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May 2020

technology company tax structure

3 Tips for Structuring Your New Technology Company

By | Startup | No Comments

“I wish I did that at the start.” It’s common to hear tech entrepreneurs uttering these words. They say this upon realizing that it’s difficult to either scale or downsize because they didn’t structure their businesses appropriately. In today’s corporate world, many new technology companies fade into oblivion as soon as they encounter their first tax or legal challenge. Those that manage to overcome these challenges face more significant challenges that even threaten their existence.

These challenges shouldn’t make your technology company a “lemonade stand.” Instead, you should use them to create a legacy of success and a long-lasting legacy. Restructuring your new technology company is the easiest way of countering most of the challenges that you will encounter. Here are three tips for restructuring your new technology company.

1. Establish a Family Trust

It’s common to see tech entrepreneurs holding their companies’ shares personally. As convenient as it is, this doesn’t allow you to split your income for taxation purposes. Likewise, it doesn’t protect your interest in the startup from any personal risk. Establishing a family trust acts as insurance for asset protection.

Often, tax returns and accounts for family trusts are only required when the trusts are receiving income by the sale of shares upon exit or via company dividends. Besides, establishing a family trust when you set up a tech company negates the need to face significant capital gains tax hurdles. Typically, such tax hurdles arise later on when you decide to move the company’s shares into a family trust.

2. Establish an Income Tax Partnership

When there are more than two businesses in a corporate group, tax consolidation is easy. The benefits of forming an income tax consolidation group with your subsidiaries or other companies include:

  • Intercompany transactions (including management and licensing fees) will be overlooked for tax purposes, thus lessening your tax burden
  • Tax obligations won’t arise when assets get transferred between the companies
  • The tax losses of one company will be offset against the profits of the other companies
  • The R&D tax incentive will be accessed at the group level. Therefore, it’s highly unlikely that eligible R&D tax expenditure will be missed.

The sooner you establish a tax consolidation group, the better. You’ll be able to access the aforementioned tax benefits as soon as possible, besides enjoying other numerous benefits of tax consolidation.

3. Set Up a Solo 401(k) for Your Company

A self-directed 401(k) is a unique retirement savings account that is only available to up and coming businesses. If you own or run a tech startup, you should take advantage of this account since it allows you to sock away up to $50,000 every year while qualifying for significant tax deductions.

Tax savings shouldn’t be your sole reason for setting up a solo 401(k) for your technology company. From a legal perspective, the money channeled to this account is secure since no one can touch it, including the IRS, bankruptcy, and those who may file lawsuits against your company.

What Are the Risks of Organizational Restructuring?

To effectively restructure your tech company and set it on the path of sustainable growth and profit, there are certain pitfalls that you should be aware of. These include:

  • Getting lost in the process
  • Establishing objectives and goals that don’t align with your company’s inherent goals
  • Confusion over team members’ roles after restructuring
  • Overcoming new tax hurdles that might emerge.

You can avoid these challenges by outsourcing the services of tax professionals at Incentax when restructuring your tech company. We use innovative data gathering tools to ensure that you get lucrative tax advantages as you restructure. If you are interested in maximizing your tax savings, contact us today.  

startup tax credits

The Use Of Tax Credits to Grow Your Startup Strategically

By | Startup, Tax Credits | No Comments

One of the greatest obstacles that startups face is the acquisition of enough capital to fund their business idea.  Financial management becomes an even more essential concept. Business ventures have various financial demands which can be a strain before the business gets to break even or become profitable. Therefore businesses have to minimize their costs and that includes taxes. For startups, how can a company use tax credits to grow their business strategically?

Startup Deductions

Did you know that you get to qualify for deductions in your first year of business? Whatever your startup costs, be it marketing or research, you are allowed a $5,000 deduction of organization costs and $5,000 of business costs if your startup total costs are $50,000 – $55,000.  However, if they are greater than $55,000, you do not qualify for these deductions.

