Startup Tax Returns - 3 Steps to Knock Out Your Tax Returns This Year
October 15th, the extension for 2020’s business tax return is just around the corner. Ready yet? Whether you’re filing taxes now or want to get a head start for next year, we’ll help you get prepared and stay prepared.
Business tax returns are not only time consuming, it’s too easy to make consequential mistakes. It doesn’t help that there are different ways to characterize the same financial transaction. Although not a mistake, it may result in you paying higher taxes.
We’ll give you 3 simple steps to get your taxes done like a pro. But first, let’s get you grounded in the basics.
Businesses are taxed at both the federal and state level. Some states don’t have state corporate income taxes (e.g. Texas, Washington).
Business taxes are based on net income, not revenue. Revenue is the total sales your business made. To put it simply, net income is revenue minus expenses. You pay taxes based on net income.
The more expenses your business incurred in a year, the less taxes you’ll pay. Expenses like salaries, legal or accounting fees, and software costs are deductible from total revenue.
You can save yourself a lot of time and money just by keeping your books in order. Bad or unorganized financial statements can jeopardize the integrity and accuracy of the tax filing. This will also suck up much more of your CPA’s time.
Now, for the meat and potatoes. Here are 3 steps to file your taxes internally and externally.
Step 1: Clean up your Balance sheet
Start with your Balance sheet before diving into your Income statement. Why? Recategorizing your balance sheet items will likely change your Income statement.
Balance sheets for startups can be tricky, here are the top 5 things worth cleaning up:
Reconcile your bank and credit card accounts
Bank and credit card balances are listed on the top of your balance sheet. The process of reconciling bank and credit cards verifies you have the same dollar amount in your bank account that you do in your accounting books. This is the foundation for verifying the accuracy of money movement and the first thing anyone needs to do in order to make sense of your accounting books.
Dive deep into your accounts receivables (A/R)
AR indicates how much money your customers owe you. Check on open invoices one by one, and keep an eye on which are paid and which aren't. Keep in mind: giving customers a long time to pay sounds appealing to them, but it puts pressure on you to have enough cash for other expenses. The sooner you collect payment, the easier it is to run your business. Long outstanding or unpaid invoices become uncollectible, which results in bad debt. No one wants that.
Record depreciation expenses for fixed assets
If you own fixed assets like a laptop or new equipment, let’s make sure to record the depreciated value on a monthly basis. In addition, if the assets have been fully depreciated, then remove them off the Balance sheet. Most assets depreciate on a straight line (same amount every month), some depreciate on an accelerated basis (amount increases every month), or units. GAAP has clear guidelines on the type of depreciation method to use. Make sure that you have the right depreciation method.
Double-check your investors’ equity
Equities represent how much money your company has currently borrowed from investors. Check it against your latest cap table. Try to stay accurate on this one, otherwise your investors will not be happy campers.
What is a Cap table? A capitalization (Cap) table is a table providing an analysis of a company's percentages of ownership, equity dilution, and value of equity in each round of investment by founders, investors, and other owners.
Review retained earnings
Retained earnings show how much money your company has made over time, but this isn’t the cash itself. Don’t mistake it with your bank balances.
Step 2: Clean up your Income statement
The net income on your Income statement dictates the tax amount you’ll pay. Often enough, startups forget to record their expenses that aren’t directly cash related (e.g. asset depreciation, bad debt, unpaid salaries, etc).
Record the depreciation expense for fixed assets
There are expenses that aren’t directly related to money. Remember to record the depreciation expense for your fixed assets (i.e. expensive lab equipment, a company car, etc).
Write off bad debt
Bad debt is the money you’re not able to collect from a service you did or item sold. Some businesses do it more frequently than others, but it generally happens at least once a year for most startups.
Record unpaid salaries
Let’s say a worker puts time in for the firm but hasn’t been paid as of year end—that’s when an accrual entry needs to be set up (Wages Payable). Experienced CPAs usually have a list of accrual entries to check against. Ask your CPA about it, they’ll tell you more.
Step 3: Hand over financial statements to your CPA
After cleaning up your books, send your CPA all your financial statements so they can prep and file your taxes for you. Almost no businesses owners file taxes on their own. Corporate taxes are very complicated, and you’ll almost never benefit from net savings with all the time you’ll spend calculating taxes when you could be building your business instead. If you don’t have a CPA lined up already, it is in your best interest to do it ASAP.
