Common Accounting Practices for Startups—and How to Excel at Them
Starting a new business is an exciting journey, and managing finances properly is crucial for long-term success. Many startups can benefit from adopting effective accounting practices that lead to tax benefits, improved cash flow, and seamless compliance. Here are three practices to embrace and how to excel at them.
Using an Accounting System
Many startups initially track finances manually using spreadsheets or don’t track them at all. By adopting an organized accounting system, it’s easy to keep track of expenses, maximize tax deductions, and make informed financial decisions. Using a well-established accounting software like QuickBooks Online can simplify bookkeeping and help management better understand the business’ financial position. As the business grows, working with an accounting professional can ensure the books and records are maintained completely and accurately.
Recording Big Purchases as Assets Instead of Expenses
Startups can benefit from understanding the accounting and tax rules regarding the capitalization of assets such as equipment, furniture, software and intellectual property. It is important for all businesses to have a “capitalization policy” in place, which establishes a dollar threshold for all purchases of property beyond which the item must be recorded as an asset and depreciated over time. Any purchases below this threshold would be immediately expensed on the profit & loss statement. One recommended threshold to use would be $2,500, which is the threshold allowed for income tax purposes. Following this threshold will ensure full immediate deduction of any lesser expenditures.
Regarding intellectual property, it is a best practice for businesses to track all costs incurred for each individual patent or trademark application so that the amounts to amortize to expense over time can be easily determined once the applications are approved.
Giving Equity to Employees with an 83(b) Election
Startups often grant employees or consultants equity awards that vest over time, such as partnership units, profits interests, or restricted stock awards. By understanding the tax implications and filing an “83(b) election,” recipients can minimize their potential tax liability. The election must be filed within 30 days of receiving the award, so it is essential to provide all relevant information and resources to recipients immediately. Filing an 83(b) election allows recipients to pay taxes based on the grant-date value of the equity rather than the future value upon vesting.
Embracing these accounting practices can help startups stay financially healthy and avoid unpleasant surprises. For any uncertainties regarding accounting standards and tax regulations, reaching out to an accounting and tax professional is highly recommended.
