In this article, we’ll answer the question “What is excise tax?”, provide an overview of commonly taxed goods and their associated rates, and show you how to file with the IRS properly.

When the time is right, consider indinero’s expert business tax services. We’ll handle accounting and bookkeeping details so you can focus on what you do best. 

Excise Definition

Excise tax is levied on certain goods and commodities produced or sold within a country and on licenses granted for certain activities. 

In decades past, the tax was a significant revenue generator for the US government. However, as the law evolved, the proportion of revenue collected this way declined. Now, it’s primarily used to discourage the consumption of certain products, such as tobacco or alcohol, and to regulate particular industries, such as those that produce significant pollution. 

Excise Tax vs Sales Tax

For business owners, excise and sales taxes may seem similar. They’re collected on goods and services, contribute to higher prices, and are the business’s responsibility to collect and remit to the IRS. 

However, there are some slight differences: 

State and federal governments assess many different excise taxes. However, five categories are the most important: highway, aviation, tobacco, alcohol, and health. These accounted for 93% of total excise tax receipts in 2019.

Here is a list of the most common excise tax rates business owners should know.

Other Excise Taxes

While the above constitutes the lion’s share of all excise taxes collected, federal and state entities charge quite a few others. Depending on your business, you may want to keep these in mind as well: 

• Aviation fuel
• Guns
• Ammunition
• Luxury chars
• Jewelry
• Furs
• Airline tickets
• Environmental taxes
• Mass communication services
• Gambling 
• Recreational cannabis
• Carbon emissions
• Sugary drinks 
• Financial transactions

Excise Tax Deductions

Excise taxes contribute to a higher cost of doing business. Still, as long as the tax is directly related to your business’s ordinary and necessary operations, you can take advantage of them as deductions. 

However, some taxes, such as on luxury items, have different rules. It’s important to know that excise tax on fuel is already included in the cost; don’t double deduct when you take the mileage reimbursement for company vehicle costs. 

To maximize your deductions, the key is to have a system for tracking business expenses. Modern software solutions can link to business accounts and take care of this automatically. If you’re using a spreadsheet to track finances, consider switching to another method or if your business is complex enough, consider indinero’s online bookkeeping services. 

Systematizing Excise Tax Collection 

By implementing a system for collecting excise tax, you can preserve your time as a business owner while remaining compliant with the law. 

Determine Applicable Goods and Services

The first step is to identify what your obligations are. This includes an overview of local, state, and federal regulations and industry-specific guidelines. 

Educate Your Team

Business growth relies on effective delegation. Educating your team, especially those in sales, finance, and compliance, ensures the responsible parties know these rules.

Consider designating a single person to hold responsibility for excise tax. When more than one individual is responsible for a task, no one takes full responsibility, and the job may not be completed. 

Integrate Collection Into Point-of-Sale Systems

If applicable, integrating tax collection into an automated system can ensure the correct amount of tax is collected while avoiding human error. 

Implement Record-Keeping Procedures

Maintaining records of sales, production volumes, and other relevant data is important for accurately filing your taxes. Without this information, the IRS can’t verify the accuracy of your reports, and you run the risk of an uncomfortable audit. (Here’s what to do if you do get audited.)

Filing Excise Tax

Excise tax is not reported on other typical business tax forms. Every business must file a quarterly or annual form 720 to do so. Depending on your business, you might also have to file a specialized form as well:

• Form 2290: heavy highway vehicle use
• Form 11-C: gambling
• Form 5330: excise tax related to employee benefit plans

How to Pay Excise Tax Online

In April 2023, the IRS received a sizable appropriation from Congress and dedicated those funds to modernizing its tax collection system and increasing audit support on high net-worth individuals.

As part of that overhaul, it’s now easier than ever to file taxes online.

• Click here to pay your federal excise tax online with a debit or credit. 
• See here for a comprehensive directory of state tax and government agencies.

Changes in Excise Tax Law

Excise taxes often change slightly from year to year. Sometimes, legislatures adjust rates to reflect changes in inflation; other times, new taxes are implemented.

Keeping in touch with a tax professional can keep you informed of these changes, but here are the changes coming to excise tax law in 2024.

• Oregon and Utah are increasing excise tax applied to motor fuel.
• Kentucky is instituting a new tax on electric vehicle power.
• Maine and Hawaii are updating their tobacco and e-cigarette excise taxes.

Conclusion

Many goods and services are subject to excise tax, but the most important by tax receipt are alcohol, tobacco, health, fuel, and aviation. 

As a business owner, be sure to implement a system for recording, collecting, and remitting excise tax to state and federal tax agencies. Human error is the biggest obstacle to legal compliance. 

If you’d like help with these or other accounting matters, consider contacting indinero’s expert accounting and tax services.

1. https://www.eia.gov/tools/faqs/faq.php?id=10&t=5 ↩︎
2. https://www.complyiq.io/gas-tax-state-2/ ↩︎
3. https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
4. https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
5. https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
6. https://www.ttb.gov/tax-audit/tax-and-fee-rates ↩︎
7. https://www.complyiq.io/cigarette-tax-state/ ↩︎
8. https://www.taxpolicycenter.org/briefing-book/what-are-major-federal-excise-taxes-and-how-much-money-do-they-raise ↩︎

In short, it’s a decision-making tool.

In this article, we’ll walk you through the basics of financial modeling so you can incorporate quality financial analysis into your business planning process. 

For help constructing financial models and other accounting necessities, indinero’s fractional CFO services are the perfect solution. We provide expert guidance at the cost of a novice in-house employee. 

Financial Modeling Basics

In our article about bookkeeping vs. accounting, we explain the difference between these two services: Bookkeeping services collect and organize information while accounting services help businesses creatively analyze data to help entrepreneurs make decisions; constructing financial models is where the expertise of accountants shines. 

When an expert puts together a model, they’ll go through the following steps: 

1. Construct a snapshot of the present moment with a combination of income statements, balance sheets, cash flow statements, and debt schedules.
   
2. Gather past iterations of the same information and relevant market movements to establish a trend line for your business. 

3. Generate forward-looking predictions by applying both conservative and ambitious assumptions to the status quo. 

When they’re finished, projections will resemble something like this:

Keep in mind that forward-looking projections are only rough estimates. The past is a solved matter; painting that picture is as simple as gathering information and inputting it into a spreadsheet. Estimating future finances is an art, necessitating both mathematical expertise and creative thinking.

From a graphical standpoint, a model’s looks depend on its use case. It may be a simple Excel-generated graph or just numbers on a spreadsheet for internal purposes. Businesses may create a stylized graphic if they plan to use the model to pitch investors or creditors. 

Types of Financial Forecasting Models

In our previous graphic, we chose to use profit as an example. However, any number of financial metrics can be modeled. Here are some financial modeling example use cases:

• EBITDA
• Revenue
• Cost of Goods Sold (COGS)
• Margin
• Operating Expenses
• Cash Flow
• Market Share
• Lifetime Value of a Customer 
• Break-Even Analysis
• Stock Price

One particularly popular forecasting technique is a Monte Carlo Simulation, which businesses create to predict possible outcomes of an uncertain event. Financial planners use it to model potential retirement assets for clients, and businesses can also apply the technique to their finances.

