As the year wraps up, it’s time to start making that list and checking it twice. No, it’s not your holiday gift list. It’s your year-end tax planning to-dos.
Taking some time to get yourself sorted could mean thousands of dollars of savings between your startup’s income, payroll, sales, and foreign taxes. Here are six areas you should explore to set yourself up for your filings next year.
#1: Be aware of new 1099-K reporting rules
If you pay your contractors through a third-party tool like Stripe, Square, or PayPal, be aware that these payment networks now need to issue a 1099-K to you and the IRS if the gross amount is more than $600. This applies to the 2023 tax year and is a huge dip from the $20,000 reporting threshold in previous years.
If you paid contractors partially through a payment platform and partially in another way, be ready to separate the amounts out. You’ll need to exclude payments made through the platform when you 1099 that individual.
While we’re on the topic, take a moment to double-check that your Stripe, Square, PayPal, etc., is under your business’s federal tax ID number, not your personal social security number. If you don’t, you could get the aforementioned 1099-K directed toward you personally, not your company. And that can make your personal taxes a nightmare.
#2: Make a plan to maximize your R&D tax benefits
As a tech startup, you’re probably engaged in research that qualifies you for tax savings. Basically, the money your company spends to discover something new (e.g., to develop a new business component) can help you lower your tax bill. Here are two areas you should explore:
R&D tax credit
This federal tax credit can help companies reduce the tax burden by up to $50,000.
To get as much as possible here, you need to figure out what counts as a qualified research expense at your startup. Putting in the work to get that organized now can make it much easier to file Form 6765, Credit for Increasing Research Activities, when the time comes.
If you’re not sure what can count toward this credit, talk with our team. We specialize in helping startups get as much as possible here.
Sales tax exemption
In some states, when you buy tangible goods used for research and development, those purchases can be exempt from sales tax. New York, for example, exempts companies from sales tax on items like computers and lab equipment if you’re using the item predominantly for R&D.
If you plan to buy expensive assets in 2024 to support your company’s exploration of new or improved products, talk with us first. We can help you find out if you could get this exemption, helping your startup save a big chunk of money.
#3: Plan your estimated taxes
If your company is required to pay quarterly estimated taxes, now’s the time to start thinking about what those payments will look like in 2024. As you set your strategy and financial goals for the coming year, those potentially hefty quarterly payments need to be on your radar.
If you think your R&D tax credit should be big enough to nearly eliminate your tax burden and exempt you from the estimated tax requirement (which applies if you owe anything above $500), think again. Because of changes to Section 174, you now need to capitalize and amortize R&D expenditures over a period of at least five years. That means you’re getting less credit in any given year, which also means that you might be subject to estimated tax payment requirements in 2024.
#4: Apply for tax residency certificates if you plan to operate abroad
If you’re planning to operate in foreign countries in the coming year, add this to-do to your tax planning list now.
Before you start operating abroad, you’ll need to file Form 6166 to get a tax residency certificate. This documentation informs foreign tax authorities that you’re filing and paying taxes in the U.S. Without this proof that you’re already tax-compliant, you could be subject to mandatory foreign tax withholdings.
This unexpected expense often serves as a major roadblock when startups attempt to scale internationally. It can also lead to startups having to hold onto receivables for months as they wait for their tax residency certificate, eating into the runway they need as they try to grow.
As you can probably expect, the IRS isn’t overly quick about issuing these certificates. So get the process started now, before 2023 wraps up, and you’ll be in a much better position to move boldly into international operations in 2024.
#5: Loop employees in
As your company does its year-end tax planning, it can be helpful to tip off employees that they should be thinking about their own. Here are a few ways you may be able to guide them toward a smoother tax filing in 2024:
- Some employees may benefit from making a contribution to their retirement account as a way to reduce their tax liability this April.
- If they’ve exercised stock options in 2023, looking into the tax implications now can prevent employees from facing an unwelcome surprise this spring.
- If your company uses an FSA or HSA, there may be a use-it-or-lose-it provision that kicks in at the end of the year. Notifying employees helps them get their claims in on time.
If you work with retirement planners or financial advisors to administrate your employees’ benefits, ask if they would be willing to host a year-end tax planning session. This can be a great way to show your employees that you value them and want to set them up for financial success.
#6: Sit down with your CPA
This is an overview of some year-end tax considerations that generally apply to tech startups, but each company is unique. That includes your own. Sitting down with an experienced tax pro before the end of the year can help you identify potential tax savings — along with pitfalls you’ll want to avoid — while there’s still plenty of time to act on them.
To get some time scheduled with a CPA who’s knowledgeable about tech startup taxes, from the R&D credit to the new 1099-K requirements, contact us.