Effective Tax Planning Tips for Your SaaS Business
The word “taxes” is often spoken in hushed tones in the back of a business office, usually around the end of the year. For companies, tax season is often a stressful time.
Many businesses will owe taxes at the end of the year. However, most company owners take this as a fact of life and pay whatever it is that the government – or their accountant – tells them to pay.
This needs to change. This isn’t “tax planning,” and is actually quite the opposite.
Tax planning, for those who aren’t familiar, is the analysis of a company’s financial situation from a tax perspective. The purpose of this type of planning is to create tax efficiencies that work to reduce a business’s tax liabilities, thus saving them money.
Tax planning most closely looks at the timing of revenues as well as purchases and other expenditures.
For example, if you received US $100 in profit for December 2016, and your business tax rate was 30 percent, you would owe a total of US $30. However, through tax planning, you might find that you can legally change the timing of your revenues so that the US $100 of profit can be deferred to January 2017, saving you $30 for the year 2016.
When you extrapolate this idea out into the millions of dollars, the benefits start to make immediate sense.
Steps Needed for Effective Tax Planning
Ok, tax planning is important. But how can you set up your company in order to take advantage of this planning? Below are five steps needed to create a system of efficient tax analysis.
- Bookkeeping - Make sure your startup has a good bookkeeping system in place. There’s been an explosion in the types of accounting software available, especially for SaaS startups. It used to be that companies would be forced to buy QuickBooks and use it exclusively. While Quickbooks is still the industry standard, it’s not for everyone, and companies can now use is FreshBooks, which is made suited for very small businesses and sole proprietorships, and Xero, for larger businesses.
Getting the right accounting software is important because you’ll conduct all your tax planning analysis from the reports it provides.
- Certified Accountant - Establish a relationship with a reputable and certified accountant. In the United States, there’s a job title called a Certified Public Accountant (CPA), and the CPA designation is a standard for a reliable accountant. Find an accountant you trust and meet with them to discuss which bookkeeping software is right for you and get advice about how to efficiently structure your taxes for your business. These accountants will also help with the actual filing of your taxes.
- Use a Company Card - This is the best way to separate your business and personal spending. When you’re planning for your taxes, you’ll need to identify company income and expenses, and then strategies on ways to lower your tax liability. If you’re personal and company transactions are mixed, you won’t be able to do this.
If you do end up paying a vendor or making a business purchase with your personal credit card, make sure to keep track of it as an out-of-pocket expense. Don’t wait to take note of it, otherwise you’ll forget about it and won’t get to claim the expense.
- Set up a Retirement Plan - Retirement plans are tax deductible and can help minimize a company’s tax burden. Also, young entrepreneurs are often cash-starved and aren’t thinking about their future. Setting up a retirement plan has the added benefit of helping business owners plan for retirement all while reducing the amount of business taxes they pay.
- Earmark Money for Taxes - Make sure you’re putting money aside in order to pay future taxes. A lot of startups fail to do this and end up using future earnings to pay for past taxes. It’s a vicious cycle, and one that’s hard to stop.
Top Tax Planning Tips for Your SaaS Startup
Now that you’ve set your company up for effective tax planning, the next thing you need to do identify business areas that can help reduce your tax burden. For example, the top four things you can do to lower your payments are:
- Offset Payroll with research and development (R&D) Costs - Most startup companies can now use an R&D credit to offset payroll taxes paid during the year. In the U.S., for example, the credit can be used to refund the employer portion of the Social Security tax paid on wages, up to US $250,000. In order to take advantage of the startup portion of this credit, the company can’t have sales exceeding us $5 million in the previous year. This credit is available for startup companies regardless of entity structure.
Tax credits are usually used to offset taxable income. This isn’t beneficial for most startups, as they are either pre-revenue during initial operations or don’t have taxable income to be offset by credits. However, the R&D tax credit, for example, will allow startups to free up cash from their R&D expenditures by saving money on payroll taxes.
- Deducting Purchase Equipment - If your SaaS company purchased new equipment during the year, the cost of the equipment can be fully deductible for additional tax savings. Such purchases can include, but aren’t limited to, a new computer to handle your tech development programming or a desk and chair for a new employee.
A requirement for this deduction, is usually that your business must have taxable income to be reduced. If your startup is pre-revenue or doesn’t have taxable income, bonus depreciation is possible. This bonus depreciation allows you to deduct 50 percent of the cost on the current year’s taxes, and the remaining cost over future periods.
- Deduction of Startup Costs - As a SaaS company, your business might have the benefit of deducting startup costs. In the U.S., it’s possible to deduct the first US $50,000 that goes to starting a business, which include such things as lawyer fees, etc.
- Turn Losses into Deferred Tax Assets - A deferred tax asset usually arises when a company overpaid its taxes or pays its taxes early. The asset is reflected on the balance sheet and represents a form of tax relief.
Your SaaS company can create a deferred tax asset, which lowers a business’s tax burden, by carrying over a loss from one period to the next. If your company incurs a loss in the previous financial year, for example, it can use that loss to lower its tax burden in the following year.
Regardless of approach, it’s important to start planning to reduce your company’s tax burden.Remember to take advantage of our tax planning cheat sheet to help you stay on top of your business tax burden!
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.