Think of Monte Carlo Simulations like a random number generator. You’ll use historical information to generate your best guess for % change after an event and the likely standard deviation around that assumption. Then, the simulation runs many thousands of times, generating a picture with probable upper and lower bounds as well as the most likely outcomes. 

By changing the assumptions, businesses can get a sense of how different conservative and risky scenarios will play out.

Using Financial Models for Decision-Making

Constructing financial models is challenging; effectively incorporating them into your decision-making process is even harder. We’ll provide some potentially worthwhile insights to make this analysis less overwhelming. 

First, the simple act of building a model is instructive; it reduces reliance on gut feelings and reveals information you might have overlooked otherwise. The logic behind writing a business plan is similar. Having the plan exclusively in mind might feel easier, but seeing it on the page and sharing it with others can also generate valuable feedback. 

However, the best use of a financial model is to evaluate risk & reward. Here are some questions to ask after constructing a model: 

• If I invest $10,000, what’s my breakeven point? 
• What level of risk do my decisions pose? 
• What return do I need to generate to justify those risks? 
• How is my business positioned to weather a market downturn? 
• What contingency plans can I use to mitigate the risk of unforeseen events? 
• How confident am I in the assumptions I’ve made building this model? 
• What areas of my business offer the most potential for return? 
• Where are the most significant costs in my business?
• What KPIs should I monitor to track the progress of my decisions? 

You may have noticed that most of these questions are qualitative rather than quantitative. That’s because numbers provide a foundation, but the success of strategic decision-making relies on interpreting objective information to make subjective judgments. 

Challenges of Financial Models

It can be tempting to look at a model and place too much faith in its predictions. However, to avoid potential missteps, keep the following in mind: 

1. The model is only as good as the data used to create it. If inaccurate information is used to generate predictions, the results will also be inaccurate.  Use a system for tracking business expenses to ensure the data you use for modeling is as accurate as possible.
   
2. Models rely on assumptions. Be careful to base your decisions, especially risky ones, on your financial model’s conservative estimates. 

Conclusion

A financial model is a powerful decision-making tool, bridging historical data and future projections. Whether you’re in real estate, SaaS, or startups, understanding the basics is crucial for effective business planning.

Don’t just see it as math; it’s a creative process that involves past trends, forward-looking assumptions, and expert insights. 

Indinero’s business tax services are here to help. We’ll handle the accounting details so you can focus on what you do best.

For more details on GAAP compliance, click below to download our free essentials checklist.

Deferred Revenue Accounting Principles

Since deferred revenue is an aspect of accrual accounting, let’s begin by distinguishing between the two primary accounting methods. Our cash vs. accrual accounting article covers the topic in-depth, but here’s a quick refresher.

The difference between these two approaches comes down to timing. With cash accounting, revenue and expenses are recognized when money enters or exits your bank account. Accrual accounting, on the other hand, recognizes revenue and expenses when committed to, regardless of when money changes hands. 

When deferred revenue is recorded, it represents a financial liability on the balance sheet to represent the cost of a service yet to be delivered.

Why Use Deferred Revenue Reporting Over Cash Accounting? 

Cash accounting is certainly simpler, so why would businesses add complexity?

There are a few reasons: 

1. It aligns with GAAP, which publicly traded companies must adhere to.
   
2. Under GAAP, it is considered a “conservative accounting” practice. In contrast to “aggressive accounting,” where one-time revenue injections can overstate company valuations, deferred revenue ensures investors and creditors aren’t misled.
   
3. Deferring revenue means matching income with related expenses, which helps financial statements report company profitability more accurately.
   
4. While revenues can appear volatile in cash accounting, this technique smooths income fluctuations and provides a more stable, representative picture of financial performance. 
   
5. It allows companies to strategically time income to maximize tax benefits.

Deferred Revenue Tax Treatment

One of the benefits is that companies can offset their current year’s tax burden. 

When income is recognized, it becomes taxable. By utilizing deferred revenue, perhaps in conjunction with taking a net operating loss, taxes can be postponed to a later date while the income can be reinvested today. 

Remember that strategic timing allows companies to delay their tax bill, not eliminate it. 

Let’s Look at an Example

The most common reason to use deferred revenue accounting is when an organization receives money upfront for services provided over time. 

For example, consider a SaaS company that sells pre-paid subscriptions. They’ll collect the money upfront but defer reporting the revenue over the contract’s lifetime. Even though they receive the money all at once, deferred revenue is the proper way to recognize the income since ongoing costs of doing business remain throughout the subscription period. 

Other services that often make use of this strategy include: 

• Newspaper Subscriptions: A publishing company that charges annually for a daily periodical.
  
• Fitness Memberships: A gym that collects upfront fees on annual memberships.
  
• Insurance Premiums: An insurance company that collects premiums at the beginning of a policy period but is obligated to provide insurance over time. 

The Journal Entry

In accounting, “journal entries” are records of financial transactions; they’re how businesses track revenue and expenses. When using deferred revenue, your journal entries will look a bit different.

Let’s continue with our SaaS company example. In addition to providing an example journal entry, we’ve set the dates to straddle two calendar years to demonstrate how deferred revenue reporting impacts taxes.

Our hypothetical software company has signed a year-long maintenance contract for $48,000, which will be paid in full on July 1st.

Let’s walk through this example:

1. After being paid, they record $48,000 in their cash account and create a corresponding entry in their deferred revenue balance.
   
2. Each month, the company debits (decreases) this account and credits (increases) the revenue record by $4,000 (one-twelfth of the original payment).
   
3. The cash account doesn’t change after the initial payment.
   
4. After twelve months, the revenue balance fully reflects the $48,000 payment, while deferred revenue has been reduced to zero.
   
5. Since the revenue is recognized over two tax years, despite receiving an upfront payment, the company will report taxable revenue to the IRS over these two years. 

FAQs

Conclusion 

Deferred revenue, a component of accrual accounting, aligns with GAAP principles, providing a conservative and transparent approach to financial reporting. Unlike cash accounting, deferred revenue recognizes income in line with service delivery rather than when cash payments are received. 

The practice promotes transparency for investors, more accurately matches income with associated costs, and carries important implications for the timing of tax burdens. 

For help with GAAP-compliant accrual accounting, indinero’s accounting services are here to help.

So, if you’re wondering when are taxes due in 2024, you’re asking the right question at the right time. Let’s navigate this maze together, untangling crucial dates, potential shifts, and everything else you need to know to stay on top of your 2024 tax obligations.

April 15th is widely known as the day personal and business taxes are due each year in the United States. However, the April 15th deadline isn’t always so cut and dry.

The date business taxes are due depends on a few things and can vary due to factors like:

• Business type
• Fiscal year-end date
• Request for tax extension

When are Taxes Due in 2024

Important Tax Deadlines for Businesses

You should always keep in mind the importance of these dates. They represent the filing deadline, the final day for submitting your business tax returns. Missing these tax payment deadlines might result in penalties or interest charges. So, it’s always better to ensure you’re ready to submit well ahead of these deadlines.

Check out our guide on what to do if you miss a tax deadline.

