VC and other funded startups have unique challenges that aren’t seen in other businesses. The VC or other Institutional Investors will expect you to provide proper financials for their analysis and review, far in excess of what a small business at similar levels of revenue growth would expect. Additionally, you have challenges with stock options and convertible debt instruments, which have made startup accounting a more specialized niche. Bette’s first startup accounting gig was right out of MIT for an MIT Startup, and she has worked with technology and startup companies ever since. As the founder of a startup CPA firm, Bette has volunteered as a mentor at Incubate Miami, one of the first attempts at building south Florida’s startup scene. We handle the accounting and tax needs of funded startups, making sure that the options are properly accounted for. If you involve us early while the lawyers are drafting the agreements, we can make sure that all your business and tax issues are addressed in your legal paperwork, issues that may not be fixable if not addressed early.
Increasing Research and Development Tax Credit
Congress has created tax credits for companies that conduct R&D, and their definition of R&D is broader than you may think it is. By properly documenting things like software development or initial product creation, we can maximize the tax credits. Even if your startup does not expect profits for many years, those tax credits provide a tax shield that is a company asset, making you more valuable in an exit. More recent legislation allows for R&D credits to offset payroll taxes, allowing startups to cash in on those credits immediately.
Special Issues When a Founder Is Foreign
If you have foreign ownership in your start-up, you may have unique reporting needs. For example, failing to properly file Form 5472, if required, can end up with a $25,000 penalty, which is absurdly large for not filing one form. Additionally, the need to do Federal Withholding on payments to foreign owners may depend on the specifics of the tax treaty with the owner’s country, requiring us to review the documents and establish a policy. While we may need a tax attorney for particularly difficult cases, many of these situations are routine for our firm but would be virtually unknown to a neighborhood tax firm. If you have foreign owners, please engage us as quickly as possible so we can work with your business attorneys during the business formation (or soon thereafter) phase, so we can ensure compliance with all requirements, and hopefully guide you in the most advantageous structure possible.
Tax Elections for Founders and Employees
Most entrepreneurs know vaguely that stock options are income, but income in the future so therefore ignore it. However, if setup properly, we can massively reduce your future tax burden very inexpensively at this time. The tax code allows you to either be taxed on sale or on receipt, as well as let you set your holding dates despite different vesting schedules. For later round employees, a poorly chosen election can result in a massive tax bill on a speculative option. For founders and early round employees, a poorly chosen election may result in a massive tax bill on exit. The difference between regular income rates (as high as 37%) and long term capital gains (capped at 20%) can be substantial for founders who may be looking at a multi-million dollar payday in the future. In high tax states like Massachusetts, California, and New York, the consequences can be even more severe. We have extensive experience guiding founders in their stock option tax election, helping them make the right decision and filing the relatively obscure paperwork with the IRS. Many startup founders, used to doing things themselves with Turbotax, may find that they owe millions of dollars more by failing to properly document this process.
A Startup CPA firm that understands Stock Option Issues are complex
While your tax treatment ultimately comes down to IRS paperwork, which paper to file is somethings that a good startup CPA can help you with. The IRS has information on Stock Options, but the rules governing statutory stock options and nonstatutory stock options can be complicated. We’ll meet with the founders and the business attorney to help you structure your paperwork to minimize the tax burden from the stock options.
Why Profitability Is an Important Goal, Even for Startups
Startups may be expected to lose money for years, with an anticipated burn rate. However, there is “good burn” where you are developing assets to produce future income, and “bad burn” where your poor controls result in losing money without an expected ROI (Return on Investment). As a startup-centric CPA firm, we understand the difference, which may not be apparent to your neighborhood CPA that specializes in W-2 employees and local businesses. We can work with you to implement profitability processes via Profit First so that your actual revenue generating projects produce gross profits, even if the company is generating losses. This will help contain your burn rate, and make your pro forma income statements look better, helping with valuations for future funding or exits.