Accurate record keeping for a startup is a fundamental practice. It is never too soon to develop best practices for your early-stage venture’s financial records.  Quality data leads to actionable information which is the backbone of business intelligence.

High-quality information is a necessity for accurate decision making in the operations of any business.  Rather than being only a consumer of time, in fact, accounting helps your small business generate profit.

The types of records which should be kept include (but are not limited to):

  • Bank Deposits and Withdrawals
  • Bank Statements and Credit Card Statements
  • Federal, State, and Local Tax Filings
  • Legal Contracts of all Types including Equity Agreements, Stock Option Grants, Options Exercises
  • Payroll Records and Payroll Tax Filings
  • Receipts for Purchases

We often get asked about what type of software we recommend to keep these various books and records. For start-up accounting solutions, we recommend the following:

  • Intuit QuickBooks (Hint: If you buy the desktop version, splurge for Accountant Edition with its extra features)
  • Intuit QuickBooks Online
  • Wave Accounting
  • Xero
These products are relatively simple to use and do not require an accounting background.  One should familiarize themselves with the Basic Terms of Accounting and the Different Types of Financial Statements to gain a working knowledge.
There are many payroll providers available, and also options that include blended HR services.  A great option for startup payroll preparation is to work with your outside accountant.  Oftentimes, this can be a less costly option than the traditional providers.
At some point, as you are on the way to becoming the CFO of your startup, you will encounter some important decisions including:
  1. Entity selection (Usually an LLC or C-Corporation, often in Delaware)
  2. Year-End (December is most common)
 These are items which are best planned in conjunction with your startup’s accounting and law firms.
Many startups’ next mistake is about filing taxes.  If you are a Delaware LLC or C-Corporation, you will usually still need to file taxes in the state where you are conducting business.  In fact, if your startup encounters a concept called nexus, you may have tax obligations in multiple states or jurisdictions.
For a quick overview of some tax considerations for your startup:
Corporate Tax:
  • Based on Net Income: No income, no tax (*except for certain states like California)
  • Federal Form 1120: 4 Months and 15 days after the year-end (E.g. Due 4/15 for Calendar year-end companies)
  • California Form 100: Minimum tax of $800.  Exemption for the first year. (Same due date as above)
  • Other states if you have “nexus.”
  • If you are required to pay taxes, your startup may need to make quarterly estimated tax payments

Employment Tax:

  • Federal and State Income tax withholding
  • Social Security, Medicare, FICA, Unemployment (quarterly, monthly, or semi-weekly deposit schedules)
  • State Unemployment, State Disability Insurance
  • Additional local taxes (Varies by jurisdiction)
Sales and Use Tax
Fees:
Most startups do not have the time or expertise to understand these complex areas of accounting.  In fact, many accounting firms can struggle when they begin to encounter startup-specific issues like 83(b) elections and the like.  That is why it is important to find a CPA who specializes in startups.  In most cases, your startup is not deriving value from the capabilities of its extensive finance and accounting staff as it may from its developers, marketers, or the like.  The answer for many startups is to use outsourced accounting or as we call it, Corporate Business Management.
Though you do not need to become an expert in accounting and tax, it is important to develop a working knowledge so that your trusted advisors can provide value in a manner in which you can understand and make actionable decisions.

How would you like to squeeze more time out of your busy week, cut down on record-keeping duties, and reduce piles of paperwork and old receipts? The optional standard mileage rates for business vehicles can help you do just that. Businesses that operate up to four vehicles at the same time can deduct this standard mileage rate rather than keeping track of depreciation, gas, and repairs.

The business standard mileage rate for 2013 is 56.5 cents-per-mile. The business rate reflects, among other things, gasoline, depreciation and maintenance costs each year. The business standard mileage rate for 2012 has been 55.5 cents-per-mile (the same as for the second half of 2011 and up from 51 cents-per-mile for the first half of 2011).

Four or more vehicles

Businesses using no more than four vehicles for business purposes can use the business standard mileage rate. Generally, the IRS prohibits taxpayers from using the business standard mileage rate to compute the deductible expenses of five or more vehicles the taxpayer owns or leases and uses simultaneously, such as in a fleet operation.

Depreciation

The depreciation component of the business standard mileage rate is 23 cents-per-mile for 2013, the same as for 2012. In 2011 the rate was 22 cents-per-mile. Businesses that use the standard mileage rate are not allowed to take actual depreciation deduction amounts, even if they are higher than the depreciation component. Before deciding to use the standard mileage rate, a look at whether you will do better under the actual expense method, which includes actual depreciation, should be considered. Especially for circumstances in which Code Section 179 expensing and/or bonus depreciation is available; taking actual expenses, including actual depreciation, may be worth the effort.