All Organizations

• January 16th, 2024: Fourth Quarter Estimated Tax Payments.
• January 31st, 2024: Form 1099 – Payors send to Payees.
• January 31st, 2024: Form W2 – Employers to send to employees.
• February 28th, 2024: File information returns (1099s) with IRS(paper).
• March 31st, 2024: Form 1099 – File information returns (1099s) with IRS (electronic).
• April 15th, 2024: Form 114 – FBAR-Filing (extension available, no filing required).
• April 15th, 2024: First Quarter Estimated Tax Payments.
• June 17th, 2024: Second Quarter Estimated Tax Payments.
• September 16th, 2024: Third Quarter Estimated Tax Payments.
• October 15th, 2024: Form 114 – Form 114/FBAR –(if extended) Filing.
• December 16th, 2024: Fourth Quarter Estimated Tax Payments.

Delaware Corporations

• March 1st, 2024: Delaware Annual Franchise Report

C-Corporations

• April 15th, 2024: Form 1120 – File return and pay tax due.
• April 15th, 2024: Form 7004 – File extension and pay estimated tax due.
• October 15th, 2024: Form 1120 – File extended tax return (if applicable).

S-Corporations

• March 15th, 2024: Form 1120-S – File return and pay tax due.
• March 15th, 2024: Form 2553 – S-Corp Election.
• March 15th, 2024: Form 7004 – File extension and pay estimated tax due.
• September 16th, 2024: Form 1120-S – File return (if applicable).

Non Profits

• May 15th, 2024: Form 8868 – Automatic Extension to File.
• May 15th, 2024: Form 990 – File return.
• November 15th, 2024: Form 990 – File return (if extended).

Partnership (including LLC)

• March 15th, 2024: Form 1065 – File return and pay tax due.
• September 16th, 2024: Form 1065 – File return (if applicable).

Sole Proprietorships

• April 15th, 2024: Form 4868 – Extension to File.
• April 15th, 2024: Form 1040 – File return and pay tax due.
• October 15th, 2024: Form 1040 – File return (if applicable)

Note that if you are using a fiscal year that isn’t the calendar year, your tax filing deadline is different and depends on your business entity and when your fiscal year ends.

Check out these other posts:

• Cash vs. Accrual Accounting
• C-Corporation vs. S-Corporation
• Controller vs. Comptroller vs. CFO

Consequences of Missing Tax Deadlines

Should you miss a tax deadline, you’re likely to face consequences such as interest charges, penalties, and even potential loss of refunds owed. The IRS doesn’t take kindly to tardiness when it comes to business taxes due. If you fail to file, the tax bill can quickly increase due to interest and penalties.

The consequences of missing tax deadlines can be severe. For instance, if you miss an estimated tax payment deadline, the penalties and interest charges depend on how much you owe and how late the payment is. It’s not just about the financial impact; your business reputation can also take a hit.

Let’s say you find yourself unable to pay your tax bill in full. It’s crucial you file your taxes as soon as possible anyway and consider setting up an installment plan for the remaining balance. Remember, failure to file is a serious issue.

Electronic filing is your best bet. It’s the fastest, most accurate way to file your taxes. And if you think you’ll miss a deadline, don’t panic. Request an extension. It’s always better to preemptively act than face the consequences of missing tax deadlines

The Internal Revenue Service (IRS) will apply a Failure to File penalty to all businesses that submit their 2023 tax return late. The Failure to File Penalty is:

• 5% of the business’s unpaid taxes for each month or part of a month that a tax return is late. The penalty won’t exceed 25% of your unpaid taxes. However, the IRS charges interest on penalty fines.
• Generally speaking, it might potentially be wise to make a bit of a larger extension payment so that one will have a refund and definitely avoid penalties and then know that the additional refund will get rolled into their Q1 estimate for the next year (two birds with one stone).

The best way to avoid penalties from filing a late tax return is to apply for a tax extension on time.

What Is a Tax Extension?

A tax extension is an application filed with the IRS to get an additional six months to submit a tax return. The application can be filed electronically or on paper and must be done before the original tax deadline.

The extension typically gives a business six months to file its taxes. While extensions can provide breathing room, they don’t delay the tax payment due dates. So, even if you’ve got an extension, make sure to estimate and pay any owed taxes by your original due date.

Penalties and interest will still be charged on any outstanding balances, so filing a tax extension is crucial if you think you might not make the original deadline.

Requesting an Extension for Tax Filing

You’ll often find that you need a bit more time to prepare your business taxes properly; fortunately, the IRS allows businesses to request a six-month tax filing extension. This tax extension gives you breathing room if you’re behind on your paperwork, but remember, it’s an extension to file, not an extension to pay what you owe.

1. Partnerships and S-Corps must file by March 15, 2024. If you need more time, use Form 7004 to request an extension to September 15, 2024.
2. C-Corps have until April 15, 2024, to file. With Form 7004, the deadline extends to October 15, 2024.
3. The extension doesn’t delay the date to pay taxes. You may face penalties and interest if you miss the filing deadline and owe taxes.

2024 Deadlines to file business tax extension

Note: The deadline to apply for a tax extension is the same date as the tax return filing deadline. Only when an extension application is submitted will the tax return deadline be extended to the dates listed in the above table.

Reasons to File for an Extension on a 2023 Tax Return

Businesses might need more time to file their taxes for a few reasons. These can include:

• You are waiting on paperwork or information from another party, such as Form 1099.
• Your business is complex, and you need more time to hire a reputable bookkeeping firm.
• Your business is expecting a net operating loss carryback.
• You need more time to organize employee plan documents.

How to file an extension for business taxes

The type of business you operate will determine which form to use when applying for an extension to submit your business’ 2023 taxes.

• For sole proprietors and certain single-member LLC’s, fill out IRS Form 4868
• Corporations, partnerships, and multimember LLC’s should use IRS Form 7004

When are Taxes Due for Quarterly payments in 2024?

Estimated Tax Payments

Upon filing, businesses that expect to owe more than $500 in income tax must make estimated tax payments throughout the year. Estimated tax payments are to be made quarterly; they can be submitted online or posted in the mail with Form 1120-W.

The deadlines to submit your business’s quarterly estimated tax payments are as follows:

When are taxes due for quarterly payroll payments?

In addition to annual business tax deadlines, businesses are also responsible to know when taxes are due for quarterly payroll taxes. These taxes include Social Security, Medicare, and federal income tax withholding from employees’ wages.

For 2024, the due dates for quarterly payroll taxes are as follows:

• Quarter 1 (January 1 – March 31): April 30, 2024
• Quarter 2 (April 1 – June 30): July 31, 2024
• Quarter 3 (July 1 – September 30): October 31, 2024
• Quarter 4 (October 1 – December 31): January 31, 2025

It’s important to note that these dates may change slightly based on weekends and holidays. It’s always a good idea to double-check with the IRS or consult with a tax professional to ensure you have the most accurate and up-to-date information.

Deadline to Send Tax Forms to Contractors

A business that works with contractors will need to report non-employee compensation using Form 1099-NEC. In this situation, the business must send Form 1099-NEC to the contractor no later than January 31.

When preparing your 2023 tax return, be sure to send the Form 1099-NEC to all contractors hired in 2023 and the IRS no later than January 31, 2024.

Are you ready to start preparing taxes for 2024? Let indinero’s experts help.

Preparing and filing taxes can be a complex and time-consuming process, especially for businesses. Having a team of experts by your side to tackle the heavy lifting of your tax needs will help ease the frustration of tax season and help you find ways to maximize your business’ tax deductions.

At indinero, our accountants and tax professionals are always up to date on the latest tax changes. We offer a variety of services to businesses of all sizes, including tax preparation, filing, and consulting. We also offer fractional CFO services to help businesses with their financial planning and forecasting.

