Podcast Summary
ERCs: Be Wary of Fraudulent Offers: Startups and VCs should verify the legitimacy of unsolicited offers for Employee Retention Credits and ensure they work with reputable professionals to navigate the complexities of ERCs.
Startups and VCs need to be cautious about Employee Retention Credits (ERC) due to the risk of fraud. ERCs were introduced as a COVID-19 stimulus measure, and while the initial distribution was legitimate, there are concerns about the large amount of money being distributed three years later. Some companies are acting as "ERC farms," cold-calling businesses and offering to help them recoup employee salaries paid during COVID-19. These calls can be misleading and potentially fraudulent. Startups and VCs should be wary of unsolicited offers and ensure they are working with reputable accounting or finance professionals to navigate the complexities of ERCs. It's essential to verify the legitimacy of these offers and the eligibility criteria before engaging with any third-party services.
ERC Program: Fraud Concerns and Uncertainty: Businesses should exercise caution with ERC program funding due to potential fraud risks and uncertainty around eligibility. If unsure, consider withdrawing applications or voluntarily repaying funds.
The Employee Retention Credit (ERC) program, which offers businesses up to $26,000 per employee in government funding, has become a target for potential fraud due to its complexity and the unsophisticated tax knowledge of many applicants. Some edge cases, such as remote work during a government shutdown, may not qualify, and the IRS is actively addressing the issue. If your startup applied but isn't sure if you should have, you can still withdraw your application. If you've already taken the money, consider voluntarily paying it back to avoid future consequences. The program was initially designed for businesses severely impacted by the pandemic, such as restaurants and airlines, but many startups did not qualify due to specific benchmarks. The total amount of money distributed grew from $3 billion in 2020 to $230 billion before being paused. Be cautious and avoid unknown risks, and if something seems too good to be true, it probably is. The IRS advises against disregarding advice from CPAs and encourages open communication.
Double-dipping on ERC and R&D tax credits is risky: Consult a tax professional for proper filing, as double-dipping on ERC and R&D tax credits can lead to fines, legal action, and negative publicity. Focus on growing your business through other means.
The Employee Retention Credit (ERC) and Research and Development (R&D) tax credits cannot be double-dipped, and attempting to do so could result in severe consequences for a startup, including fines, legal action, and negative publicity. The proper way to pursue these tax incentives is by consulting with a trusted tax professional or CPA firm, who can guide you through the eligibility process and ensure accurate filing. The ERC and R&D tax credits are complex and reflect on annual tax returns, so it's essential to approach them with caution and focus on growing your business through other means, such as raising more capital or increasing revenue, rather than relying on these tax incentives heavily. Additionally, the R&D tax credit is increasing for the 2023 tax year, making it an attractive option for eligible startups.
Eligibility for US R&D Tax Credit: The US R&D Tax Credit encourages R&D spending and job creation in America by offering tax incentives for novel, technological, uncertain, and experimental engineering projects in the US, involving US engineers on US payroll.
If you're a startup company investing in Research and Development (R&D) for your app or software, you may be eligible for the US Research and Development Tax Credit. However, the qualifications for this credit are specific and include the engineering being novel, technological in nature, eliminating uncertainty, and involving a process of experimentation. The engineers or contractors working on the R&D must be based in the US and on US payroll. The tax credit process is important for encouraging R&D spending and job creation in America. It's crucial to go through this process with an expert to ensure eligibility and avoid wasting time. The Certified Public Accountant (CPA) signing your tax return will also carefully review this credit to ensure its validity.
Taxes and Finances for a Startup: Costs and Filings: Startup tax and finance costs range from $3k to $10k+/year, including accounting, state, federal taxes, and filings. Consult CPAs for advice.
The cost of taxes and finances for a year one startup with around 500K in funding and a few employees can range from $3,000 to $10,000 or more, depending on the number of states they operate in. The baseline accounting cost is approximately $500 to $600 per month. Freelancers and contractors can help minimize taxes in different states. However, if equipment is bought for contractors or office leases are paid, it could trigger taxes. Annual state and federal tax returns, franchise taxes, and 1099 filings are essential. Delaware corporations require additional filing fees. Startups should consult their CPAs for specific advice.
Prepare for fundraising with accurate financial records: Maintaining transparent and consistent financial records from the start increases chances of securing investments and provides clear understanding of company's financial trajectory
Proper financial record-keeping is crucial for a startup's success in attracting investors. During the fundraising process, being due diligence ready is essential to close deals smoothly and efficiently. Neglecting accurate financial reporting can lead to significant issues, such as accounting nightmares, which can halt the investment process and even put the company in a precarious financial position. These complications can take months to resolve, potentially consuming valuable time and resources. Therefore, it's recommended for startups to maintain transparent and consistent financial records from the very beginning. This not only increases the chances of securing investments but also provides a clear understanding of the company's financial trajectory.
Regular financial communication builds trust with investors: Regular financial updates build trust, help leaders stay informed, and enable investors to make informed decisions
Transparent financial communication is crucial for building confidence with investors and ensuring the financial health of a company. The speaker emphasizes the importance of regularly checking cash balances and understanding the reasons behind changes in expenses. By receiving weekly reports with up-to-date financial information, investors can make informed decisions and feel reassured that their investment is being managed responsibly. This practice not only builds trust with investors but also helps the company's leadership stay on top of their finances and make strategic decisions. Regular communication also serves as a way to build confidence within the investor community, making it easier to secure additional funding or support when needed. In summary, maintaining clear and consistent financial communication is an essential aspect of running a successful business and keeping investors informed and engaged.
Stay informed about your startup's financial situation: Understand cash balance, use tools for updates, and prioritize financial literacy for informed decisions and growth
As a startup founder or CEO, it's crucial to have a clear understanding of your company's financial situation, specifically your cash balance, at all times. This knowledge is essential for making informed decisions and presenting accurate information to investors and board members. The use of tools like monthly investor updates and real-time cash balance checks can help keep you informed. Additionally, having a reliable accounting and consulting partner can provide valuable assistance in managing financial operations and ensuring regulatory compliance. As the saying goes, "know your numbers," especially when it comes to altitude and speed in the startup world. Don't let a lack of financial transparency stall your growth or potentially lead to a crash. Stay informed and prioritize financial literacy for the success of your business.