Research and Development (R&D) Tax Credits

R&D tax credits are offered to enterprises involved in developing or designing prototypes and processes and products like software, or the improvement of the same to reduce their tax liability. These taxes are meant to encourage startups to invest in research and development. They can really help offset the expenses that startups incur in research and development.

This allows entrepreneurs to be less apprehensive about the risks of building their startup. Businesses with annual business receipts of less than $5,000,000 can claim a $250,000 credit for up to 5 years to offset against their FICA taxes. A business can choose to either claim the credit or offset against their social security taxes.

What are the requirements for claiming R&D tax credits?

You need business records to claim R&D tax credits. Companies must ensure that they document their research activities for them to make a claim. This means they have to indicate the expenses that were incurred in each activity.  It is also important to substantiate which employees were involved in the R&D activities through proper record keeping.

There are other strategies a company can use to ensure that they reduce their tax liability, including:

Retirement Contributions

Contribution to a retirement plan can earn you tax benefits. This includes personal contributions, and if you have employees IRA plans are ideal. There are also plans like SEP which allow you to make contributions on behalf of your employees discreetly.

Having a Home Office

If you are one of those who have started their business in a garage, did you know that having a home office can reduce your taxes? If you use your space as an office on a regular basis and it is exclusively for business you get to deduct $5 dollars per square foot of expenses for up to 300 square feet.

Business Registration

How have you registered your company? This is important because it will influence how you get to pay taxes. You get to save on taxes by registering your business as an S Corporation. Sole proprietors are the least taxed and C Corporations sometimes get to be double taxed.

Note: It is not advisable to lower your taxable income so that you do not get to pay taxes as it is counterproductive as you are trying to make profits. Instead, maximize your retirement income by getting an IRA savings plan for you and your employees.

Starting a business is not easy and it involves a lot of risks but that should not be a reason to give up on a good idea. With the right information, you can grow your business despite capital constraints. Contact us for consultation or for more information on how you can be tax-efficient and how you can strategically grow your business.

healthcare tax credits

Tax Credits and Deductions for Healthcare Companies

By | Tax Credits, Tax Incentives | No Comments

Governments use tax deductions and credits to reward businesses for providing employment opportunities, developing and enhancing solutions, improving the economy, and making the world a better place through activities like combating climate change. 

Tax credits and tax deductions are excellent opportunities for businesses to lower their tax liability significantly. As a company in the healthcare sector, you have a higher chance of qualifying for these tax savings. 

Here are some tax credits and deductions that healthcare companies are eligible for:

1. Research and Development Tax Credit

This type of tax credit, also known as R&D, was introduced by the United States government to encourage companies within the private sector to undertake innovation. For example, pharmaceutical firms enjoy this tax credit as an incentive to improve research for vaccines. 

Through the R&D tax credit, healthcare companies retain higher profits on their products resulting from research. This is possible given that the firms pay fewer taxes and thus spend less on research. 

The R & D tax credit is not limited to a particular industry. For a company to qualify for this credit, it needs to be involved in creating new products or systems, developing or enhancing software, or improving already existing products or systems. Thus, firms in agriculture, manufacturing, engineering, energy, textile, and healthcare, among many others, can benefit from it.  

Examples of areas where healthcare companies can qualify for the R&D tax credit include the development or enhancement of performance-related surveys for professionals in the mental health sector. Creating unique seating arrangements like an armchair that also serves as a wheelchair for those in care homes also calls for research and development. Introducing processes that help to remove contaminants from chemical compounds promotes respiratory health. Also, building prototypes for orthopedic instruments fall under research and development due to the complex medical components involved. 

State and federal credit rates can vary. For example, the federal R&D rates are 20%, while the California rate is 15%

2. Small Business Healthcare Tax Credit

Both established and small businesses can benefit from tax credits. The Affordable Care Act in the United States brought forth the small business tax credit. Firms that offer their workers health insurance are eligible for this tax credit. 

To qualify for the tax credit, your company needs to have a maximum of 25 full-time employees, pay each employee $55,000 a year or below, cater for half or more of their health insurance premiums and have insurance from the Small Business Health Options Program (SHOP) market. 

