You filed an extension for your taxes and now realized the next deadline is approaching. It can be difficult to keep up with everything you need to hand over to the IRS while running an early-stage startup. But missing the next deadline could put you further in the hole operationally and financially.
For S Corporations and Partnerships, the extended deadline is September 16th. C Corporations have an extended deadline of October 15th. Staying organized throughout the year helps, but there are other factors that most founders don’t have the time to look into. Tax laws and regulations change. You’ll need time to understand them and how they affect your business. Hiring a tax expert can ease the stress and confusion, as well as ensure you meet the various deadlines.
To give you that extra push, here’s why you should file before the extended tax deadline:
Late penalties and interest
Being just one day late filing your tax return will cause penalties and interest to be added to the amount you owe the IRS. The IRS issues several different types of penalties:
- Failure to file
- Failure to pay
- Failure to pay proper estimated tax
If you fail to file your tax return, a tax penalty of 5% of the amount due will be added for up to 5 months of being late (totaling 25%) plus interest. That means, if you owe $2,000 to the IRS, you’ll incur an extra $100 every month that you fail to file a return up to 5 months.
Then there’s actually paying the IRS. Failing to pay on time will cost you an additional 0.5%. You’ll incur this additional fee until the tax is paid in full or until it reaches the maximum penalty of 25%.
There is a chance to get the IRS to drop some of the penalties. The goal is to get you to pay what you owe. Don’t let procrastination or fear keep you from filing.
Potential loss of R&D Tax Credit
R&D tax credit is also known as the Research and Experimentation tax credit which was first introduced in 1981. R&D tax credits offer discounts to startups who are spending money developing new products and processes or making improvements to existing ones. The tax credit is available to startups even if they aren’t yet profitable. There are a few qualifications for the R&D tax credit, but if you meet them you could save up to $250,000 or more.
There is a four-part test established by the IRS for the activities being claimed:
- Technical uncertainty You would need to demonstrate that you are developing or improving a process or product. It must be beyond making aesthetic changes.
- Process of experimentation Did you explore any alternatives? Showing that you fully evaluated the product or process through modeling, simulation, trial and error metrics will be wanted by the IRS.
- Technological in nature Experimentation must be supported by hard sciences like engineering, chemistry, or computer science.
- Qualified purpose The purpose of the research is to bring improvements to a product or process or creating a new product or process. The results should result in enhanced performance, ability, function, reliability or quality.
Failure to file your taxes could hinder you from getting major cash back that you could use to reinvest back into your company like offsetting the cost of payroll taxes or using it for nonprofitable reasons. A tax expert can help you go back to qualifying years to amend your income taxes to claim money you’ve missed. Generally, you have three years to make the amendment.
Potential Loss of Investment
Founders put their companies at risk when they fail to have their taxes in order. Before an investor hands over a large check, they will go through a checklist of due diligence. There are many checkpoints that potential investors look at – including taxes.
On that list, tax due diligence includes a potential investor taking a look at any outstanding tax liabilities or exposure. For example, if a startup hasn’t filed corporate income tax returns or collected sales tax they could owe the IRS or state taxing agency a significant amount of money plus penalties and interest.
A potential investor could see this as a red flag and pull away from the deal. They would prefer to have their investment dollars go towards building the startup instead of covering money owed for back taxes. In addition, not keeping the startup tax compliant doesn’t put the founder in a favorable light. It could indicate future problems with the founder managing the business.
Here’s what you can do to meet the tax deadline
If you feel like filing your taxes is a burden that you don’t want to deal with, find a tax professional. Early Growth has worked with startups for over 10 years, offering a team of professionals that handle taxes, fund management, and day-to-day finance and accounting.
Even if you have someone on your team that has experience with preparing taxes or you are pre-revenue and just starting out, outsourcing a tax expert allows you to focus on the business and reduces room for error. If you would like a free consultation, connect with us here.
Follow Us: @EarlyGrowthFS
Why Your Startup Business Structure Is A Loaded Decision
How Startups Can Ace Year-End Tax Planning
Filing Form-1099: What to Know