From outsourcing work with contractors to looking into how fringe benefits can save you money, here are 12 answers to the question, "What are some helpful tax hacks for startups that every startup needs to take advantage of?"
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- Utilize Contractors
- Reduce Your Taxable Income With Section 179 Deductions
- Look into Tax Credits
- Claim Losses on Aged Equipment Instead of Selling
- Time Your Income and Expenses
- Take Advantage of Qualified Small Business Stock (QSBS)
- Save Receipts
- Seek Professional Advice
- Pay Attention to State and Local Taxes
- Keep Current With Tax Regulations
- Use the R&D Tax Credit to Fuel Your Startup's Growth
- Identify Savings Through Employee Fringe Benefits
Hiring employees is a big step for startups that cannot be taken without careful thought and consideration, especially since they typically come with more complicated and higher tax requirements.
In those first years of an early startup, independent contractors can help significantly save costs at tax time. Rather than worrying about overtime, payroll tax laws, workers' compensation, Social Security, and other costly expenses, you can skip many of them by utilizing independent contractors.
Beyond immediate tax savings, independent contractors can work for you with far more flexibility than a full-time employee, so you can quickly scale their work (and your labor costs) up and down as your business needs.
Shawn Plummer, CEO, The Annuity Expert
Reduce Your Taxable Income With Section 179 Deductions
A startup tax hack that can definitely help new small businesses is leveraging Section 179 deduction to the advantage of the company. Section 179 entails that any equipment or software asset that you're buying takes the depreciation deduction in the first year of purchase. In simple terms, if you're purchasing any equipment up to $2.62 million, you deduct the depreciation expense in one go rather than dividing it over the next 5-10 years.
Any startup in its initial year would require some form of equipment, be it machinery or software. Considering the financing cost, EMIs, and other onetime expenses already on their head, startups do not have to worry about deducting for upcoming years and deducting the entire depreciation amount in the first year. This move brings their taxable income down and allows them to save money on revenue generated.
At the same time, Section 179 also welcomes the growth of trade as new businesses are willing to purchase more equipment & software.
Johannes Larsson, Founder and CEO, Financer.com
Look into Tax Credits
A tax credit is an amount of money you can subtract from the taxes you owe. For example, if you owe $100,000 in taxes and have a tax credit of $100,000, you won’t have to pay a cent in taxes.
This can help your startup save thousands of dollars, so I highly suggest taking advantage of them. There are several types of tax credits you can qualify for right now. These include:
- Research and development credit
- Low-income housing credit
- New markets tax credit
So if you’re looking to save money on taxes, talk to your accountant about these tax credits.
Claim Losses on Aged Equipment Instead of Selling
If you look at Section 1231 of the tax code, you might save more on taxes by claiming a loss on old equipment than you would make by selling it. Keep track of any new equipment purchased for your startup, because the age of the equipment can impact the tax deductions you make in the future!
Colin Palfrey, Chief Marketing Officer, Crediful
Time Your Income and Expenses
Startups can use timing tactics to efficiently manage their tax liability. They can accelerate or delay income and spending to maximize tax deductions and reduce taxable income.
For example, a startup can postpone invoicing clients or accelerate vendor payments at the end of the tax year to move income or expenses to a more advantageous tax year. They can also take advantage of current deductions by prepaying expenses, such as rent or supplies.
Startups, on the other hand, should know the tax regulations and constraints for timing methods, and seek professional guidance if necessary.
Kyle Bassett, Chief Operating Officer, Altitude Control
Take Advantage of Qualified Small Business Stock (QSBS)
QSBS is a significant tax break for startup owners who qualify. It allows them to exclude up to 100% of the gain realized from selling their stock, as long as they have held the stock for over five years.
This can significantly reduce your tax liability and allow you to keep more of the money you make from selling your stock. However, there are some restrictions on who can qualify and the amount of gain that is excluded, so it's important to consult a tax professional to make sure you qualify.
Martin Seeley, CEO, Mattress Next Day
Keeping one's financial footprint intact through saving receipts is the best hack. For startups and small business owners, receipts are full of deductions that can be taken advantage of come tax time, so it is crucial not to simply throw them away without taking note. If storing physical receipts is out of the question, use digital storage through technology like apps.
Alexandre Robicquet, Co-founder and CEO, Crossing Minds
Seek Professional Advice
Tax laws can be complex, and regulations can change frequently. It's essential to seek professional advice from a tax advisor to ensure you are complying with tax laws and regulations and taking advantage of all available tax-saving opportunities.
Ahad Ali, CPA, Ahad&Co
Pay Attention to State and Local Taxes
I believe that startup leaders shouldn't forget about state and local taxes, which can vary a lot depending on where the business is located and what it does. Some states provide starting tax breaks, such as tax credits, exemptions, or grants, whereas others have high tax rates or rigorous compliance requirements.
To understand their state and local tax obligations and opportunities, startups should speak with a tax professional.
Gerrid Smith, Communications Manager, Property Tax Loan Pros
Keep Current With Tax Regulations
Tax regulations change often, and entrepreneurs must stay up-to-date to take advantage of all possible tax breaks. Startups can collaborate with a tax professional to stay on top of their tax obligations and use all tax breaks. Additionally, startups should plan for any future tax law changes that may affect their business.
Adam Garcia, CEO, The Stock Dork
Use the R&D Tax Credit to Fuel Your Startup's Growth
The Research and Development (R&D) Tax Credit is one of my favorite tax strategies for businesses, and I'm happy to share it with you. As a FinTech industry specialist, I know that technology improvement and innovation are essential for businesses to stay competitive. I, therefore, made it a top goal to benefit from the R&D Tax Credit, which rewards businesses for making these investments.
When we at Compare Banks created our own algorithms and data analytics tools, we could claim the R&D Tax Credit. As a result, we could reinvest our savings in expanding our company and dominating the market.
Startups can save up to 20% on their qualified R&D expenses, such as employee salaries, supplies, and contract research, by utilizing the R&D Tax Credit. Startups may receive a substantial capital inflow as a result, enabling them to make investments in expansion and innovation.
Percy Grunwald, Co-founder, Compare Banks
Identify Savings Through Employee Fringe Benefits
Startup leaders must identify tax hacks that can benefit their company. One uncommon way that startups can save money is through employee fringe benefits.
For instance, employers are allowed to provide certain types of transportation benefits or other expenses, such as meals and entertainment to employees tax-free, up to a certain allocated amount. This effectively reduces income taxes for the company, while also motivating its employees with appropriate financial rewards—which every startup needs!
Julia Kelly, Managing Partner, Rigits