by Anjum Tunuli, chief tax officer at Early Growth Financial Services
Cutting your own hair can be a dangerous endeavor that whites many a knuckle. Sure, it saves money and it could end up looking good, but one sneeze, flinch, or cough could turn your once-beautiful ‘do into a literal head-scratcher.
Startup taxes, believe it or not, are the same way. Young companies that are low on funding and high on initiative will take a DIY approach, even at the risk of filing incomplete or erroneous returns. And as the Internal Revenue Service continues to wage war against fraud and identity theft, filing clean, complete returns is key — especially as your business scales.
Growth Leads to Complexity.
Filing taxes seems straightforward initially: There’s online software to keep founders from misplacing a figure. But it’s when startups begin to scale that challenging tax issues begin to arise.
Take sales tax, for instance. If you sell a product, the state where you’ve established nexus needs to be determined, as does whether sales tax applies to your product there. Each state regulates sales tax differently, so keeping track of regulations yourself can be challenging.
This process gets repeated when identifying “income tax” regulations in the various states where a startup operates. For instance, if your startup is in the Bay Area but you hire a New York engineer, that engineer may fall under New York’s filing requirements.
If your startup is eyeing international expansion early on, your tax compliance and planning needs, both home and abroad, immediately ratchet up. Mistakes in this area can result in severe penalties, including a $10,000 fine from the IRS for a missing foreign disclosure.
Then there’s the decision of whether to use cash-based or accrual-based taxes. There’s a chance your business’s success will force you to switch to accrual, which can be disastrous if you aren’t prepared.
Keeping these factors, as well as others, in mind when doing taxes in-house is key. One misfiled document here or miscalculation there can leave a startup’s books looking patchy.
Line Up Your Startup’s Taxes.
While filing taxes for a successful small business is undeniably intricate, there are ways to ease the yearly pain of tax preparation. Try the following to help your startup avoid a bad Tax Day:
1. Plan ahead.
Being proactive is always key when it comes to taxes. When you’re hiring a new employee out of state, for example, it’s best to check on potential filing issues in that state before bringing him aboard.
A failure to proactively investigate all considerations can cause you to miss important filing and payment dates, forget to file important documents, or be assessed hefty unplanned fines — all scenarios your startup likely wants to avoid.
2. Work with professionals.
Startups with multistate or international tax issues may find it in their best interests to work with tax professionals experienced in these areas. It’s almost impossible for a business owner to keep up with all the international and multistate tax regulations, mergers and acquisitions issues, and equity compensation happenings.
A misstep in any one of these areas can cost you tens of thousands of dollars, so bring in someone who knows his stuff. A seasoned tax professional can help startups avoid fines and keep the tax process simple.
3. Use your resources.
When it comes to taxes, questions will arise. It’s important to ask those questions up front instead of putting them off or making uninformed decisions without advice and hoping you made the right choices. If you’re working with tax professionals, be sure to ask them what you need to know before opening a foreign subsidiary.
They will be able to walk you through all the tax and accounting considerations, such as domestic and international filing requirements, how to account for intercompany transactions, and how to document transactions so tax authorities recognize them. If you’re still doing taxes on your own, these questions will be the type to bring to a mentor or an experienced member of your network.
When it comes to taxes, you really can’t be too careful. Well-meaning business owners often run into tax problems where they least expect them, and no startup wants to discover during a state audit that it failed to collect all appropriate sales tax or to get hit with heavy penalties for missing foreign disclosures.
In-house tax filing requires a startup to be proactive and precise. Be both, and your business’ tax filings will look even and smooth on all sides.
Anjum Tunuli is the chief tax officer at Early Growth Financial Services, a firm that addresses the lack of on-demand financial support available to startups. Read more tax advice from Anjum.