The Small Business Healthcare Tax credit can cover up to 50% of the health insurance premium payments for your employees. 

You should know that you cannot claim the credit two years in a row. 

3. Pass-Through Deductions

If you are a sole proprietor, are in a partnership, S corporation, limited liability partnership, or any form of business that subjects you to a pass-through, you can get a deduction. A pass-through deduction can lower the taxes on your net income by 20%. 

Companies that fall under the category of prohibited specified trade do not qualify for pass-through deductions unless they fulfill certain conditions. Examples of this include clinical entities that are operated by the owner.

4. Business Expense Deductions

Some expenses you incur in running a business can make you eligible for tax deductions. If you are starting your business, you can apply for a deduction on your capital expenses. After that, you are eligible for deductions on your business expenses. If you travel a lot for business, you can have deductions for travel costs. 

Knowing which tax credits and deductions you are eligible for, when they’re due and how to apply for them can be confusing. That is why it’s vital to enlist the services of tax credit experts like Incentax who will simplify the process for you and help you take optimum advantage of the available federal and state tax credits. 

r& d tax credit

The Inside Scoop on R&D Tax Credits

By | Research and Development Tax Credits, Tax Credits | No Comments

American companies are spending more on Research and Development each year. The National Science Foundation shows sustained increases in research and development expenses in the US in the years after the 2008 financial crisis, meaning, American companies are trying to innovate and put their money where their mouth is. 

Yet small and medium business owners hear the words “research and development” and they probably envision something outside of what they and their teams are doing on a daily basis.  

When business owners hear “R&D tax credits” it’s easy to think that you need to have a huge department doing rocket science each day and invent the next huge thing to even be considered as a business that does Research and Development. 

Well, R&D tax credits are one of the areas in tax incentives where the little guy can benefit too.  Advocates for the R&D tax credit believe the government could do a better job at educating business owners, regardless of the size, on the tax credits they could be taking advantage of and aren’t. 

What is an R&D Tax Credit and What is it Trying to Get Companies to Do?

What these tax credits are trying to do is incentivize companies through a tax break for doing Research and Development work in the US. Notice, we’re not even saying Research and Development that works.  We’ll get to that in more depth in a bit. The goal is to keep more jobs in the US and reward companies that are trying to innovate. 

What kind of activity qualifies as Research and Development? 

Any activity in your business that involves design, development, and improvement of a product and/or a service may qualify as R&D.  In fact, in 2003, the “Discovery Rule” that was part of this tax credit was removed; instead of having the R&D tax credit only accessible to companies executing research activities “new to the world”  the tax credit became accessible to companies executing research activities that were new to them, or an improvement upon what they were doing before. 

In 2015, the Research and Development tax credit became permanent, and the profit thresholds necessary to qualify where lowered, meaning that startups that weren’t generating a lot of money, but were possibly generating a lot of innovation could benefit too. You just have to pass what’s known as the four-part test to qualify.

Does my company have to invent something new? 

No! You should be able to demonstrate, through documentation your teams are keeping, that the work you’re doing attempts or successfully improves upon a product or service, or develops a new product or service. 

What do I need to document to claim it? 

You need to document the activities you do as part of your research and development, as well as the expenses those activities require. Some examples of documentation that can help support your claim are project briefings or notes, product descriptions or white papers, payroll records and expense reports. 

How small can my business be to qualify for an R&D Tax Credit?

Your business’s revenue has to be less than $5 million in a given year to qualify. You can submit up to five years of evidence as part of your claim and apply it retroactively as far back as 2015. 

What about state taxes?

Make sure to check with your state’s Tax Department for applicable credits in your state. Many states have their own tax incentives for Research and Development, but they vary from state to state. 

How can I find out more about this and start my claim if I qualify? 

Our team of experts at Incentax, LLC knows the tax code in and out and can help you evaluate your individual business situation to find every tax break you can get. Contact us to set up a consultation and learn more about this and other tax credits you may benefit from.