Establishing your new business takes both time and energy, so don’t overlook potential tax deductions that can reduce taxable revenue dollar for dollar.
Start-up costs and organizational expenses may be deducted up to $5,000; any remaining costs should be spread over 180 months starting with the month you launch operations.
1. Research and Development Credit
Research and Development Credit is an often-overlooked source of non-dilutive funding that’s often neglected. This tax credit provides significant value to start-up firms as it can be used to reduce payroll taxes.
Startups hoping to take advantage of this credit must engage in R&D activities that meet certain criteria, including simulation, evaluation of alternatives, systematic trial-and-error, modeling and testing activities that draw heavily upon hard science.
Startups often operate with razor-thin margins and cash running out is often cited as one of the reasons they fail. By claiming this tax credit, startups may reduce their burn rate and free up capital for client-facing operations. To claim it, startups must file Form 1120; its credits will apply towards payroll taxes starting in the quarter following return filing. For further guidance and to see if eligibility exists, they should consult a CPA who specializes in this area to help calculate their credit and determine if it’s an effective way of offsetting these taxes.
2. Employment Tax Credit
Startups that use cutting-edge technologies, including those involved in the on-demand economy, big data analysis, agriculture, winemaking or oil and gas may find this credit especially advantageous. It can cover payroll taxes for up to three years of operation incurred by employees employed by their business.
Tax credits offer valuable relief to recovery startup businesses during difficult financial times. By providing a refundable tax credit against certain employment taxes, recovery startup businesses can focus on growing their businesses without worrying about revenue reductions, payroll issues or debt accumulation.
Startups may qualify for this credit if they offer at least two weeks of paid family and medical leave to eligible employees, employ 100 or fewer workers, and at least one non-highly compensated worker; further, no employee receiving this credit from their employer’s retirement plan should have already received contributions or benefits under another retirement plan sponsored by this same employer.
3. Mortgage Interest Deduction
Although the mortgage interest deduction has long been seen as beneficial to wealthy borrowers, it should still be explored as it could help you lower your tax liability and save you money in interest payments. For more information or advice about taking advantage of it, consult with a financial adviser or tax professional.
Along with costs associated with getting your company off the ground, expenses related to expanding and growing it may also be deducted as deductions – for instance meals eaten while conducting business, advertising expenses (printing, online or TV ads).
Deductions work differently from tax credits in that they reduce your total taxable income rather than directly subtracted from it. Therefore, it is vital that you remain knowledgeable of which deductions could best help to lower your 2022 tax bill.
4. Capital Gains Deduction
Investment in entrepreneurial ventures can be risky, and investors may experience numerous capital losses before finding one that yields substantial returns. Unfortunately, the tax code penalizes these risky investments by forcing taxpayers to wait many years before being eligible to deduct these capital losses – creating an unfair asymmetry which rewards riskier investments with increased returns while punishing similar returns among other investors.
To avail themselves of the potential tax benefits provided by Sections 1202, 1045, and 1244, investments should be made in startup businesses that meet specific criteria. Furthermore, entity structure of these startups can have an effect on tax benefits; LLC investments differ from C corporations when investing tax efficiently through an IRA or self-directed trust can help mitigate taxes further. Finally, state tax laws may impose additional filings or restrictions related to investment-related deductions that must be kept in mind when planning investments under Sections 1244-1245 and 1244.