Luxury vehicle caps. If actual depreciation is taken on a business vehicle, Congress wanted to be sure that vehicles selling above a certain price point did not enable their owners to take a larger write-off because of that premium cost. The “luxury vehicle” limits are designed to do just that, although taxpayers may debate the price points above which Congress set the “luxury” level. For example, using the standard mileage rate to value an employee’s personal use of a business vehicle is not allowed if the vehicle is valued at more than $15,900 for 2012 (projected to rise to $16,000 in 2013); Light trucks or vans are governed by a slightly higher level of $16,700 for 2012 (and $17,000 for 2013). This value also translates into the cap allowed on depreciation taken each year on the vehicle. For example, the maximum depreciation deduction for passenger automobiles first placed in service by the taxpayer in the 2012 calendar year is $3,160 for the first year (in addition to $8,000 for bonus depreciation, if applicable). For light trucks and vans, the first year cap is slightly higher: $3,360 (but with the same additional $8,000 deduction for bonus depreciation).

Special rules for heavy SUVs. For many years, SUV owners enjoyed a special tax break, often referred to as the “SUV loophole.” As explained, the “luxury car” rules place strict limits on the maximum amount of depreciation that may be claimed on passenger automobiles, including trucks and vans, during each year of a vehicle’s recovery (depreciation) period. Generally, however, the luxury vehicle limits only apply to vehicles primarily used on public streets with an unloaded gross weight of 6,000 pounds or less. A truck or van, including an SUV built on a truck chassis, is not subject to the annual vehicle depreciation limitations if its gross vehicle weight rating (maximum loaded weight) is in excess of 6,000 pounds. This “loophole” treatment had allowed many taxpayers who purchased an SUV with a gross weight in excess of 6,000 pounds to write off the entire cost in the year of purchase under the Code Sec. 179 expensing deduction.

Congress started to crack down on the so-called “SUV loophole” when, in the American Jobs Creation Act of 2004, it put the brakes on the cost of any SUV that may be expensed under Code Sec. 179 to $25,000, in addition to being counted toward the total caps on deductions for Code Sec. 179 property of all types. For example, a $139,000/$560,000 overall Section 179 expensing limits apply for 2012 (this is scheduled to drop to $25,000 for 2013, with a $200,000 investment ceiling, unless Congress takes further action). If the SUV is not built on a truck chassis or if it does not have a gross vehicle weight of more than 6,000 pounds, however, the “luxury vehicle” limit puts an even lower cap on those deductions. Nevertheless, heavy SUVs continue to benefit from a “bonus depreciation” loophole in the law in which a deduction for bonus depreciation is not capped for those vehicles not falling under the luxury-vehicle depreciation caps (that is, heavy SUVs). Although bonus depreciation applies to 2012, Congress may not extend it into 2013, or it may do so but without retaining what some have termed an unintended benefit for heavy SUV owners.

Bonus depreciation. Bonus depreciation for 2012 may be added to the available first-year deductions allowed on the purchase of a vehicle used for business if certain criteria are met. For most vehicles (those that are not fully depreciated in their first-year after applying the cap), business taxpayers claiming 50 percent bonus depreciation in 2012 are allowed an additional $8,000 in first year depreciation over and above the $3,160 first-year limit, for a total of $11,160 in the first tax year. Bonus depreciation, however, is for new vehicles only, and only if placed in service within the tax year. The section 179 expensing deduction, on the other hand, is available for both used and new vehicles.

Personal and business use

If you use your business vehicle for personal trips (including commuting back and forth from home and your principle business location) you must pro-rate your deduction to exclude the percentage of personal use. The magic number here is 50 percent. As long as you use your vehicle more than 50 percent for business during the year, you can pro-rate your deduction. You also have the option of using the standard mileage rate, based on miles of business use for the year times the prescribed rate.

Rahim Fazal, this week’s live chat host (click here to RSVP), still remembers the exact moment he knew he would be a lifelong entrepreneur. It was June 14th, 2000. Rahim was in his senior year at high school, and he’d just sold his first venture, a Web hosting company, for a sweet $1.5 million.

Up to that moment, everyone around me, my parents, my family, my teachers, my counselors, etc. was telling me what to do with my life,” he told a startup conference audience in Canada earlier this year.

Not anymore, clearly.

The co-founder of Involver, the world’s largest social media marketing platform (just acquired by Oracle), has never looked back. In fact, he went on to become one of the youngest directors of a publicly traded company in the history of the U.S. and the youngest student ever accepted into Canada’s top MBA program at the Richard Ivey School of Business.

To boot, the White House just honored Rahim with an Empact 100 Award too, and he’s been named as one of the Top 25 Digital Thought Leaders by iMedia. And today, Involver is used by more than 1 million companies, including a number of Fortune 500s.

So what’s his secret sauce? How did Rahim get so far, so fast?

Aside from being nice and not listening to detractors, he says it’s all about throwing away your pride and asking for help when you need it.