If you’re ready to get started or if you have any questions, please contact us today. We’d be more than happy to help you prepare for next year’s tax season.

Fortunately, cash flow is a relatively easy concept to understand. Briefly, cash flow refers to the movement of money in and out of a business, reflecting the company’s health and liquidity. Understanding cash flow makes it easier to manage day-to-day operations, project future finances, and prepare for conversations with prospective investors. 

In this guide, we’ll provide an in-depth understanding of cash flow statements and show you how to manage your cash flow.

As you’re scaling your business, indinero’s fractional CFO services are here to support you. We’ll handle your accounting needs at a fraction of the cost of a full-time employee so you can focus on growing your operation. 

Components of Cash Flow 

Net cash flow contains three distinct categories of financial flows. Stakeholders use these components to assess how likely a company is to see long-term success. 

• Operational: Funds generated or consumed by a company’s core business activities, such as sales, salaries, and overhead.
  
• Investing: Monetary exchanges related to long-term asset purchases, property, and equipment.
  
• Financing: Flows related to capital structure, including issuing or repurchasing stock, paying dividends, and managing debt. 

Those relying on intuition from personal finance might think of cash flow in binary terms: positive is good, while negative is bad. For businesses, the concept is more nuanced. 

A fast-growing company might subsidize operational losses with debt or equity financing. On the other hand, a struggling organization might have positive operational cash flow but be net negative due to debt service obligations. Whether or not a company’s cash flow is “good” depends on context.

Cash Flow vs Revenue

It’s easy to confuse these two terms, but there is an important difference. 

Revenue represents the total income a company earns from its core business activities. Cash flow focuses on the movement of money in and out of a business, regardless of source or destination. 

How to Calculate Operating Cash Flow

Investing and financing cash flow is important for growth, but for a business to succeed, it must generate a positive operating cash flow; if the core business isn’t profitable, nothing else matters. 

Operating cash flow is derived by adjusting net income for non-cash items and changes in working capital. 

• Net income is gross revenue minus expenses.
  
• Non-cash items most commonly include depreciation and amortization.
  
• Changes in working capital refer to the difference between current assets and current liabilities.

Operating Cash Flow Formula

Operating Cash Flow = Net Income + Non Cash Expenses + Changes in Working Capital

How to Read a Cash Flow Statement

The amount of information in a cash flow statement can be overwhelming, even for trained professionals. Here is a brief list of rules to help you read a cash flow statement.

1. Figures in brackets are outflows (negative) while those without are inflows (positive).
   
2. Most statements will include the current and previous fiscal year, allowing stakeholders to gauge trends.
   
3. The statement is divided into operating, investing, and financing activities.
   
4. Operational cash flow begins with net profit (or loss). It’s computed in detail on an income statement and imported into the cash flow statement.

5. You can’t add the numbers from top to bottom to calculate net cash flow. Double counting would throw your calculation off since sections are summed individually and then compiled into a total.
   
6. Despite the name, non-cash activities such as amortization and depreciation can also appear as line items. They’re included to provide a holistic view of financial performance.

Cash Flow Statement Example

Reading a list of rules and formulas isn’t the easiest way to understand this concept. Instead, let’s look at a cash flow statement example using Amazon’s 1999 report. 

Since the most challenging part of reading financial statements is the amount of information on the page, we’ve abbreviated much of this example. Some line items have been collapsed into a single “other” category, and the figures have been rounded and reported in millions rather than thousands. 

We encourage you to compare this condensed statement with the original document (page 36), particularly where one subsection ends and another begins. The indentations and underscoring can be disorienting. Use our example to orient yourself; each “net” line item will match Amazon’s document.

Amazon.com INC. Consolidated Statements of Cash Flows (in millions)

Reading the Statement: How to Calculate Net Cash Flow

Note that in the example above, the statement is divided into three subsections (operating, investing, and financing) and includes subtotals. To calculate net cash flow, take the sum of each of the subtotals: 

1999 = -90 – 922 + 1104 = $92 million

1998 = 31 -261 + 254 = $24 million

Finally, add “net cash flow” to “cash at the beginning of period” to determine cash at the end of the year. 

Analyzing Amazon’s Statement of Cash Flow

When analyzing a cash flow statement, start with two questions:

1. Does the company have a positive net income? 
2. If not, does it have the cash flow to survive until it becomes profitable? 

Amazon is a unique business, but we chose its 1999 cash flow statement because the tension between positive cash flow ($92M) and large net losses ($719M) is instructive. At some point in your business, you might be facing a situation where you are unprofitable but have access to credit or investors.

Between 1998 and 1999, the following occurred: 

1. Net operating losses ballooned from $124M to $719M. Even after accounting for amortization, depreciation, and changes in working capital, they still lost $90M.
   
2. Before considering any other expenses, payments on long-term debt alone amounted to $188M. Their statement of operations reveals this was 65% of their gross profit for the year.
   
3. They took on an additional $1.2B in long-term debt, exceeding all gross profits earned since inception.
   
4. Revenues increased by ~$1B while gross profit only increased by $150M. 

Take the view that profit from operational activities must eventually outpace the subsidization debt and equity provides. Then, put yourself in the shoes of an early 2000s investor. 

Would you have bought in? 

Many didn’t. Amazon’s position was precarious, and critics wondered how effectively they could compete with established brick-and-mortar retailers. Their success may seem inevitable in hindsight, but it was perfectly rational to have said no at the time.

Cash Flow Planning

Cash flow is the key to planning for the short-term survival of a business. Here are a few tips to ensure your company maintains positive cash flow. 

Use Breakeven Point as a Benchmark

Most businesses aren’t profitable at first. Setting your breakeven point, where revenue equals expenses, as the end goal will clarify and simplify your goals.

Look at Debt Through the Lens of Cash Flow

Business owners have the privilege of thinking differently about debt than individuals. For instance, spending $10,000 on a 20% interest credit card is risky. Salaries are fixed in the short term, and the only way to pay it off is by cutting spending.

However, that same investment in the hands of an entrepreneur carries only a $300 monthly payment. Could you turn a $10,000 investment into at least $300 monthly income? It’s possible. 

Build a Highly Productive Team

Bootstrapping startups make the mistake of hiring less experienced workers to save money. However, their skill level may force you to spend more time and resources onboarding and training than the cost savings were worth. 

Hiring the best candidates, even if they’re more expensive, can earn you more money in the long run.

Be Strict About Receivables 

Having customers pay upfront will make it easier to manage expenses and overhead. 

You can offer discounts or ask for advances or deposits for long-term projects to encourage timely or early payments. If you take credit payments, have a written policy determining who is eligible for credit and who is not. 

Maintain a Six-Month Emergency Fund

Having at least half a year’s savings in the bank is standard wisdom in personal finance and applies to entrepreneurs as well. A degree of safety is important to plan for the future.

This doesn’t mean having six months of cash available, though that is preferable. Businesses manage their finances differently than individuals; lines of credit are also acceptable. 

Keep Good Records

It’s impossible to project future cash flows without understanding current costs and revenues. For more information on creating a system that helps you track expenses and save money on taxes, give our guide on tracking business expenses a read.

