Hey everyone, it’s me, Bette Hochberger, CPA, CGMA. Launching a startup is an exhilarating journey, especially when you’ve secured funding to bring your vision to life. However, with great funding comes great responsibility—especially when it comes to taxes. Without the right strategies, tax liabilities can eat into your hard-earned funding. But don’t worry! With some smart planning, you can maximize your resources while minimizing tax stress. Here are some practical tax strategies for funded startups to keep more of your money working for you.
Leverage Startup Tax Deductions
The U.S. tax code is pretty friendly to startups, so take full advantage of it! Startups can deduct up to $5,000 in initial startup costs and another $5,000 in organizational expenses in the year they launch. If your startup expenses exceed these limits, the remaining costs can be amortized over the next 15 years.
Examples of deductible expenses include:
- Market research
- Legal fees for setting up your business structure
- Advertising costs
- Salaries for employees or contractors
Tracking these expenses meticulously will ensure you don’t leave any money on the table.
Choose the Right Business Structure
The business structure you choose—LLC, S-Corp, or C-Corp—has a huge impact on your tax liabilities. Many funded startups opt for a C-Corp, especially if they plan to attract venture capital. While C-Corps face double taxation (on corporate profits and shareholder dividends), they also allow startups to benefit from the Qualified Small Business Stock (QSBS) exemption.
Under the QSBS rule, if you hold your shares for at least five years, you can exclude up to $10 million or 10 times the adjusted basis of your investment from capital gains taxes. This exemption can save you substantial dollars when your startup takes off!
Take Advantage of R&D Tax Credits
If your startup is working on innovative products, services, or technologies, you might qualify for the Research & Development (R&D) Tax Credit. This credit rewards companies for investing in innovation, and it can be a game-changer for funded startups. The best part? Startups with less than $5 million in revenue and operating for fewer than five years can use this credit to offset up to $250,000 in payroll taxes annually.
Work with a tax professional to determine if your activities meet the criteria for this credit—it’s a big win for companies in technology, biotech, and other R&D-heavy industries.
Plan for State and Local Taxes
Many startups focus on federal tax strategies but forget about state and local taxes. Depending on where your startup is based, you may face:
- State income taxes
- Franchise taxes
- Sales and use taxes
Consider relocating to a tax-friendly state or setting up operations in areas that offer tax incentives for startups. Some states and cities provide credits, exemptions, or grants to encourage business growth—research these programs and take advantage of them!
Work with a Tax Professional
Finally, one of the smartest moves you can make as a funded startup is to partner with a tax advisor who understands the unique challenges of startups. They’ll help you identify deductions, credits, and strategies tailored to your business, ensuring you stay compliant while optimizing your tax savings.
Taxes don’t have to be a burden for funded startups. By implementing these strategies—leveraging deductions, selecting the right structure, taking advantage of credits, and seeking expert advice—you can minimize tax liabilities and keep more of your funding focused on growth.
Remember, every dollar saved in taxes is a dollar you can reinvest in your startup’s success. Schedule a meeting with us and start your tax planning today!
