Home/Tax Planning/Tech Company Tax and Accounting Considerations

Tech Company Tax and Accounting Considerations

tech company accounting taxIf you run a technology business, you are aware of the high demands inherent in such a fast-paced field.  The need to stay ahead of the competition demands forethought and innovation like no other industry. But have you considered your success may depend on more than having the best product.

Most high-technology businesses begin as private endeavors with the ultimate goal of going public.  With that kind of growth on the horizon, it can be easy to get wrapped up in product development and fail consider how important accounting and tax advice is to your upward mobility.  Without a solid plan for the correct business structure and tax strategies, your business may have to overcome more than the competition.

ATTRACTING TALENT

Attracting the best talent will be one of your first hurdles.  Capital is likely tight while your product is still on the drawing board.  This is the time to look at stock based compensation structures.  Stock options and restricted stock units can be an enticing addition to compensation packages, helping you to compete with larger, more established, companies for the talent you need.

Stock Options: A stock option is the right to buy stock in the future at a fixed price.  The options will typically have conditions attached, reflecting such items as expiration dates and requiring employment for a length of time (a vesting period).   The option may even require the achievement of certain performance goals before the option is exercised.

Stock options can have favorable tax treatment for the employee, but only if the initial setup follows the rules for incentive stock options (ISOs).  Otherwise, your options would be classified as non-qualified stock options (NQOs).   ISOs can only be granted to employees, whereas NQOs can be granted to both employees and outside consultants.

Restricted Stock Units:  A restricted stock unit (RSU) is a grant of company stock, but the stock is not handed over immediately.  There will be certain restrictions or requirements before the stock that was granted is actually released to the employee.  Some RSU agreements may require employees to pay a purchase price for the grant.  The units are typically forfeited if the restrictions or requirements are not met.

RSUs differ from stock options in that stock options are the option to buy a stock at a set price.  An RSU is stock that is granted, though the employee can be required to pay a price for the grant.    Both will likely be subject to certain conditions and timing restrictions. 

Make sure your advisor is knowledgeable in the rules for each type of stock option or grant so there are no surprises down the road.

CAPITAL FUNDING

Funding will be another initial challenges.  You have many options to consider for funding your capital needs.  Your business advisor can assist with suggesting potential funding sources, which may include bank loans or outside investors (venture capitalists).

Whether you are applying for a loan or presenting your idea to a potential investor, you should have a business plan in place ahead of time.  Your business plan will show that you have a viable idea that you are approaching in a serious and professional manner.

MULTI-STATE NEXUS

Are you ready to do business across state lines?  Technology businesses frequently do business or sell their product outside of the state, or even outside of the country.  You will need to determine if you have “nexus” in states in which you do business.  Nexus is defined as a means of connection, tie, or link and is the term that is used when determining if a business has a physical presence in another state.

States have become aggressive in recent years in claiming that businesses have nexus within their borders.  This is a revenue source that states have begun fighting for.  Federal law limits states’ ability to assess income taxes on businesses that do not have a physical presence in their state, resulting in states using increasingly lower thresholds to determine if physical presence, or Nexus, is met.

You will need to be aware of each state’s or country’s income tax laws, and how it will affect the cost of doing business in that particular place.  Also consider that there may be separate sales tax requirements in each state you reach.  There is much at stake in determining Nexus and handling multi-state reporting.

These are just a few of the accounting and tax issues you will need to address for your technology start-up.  As you can see, it is of vital importance to work closely with your tax and business advisors when starting your business, for they can help guide you through the myriad of financial and tax issues that are sure to come up as your business grows.

 

By | 2017-05-24T13:42:03+00:00 January 17th, 2017|Tax Planning|0 Comments

About the Author:

Gumbiner Savett Inc. editors are comprised of tax and audit practitioners ranging from manager to shareholder. They are dedicated to staying on top of the latest rules and regulations in the accounting and finance industry.

Leave A Comment

Show Buttons
Hide Buttons