Revenues Up / Taxes Down: Financial Planning Considerations for Startups


As a founder or key employee, you’re no stranger to getting your hands dirty and doing whatever it takes to get your startup off the ground. In addition to your many sleepless nights, you’ve probably been on the receiving end of countless financial “advice” on how to build, maintain, or exit a successful venture. Much of it is interesting, such as how to scale your product, engage with collaborators, and utilize new technologies. But for action-oriented startup folks, the accounting, tax, and legal compliance issues may be, for lack of words, “less” interesting.

To ease with the pain, we’ve compiled a list of questions and considerations to help you understand how proactively making compliance-related decisions can actually help your startup achieve profitability and reduce your tax liability.

This way you can focus on your startup’s core strategy, achieve your business goals, and develop an innovative product or service!

What sort of legal entity is most advantageous for your startup’s long-term strategy? Whether you plan to maintain a small operation with simple profits or intend to exit via a large acquisition transaction, be sure you choose the right legal entity as it can result in major financial impacts to your firm.

Who is in charge of your startup and how does it impact your taxes? The importance of voting rights have increasingly been in the headlines when successful tech startups reach the IPO stage. How you manage your debt to equity ratios and associated repayments or distributions can affect your bottom line and possible tax deductions.

How are you classifying and paying your employees? As if it wasn’t difficult enough to first hire the right people for your startup, you also have to worry about how they are documented and compensated. W2s, 1099s, or equity-based compensation are all options startups have used without always thinking of the impacts to both their financials and their taxes.

How are you accounting for your startup costs? While there are limits to how much you can expense during your first year in business, amortizing startup costs over time will help you reduce your taxable income for as much as 15 years.

Are you properly recording your development costs? R&D costs can be expensed until your product is finally ready for prime time. However, the treatment of these costs vary between GAAP and IRS rules, specifically the ability to capitalize costs for the finished product.

When do you recognize profits? Recording revenue ‘officially’ is often confusing. Startups often wish to demonstrate that they are recognizing revenue as soon as possible. However, this may have adverse effects from a tax perspective. Finding a balance that pleases investors and complies with the IRS is key.

What are the pros and cons of doing business across geographic locales? Tax credits, multi-state income and sales taxes, and impacts from selling your product internationally all come with numerous things to consider. While many startups may acknowledge these issues, they often ‘kick the can down the road’. Instead, proactively discussing tax planning in alignment with startup strategy could help avoid a headache when tax season rolls around.

What (if any) is your exit strategy? While not all startups intend to sell or close down their shop, keeping the end in mind will help plan for taking advantage of tax planning items such as losses that are carried forward and buyer/seller perspective during a merger or acquisition.

We hope you found this helpful but please keep in mind that this post was written broadly for informational purposes. It is not intended to constitute professional accounting, tax, or legal compliance advice. For consultation on how your startup can benefit from application of a financial planning strategy, please contact a professional, licensed advisor.

Mayur Vyas, CPA