Conclusion

Cash flow measures money coming into or leaving a business, regardless of source. Understanding cash flow statements can help entrepreneurs plan for their future finances and evaluate the balance between operational, investment, and financial flows. 

As 2023 draws to a close, it’s pivotal for small businesses to scrutinize their financial status and strategize effectively for tax reduction and a robust financial future. Despite a static tax legislative landscape, the looming possibility of future amendments necessitates proactive tax planning. At indinero, we’re committed to guiding you through these complexities and optimizing your financial strategy with our comprehensive business tax services.

Analyzing Financial Statements for Tax Efficiency

Maximizing Tax Savings through Financial Insights: Delve into your financial statements to accurately gauge your business’s income and expenses. Up-to-date accounting is vital for an unobscured view of your tax situation. Our team specializes in dissecting your financial statements, uncovering potential tax-saving avenues, and developing pinpointing strategic business tax strategies.

Strategic Tax Management: Deferring Income and Accelerating Expenses

Enhancing Financial Position through Tax Timing: Navigate the intricacies of deferring income or accelerating expenses to influence tax savings significantly. Leveraging the timing of property or equipment purchases before the year’s end can yield maximum tax write-offs, especially under favorable depreciation regulations.

In most cases, you should defer income when it’s unclear when you’ll actually receive payment. For example, if you worked for a client in December 2022 and haven’t yet billed them for your services, you might want to defer income until January 2023 to lower your 2022 taxes.

Other factors to consider include whether the work will still be applicable in the future and how much additional risk there is that you won’t be repaid. If the work will still be applicable and there is no additional risk, deferring income can be a good idea even if payment isn’t received immediately. Conversely, if there is more risk that the work won’t be repaid or the payment isn’t likely anytime soon, waiting until payment is certain before deferring income might make more sense.

When it comes to taxes, there are a few key concepts to understand: deductions, credits, and tax rates.

A deduction is an expense that a taxpayer or business can subtract from their taxable income before applying a tax rate to calculate the total amount of business taxes owed. Some common types of deductions include mortgage interest, state and local taxes, and charitable contributions.

A credit reduces the amount of taxes you may owe on a dollar-for-dollar basis. Some common types of credits include the Earned Income Tax Credit (EITC) and the American Opportunity Tax Credit (AOTC). The EITC provides a tax break to low-income families, while the AOTC offers a tax break to students who are pursuing postsecondary education.

Tax rates vary depending on how much money you make and where you live. In some cases, tax rates may even change depending on your marital status or whether you have children living with you.

Navigating Business Meal Deductions

Understanding Deduction Rules for 2023: With the holiday season nearing, be mindful of the guidelines for business meal deductions. Although the 100% restaurant meal deduction isn’t applicable this year, certain business meals might still qualify for full deductions. Proper categorization of these business expenses is critical in small business tax planning.

Utilizing Net Operating Losses (NOLs)

Turning Losses into Potential Savings: If your business’s deductions surpass income, resulting in a Net Operating Loss, understand how to apply these NOLs against taxable income from other years within specific constraints. Our experts are here to aid you in maximizing the tax advantages of NOLs.

Leveraging Energy Tax Incentives for Sustainable Practices

Reducing Carbon Footprint While Gaining Tax Benefits: Investigate tax incentives designed to encourage eco-friendly business practices. 

When certain criteria are met, organizations may be able to claim tax credits for items such as:

• Electricity is produced from certain renewable sources (including geothermal, solar, and wind facilities).
• Energy-efficient home improvements.
• Alternate fuels – Organizations may be eligible for a tax deduction based on the energy savings generated for qualifying energy-efficient commercial building property.
• The rules are complex, and careful research and planning can benefit business tax planning.

Broadening Your End of Year Tax Planning Strategy

Exploring Additional Considerations for End-of-Year Planning and Business Taxes:

• Employee Retention Credit (ERC): Qualify for ERCs if impacted by COVID-19 in specified periods.
• Charitable Contributions: Be aware of the limitations on charitable contribution deductions for 2023. A deduction is limited to 10% of the corporation’s taxable income. Careful planning is essential to maximize the tax benefit potential of your charitable contributions.
• Leverage Tax Credits: One lesser-known example is the work opportunity tax credit (WOTC), designed to help employers hire and retain individuals from certain target groups that have faced significant barriers to employment. This includes members of families receiving benefits under Temporary Assistance for Needy Families (TANF) program, felons, veterans, and those from other target groups. The credit is worth up to $2,400 per eligible new hire. 
• Digital Assets & Cryptocurrency Taxes: Stay informed about the tax implications of transactions involving virtual currencies.
• Transactions Between Business and Owners: Optimize tax considerations in dealings between businesses and business owners. This includes aspects such as loans, distributions, and salaries. Be sure to structure these most beneficial elements from a tax perspective.
• Estimated Business Tax Payments: Regularly review these payments for liquidity management and compliance.

Concluding Thoughts: Partner with Indinero for Tailored End of Year Tax Planning

Year-End Planning for Your Business’s Success: Leverage our expertise to optimize your tax planning, develop effective tax strategies, reduce tax liabilities, and set your business on a path of prosperity. Engage with the business tax professionals at indinero to discover how we can elevate your end-of-year tax planning and bolster your business’s financial health.

You do this by using an unprofitable year to offset future profits, which may sound a bit complicated. Not to worry. In this guide, we’ll present the rules and limitations of net operating losses and demonstrate how to use them to save money and grow your business. 

Navigating tax advantages like net operating losses can be a headache. InDinero’s business tax services can save you time and money, as our team of professionals will ensure you’re making the most of every tax year. 

What is a Net Operating Loss?

Net operating loss occurs when a business’s permissible deductions surpass its taxable revenue during a given year. In other words, when a business loses money.

What Are the Uses of a Net Operating Loss?

Business owners can use net operating loss to manage their finances strategically. There are two primary ways to do this: 

Method 1: Using a year of poor performance to offset a good year

No business wants to record profit losses, but if you do, this tactic can be a silver lining. Think of this method, called a net operating loss carryforward,  like a coupon; things went poorly this year, but you’ll get a discount on next year’s taxes.  

When done correctly, your tax professional will apply last year’s loss to this year’s profit as a tax deduction. For example, if your business lost $50,000 last year but earned $150,000 this year, you could apply a net operating loss carryforward and only pay tax on $100,000 of your profits from this year. 

Related: Learn how to calculate gross vs. net income to determine whether you’ll be profitable or take a loss this tax year. 

Method 2: Strategically timing investments

A profitable business can invest in growth tax-efficiently by taking advantage of net operating loss rules. 

Imagine this scenario: You’ve turned a $100,000 profit, and your estimated taxes are $25,000. However, you’ve been considering expanding and need to invest $200,000 to do so. 

If you make that investment before the end of the tax year, you’re now reporting a loss of $100,000. You’ll no longer owe the $25,000 in estimated taxes, and you can use the loss to reduce your tax burden in subsequent years. 

For those interested in strategically timing expenses to reduce tax liability in other ways, consider reading our article on cash vs accrual accounting.

Net Operating Loss Carryforward Example

These methods can seem complex when written out, so we’ve put together an image to demonstrate how a business could use a net operating loss to save money on its tax bill.

In year zero, our hypothetical business reported a net negative profit. It wasn’t so bad that they closed up shop, and they were profitable the next year. They used their year-zero loss to offset taxable profits in the following year; this is a net operating loss carryforward.  

