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What personal tax credits are available for start-up founders?

Before I check with a CPA or tax attorney, I have a question that some of you may have already had to address in regard to your personal taxes.

Many of us are, have been or will be founders of start-ups that are legally structured as corporations. During the bootstrapping face, from a personal tax accounting perspective, what kind of personal tax credits and/or deductions am I eligible for? Or said another way, how do you handle the expenditures that you are using from your personal assets to finance the company's costs? The assumption here is that you are not taking any salary.

Again, to be clear, I am not talking about dealing with the business taxes for the corporation but your personal expenses related to the company. So, I'm guess there are several approaches that can be taken:

  1. Transfer these personally incurred expenses and assets to the company. In reality, you are advancing a certain amount of money to your business and your business incurred a debt to you. Keep them on the books as a liability on the balance sheet to be paid sometime in the future and, therefore, no job related deductions on your personal taxes.

  2. Same as above but allow the company to write the debt off and not directly reimburse you. Claim these costs as job related expenses for income tax purposes.

  3. Transfer these costs to the company as above so it becomes a liability on the balance sheet. Again this has the advantage of recording real expenses into the financials. You can capitalize these costs (as well as lost salaries, etc.) and swallow the liability and use it as justification for company valuation and accelerated vesting.

#1 is generally not going to sit too well with professional investors as they are not huge fans of lots of unpaid debt on the books that needs to get paid out of the funding.

#2 seems like a reasonable option but, with no W-2 salary from the company, very little is deductible on your personal taxes for this year's taxes (I have some other income). That said, if you have absolutely no income for the tax year it really doesn't matter and you are best to defer this to the next tax year when hopefully you will have some W-2 income from the company.Also, where would the majority of these deductions be taken on your personal taxes. Would it be under misc. job related expenses?

#3 is another reasonable option although you are putting everything at risk and taking zero personal tax credits for your personally incurred costs. Of course,you can't use founders costs and labor to justify the valuation ask and vesting and then turn around ask that you get paid for these costs too.

Anyhow, I think some combination of #2 and #3 makes sense but I'm curious what others have done or have been advised to do by their tax attorney or CPAs.

Thanks

Craig

3 Replies

Tarek Ayna
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Tarek Ayna Entrepreneur
Founder and Developer at appSmarts
Here is my understanding of what my accountant did: he got the business expenses that I incurred from my personal accounts to be considered as debt from me to the company. This way when the company starts making money, I can get that amount of money out of the company without being taxed as payroll tax since it is a loan payment.

The usual disclaimer goes here: I'm not an accountant and this is just my understanding of what my accountant did.
Mark Piekny
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Mark Piekny Entrepreneur
Engineer, Consultant & Entrepreneur
Interesting. Well thought out, Craig. I am with Tarek. My accountant has done the same. It is the most simple, other than just writing it off as a pass-thru expense if your an LLC or S-Corp. Best of luck.
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Entrepreneur

Hi Craig, FYI - I have a service that may be able to help.My name is Aasim and I just launched a site -- www.LiveWireTax.com -- that connects you LIVE to qualified CPAs, Enrolled Agents and Tax Preparers across the country. They can definitely answer all your questions (every session starts with a FREE 15 min consultation where you can ask all these questions and more) as well as help you file returns for small business or individuals. And if you use our service to prepare your business return and mention Founder Dating, we'll give you 50% off the cost of your personal return. Happy to answer any questions you have. Best,

Aasim

Monica Borrell
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Monica Borrell Entrepreneur
CEO and Founder at Cardsmith
I formed my startup as an LLC so the expenses pass through to my personal return and can offset other (consulting) income for the year that I have outside of the startup. I plan to convert to a C-Corp at some future point before taking on significant investment $. I've learned that it is really hard to get a personal tax benefit if you are putting $ into a C-Corp pre-revenue, but am I interested to learn about other creative options.
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