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?
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:
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.
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.