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Year End Tax Planning Tips for Emerging Growth Companies

December 11, 2015

During the holidays you often hear the saying “It is better to give than to receive” but we don’t think this should apply to having your company make unnecessary tax payments to the IRS, state or local tax authorities.

Many emerging growth companies don’t have revenue in their first year or two of operations as they create a viable product, solicit customers and work to raise money from angels and venture capital firms.

Avoid Tax Liabilities and Defer Year-end Revenue When Possible.

Screen Shot 2015-12-11 at 3.39.04 PMWhen your company starts to write business near year-end for services to be performed over the course of the subsequent year, and if you are a cash basis taxpayer, you need to be careful not to generate large upfront payments / deposits. Such payments could be taxable in 2015 and will not be offset by expenses which will only be incurred in 2016. By using your cash to pay taxes upfront, you simply may not have the cash flow in 2016 to cover your expenses.

Your company is much better off asking customer to pay after 1/1/16 so the revenue can align with expenses in 2016, and you will pay tax only on your net income.

Remember to File Federal, State and Local Tax Returns.

While these actions may seem to many like a blinding glimpse of the obvious, some founders seem to think if they did not have any revenue, why bother filing taxes? By filing all your taxes you will be able to “clock-in” business expense deductions and in some cases establish a net operating loss (NOL).

Screen Shot 2015-12-10 at 6.24.46 PMAn NOL happens when a business’ expenses exceed its income, which again is often the case for early stage emerging growth companies. You can choose to carry a 2015 NOL back for up to 2 years to help recover taxes you may have previously paid.

You can also carry the NOL forward for up to 20 years. This is a really smart move if you think your business’ tax rates will go up. The NOL deduction can save you money in the future.

In addition, if you don not file your tax returns, the 3-year statute of limitations does not start to run and at some point in the future, the IRS can go back and issue a tax assessment. Generally, the IRS can only go back three years for audits.

Take Advantage of New York State Tax Credits and Incentives:

Screen Shot 2015-12-11 at 3.42.35 PMNew York State offers a wide variety of tax credits that emerging growth companies can qualify for. They include the following:

Cash Incentives: New York State offers low-cost loans and grants to companies that invest significant capital in the state and commit to the creation and retention of private sector jobs. Terms can be customized to each project; other criteria apply.

Emerging Technologies: New York State has enacted tax incentives for: investors in Qualified Emerging Technology Companies (QETCs); job creation by QETCs; and R&D investment, R&D expenses and qualified high technology training costs incurred by QETCs.

Investment Tax Credit (ITC): Businesses that create new jobs and make new investments in production property and equipment may qualify for tax credits of up to 10% of their eligible investment. New businesses may elect to receive a refund of certain credits and all unused credits can be carried forward for 15 years.

Real Property Tax Abatement:  To encourage development, expansion and improvement of commercial property, a 10-year property tax abatement is available to offset increased assessments due to improvements to business and commercial property.

Research and Development (R&D) Tax Credit: Investments in R&D facilities are eligible for a 9% corporate tax credit. Additional credits are available to encourage the creation and expansion of emerging technology businesses, including a three-year job creation credit of $1,000 per employee and a capital credit for investments in emerging technologies.

Source: New York State Department of Tax & Finance

It may pay founders and their emerging growth companies handsomely to follow these tips and work with a qualified CPA to make sure to take advantage of every tax break and incentive possible.

For more year-end tax planning tips, including how to deal with the uncertainty over expired tax breaks, please click here for the Marks Paneth year-end tax planning guide.

 

This material has been prepared for general informational and educational purposes only and is not intended, and should not be relied upon, as accounting, tax or other professional advice. Please refer to your advisors for specific advice.