On March 13th, 1871 invited a group of entrepreneurs, investors, and policymakers to address challenges associated with financial and tax regulations. Taking the lens of established or soon-to-be entrepreneurs, the forum was full of insights and best practices on how founders could navigate their way through a web of complex regulations. This policy forum was created in partnership with Groundwork, a workshop series focused on foundational topics for entrepreneurs.
With tax season looming, 1871 gathered a group of industry experts to help entrepreneurs chart a path through the financial complexities of tax filings, and stay abreast of recent developments in federal, state, and local tax laws. The panel included Greg Grove (Equity Principal, Chair of Startups and Venture Capital, and Blockchain Technologies Team Lead at Much Shelist), Lauren Graf (Tax Partner at EY), Keith Staats, (Executive Director of the Illinois Chamber of Commerce Tax Institute, and moderator Amy Rosenow (CEO & Founder of Jugl).
- Every State is a Snowflake
Your location is going to have a big influence on which taxes you pay and how much you pay. Sales and use taxes often trip up business owners because of how much they vary from one locate to the next. For example, the state of Illinois doesn’t tax cloud-based services (i.e. SaaS platforms), but that doesn’t hold true for the City of Chicago because of the Chicago Lease Tax. The sales tax for the state and city also differ.
- Consider the Right Entity For You
Historically, founders have been encouraged to set up their businesses as sole proprietorships or “pass-through entities,” but with the Tax Cuts and Jobs Act, C corporations are now taxed a flat rate of 21 percent. With the corporate tax rate lower than the individual tax rate, founders have more options when it comes to classifying their business venture. The decision is further complicated by the intricacies of the 20 percent pass-through tax deduction (section 199A), which leads to the third takeaway….
- Don’t Do It Alone
When it comes to taxes and finances, there are certain times where there’s just no substitute for external expertise. your business, a trusted advisor is your biggest asset. If an experienced entrepreneur is willing to take your call, ask for their guidance. They’ve been where you are and will tell you when you need to call in the big guns - the accountants and lawyers.
Transitions are also a key moment where you should seek guidance. If you start earning revenue, secure a major contract, and become profitable, then you need to have a chat with your friendly neighborhood lawyer or accountant to ensure that you’re in bounds for your next stage of development. They’re the ones that are going to make sure you don’t forget to file for a 83b election.
- It’s Okay to Ask for Forgiveness But Act Fast
If you did screw up your taxes, know that you can always ask for forgiveness. In fact, if you’ve had good behavior up until your error, it’s likely that you’ll get a pass -- just make sure that you don’t dally or ignore the issue. The panel unanimously agreed that the biggest problem they’ve seen with their clients is the delay in handling legal or financial issues.
- Always Check If You Qualify
There are different tax credits available to entrepreneurs, and you’ll never know if they’re relevant to your business unless you apply. While an R&D tax credit may sound like it only works for pharmaceutical companies, it actually applies to any startup that is innovating products or services. The credit is available as refund against company payroll taxes, so you don’t need to be profitable in order to access it. The Illinois Investor Tax Credit Program also provides huge benefits to startups approved as Qualified New Business Ventures (QNBVs) - investors in certified companies can receive a state tax credit equal to 25 percent of their investment. In order words, if you don’t ask, you don’t get.
For more insight into startup tax intricacies, check out Rob Pasquesi’s (Founder of Pasquesi Partners) blog. Rob is a longtime mentor to startups in the 1871 community.