Filing your startup taxes: Which two financial statements do you need?

Most startups have a tax year-end of December 31, which is right around the corner. But professionals who provide tax services for startups advise that there’s a lot of founders should know before the April 18, 2023, tax return due date.

For example, even if your startup is unprofitable, a tax provider will need certain financial statements to file the return. For fledgling early-stage startups that can’t necessarily afford an in-house accountant, this can be a disconcerting discovery.

From required financial records and tax documents to deadlines, here we’ll delve into what you need to file your startup’s tax return, based on advice from Escalon’s experts in tax management services for startups.

How to get your startup’s taxes done

The first step to filing your startup’s return is to gather up your tax records. Aside from making it easier to prepare an accurate return, organized tax documents are essential for identifying and substantiating deductions and credits for which your startup may be eligible. 

But who should prepare your return? And which records should you pull from your startup’s reams of paperwork? 

Ideally, you’ll entrust your tax return to a preparer who routinely provides tax services for startups. They can leverage the tax code’s complexities and technicalities for your success, which requires experience and deep understanding. 

Regardless of who does your startup’s taxes, below are the key documents needed.

Two essential financial statements

Three core financial statements — the income statement, the balance sheet and the statement of cash flows — provide a formal record of your startup’s financial activities. These statements are typically required from investors, prospective partners and other stakeholders.  

But for tax purposes, the balance sheet and the income statement are particularly crucial. To recap what these two statements show:

• The balance sheet provides a summary of a firm’s assets, liabilities and shareholder equity at a specific point in time.

• The income statement (also known as the profit and loss statement) summarizes all the business’s income, revenues and expenses over a given period, including the cumulative impact of revenue, expense, gain and loss transactions. 

Why are the balance sheet and the income tax statement needed at tax filing time? Because taxes appear in some form on both.

For example, the balance sheet typically lists sales tax and use taxes as current liabilities. The income statement lists expenses related to taxes. 

Some portion of federal payroll tax liabilities appear as an expense on the income statement, and the unpaid portion appears on the balance sheet. Deferred income tax liabilities may also be listed on the balance sheet.

Existing tax documents

In addition to the balance sheet and income state, you’ll need your startup’s:

• Prior year’s tax returns (federal and state).
• Local tax returns (if applicable).

What for? Because these give your tax preparer a better understanding of your business and show which deductions your startup has (or hasn’t) been taking.

Basic business information

Be ready with rudimentary business information including:

• Legal business name.
• Business address.
• Social Security and address information.

EIN letter

You’ll need your IRS-supplied Employer Identification Number (EIN), aka federal tax identification number, to ensure your return is done quickly.

Other financial records

Be ready to supply documentation for qualified business expenses. If you are unsure whether a particular expense qualifies as a business expense, check with your tax professional. These may include:

• Loan information: Records of loan payments and/or accrued interest. 
• Asset information: Receipts for assets such as equipment, property or goods you’ve bought or sold over the year.
• Income and expense information: Sales invoices, bank statements, receipts for payments, credit card statements, 1098 mortgage interest statements, property taxes.
• Deductible information: Records of health insurance payments, IRA contributions, home office, mortgage interest, charitable giving.
• Estimated tax records: Records of quarterly taxes that you’ve already paid in the year.
• Wage and payroll information: W-2 wage and tax statements issued to employees; Form 1099-MISC (non-employee compensation report).

Startup tax FAQs

Can I file my own taxes? There’s no legal or IRS requirement to hire a tax preparer, but a professional tax service for startups can help you capitalize on deductions and credits that might otherwise go undetected, particularly those unique to early-stage startups.

Does my unprofitable startup have to file? Yes. Even if your startup reported losses or had zero profits in 2022. However, the tax code allows businesses to claim a tax loss carryforward.

Do bootstrapped startups with no revenue need to file taxes? Yes. Tax filing is mandatory for all seed-stage startups and businesses in receipt of the EIN confirmation letter.

What’s the due date for startup tax returns? Most startups are registered as C corporations, for whom the tax deadline is April 18, 2023. However, you can file an extension with the IRS through Oct. 16. In the event your startup has a business structure other than that of a C-corp, visit the IRS website for your 2022 income tax return deadline.

Below are key tax deadlines for C-corp startups in 2023:

Takeaway

Trying to determine your tax liability, figuring out filing requirements and determining how to file a federal income tax return as a new startup owner can be arduous. That’s why many startup owners invest in outsourced accounting expertise to sort through the tax code’s complexities. Possessing an in-depth knowledge of tax and business laws, these experts can easily interpret confusing, ever-changing IRS tax laws and max out your tax savings while delivering accurate reporting and tax filing at cost-effective rates.

Want more? In addition to taxes, accounting, bookkeeping and CFO services through its FinOps, Escalon’s Essential Business Services include PeopleOps (HR, benefits, recruiting and payroll) and Risk (business insurance). Talk to an expert today.