Who Can Claim a Net Operating Loss?

Any business that records a loss in a given year may claim a net operating loss. This tool can be used by sole proprietors, LLCs, partnerships, C-Corps, and even S-Corps.

Related: How to convert LLC to S Corp or C Corp

However, the rules for partnerships and S-Corps are considerably more complicated than others. IRS rules state that these entities generally cannot use a net operating loss carryforward, but that the partners or shareholders themselves may take the deduction, in proportion to their share of ownership, to offset their personal incomes. 

Those specific rules are outside the scope of this article; if you’re in this situation, consider engaging inDinero’s accounting services for assistance.

Net Operating Loss Limitations 

Using net operating losses can save your business significant money, but the IRS has guidelines to ensure the rule isn’t abused. 

First of all, the rule only applies to income. That means other liabilities, such as sales or property taxes, cannot be reduced with this method.

Net Operating Loss 80% Limitation 

A carryforward can’t be used to reduce next year’s tax liability to zero. The maximum deduction in any given year is 80% of taxable income. That means no matter how large of a loss you’ve taken in previous years, you’re still on the hook for at least 20% of your net profit. 

Thankfully, the IRS allows businesses to carry their net operating losses indefinitely into the future. The old rules set a cap at 20 years, but the Tax Cuts and Jobs Act did away with this limitation. 

If you can’t use the entire net operating loss because of the 80% annual limitation, you can still use it next year.

Net Operating Loss Carryback Limitation

A net operating loss carryback is where this year’s losses can be used to earn a tax refund from a prior year’s taxes. Unfortunately, recent IRS rule changes nearly completely forbid this practice. 

For tax year 2021 and forward, this practice is completely prohibited for everyone except farming businesses and certain insurance companies. ¹

Losses during tax years 2018, 2019, and 2020 can be carried back.²

Section 382 Limitation

The IRS (in Section 382 of the tax code) generally limits net operating loss carryforward for corporations that have ownership changes greater than 50%. They do this because they don’t want the owners of corporations to sell their net operating losses. This is called a Section 382 NOL limitation—or, simply, a 382 limitation.

This annual limitation is calculated by multiplying the market value of the business by a percentage, usually about 2%. If a business was valued at $2 million, the maximum net operating loss carryforward they’re eligible for is $40,000 (2% of $2MM). 

Note: The Section 382 NOL limitation rules are complicated, and this article only covers the basic ideas. To explore more about this limitation, speak with an expert from our business tax services team. 

Record Keeping and Documentation

Keeping detailed records of your finances is essential if you want to take advantage of net operating losses. 

Not only is it impossible to know how much of a net operating loss you’re eligible for without these records, but you’ll also need these in case of an IRS audit. 

We’ve written about how to keep track of business expenses by systematizing record-keeping. If you’re not already using an automated software tracking system, give that article a read.

Conclusion

Running a profitable business is challenging. Fortunately, the IRS does its best to encourage the survival of as many businesses as possible; net operating loss carryforwards is one such form of assistance. 

For more help managing your business’s financial side, contact Indinero today. 

1. https://www.irs.gov/publications/p536&sa=D&source=docs&ust=1698870518244185&usg=AOvVaw0GRMyrVMQAt_x6Esdw5lTk ↩︎
2. https://crsreports.congress.gov/product/pdf/IN/IN11296&sa=D&source=docs&ust=1698870518244449&usg=AOvVaw2xpXZxsBZa4LldeX5zo8gQ ↩︎

In this guide, we’ll walk you through calculating this metric and explain why it matters to your business. 

Want to get a deeper understanding of other vital financial terms for business owners? Download our guide.

Why Should Business Owners Understand EBITDA?

The number of financial measures and ratios accountants use can feel overwhelming. How many ways can we possibly repackage the question, “Is this company profitable?” 

That said, there are a few bottom-line reasons for business owners to pay attention to EBITDA.

• Business valuation for sale: When selling a business, potential buyers may use EBITDA to assess its underlying profitability. Knowing your EBITDA helps you communicate the financial health of your enterprise and enhances its perceived value in the eyes of prospects.
  
• Attracting investors and creditors: Similar to how a potential buyer might assess your business, investors and creditors may use EBITDA to evaluate your ability to generate cash and service debt. A keen eye towards EBITDA can make your business more attractive and open opportunities for growth.
  
• Operational efficiency: EBITDA applies to more than buyers, investors, and creditors. It can help you assess the operational efficiency of your business. The metric provides insight into how your core operations are performing by isolating earnings from capital and tax-related expenses.
  
• Comparisons with industry benchmarks: Knowing your EBITDA allows you to compare your company with industry benchmarks. Whether you’re ahead or behind the curve, it’s important to know where you stand.
  
• Strategic decision-making: If you’re considering expanding your service line, opening new locations, or implementing cost-cutting measures, running projections as an EBITDA calculation can help make better-informed business decisions.

Why Use EBITDA Over Other Metrics?

All financial ratios have their unique use cases, advantages, and drawbacks. EBITDA is particularly useful for the following reasons:

• Cash flow representation: EBITDA is a proxy for cash flow. It’s not perfect, but it indicates how much cash is being generated from operational activities.
  
• Debt analysis: If a business has a significant debt, EBITDA is useful for assessing how readily it can cover those obligations. The debt-to-EBITDA ratio is an especially important metric lenders and investors use to assess a company.
  
• Communication with stakeholders: EBITDA is a succinct snapshot of financial health. A single number is easy to communicate with stakeholders, especially if they aren’t familiar with accounting concepts like depreciation and amortization.

How to Calculate EBITDA

To calculate EBITDA, begin with your net income, which is an all-encompassing measure summing revenues against all costs of doing business: overhead, employees, inventory, interest, taxes, amortization, depreciation, etc. Then, add the cost incurred from interest, taxes, depreciation, and amortization. EBITDA should be higher than your net income when you’re done. 

In other words, tally your net income without considering the cost of interest, taxes, depreciation, or amortization. 

Calculating EBITDA is easier said than done, however. Reliable net income figures require a systematized method of accounting for costs and revenue. Without one, accurately tallying everything can feel like looking for needles in a haystack. 

If you feel your system could use an upgrade, consider reading our article on tracking business expenses.

EBITDA Formula

EBITDA = Net Income + Interest + Taxes+ Depreciation + Amortization

EBITDA Calculation Example

Let’s assume we’ve already done the hard part of collecting the data and consider a hypothetical example.

Step 1: Calculate Net Income

Step 2: Add Interest, Taxes, Depreciation, and Amortization 

Now that we have some real numbers to look at, it’s easy to see where EBITDA gets its name. Net income is considerably lower than EBITDA, because EBITDA is earnings before interest, taxes, depreciation, and amortization. 

EBITDA Margin

EBITDA margin measures a company’s operating profit as a percentage of revenue.

In the example above, we calculated a raw EBITDA of $150,000. But if we want to compare how efficient the business is to a company of a different size, we have to standardize our metric. This is where EBITDA margin comes into play. 

EBITDA Margin Formula

To calculate EBITDA margin, divide raw EBITDA by total revenue and multiply by 100.

EBITDA Margin (%) = EBITDATotal Revenue x 100

For example, the EBITDA margin for this example business would be:

 $150,000$500,000x 100 =30%

What Is a Good EBITDA Margin By Industry?

