What every startup founder needs to know about taxes
It’s led by Cameron Keng, a certified public accountant, and resident mentor and advisor at a number of New York Cities co-working spaces such as New York City, Grind Spaces, We Create, Green Spaces and Hubitat.
This guide is based on Mixergy’s course with Cameron Keng.
At age 17, Cameron Keng was desperate for cash for his first startup. Then he learned about net operating loss, received $10,000 back from the IRS, and started his business.
It was all done by understanding tax rules and regulations for start-ups, so we invited him to teach you how to do it.
Cameron is now a Certified Public Accountant and resident mentor and advisor at a number of New York City’s co-working spaces, such as New Work City, Grind, WECREATE NYC, Green Spaces and Hubitat.
Here are the actionable highlights from the course.
1. Get a specialized accountant so you’ll have a tax expert focused on your company
Cameron had a client in New York paying $5 million in taxes for his online company, and he advised him to hire a contractor in Nevada, rent an office, and list it as the primary location — a perfectly legal move that reduced his taxes to $200,000.
- Take Action:
- Interview several accountants with tax experience in your particular industry, and choose one who’s willing to teach you how to take advantage of laws that will lower your tax bill.
2. Sell products by electronic download only to avoid paying sales tax
Cameron says companies like SAP started the drop and carry, where they come to your office and install software with their CDs, and leave with the CDs, allowing them to avoid paying sales tax on some very expensive software.
- Take Action:
- Instead of shipping a DVD or CD, make your products electronic and available by download.
3. File for research and development credit so you’ll get a direct cash benefit
One of Cameron’s clients was developing online software and never took the R&D credit because his previous accountant didn’t know about it, costing him $80,000 over a period of four years.
- Take Action:
- Your accountant will help you file the R&D credit form and advise you about what percentage is creditable (ranging from 65% to 100%).
4. Incorporate only when appropriate to save money
Cameron says that even after paying a one-time incorporation fee, companies can face steep annual fees for incorporating and for preparing corporate tax returns.
- Take Action:
- Include the company’s tax returns on Schedule C of your personal tax returns unless you have substantial liability, get investments, and make at least $50,000, in which case ask your accountant about the LLC or S Corp.
5. Keep business transactions separate to have personal protection from liability
Cameron cites an extreme case of an Italian restaurant owner who tried to count hookers as a medical expense — the IRS charged penalties, interest, and assigned a very expensive legal chaperon to oversee all tax-related decisions.
- Take Action:
- Keep records (again, hire an accountant), and if you use company money for personal expenses, treat it as a shareholder loan and pay it back.
6. File even if you had no income and don’t owe money to avoid possible penalties
Cameron had a client who registered an S-Corporation, but never filed taxes, resulting in almost $10,000 in federal and state penalties.
- Take Action:
- Make sure you’ve filed all of your 20+ tax forms, even in a down year.
7. Take a dividend to avoid a 15.3% tax for Social Security and Medicare
One of Cameron’s clients lost feeling in her legs when he told her she’d overpaid her taxes by $1.53 million for the previous four years because she’d paid herself 100% with salary.
- Take Action:
- If you own 100% of an S-Corporation, record a reasonable salary for your job title in the “wages” box of the tax form, and distribute the remainder of your paycheck as a dividend.
8. Claim your losses to get back money paid in a more profitable year
One year Cameron personally had about $30,000 in losses, so he amended his return from the prior year to claim those losses and got back $10,000 that he had paid the previous year.
- Take Action:
- Your accountant may not suggest it, so be sure to ask how much of your previous tax payments you can get back by applying your net operating loss (NOL).
9. Defer taxes to help you conserve cash today
Cameron says to take advantage of Section 179, which allows you to deduct the total cost of equipment purchased in 2011 and 2012, rather than appreciating it over five years.
- Take Action:
- Accelerate the write-off of a business purchase by deducting the expense as quickly as possible.
Written by April Dykman, based on production notes by Jeremy Weisz