bodies.
Finally, we do recommend separating your personal and business finances. It will make preparing your taxes much easier and help you avoid legal trouble.
Are you a new startup ready to succeed? Are you looking to get your new business off the ground and watch it rise to success? We are here for you. We can help answer your questions and guide you through the process. Outsource your HR duties, finances, payroll and more to us. Contact Escalon today to get started.
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