4 Tax Strategies To Get the Most From Your Startup

Cash is important to have for every business. For startups, though, cash is vital.

One way to ensure your startup has enough cash is to monitor expenses. While some expenses are fixed, others can be reduced, such as business taxes. Taxes are one of the most significant expenses for startups and established businesses. Whether this is your first startup or your most recent launch, use this article for tax planning strategies to help minimize your tax burden.

Choosing the right structure

There are several entity structures to choose from, each with different tax implications. Here’s a snapshot of the most common entity structures and how they affect taxes for your startup.

• Sole proprietorships: Income tax up to 37% on net profit; self-employment tax of 15.3% on up to $168,200 of profit; additional self-employment tax of 3.8% on all profit above $168,200.
• S corporations: Income tax of up to 37% on net profit; self-employment tax of 15.3%; and income tax of up to 37% on a designated amount of salary for the S corporation’s owner.
• C corporations: Income tax up to 21% on net profit; self-employment tax of 15.3% and income tax of up to 37% for the C corporation’s owner; any distributions from the company to the owner is subject to a dividend tax of up to 23.8%.
• Partnerships: Same tax structure as sole proprietorships, except two or more owners split the profits.
• Limited Liability Companies (LLC): Treated like partnerships for tax purposes. Profits (and thus taxes) don’t have to be split evenly between the owners.

Each of these entity structures has pros and cons from a federal tax standpoint. Small business owners and entrepreneurs should consult with 1-800Accountant to determine which entity type best fits their business's current situation. Also, consider an annual review to determine if something significant changed that might make a different business structure more appropriate.

Take a look at your equity

Let’s say you buy $100 of Big Box Store, Inc. stock in 2014 and sell it for $150 in 2024. You would have to pay capital gains tax on the $50 increase in the stock price.

But what if a tax break allowed you to sell your $150 of stock and pay zero taxes on the increase in the stock price? This is what can happen with qualified small business stock (QSBS). Also known as Section 1202 stock (where this tax break lives in the Internal Revenue Code), QSBS can provide a significant tax break under the right circumstances.

In fact, you can exclude from taxes the greater of $10 million or ten times the adjusted basis of your investment. This yields a minimum of $2 million in tax savings (20% long-term capital gains tax rate).

Here are the primary qualifications to be able to use QSBS for your business:

• You must be a C corporation in the U.S. (it can’t be an S corporation).
• Your business’s assets must be $50 million or less at all times after August 9, 1993 (or the period of the company’s existence) before and after the issuance of the stock.
• Your business must always be active (not a holding company) when the stock is held.
• If acquired after September 27, 2010, the stock must be held for more than five years to be free from income tax, alternative minimum tax, and net investment income tax.

While there are more hoops you’ll need to jump through, QSBS is a big tax break to consider if your startup qualifies.

Open a tax-advantaged account

A tax-advantaged account is a special account designed to provide tax benefits when you contribute money to that account. Retirement accounts such as 401(k)s and IRAs, 529 college savings plans, Health Savings Accounts, and Flexible Spending Accounts are all considered to be tax-advantaged.

Here’s a look at several common types of tax-advantaged accounts that startups will encounter.

• Solo 401(k) Plan

If you’re a startup with no employees (other than a spouse), you can open a solo 401(k) plan. In solo 401(k)s, both you and your business contribute to your retirement plan. As an individual, you can contribute up to 100% of your self-employment earnings, up to a maximum contribution of $23,000 in 2024. The business can contribute up to 25% of your self-employment earnings. Combined, contributions cannot exceed $69,000.

• Simplified Employee Pension (SEP) Plan

SEP plans are for businesses of any size and are fully funded by the employer. Employers can contribute up to 25% of eligible employee compensation, up to a maximum contribution of $69,000 in 2024. These plans are great if you need flexibility because contributions are discretionary. If your business has a big increase in revenue for a particular tax year, you can contribute more. In years where revenue is down, you can decrease or even halt contributions for that specific year.

SEP plans tend to work best for sole proprietors who only have a few employees since employer contributions must be equal for all employees.

• Savings Incentive Match Plan for Employees (SIMPLE)

SIMPLE plans are for businesses with fewer than 100 employees and are funded by both the employee and the employer. Employees can contribute up to 100% of their compensation, up to a maximum contribution of $16,000 in 2024. Employers can choose to either (1) match those contributions on a dollar-for-dollar basis up to 3% of the employee’s salary or (2) make fixed contributions of 2% of employees’ salaries to all employees regardless of their elective deferrals.

SIMPLE plans tend to work best for small businesses with more than just a few employees.

Take advantage of tax deductions and tax credits

Finally, let’s look at some of the most common small business tax deductions that can help maximize your tax savings for your new business.

• Startup and organizational costs. You can immediately deduct up to $5,000 of startup costs if the cumulative total of your startup costs doesn’t exceed $50,000.
• Advertising expenses. The cost of advertising and promoting your business. This can include printed brochures and business cards, website design and maintenance, and actual ads bought on websites, television, radio, or billboards.
• Business meals. You can deduct 50% of qualifying meals if they have a business purpose, such as meeting with clients or prospective clients. Meals provided for employees are 100% deductible.
• Business use of a vehicle. You can calculate your business vehicle deduction using one of two calculations. First, you can multiply the total miles driven for business purposes for a particular year by the IRS’s mileage rate for that year. In 2024, the mileage rate is 67.0 cents per mile. Second, you can add up all your expenses (i.e., actual cost of gas, insurance, repairs, oil changes, etc.) and deduct the total.
• Depreciation. When you purchase something that you’ll use in your business for several years, for example, a computer, vehicle, furniture, or equipment, you generally have the option of deducting the cost of these items immediately the year they were bought, or spreading out the cost over a defined number of years. There are certain scenarios where each of these two scenarios makes sense for your business.
• Qualified Business Income Deduction. Also called the QBI deduction or the 199A pass-through deduction, qualifying businesses can shield up to 20% of business income from taxes.

These are some of the more common business expenses, but there are many more available.

Your startup tax strategy

Now that you’ve got an overview of the different ways a startup business can cut its tax bill, the question is, “What tax strategies make sense for your business?”

Find out by talking to the experts at 1-800Accountant, America’s leading virtual accounting firm for small businesses. Whether it's bookkeeping, payroll, tax advisory, or any of our professional accounting services, we have the affordable pricing solutions you need to help your startup minimize its tax liability. Schedule a quick consultation – usually 30 minutes or less – to learn more.