With 2016 now in the rear-view mirror, the ever-stressful season of your 2016 year-end taxes is right around the corner. This time of year can be particularly stressful for individuals growing startup companies. Trying to keep up with the ever-changing tax code can be confusing, and it diverts valuable time and attention away from focusing on the success of your business. To help alleviate some stress, here are our top three tax planning ideas to help you save on your 2016 taxes:
1. Offsetting Payroll Taxes with Research & Development (R&D) Expenses
As part of the Protecting Americans from Tax Hikes Act of 2015 (PATH), startup companies can now use the R&D credit to offset payroll taxes paid during the year. The credit can be used to refund the employer portion of the Social Security tax paid on wages (6.20% tax) up to $250,000. In order to take advantage of the startup portion of this credit, the company must not have sales exceeding $5 million in 2016 or have sales prior to 2012. This credit is available for startup companies regardless of entity structure.
Tax credits are used to offset taxable income; yet this is often an issue for startups, as they are either pre-revenue during initial operations or don’t have taxable income to be offset by credits. Utilizing this credit will allow startups to free up cash from their R&D expenditures by saving money on payroll taxes.
2. Deducting Purchased Equipment
If your startup purchased new equipment during 2016, whether it be a new computer to handle your tech development programming, or a desk and chairs to meet customers, the cost of the equipment can be fully deductible for additional tax savings.
A requirement for this deduction, which is known as Section 179 expense, is that your company must have taxable income to be offset. If your startup is pre-revenue or doesn’t have taxable income, bonus depreciation is still available. This bonus depreciation allows you to deduct 50% of the cost on this year’s taxes, and the remaining cost over future periods.
3. Deduction of Startup Costs
As a startup, your business has the benefit of being able to deduct the first $5,000 in its start-up costs. This deduction phases out dollar for dollar starting at $50,000 in total start-up costs and is completely phased out once start-up costs reach $55,000. Start-up costs that are not expensed are deducted over 180 months beginning in the month the active conduct of the business begins. Examples of start-up cost include: legal and accounting fees, license costs, salaries for temporary staff and costs to host initial meetings. In order to receive this deduction, you must be in your first year of operations.
When preparing or planning for your year-end taxes, it is always best to consult your Certified Public Accountant (CPA). Using an experienced advisor will ensure that all available deductions and tax savings are brought to your attention. Take advantage of these tax-saving opportunities to position your startup to take on 2017 full speed.