Does thinking about filing your taxes put some tension on your shoulders? If so, it’s probably because you’ve had a less-than-ideal filing experience in the past. And in most cases, those unwelcome filing instances come from surprises.
Or you might be feeling stressed because you don’t know what to expect.
Either way, we can help. By giving you a heads-up in some key areas, we can make filing your tech company’s 2022 taxes gets a whole lot easier — and less stressful.
For that, we tapped an expert. Akshay Shrimanker, our Founder and CEO, has years of experience helping companies file as seamlessly as possible. He teed up a few tips to help you avoid unwelcome surprises as you navigate your 2022 tech company tax filings.
Know how Section 174 changes R&D expenses
Historically, you could take the deduction for R&D (which the IRS called R&E [research and experimentation]) expenses in the year you spent the money. But the Tax Cuts and Job Act of 2017 changes things from 2022 on — and not in a favorable way.
Now, per amendments to Section 174 of the Internal Revenue Code, you have to amortize the deduction over five years if you’re based in the U.S. and over 15 years if you’re a foreign entity. The ability to take the deduction in the year spent went away on December 31, 2021, so as you’re doing your 2022 taxes, this needs to come into play.
Knowing about this might also impact how you spend in 2023 and beyond. Because you can’t take the deduction in the year you spend the money, you might scale back your R&D expenses.
Navigating this change can get a little complicated, but we can help, both with figuring out how it impacts your 2022 taxes and with your 2023 planning.
Dial in your accounting system
You don’t need to sink a ton of hours into your accounting. Technology can — and should — be your ally here. There are plenty of smart tools that can track money coming in and out, automatically categorize transactions, and create the reports you need with just a few clicks. The right accounting system can save you time, money, and hassle.
If you don’t already have a system in place, Akshay recommends two in particular: QuickBooks Online and Xero. Our team loves these solutions for two reasons. First, they’re easy to set up. And once they’re up and running, they sync all of your credit card and bank transactions in real time.
While today’s best accounting systems are fairly easy to establish, that doesn’t mean you should set it and forget it. Akshay also recommends sitting down on a weekly basis to make sure your synced transactions are getting properly categorized. That way, when it’s time to file your taxes, everything is organized and ready to go.
Spread things out when applicable
To make filing your taxes — and tracking and analyzing your startup’s financials — easier, use generally accepted accounting principles (GAAP). This means that you don’t just record expenses as you pay them. Instead, you think about what that money means.
Take your insurance coverage as an example. You might pay an annual premium each January. Instead of lumping that whole expense into January, though, you should amortize it over the year (i.e., divide it by 12 and apply that amount to each month’s expenses). This way, your books more accurately reflect what’s actually happening at your business.
You’ll be using the GAAP of periodicity, which says that everything gets recorded in the appropriate accounting period. And this doesn’t just help with analyzing your company’s financial standing and filing your taxes. Investors like companies that use GAAP-based accounting.
A lot of startups pay for hosting services like Amazon Web Services (AWS). You might assume this should get categorized as a software expense. Actually, though, you should tag it as a “cost of services sold.”
That’s because this expense impacts your gross profit. Categorizing it as a “cost of services sold” expense means your accounting software will factor it in when calculating gross profit.
Create a dump bucket
Throughout the year, you probably get a ton of invoices, bills, receipts, and other documentation that you think your accountant might want. To keep track of all of this without cluttering up your own inbox, Akshay recommends creating a separate email address like [email protected].
That way, you can simply forward things along to that email address. And at tax time, you’ll have a one-stop shop to find what you need.
Go accrual-based, not cash-based
As a general rule, Akshay recommends using an accrual basis of accounting instead of a cash basis.
What’s the difference? With accrual-based accounting, you record revenue when you send out the invoice instead of when it’s paid. This way, you can bring A/P and A/R into the picture when you’re looking at your startup’s financials.
This gets extra important if you’re a SaaS company that charges clients upfront for subscriptions.
Enlist the right help
Taxes can get complicated for any company, but they can be particularly tricky for tech startups. You have nuances that other companies don’t, like factoring in multiple rounds of investment, issuing stock, and recording convertible debt. Plus, there’s the aforementioned R&E tax credit and the changes from the amendment to Section 174, which adds a new layer of complexity for 2022.
Long story short, not all accountants have expertise in the type of tax preparation your tech startup needs. And if you choose someone who doesn’t really understand your world, preparing your taxes takes them longer, which directly translates into you spending more money. Plus, you risk them making a mistake. That could mean you pay more than you need to in taxes or, worse yet, get fined, audited, or both.
To find someone who will be able to simplify things for you and keep costs down, look for a CPA who has experience working with startup corporations.
You don’t have to look far. Akshay and our ShayCPA team have extensive expertise in helping startup tech corporations nail their taxes. To make filing for 2022 as easy and painless as possible, contact us.