That “aha moment” came to Rahim when he started falling behind at university. “Running out of options and excuses, I admitted I just didn’t get the material,” he remembers. For the first time in his life, he had to ask for help. “With a little bit of luck, and A LOT of help, I graduated with an A-average.

And look how far he’s come!

This Thursday, January 10th at 3 PM EST, why not come get a bit zen with a real business Buddha?

Learn how it could just be your pride holding you back. Rahim Fazal will unblock your shareholder chakra and lead you down the path to ultimate entrepreneurial enlightenment … no yoga mats required!

Join our hour-long #StartupLab live chat presented by Citi, and learn firsthand how to let go — and go higher.

Got questions for Rahim? Bring them with you Thursday to the live chat!

Click here to RSVP`

After weeks, indeed months of proposals and counter-proposals, seemingly endless negotiations and down-to-the-wire drama, Congress has passed legislation to avert the tax side of the so-called “fiscal cliff.” The American Taxpayer Relief Act permanently extends the Bush-era tax cuts for lower and moderate income taxpayers, permanently “patches” the alternative minimum tax (AMT), provides for a permanent 40 percent federal estate tax rate, renews many individual, business and energy tax extenders, and more. In one immediately noticeable effect, the American Taxpayer Relief Act does not extend the 2012 employee-side payroll tax holiday.

The American Taxpayer Relief Act is intended to bring some certainty to the Tax Code. At the same time, it sets stage for comprehensive tax reform, possibly in 2013. Moreover, it creates important planning opportunities for taxpayers, which we can discuss in detail.

Individuals:

Unlike the two-year extension of the Bush-era tax cuts enacted in 2010, the debate in 2012 took place in a very different political and economic climate. If Congress did nothing, tax rates were scheduled to increase for all taxpayers at all income levels after 2012.  President Obama made it clear that he would veto any bill that extended the Bush-era tax cuts for higher income individuals. The President’s veto threat gained weight after his re-election.  Both the White House and the GOP realized that going over the fiscal cliff would jeopardize the economic recovery, and the American Taxpayer Relief Act is, for the moment, their best compromise.

Tax rates.  The American Taxpayer Relief Act extends permanently the Bush-era income tax rates for all taxpayers except for taxpayers with taxable income above certain thresholds:

$400,000 for single individuals, $450,000 for married couples filing joint returns, and $425,000 for heads of households.  For 2013 and beyond, the federal income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent.  In comparison, the top rate before 2013 was 35 percent.  The IRS is expected to issue revised income tax withholding tables to reflect the 2013 rates as quickly as possible and provide guidance to employers and self-employed individuals.

Additionally, the new law revives the Pease limitation on itemized deductions and personal exemption phaseout (PEP) after 2012 for higher income individuals but at revised thresholds. The new thresholds for being subject to both the Pease limitation and PEP after 2012 are $300,000 for married couples and surviving spouses, $275,000 for heads of households, $250,000 for unmarried taxpayers; and $150,000 for married couples filing separate returns.

Capital gains.  The taxpayer-friendly Bush-era capital gains and dividend tax rates are modified by the American Taxpayer Relief Act. Generally, the new law increases the top rate for qualified capital gains and dividends to 20 percent (the Bush-era top rate was 15 percent). The 20 percent rate will apply to the extent that a taxpayer’s income exceeds the $400,000/$425,000/$450,000 thresholds discussed above. The 15 percent Bush-era tax rate will continue to apply to all other taxpayers (in some cases zero percent for qualified taxpayers within the 15-percent-or-lower income tax bracket).

Payroll tax cut.  The employee-side payroll tax holiday is not extended. Before 2013, the employee-share of OASDI taxes was reduced by two percentage points from 6.2 percent to 4.2 percent up the Social Security wage base (with a similar tax break for self-employed individuals).  For 2013, two percent reduction is no longer available and the employee-share of OASDI taxes reverts to 6.2 percent. The employer-share of OASDI taxes remains at 6.2 percent. In 2012, the payroll tax holiday could save a taxpayer up to $2,202 (taxpayers earning at or above the Social Security wage base for 2012).  As a result of the expiration of the payroll tax holiday, everyone who receives a paycheck or self-employment income will see an increase in taxes in 2013.

AMT. In recent years, Congress routinely “patched” the AMT to prevent its encroachment on middle income taxpayers. The American Taxpayer Relief Act patches permanently the AMT by giving taxpayers higher exemption amounts and other targeted relief. This relief is available beginning in 2012 and going forward. The permanent patch is expected to provide some certainty to planning for the AMT. No single factor automatically triggers AMT liability but some common factors are itemized deductions for state and local income taxes; itemized deductions for miscellaneous expenditures, itemized deductions on home equity loan interest (not including interest on a loan to build, buy or improve a residence); and changes in income from installment sales. Our office can help you gauge if you may be liable for the AMT in 2013 or future years.

