Five Tax Mistakes that Could Put Your
SBIR/STTR Company At-Risk
By: PJ Donohue, CPA
Winning your first SBIR/STTR (commonly abbreviated “SBIR”) award is an impressive milestone, but it also transforms your lean startup into a highly scrutinized government contractor overnight. Unfortunately, accounting protocols that worked for your early startup don’t always translate to the unique world of government funding. To keep your venture on solid ground, avoid these five common tax blunders that frequently catch SBIR founders off guard.
1. Timing of Income and Expense Recognition
Choosing the right method of accounting for taxes is crucial for SBIR-funded companies. Between the two choices – cash and accrual – most founders will choose the cash method due to its perceived simplicity. However, for companies that draw down funds in one year but do not spend the cash until the following year, the cash method can create a significant tax burden.
Utilizing the accrual method aligns the grant revenue with the R&D expense to significantly reduce, if not eliminate, your tax liability. This is particularly important for many awardees who receive a significant portion of the funds up front (such as through the NSF SBIR program).
2. Not Understanding Your Entity Type
Understanding your business entity structure is key when you file taxes. For example, we have seen founders file Schedule C with their individual tax returns for an LLC when they really have a partnership that should be filing its own return (Form 1065). Penalties for late partnership returns are on a per-partner-per-month basis, and can eat a company’s runway before it gets off the ground.
3. Confusing Automated Bookkeeping with Actual Accounting
Many founders connect their bank accounts to QuickBooks Online, pull the bank transactions through automatically, and then assume their bookkeeping is done. It’s only when tax season comes around that they find out they not posted their transactions correctly, and not only will they not be able to have their financials in order by Tax Day, but they don’t even have usable data to make an extension payment. That leaves us in an awkward conversation right before the deadline, in which we have limited time and information to make a filing decision.
4. Paying Employees Without Running Payroll
Your PI and key personnel must be paid through running a proper payroll. We have seen companies send “payroll” payments through Zelle, bypassing a formal payroll run and omitting withholding taxes. This leads to back taxes, IRS penalties & W-2 issues.
The IRS is particularly aggressive in its recovery of unpaid payroll withholding, as these taxes are considered held in trust, which can create personal exposure to founders and shareholders.
5. Missing International Tax Filings
Companies that establish a foreign subsidiary and fail to report this on their tax return will face an automatic penalty of $10,000. Even more painful is the failure to report transactions between a US corporation and its foreign shareholders (greater than 25%). The penalty for missing this is an automatic penalty of $25,000.
Avoiding these mistakes starts with having the right advisors in your corner. EGC’s team of CPAs has deep expertise in SBIR accounting, and we are here to assist with optimizing your tax strategy. Click here to schedule a call to discuss how we can support your needs.
