For founders, startup taxation is one of the biggest sources of stress. Many can relate if you’re a new business owner who can’t afford an accountant but still has to deal with the dreaded task of filing your company’s taxes. Unfortunately, you can’t avoid dealing with this issue. Due to the enormous yearly cost of $441 billion and the severe penalties that result from noncompliance, your startup company cannot afford to ignore startup taxation obligations. That’s why it’s important to look for solutions to make it easy. Moreover, instead of paying so much in taxes, why not locate some fantastic tax-saving tips? To help you out, we’ve compiled 10 great tax-saving tips for startups in this article along with some other important things you need to know about startup taxation.
You’ve taken on an enormous responsibility by becoming a startup company owner. There’s a lot on your plate, from writing a business strategy to finding and employing staff. It’s important to consider startup taxation even while you juggle other starting duties. To stay on the right side of the law, avoid fines, and save costs, there are a few things to bear in mind about startup taxation from the outset of a business’s existence. We’ll give you some amazing tax-saving tips once you learn a few essential points regarding startup taxation.
What is startup taxation?
A startup is a new business that is just getting off the ground. One or more entrepreneurs create a startup when they see an opportunity to fill a market need. These businesses often have significant startup expenses and little initial revenues. However, like any other operating business, regardless of the size, they are required to pay taxes to Internal Revenue Service. Startup taxation is the taxes that a startup needs to pay. This can include, Federal and State income tax, franchise tax, and other kinds of taxes.
Do startups need to file a tax return?
The United States Internal Revenue Service (IRS) requires all businesses, including seed-stage enterprises, to submit tax returns annually. This includes all businesses that received an EIN letter from the US government. Even though the letter didn’t come until December of 2022, businesses still need to submit their returns for that year.
The IRS requires you to register whenever your firm has any activity, even if it’s in its infancy, made a loss, or made zero profits. There are two reasons why it’s important for a company to file:
- The government demands it
- You may someday get a refund for the losses you took.
In light of the existing tax rules, companies may use their historical losses to reduce future tax liabilities. Therefore, if you suffered a loss in 2021 and then started making money again, the losses may be used to reduce or eliminate your tax bill for that year.
What are tax return due dates for startups?
Depending on how you set up your business, you may have some leeway regarding when you have to prepare for your 2023 business taxes. The IRS may charge you 5% of any taxes you owe every month if you fail to pay by the due date. Penalties begin at $210 or 100% of taxes outstanding if they aren’t paid within 60 days of the due date.
Here are the dates to remember while submitting your company’s 2023 federal income tax –
- January 31, 2023 – Form 1099-MISC for 2022 sent to recipients, Form 1099-NEC for 2022 sent to IRS and contractors, and Form 3921 for 2022 sent to employees
- February 28, 2023 – Form 1099-MISC filed via paper to IRS and Formed 3921 filed via paper to IRS for 2022
- March 1 – Delaware (DE) Annual Franchise Tax Report (2022), along with minimum payment
- March 15 – S Corp/LLC Income Tax Return/Extension (2022)
- March 31 – Forms 1099-MISC, 3921, 3922, and W-2G (2022) filed electronically
- April 15 – CA Minimum Franchise Tax payment (2023)
- April 18 – Federal/State Q1 Income Tax payment (2023)
- April 18 – C Corp/Individual Income Tax Return/Extension (2022)
- June 1: DE Franchise Tax Estimated Payment (2023) (if applicable, 40%)
- June 15: Federal/State Q2 Income Tax payment (2023)
- September 1 – DE Franchise Tax estimated payment (2023) (if applicable, 20%)
- September 15 – Federal/State Q3 Income Tax payment (2023)
- September 15 – If extended, S Corp/LLC Income Tax Return (2022)
- October 16 – If extended, C Corp/Individual Income Tax return (2022)
- December 1 – DE Franchise Tax estimated payment (2023) (if applicable, 20%)
- December 15 – Federal/State Q4 Income Tax payment (2023)
Form startups need to fill out tax returns
Ensure you have all the necessary tax forms before collecting your financial documents. If you file the improper paperwork with the Internal Revenue Service, your startup may lose out on the tax refunds to which it is entitled. Therefore, here’s the list of important federal U.S. startup tax return forms you need to file depending on the company structure of your startup:
- For C corporation – The income, profits, losses, deductions, and credits are reported on Form 1120, which also calculates the corporation’s income tax due.
- For S corporation – The income, profits, losses, credits, deductions, and other domestic company or business details for any tax year for which an S-corporation election was made are reported on Form 1120S. Multi-member LLCs use Schedule K-1 to report the profits, losses, and dividend payouts for the S-corporation shareholders of a company or financial organization.
- For Partnership firms or LLC – The income, profits, credits, losses, deductions, and other information related to the operation of a partnership are reported on Form 1065. Schedule K-1 is the same document that LLCs and partnerships provide their partners to complete before submitting Form 1065.