Child tax credit and related incentives.  The popular $1,000 child tax credit was scheduled to revert to $500 per qualifying child after 2012.  Additional enhancements to the child tax credit also were scheduled to expire after 2012.  The American Taxpayer Relief Act makes permanent the $1,000 child tax credit. Most of the Bush-era enhancements are also made permanent or extended. Along with the child tax credit, the new law makes permanent the enhanced adoption credit/and income exclusion; the enhanced child and dependent care credit and the Bush-era credit for employer-provided child care facilities and services.

Education incentives.  A number of popular education tax incentives are extended or made permanent by the American Taxpayer Relief Act.  The American Opportunity Tax Credit (an enhanced version of the Hope education credit) is extended through 2017.  Enhancements to Coverdell education savings accounts, such as the $2,000 maximum contribution, are made permanent.  The student loan interest deduction is made more attractive by the permanent suspension of its 60-month rules (which had been scheduled to return after 2012). The new law also extends permanently the exclusion from income and employment taxes of employer-provided education assistance up to $5,250 and the exclusion from income for certain military scholarship programs.  Additionally, the above-the-line higher education tuition deduction is extended through 2013 as is the teachers’ classroom expense deduction.

Charitable giving.  Congress has long used the tax laws to encourage charitable giving.  The American Taxpayer Relief Act extends a popular charitable giving incentive through 2013:  tax-free IRA distributions to charity by individuals age 70 ½ and older up to maximum of $100,000 for qualified taxpayer per year.  A special transition rule allows individuals to recharacterize distributions made in January 2013 as made on December 31, 2012.  The new law also extends for businesses the enhanced deduction for charitable contributions of food inventory.

Federal estate tax.  Few issues have complicated family wealth planning in recent years as has the federal estate tax.  Recent laws have changed the maximum estate tax rate multiple times. Most recently, the 2010 Taxpayer Relief Act set the maximum estate tax rate at 35 percent with an inflation-adjusted exclusion of $5 million for estates of decedents dying before 2013. Effective January 1, 2013, the maximum federal estate tax will rise to 40 percent, but will continue to apply an inflation-adjusted exclusion of $5 million. The new law also makes permanent portability between spouses and some Bush-era technical enhancements to the estate tax.

Businesses:

The business tax incentives in the new law, while not receiving as much press as the individual tax provisions, are valuable. Two very popular incentives, bonus depreciation and small business expensing, are extended as are many business tax “extenders.”

Bonus depreciation/small business expensing.  The new law renews 50 percent bonus depreciation through 2013 (2014 in the case of certain longer period production property and transportation property). Code Sec. 179 small business expensing is also extended through 2013 with a generous $500,000 expensing allowance and a $2 million investment limit.  Without the new law, the expensing allowance was scheduled to plummet to $25,000 with a $200,000 investment limit.

Small business stock.  To encourage investment in small businesses, the tax laws in recent years have allowed noncorporate taxpayers to exclude a percentage of the gain realized from the sale or exchange of small business stock held for more than five years.  The American Taxpayer Relief Act extends the 100 percent exclusion from the sale or exchange of small business stock through 2013.

Tax extenders.  A host of business tax incentives are extended through 2013.  These include:

  • Research tax credit or R&D credit
  • Work Opportunity Tax Credit (WOTC)
  • New Markets Tax Credit
  • Employer wage credit for military reservists
  • Tax incentives for empowerment zones
  • Indian employment credit
  • Railroad track maintenance credit
  • Subpart F exceptions for active financing income
  • Look through rules for related controlled foreign corporation payments

Energy:

For individuals and businesses, the new law extends some energy tax incentives.  The Code Sec. 25C, which rewards homeowners who make energy efficient improvements, with a tax credit is extended through 2013.  Businesses benefit from the extension of the Code Sec. 45 production tax credit for wind energy, credits for biofuels, credits for energy-efficient appliances, and many more.

Looking ahead

The negotiations and passage of the new law are likely a dress rehearsal for comprehensive tax reform during President Obama’s second term.  Both the President and the GOP have called for making the Tax Code more simple and fair for individuals and businesses.  The many proposals for tax reform include consolidation of the current individual income tax brackets, repeal of the AMT, moving the U.S. from a worldwide to territorial system of taxation, and a reduction in the corporate tax rate. Congress and the Obama administration also must tackle sequestration, which the American Taxpayer Relief Act delayed for two months. All this and more is expected to keep federal tax policy in the news in 2013. Our office will keep you posted of developments.

If you have any questions about the American Taxpayer Relief Act, please contact Origins Group at (310) 691-5040 or (818) 691-1234 or via e-mail at info@originsgroup.com.  We can schedule an appointment to discuss how the changes in the new law may be able to maximize your tax savings.