6 Tax Issues For Business Startups

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6 Tax Issues For Business Startups

Are you looking to get a start-up idea off the ground? While peer groups can help you level up your business and explode your growth, there are some fundamental things you need to get right before this. You need to make sure you aren’t messing up your taxes and putting your company at risk of fines. It’s not uncommon for beginner entrepreneurs to be confronted with crucial tax issues when forming a startup. However, if they’re attentive, founders can ensure they avoid these common tax problems. Here are 6 common tax issues that are often overlooked. 6 tax issues for business startups.

#1. Choosing the Appropriate Business Entity

The creators of a startup company; must decide whether they will organise their company as a limited liability company (also known as LLC) or a corporation. 

A limited liability company (LLC) is not a separate tax entity like a corporation; instead, it is like a partnership or sole proprietorship. All of the profits and losses of the LLC; pass through the business to the LLC owners who report this information on their personal tax returns.

If the company decides to establish itself as a corporation rather than an LLC; the founders must then decide whether to have it taxed as an S Corporation or a C Corporation. The major difference between the two; is that a C Corporation is taxed at the corporate level, and also at the personal income tax level; when dividends are made to the shareholders.

In contrast; an S Corporation is not taxed at the corporate level, and the shareholders are only taxed at the individual level.

#2. Forgetting to Pay Payroll Taxes

Startups with payroll-related tax issues will inevitably look at paying steep fines. 

Consciously not paying or filing taxes related to the payroll is a federal offense. The owner of multiple startup companies such as Maverick, explains that “this can be avoided with proper financial management and record-keeping. Startups can avoid this common tax problem by paying their state and federal payroll taxes in a timely manner. Paying within three days of issuing payroll checks can help avoid major problems down the line.” 

#3. Deductions for Home Office Expenses

Many small companies attempt to deduct home office, phone, and internet expenses for tax purposes. However, businesses may only do this if their home office, phone, and internet expenses they are trying to claim; are used solely for business purposes. Although, depending on your state, this will change greatly. 

For example, in Australia, officials of the Australian Taxation Office (ATO)  state:

“If your home is your principal workplace with a dedicated work area, you can claim running expenses, work-related phone and internet expenses, the decline in value of a computer (work-related portion), the decline in value of office equipment, and occupancy expenses. If your home is not your principal workplace but has a dedicated work area; you can claim all of the same expenses as if your home was your principal workplace, except occupancy expenses. Furthermore, if you work at home but have no dedicated work area, you can only claim work-related phone and internet expenses, the decline in value of a computer (work-related portion), and the decline in value of office equipment. You cannot claim running or occupancy expenses.”

#4. Decide Between Employees or Independent Contractors 

It is critical for tax purposes; that a business correctly decides whether individuals providing services to their startup; are employees or independent contractors. 

If a startup company has significant control over a worker; the worker should be classified as an employee, not an independent contractor. Penalties and charges may apply to businesses that don’t correctly classify a worker. 

Business owner, Daniel Halse, suggests the following insightful solution, “Once you’ve established whether to incorporate employees or contractors, start putting people first. Take care of employees and contractors and give them the benefits they deserve. This is the only way to have a long-term and secure employment relationship.”

#5. Correctly Documenting All Income and Deductible Expenses

Every startup company should employ a record-keeping system that accurately documents all income and deductible expenses. Companies should keep records including financial records such as; receipts and invoices for goods and services they buy and sell and bank statements, legal records such as business registration documents, employee records such as staff rosters, attendance and pay records, and policy and procedure records such as workplace health and safety plans, to avoid tax evasion. 

The value of this is reinforced by the business owner, Matt Parker, who says that “properly documenting all relevant expenses is the most effective way to ensure no excess debt is incurred. When debt can impact future financial opportunities, we recommend making correct documentation a priority.”

#6. Understand Qualified Small Business Stock

Qualified Small Business Stock is a tax benefit whose purpose is to encourage long-term investment in small businesses.

Richard Harrison, of All Business, explains “for the stock of a startup to be qualified as QSBS (or Qualified Small Business Stock), the stock must be issued by a C Corporation, and will only qualify if the C Corporation is a ‘qualified small business’ at the time of issuance. This requires that the corporation have less than 50 million dollars of gross assets before and after the stock issuance.”

Final Thoughts

In the end, the only way to avoid stress is to get your tax right the first time around.

Startups often make the mistake of not doing enough research and choosing the wrong structure for their company. As a result, they have to redo everything which takes time, money, and energy.

To avoid this tax issue, startups should do their research and/or invest in expert advice. For starters, apply everything you’ve learned in this article.

Sarah Miller

Sarah writes about her personal journey, learning, life optimisation and her passions. For more thoughts and ideas, you can connect with Sarah on Twitter

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