Getting ready for tax season isn’t most people’s idea of fun. Here at ShayCPA, we think that’s most likely because it often comes with unexpected, unwelcome surprises. As a result, a lot of people feel tension at the mere mention of the word “taxes.” But it doesn’t have to be that way.
With years of experience supporting tech startups in their tax preparation, Akshay Shrimanker, our Founder and CEO, has some tips that can make the process less painful for you. If you want to make filing your 2021 taxes a breeze, put these best practices to work.
Leverage an accounting system
We can’t say this enough: a good accounting system can make all of the difference. Today’s automated, smart tools can track transactions, help with categorization, compile reports, and more. Ultimately, they can save you hours and hours — not to mention countless headaches.
Akshay recommends solutions like QuickBooks Online and Xero to keep all of your startup’s financials organized. QuickBooks is a personal favorite of his because it’s so easy to set up and, once established, will sync your bank and credit card transactions daily.
Don’t stop there, though. He recommends sitting down frequently (e.g., weekly) to categorize all of those synced transactions. Doing this periodically will make it a lot easier to get everything organized during tax time.
Setup an easy way to organize documents
While accounting software can do a lot of the legwork of transaction capturing and organization for you, it probably can’t store all of the documents you might need at tax time. Fortunately, Akshay has an easy way to hack this.
He recommends setting up an email address like [email protected] Then, you can have all of your bills, invoices, and other tax-relevant documents (like receipts for quarterly estimated tax payments) forwarded to that address.
When tax crunch time rolls around, you’ll have a single place to look for everything you need.
Fine-tune your expense recording
Let’s talk about your expense recognition, or how and when expenses get recorded. Obviously, your accounting solution should help there.
But as you do your regular categorization work, make sure you’re flagging things correctly and putting them into the right buckets.
As an example, let’s say you pay for rent or insurance upfront. Don’t just toss them into the rent or insurance category and forget about them. Instead, generally accepted accounting principles (GAAP) dictate that you should mark them as a prepaid expense, then amortize the expense over the appropriate length of time. Basically, you want to apply the GAAP of periodicity, which says that everything gets recorded in the appropriate accounting period.
Let’s go back to insurance as an example. If you pay an annual premium, mark it as a prepaid expense. Then, divide it by twelve and apply that amount to each month’s expenses throughout the relevant year.
This might seem like an unnecessary extra step, but investors want to see startups use GAAP-based financials. Getting in the habit of following this method now can set you up for success as you scale.
Another area to consider for your expense recording is hosting (e.g., Amazon Web Services [AWS]). Again, this might seem like it should get categorized as a software expense, but it’s actually something you should record as a “cost of services sold.” That way, you’ll consider it when calculating your gross profit.
Double-check your revenue tracking
In the same way, you need to finesse how you track money going out; your revenue recognition also deserves some attention.
Akshay generally recommends using an accrual basis of accounting rather than a cash basis. This means you record revenue when you earn it (e.g., when you send out an invoice) instead of when you receive it (e.g., when the invoice is paid). Accrual-based revenue recognition lets you bring accounts receivable and payable into the picture when you’re looking at the finances of your tech company.
That’s particularly important for SAAS-based companies, especially if you charge your clients upfront for subscriptions.
Akshay’s main point here is that recording revenue in the incorrect period can mess up both your company’s financials and your taxes. To avoid that, develop a revenue recognition schedule. For example, you might want to check that revenue is correctly recorded on an accrual basis during your weekly expense categorization sitdown.
Straighten out your COVID relief
If your tech company received a Paycheck Protection Program (PPP) loan or some other kind of Economic Injury Disaster grant or loan (EIDL), you need to record them correctly, or you could face fallout on your taxes.
Specifically, record your PPP as a loan on your balance sheet until you get the notification of forgiveness from the Small Business Administration (SBA) via your bank.
Mark your EIDL as “other income — EIDL grant” on your profit and loss statement. Consider bolding or highlighting it, too. The key here is to call it out, so it doesn’t get recorded as taxable income.
Sit down with a CPA who gets it.
The taxes for a tech startup come with a lot of nuances, from various rounds of investment to R&D that you can potentially claim as a tax credit. So it’s worth hunting down a CPA who has experience in the startup field working with corporations. They can help you navigate the tax ramifications of things like issuing stock and recording convertible debt.
Sitting down with just any CPA can mean two things: more time and more money. If the accounting professional doesn’t understand the startup world, you’ll need to spend more time with them to help them wrap their heads around your unique situation.
More importantly, though, an under-experienced accountant can lead to costly mistakes. As you scale your tech company, every dollar counts. So don’t let yourself pay more than is absolutely necessary to the IRS and your state tax agency.
With tax time right around the corner, Akshay and our team hope these best practices help you streamline your tax prep. If you want to talk with Akshay or another one of our startup-specialized accountants, don’t hesitate to contact us.