Once again, we've reached the time of year that many entrepreneurs have come to dread: tax-filing season. Tax returns without extensions are due by March 16th for most corporations and April 15th for individuals and passthrough entities.
Entrepreneurs must stay on top of the many changes to the tax rules in 2014 to avoid needless hassles with tax collectors and to boost the profitability of their businesses. The following three issues are particularly crucial for up-and-coming tech start-ups.
1. Conducting Research & Development
In 2014, start-ups can claim the Alternative Simplified Credit portion of the Research & Development Tax Credit on an amended tax return. Before, businesses could only obtain the ASC on an originally filed return. This narrow time constraint proved to be an enormous barrier – especially for young start-ups with lean staffs and constant deadlines – to obtain the ASC.
The stringent filing deadline for the ASC was particularly problematic given that many tech startups are unable to claim R&D Tax Credits. Their smaller size and greater volatility make it more difficult to maintain R&D spending that is consistent with other costs during the R&D Tax Credit “base period.” Start-ups frequently miss this ratio because their sales grow at a much faster rate than R&D expenditures, or R&D activities rapidly become more efficient. For these reasons, making the ASC requirements manageable for tech start-ups is a huge opportunity.
2. Hiring New Employees
The Work Opportunity Tax Credit provides an attractive reward for entrepreneurs who expand their team. In fact, this incentive grants a tax credit of up to $9,600 if a new hire belongs to a target group that has consistently faced significant barriers to employment.
Even if a new hire does not satisfy the requirements for the WO Tax Credit, entrepreneurs should keep in mind that tech start-ups can deduct the costs of paying employees “reasonable” compensation. Thus – from a pure tax perspective – growing a tech start-up’s team is almost always beneficial.
3. Providing Health Insurance to Employees
The Affordable Care Act will likely have little effect on tech start-ups. This is because businesses with fewer than 50 employees – a classification that includes most tech start-ups – are not subject to either the employer mandate (which will not even go into effect until 2015) or the ACA’s annual reporting requirements.
Nonetheless, if an individual employee does not receive health insurance through his employer – which is somewhat likely at a tech start-up – then the employee must look elsewhere to obtain health insurance that satisfies the minimum essential coverage requirements, qualify for an exemption or pay the shared responsibility penalty.
Fortunately, the Small Employer Health Insurance Tax Credit gives tech start-ups a benefit for providing coverage to employees. The SEHI Tax Credit, which can be claimed by businesses with 25 or fewer full-time employees, covers 50 percent of healthcare premiums the employer pays on behalf of its employees.
Thus, although the ACA may create new potential challenges, tech start-ups can likely avoid the impact of most of them with proper planning and compliance.
In light of the promising opportunities and dicey pitfalls that are new to the tax rules, it would be wise for entrepreneurs to ensure that their tech start-ups are meticulous in filing this year’s tax returns. Failure to do so could cause them to miss out on crucial chances to grow and even entangle their businesses in wasteful squabbles with the IRS. Clearly, neither are things that start-ups can afford.
For more information, please contact the author of this article Daniel Willingham or your local UHY LLP professional.