Founders 2020 has been a tumultuous year and as I was writing this blog post I realized that there are so many aspects that founders need to think about this year versus prior years that the year-end tax planning actually needs to start right now, instead of towards the end of the year!
- Do you have any convertible note conversions? If so collect W9’s from your investors as you will need to issue 1099-INT statements to them. Getting your investors prepared for this is important especially Angel investors who will need to report Interest income that they haven’t actually constructively received as cash.
- Did you pay any contractors outside of the payroll system (Gusto, Justworks etc) examples would be law firms, and wire transfers etc – Collect W9’s from these individuals/companies as they will need to be issued 1099-NEC forms which are new for 2020.
- Research and Development Costs: An R&D credit is available to early-stage which can be worth up to 10% of qualified expenses and can have immediate cash-benefit by offsetting payroll taxes. Now is a great time to prepare Research and Development study so you can make sure you have the documentation needed to qualify. Please see our blog post here for more info on that.
- Expenses that were paid with PPP funds will be non-deductible for tax purposes so now is a great to make sure these are clearly identified as such in your Accounting system to make the preparation of your tax filings a smoother process. For more information on how to do this see here.
- Cares Act NOL Rules: Some startups (C-Corps) that have had profits in the past five years and paid taxes may be able to carry back losses from 2020 to prior years and get back money. This is an important analysis to do as it can be valuable for you tech company especially for those that may be running short on their runways. Added to this benefit the limitation of 80% of NOL’s generated from 2019 to be offset against taxable income has been removed.
- Nexus and Multi-State Allocation: Tech Companies have been for a long time a big proponent of distributed teams and Covid 19 has put that into overdrive as employees have spread far and wide across the US and Internationally as a result. This does however open up a can of worms as to residency issues and company nexus issues. Understanding where your employees are, and doing an analysis where you may have new offices, (even Co-working spaces that your employees may be using can trigger nexus) should be able to provide you with a risk assessment as to where you may have exposure. You will then need to understand your sales by state, analyze click-thru nexus rules, and discuss with your tax advisor and attorney to understand where you may have filing requirements.
- For some tech founders this year may be your last in operation and you if you are thinking about closing or selling your business there is a whole host considerations including taxes that need to be worked through. Contact your CPA and attorneys now as this year will be especially challenging with the sheer volume of businesses closing, and it may be best to get your ducks in a row now versus later this year or next tax filing season.