For a comprehensive look, the NYU Stern School of Business has compiled a table organized by industry with data accurate up to January 2023. The “EBITDA/Sales” column corresponds to the EBITDA margin we’re discussing here. 

1. In general, most industries fall between 10-30%.
   
2. The average is in the US 15.68%.
   
3. There are a handful of industries with exceptionally lower margins: airlines, food wholesalers, and retail.
   
4. There are several industries with exceptionally higher margins: green energy, tobacco, and semiconductors. 

EBITDA Margin By Industry: Selected Sectors

EBITDA Variations

EBITDA is a versatile metric. Depending on the scenario, it might be relevant to employ one or many of these variant EBITDA calculations when preparing for a conversation with investors or creditors.

Keep in mind that while variations can provide important insights, they also have their critics. Some argue that too many adjustments obscure a company’s true financial health; it’s crucial to understand the context and reasons behind any adjustment to EBITDA.

Adjusted EBITDA

Adjusted EBITDA removes expenses that could distort the value of the calculation—for instance one-time, irregular, or non-recurring items. This is done on a case-by-case basis; there is no standard method of adjusting EBITDA. 

It might seem manipulative to pick and choose certain expenses to omit, and unethical actors certainly do. But remember, the goal of EBITDA is to narrow the focus to core business activities. Just be sure to omit details in good faith and note them transparently to investors. 

EBITDAR 

EBITDAR excludes rent in addition to the normal EBITDA calculation. This variation is used in industries where leasing or renting assets are significant expenses. For example, airlines commonly rent jetliners from one another. 

The reason for omitting a significant expense is to allow investors to compare core activities absent a distortatively large line item.   

EBITDAC

EBITDAC was born in the wake of Covid-19 and measures profitability before interest, taxes, depreciation, amortization, and coronavirus. With such a significant disruption to normal business activities, it is reasonable to delineate between normal and extraordinary fiscal years. 

EBITDAX 

This variation additionally excludes exploration expenses from the normal EBITDA calculation. The oil and gas industry often employs this metric due to the significant costs of exploration, so analysts can examine the impact of core activities without a distortionary expense. 

EBITDAE 

Some companies have significant employee stock ownership plan (ESOP) expenses. This EBITDA variation excludes ESOP expenses. 

EBIT vs EBITDA

EBIT is earnings before interest and taxes while EBITDA further excludes depreciation and amortization. Companies may choose to employ EBIT when they have significant capital expenditures (which are represented by depreciation and amortization costs) that they’d like to isolate from their core operational activities.

Conclusion

Focusing on core operational cash flow by excluding capital expenditures and taxes allows the focus to rest squarely on cash flow. EBITDA is important for business owners seeking a comprehensive view of their financial health. It helps one evaluate

business efficiency as well as provide potential buyers, investors, and creditors with relevant information. 

If you’d like help with the nitty gritty details of accounting, consider reaching out to indinero’s expert accounting services team today.

C-Corp executives considering a primary stock offering can use them to incentivize investors to purchase a primary stock offering. 

If you’re an investor, the QSBS exemption could help you tap into new benefits from existing qualified equities, or you can seek out QSBS extensions as part of an overall tax-efficient investment strategy.

This article will help you determine if your investments or corporation are potentially eligible for the exemption. However, the IRS rules surrounding this tax break are complicated and go beyond what we’ve covered in this article. If you want to dive deeper into this topic, you can connect with one of the experts on our business tax services team.

What is the QSBS Exemption?

The QSBS exemption was created by Congress in 1993 to encourage long-term investment in small businesses. Housed under section 1202 of the tax code, it provides for a 50-100% exemption from capital gains tax for qualified stock investments. 

QSBS Rules for Qualification

The QSBS exemption has a long list of qualifying factors, and even if you are operating in an eligible industry, there may be rules that cause you to be excluded. 

Non-Qualifying Industries

Before looking at the lengthy list of qualifying rules, first, check that the corporation isn’t on the list of expressly prohibited businesses. 

The IRS defines a qualified trade or business as any field other than the following: 

• Health
• Law
• Engineering
• Architecture
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Farming
• Hotels
• Motels
• Restaurants

Finally, businesses reliant on the reputation of an owner or employee, don’t qualify. An example would be Mint Mobile, a company that is arguably reliant on the reputation of Ryan Reynolds as their spokesperson. 

Qualifying Industries

The law doesn’t outline specific industries that qualify. However, after considering those that are explicitly excluded, there are quite a few that remain: 

• Manufacturing
• Technology
• Research and development
• Software
• Retail
• Transportation
• Educational services
• Telecommunications 

If you’re unsure if your business is eligible, it’s worth checking with an indinero business tax services expert. 

Detailed Eligibility Rules

Once you’ve verified that IRS rules do not explicitly exclude the industry, the next step is to verify that all other eligibility requirements are met. Here’s a breakdown of those rules: 

• Stock must be from a primary offering after 1993; no secondary market purchases qualify.
• The minimum holding period is five years unless one uses the QSBS rollover (detailed below).
• A C Corporation must issue the shares.
• Such C-Corp must be valued at no more than $50M before and directly after the issuance (determined by accounting for the issuance proceeds). This includes the aggregate value of all parent and subsidiary corporations.
• The corporation may not own securities of other corporations (other than its subsidiaries) over 10% of the value of its assets.
• At no point beginning three years before the issuance may the corporation buy back stock exceeding 5% of the value of all outstanding stock.
• The beneficiary of the exemption must be an individual or passthrough entity.
• The stock must be purchased with cash, property (not stock), or as payment for services; advisory shares and employee stock options are valid.
• Beneficiaries and related persons may not participate in a stock buyback from the corporation anytime six years before the issuance and through the entire holding period.

QSBS Rollover

The QSBS rollover allows investors to sell before the 5-year exclusionary period is over and remain eligible for the exemption. 

As long as they held the original stock for six months and invested all proceeds into another qualified stock within 60 days of selling the original batch, eligibility is maintained and the holding period carries over.

QSBS Rules by State

While the QSBS applies universally to federal capital gains taxes, some states still levy capital gains taxes. Here is the list of states that do not conform to the federal rules: 

• California
• Mississippi 
• Alabama
• Massachusetts 
• New Jersey
• Pennsylvania 
• Wisconsin

QSBS Tax Treatment

The QSBS exemption shields the greater of $10M of gains, or 10x the cost basis of purchased stock, from capital gains tax. 

How much capital gains tax an investor is safe from depends on when the stock was purchased. Sometimes it’s 50%, others 75% or even 100%. 

Keep in mind that the alternative minimum tax (AMT) and net investment income tax (NIIT), rules designed to ensure high-income earners don’t pay an unfairly low tax rate, may still apply. Additionally, due to rules surrounding the AMT, the capital gains tax rate on non-excluded capital appreciation is 28%

For example, if an investor sold qualified stock purchased during the 50% exclusionary period that had accumulated $1,000,000 of capital gains, they would owe capital gains tax on only $500,000. 

This would come to a capital gains tax bill of $140,000 ($500,000 * 0.28). 

How to Report QSBS on Your Tax Return

There are two primary steps for reporting the sale of a QSBS on your tax return. Anyone who sells a capital asset must:

1. Fill out form 8949, where the dates and details of transactions are recorded.
2. Transfer the net results from form 8949 to your schedule D filing. 

