Saving Your Startup from Becoming a Tax Horror Story

It’s not typical for startup founders to focus on taxes. After all, valuable attention away from your core strategy can be costly. For this very reason, many startups place their tax strategy at the bottom of the priority list (some also hope they’ll get acquired before tax complications arise).

That is a mistake, and the underlying reason behind startup tax horror stories.

Just ask Jordan Markuson, who believed that everything was simple as he made cash by selling and buying online domains. The IRS decided to knock at his door and peek into his accounts. At first everything went fine, but then Markuson’s auditor caught him inappropriately expensing home items that were dual-use.

The outcome? Markuson owned a significant amount to the government. The amount due put a dent in his company’s cash flow and in the end, sunk his startup.

So the key takeaway from this story is — and it can’t be stressed enough — that you must keep your tax strategy right to keep liabilities/penalties and any unforeseen dues at bay. Here are some measures you can take to pass through the murky water:

• Have a Partner By Your Side

The ever-changing tax landscape and modifications to startup business structure means you need to be on the hamster wheel constantly. But it can be difficult for companies when they’re focused on more strategic business objectives, such as growth and scale. Additionally, ERP business rules must change constantly to accommodate new expectations, so it is difficult to keep up with all the tax requirements.

ADP Employment Tax & Compliance Services allows businesses to utilize expert knowledge in order to comply with the rules of different tax jurisdictions, and do all that while freeing up resources for strategic endeavors. By having tax professionals on your side, you can better manage tax compliance. Updates can be implemented as soon as they’re required because professionals are apt at designing processes that follow all proposed tax changes.

• Select the Right Entity

The legal structure of your startup affects your rate of taxation, so it’s important to select the right entity when forming the company (it’s also possible to change the entity of an existing company). For instance, creating an LLC, S Corporation or C corporation could help lower your tax bill. If you operate two businesses, avoid trouble by maintaining separate accounts for both.

Also, if your startup is based in a region like Europe, consider registering for VAT. Don’t wait for the turnover to reach the threshold to register; VAT registration can be done on a voluntary basis. Weigh the benefits of VAT against the requirements of keeping records and submitting returns on a frequent basis.

• Keep Personal & Business Expenses Separate

Remember how Markuson lost his venture? Startup founders spend so much time in their companies that they sometimes mix up business and personal expenses. This could lead to major tax issues come filing time, and may also lead to loss of company status or legal infractions. Therefore, maintenance of receipts along with good records is vital.

You can also look into amortization, but be careful as the IRS doesn’t allow for changes once the amortization period is set. If costs are amortized rather than outright deducted, it may benefit you in the long run. This can be an option if your startup doesn’t earn much in the first year but is expected to profit in the future.