Tax saving tips for startups
We’ve created a list of the best tax-saving tips that might lighten your startup’s tax load. It will facilitate your company’s expansion without adding the unnecessary stress of taxation. Let’s jump right in.
- Understand tax obligation – Finding out how much tax is owed is the first order of using all tax-saving tips. For instance, earnings from a sole proprietorship are subject to income tax. Those who own corporations must pay a separate tax on corporate income. Payroll, sales, and property taxes are only a few of the several potential sources of revenue collection. Once you’ve determined which taxes you’re responsible for, you’ll need to know the applicable rates and when they’re due.
- Have regular updates on tax laws – Keeping up with the latest developments can help you get all the tax breaks for which you are eligible. Since tax law is subject to frequent revision, keeping abreast of developments is essential. A tax law newsletter subscription or frequent visits to the IRS website will serve this purpose. You may maximize your refund with our tax saving tips by claiming every credit and deduction you are legally eligible for by keeping yourself up-to-date on tax law changes.
- Keep all records and receipts – All businesses, but particularly new ones, need to have reliable record-keeping systems in place to use our tax-saving tips. Maintaining thorough financial records is essential. When it’s time to submit your taxes, you may use this information. All business-related invoices and receipts should be filed away. You might also benefit from using accounting software to monitor your financial standing. This will guarantee you get all the tax breaks you are eligible for.
- Hire family members – If any of your relatives can assist you with your firm’s operations, do not hesitate to put them to work for you now while you are just getting started. Because of the additional tax advantages, this is one of the greatest tax-saving tips you can put into practice. The money you pay them may be written off as a business expense. Income taxes will be lowered, and other taxes, such as FUTA and FICA, may be avoided.
- Keep payroll straight – Being familiar with payroll is essential due to the many tax forms and regularly scheduled payments associated with employing personnel. Many new company owners seek the help of an accountant to ensure that all required forms are filled out correctly, and taxes are paid on time. Each employee must fill out federal withholding forms (W-4), and employers must contribute at least as much to their workers’ Social Security and Medicare accounts.
- Keep your account separate – It is important to separate your company finances from your finances by opening a separate corporate checking and savings account. A company’s bank account should also never be utilized for anything other than legitimate commercial transactions. The owner, shareholders, or members may be liable for startup taxation bills if personal and corporate resources are mixed.
- Claim startup deduction on taxes – When completing your taxes, take advantage of every credit and deduction you are eligible for. The money you save during startup taxation may be substantial. Deductions might be standard or itemized. Regardless of your actual outlays, you can claim the standard deduction from your income. In contrast, itemized deductions let you write off certain costs incurred during the year.
- Hire professionals to file tax – Hiring a professional is an excellent choice if you are unsure of your company’s tax requirements or do not feel confident navigating startup taxation on your own. Consult a tax professional, such as an accountant or tax attorney, to assist you in understanding and adhering to tax regulations. Furthermore, they may assist you in claiming any tax credits or deductions to which your company is entitled. Ensure the accountant you employ is familiar with startups and up-to-date on tax regulations. You may Get free advice from other companies by asking for references.
- File the tax return on time – Understanding the tax consequences of your company is critical when you start, as is making sure that you pay your taxes on time. You should begin by filing your startup tax return on time. You may have to pay late filing fees and penalties if you don’t turn in your taxes on time. Be familiar with your startup taxation filing requirements and submit your returns on time. It is important to remember to make timely payments of the startup taxation after filing. Interest and penalties may be imposed for late tax payments. Keep in mind the due dates for payments and plan your finances properly.
- Get tax filing software – Without a doubt, one of the finest investments you can make as a new business is in tax preparation software. You may not be able to afford professional tax advice, accounting services, or even a bookkeeper. This implies that tax preparation software will be useful and effective even for the most astute business owners. You should conduct some investigating to locate the greatest software that fits your needs. Essentially, it will assist you in completing your startup tax returns online and ensure the largest possible refund and 100% correctness.
- Donate unused inventory – Donating unused supplies and machinery is preferable to selling them off when it comes to saving on startup taxation. Taking this action will allow you to take advantage of tax benefits. Donations of any kind, real estate, machinery, money, or supplies, are tax-deductible.
- Overpay your tax estimates – One of the greatest tax-saving tips is to pay more than you owe. Although it goes against common sense, this is a fantastic method for avoiding tax penalties. Having previously worked in the corporate world, most company founders are familiar with W-2s. In turn, this causes people to overlook the need for quarterly tax payments while making their budgets. The interest and penalties they incur, before they recognize their error, may be crippling, and for some companies, the cycle never ends.
Need help with your tax return filing?
Startup taxation can be challenging while you’re busy handling several other operational things. Hiring professional services like Eqvista can significantly take the load off of your shoulders and ensure the accuracy and compliance demanded by the IRS. Get in touch with experts at Eqvista to learn about our business filing services.