While the IRS doesn’t require any special documentation to be submitted with your filing, claiming the QSBS exemption is rare. It may put you at heightened risk of an audit.

To protect yourself, be sure to keep your financials in order and, if you run a business, have a system for tracking business expenses that explicitly maintains separation between personal and entrepreneurial finances. 

Conclusion

The QSBS is a tax-efficient investment strategy that can facilitate wealth preservation for some and accelerate wealth creation for others. The benefits are substantial and investors should carefully examine eligibility requirements. 

If you think your investment portfolio may contain qualifying stocks, reach out to an indinero accounting services expert today. 

In this article, we’ll walk you through how to estimate costs in theory and practice with a real-world example. We’ll also identify what the IRS officially regards as startup costs, so you can strategically time your expenses to maximize tax efficiency. 

Launching a business can be challenging, but it’s a lot easier if you have a financial expert in your corner from day one. Our accounting services for small business can help you get started on the right foot. 

Before You Start: How Much Do You Need to Save?

The best way to estimate start up costs is to make a thorough list of every possible expense and seek quotes from relevant parties. (We’ve got a list below to help you get started.)

Once you’ve gathered estimates for one-time and recurring expenses, do the math and ensure you have access to six months of operating expenses available before you start. This will give you the financial runway you need to get your business off the ground. 

Having this sum in cash is the least risky way to start, but in most cases, entrepreneurs also tap a combination of private investments, bank loans, and business credit cards.

If you need help securing startup funding, read our guide to SBA loan applications or contact an indinero small business expert today.

Our List of Common Start Up Costs

If this is your first time opening a new business, you may be unsure what start up costs you need to plan for. We’ve compiled this list, covering many common expenses and their average cost. However, your business is unique, so some of these expenses may not be applicable, or you may need to add others. Remember: You can get more accurate estimates by researching online and asking for quotes. 

Incorporation Fees

Most states require a nominal fee to incorporate your business. This will vary depending on where you are setting up your business, but on average, you can expect to pay about $150 to register.

For more guidance on incorporating your business, check out our guide on choosing a limited liability corporation (LLC) vs sole proprietorship.

Office Space 

Traditional office space can cost between $8-$23 per square foot, per month, while a coworking space costs between $250 and $500 per individual per month. Once again, these figures highly depend on where and how much space you want to rent out. Some businesses may be remote, so the office space cost would be much lower or non-existent. 

Marketing

An established B2B business might spend 10% of annual revenue on marketing, while a B2C business may spend 5%. A 2023 Delloite survey of over 300 chief marketing officers revealed their average marketing spend to be ~9% of revenue.

For a specific reference, a survey of 1,500 Canadian small businesses found their average annual marketing spend to be $30,000. 

Website

Forbes reports that the average small business website (up to 16 pages) could cost between $2,000-$9,000. Your expenses will depend largely on whether you or someone on your team plans to build the site or if you expect to hire a professional developer to get it live. 

Utilities

According to the Building Owners and Managers Association, the average cost of commercial building utilities is ~$2 per square foot. If you plan on having a physical office space for you and your staff, make sure you are considering utilities like these. 

New Technology or Machinery

Depending on what kind of business you’re starting, you may need to purchase new hardware or machinery to get your operation off the ground. Costs can vary widely depending on what you need. If you’re only looking to purchase a few new laptops or some online software, this start up cost might only be a few thousand dollars; for more expensive machinery, this expense can be much higher. 

Consultants

According to Forbes, standard startup consultancy fees run between $75 and $400 an hour. Consider whether you plan to hire experts to help you get your business up and running, and find a few average prices for the types of consultants you’re looking for to estimate this cost. 

Start Up Costs Example

To further illustrate what your startup costs for business might look like, consider the fictional case of Rita’s doughnut shop. We pulled these cost estimates from the Small Business Administration (SBA). 

In Rita’s case, if she followed our recommendation of having six months of operating expenses available, she would need $65,000 to shart her shop. 

Rita’s Doughnut Shop

Start Up Costs Tax Treatment: How to Maximize Your Tax Expenses 

Now that you’ve estimated your startup costs, it’s time to use them to save money on your upcoming tax bill. Here’s what to consider: 

What Time Period Is Your Business In?

The IRS divides your business into two time periods: startup mode and the active trade or business period. This distinction is important, as deductions come more easily during the active period.

A business becomes an active trade or business when it’s ready to start selling its core product or services. Before that point, it was in startup mode.

Startup mode often ends when the first sale is made, but not always. Sometimes, miscellaneous income is earned but the business continues to be in startup mode. Other times, even though it hasn’t made a sale yet, a business is no longer a startup in the eyes of the IRS because it’s ready to fulfill its primary business purpose.

In startup mode, deductions are limited to $5,000 for capital expenditures and $5,000 for organizational costs. All other deductions are put on hold until the business becomes active in the eyes of the IRS. If your total costs exceed $50,000, the cap grows smaller: The $5,000 maximum is reduced by every dollar over $50,000 you spend during the startup period. 

From here, your startup costs are amortized evenly over the next fifteen years. If the business shuts down, any remaining un-deducted startup costs are fully deductible on the final year’s tax return. Any loss in excess of profit is eligible for a net operating loss carryforward.

Should You Spend During the Start Up or Active Period?

Let’s say your business incurs $150,000 in startup costs. When it becomes active, you’ll start deducting these costs at $10,000 per year. These deductions are locked and are released over fifteen years. 

However, is it mandatory to incur all of those expenses before entering the active phase of your business? No. By deferring what you can until after the startup phase, you are eligible for those deductions in full the year they occurred.

Qualifying Start Up Costs

The IRS has a simple definition of qualifying business start up costs. It comes down to two factors, and any expense that meets both criteria counts as a start up cost: 

1. It’s a cost that would be considered “ordinary and necessary” for operating a business during the active period. For future reference, this is the same definition that qualifies expenses for small business tax deductions.

2. It’s a cost a business pays or incurs before the day their active trade or business begins. 

Nonqualifying Start Up Costs

The IRS prohibits deductible interest, taxes, and research and development (R&D) expenditures (defined as research and experimental costs normally occurring in a laboratory or product testing environment). Software development as well as attorney fees for obtaining a patent are also considered R&D expenses, and therefore don’t qualify for deductions. 

Can You Deduct Start Up Costs With No Income?

Yes, you can deduct startup costs even if your business has no income in the initial stages. The IRS allows entrepreneurs to deduct qualifying startup costs, regardless of whether the business generates revenue in its early days.

How to Claim the Start Up Tax Deduction

Simply deduct the startup or organizational costs on your income tax return for the year the active trade or business begins.

If you file on time but forget to claim the deduction, you may do so by filing an amended return within six months of the due date of the return (including extensions). 

Conclusion

Forecasting business start up costs is challenging, especially if you’re a first-time business owner. While there’s no substitute for real-life quotes and cost estimates, we hope our article provided a reasonable place to begin your planning process.

Remember to secure at least six months of operating expenses before starting your business and, to save on taxes, delay any expenses you can until after the startup phase.

Before you go, consider taking the time to read our article on how to keep track of business expenses. Doing so will save you headaches come tax time.

Best of luck in your journey to entrepreneurial success. When you reach a stage where you need accounting help, we are always here to provide affordable accounting services for small businesses.