Providing Tax and Accounting Advice for University Business Start-Ups



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University-Business-Start-Ups In today’s economy, with fewer established company job opportunities, university students are creating their own jobs with start-ups. Campus incubators are one of the many factors that attribute to this trend. Universities account for around one-third of business incubators in the United States. Universities such as the Massachusetts Institute of Technology with its $100,000 Entrepreneurship Competition have helped to create 130 start-ups and 2,500 jobs. There is a growing opportunity in providing university start-ups with tax, accounting, and business advice.

Many founders of university start-ups are from the burgeoning Science, Technology, Engineering, and Math (STEM) fields. Individuals from these backgrounds may have great ideas for new businesses however, typically do not have accounting and tax experience.

Choosing a Start-Up Advisor

One of the best ways universities can aid start-ups in addressing business concerns is to introduce start-ups to experienced accounting firms and advisors, especially firms with flexible fee structures.  Firms and advisors with flexible fee structures work by charging low or sometimes no fees in the beginning and then increase fees later when companies begin to generate a profit.  Many accounting firms provide this kind of service for promising start-ups because they know that it takes some time for a newly formed company to become profitable. Accounting firms and advisors offer flexible fee structures as a strategic way to build long-term relationships with newly formed businesses that have strong potential for growth.

Keeping Track of Capital Contributions

Advisors should endeavor to identify all capital contributions. With these types of start-ups, capital contributions include and are not limited to:

1.    Personal contributions
2.    Friends and family contributions
3.    Credit card funding
4.    University Grants

Properly categorizing capital contributions is important for multiple reasons. Accurate accounting will keep from inadvertently classifying capital contributions as gross receipts that might trigger income taxes or sales tax. In addition, accurate capital contributions are crucial for establishing “tax basis” that may reduce future income taxes on distributions or business income. Recording capital contributions in the beginning stages also allows founders to keep track of how much equity they have invested in their start-up and helps to mitigate equity disputes in the future.

Managing Payroll Tax

Many founders may be “do- it-yourselfers” and think that with a little research and hard work they will be able to navigate the complexities of payroll tax filing successfully.  This may not be the best approach because every hour spent on trying to learn and execute support functions takes away time from core business activities and future growth of the business. Another factor that makes it impractical for start-ups to undertake the responsibilities of payroll is that the state and federal laws associated with payroll are always changing. It can be easy to make mistakes or miss deadlines. Failure to report payroll tax filings in an accurate and timely manner can result in large penalties.

A practical option for start-ups is to seek out a third party payroll processer or even a Professional Employer Organization (PEO) to manage payroll and compliance. A PEO is a company that, for tax purposes, employs the workers of several other businesses and provides human resource related functions for those companies. PEOs perform employee benefit administration, payroll, recruiting, employee training, worker compensation administration, and safety and risk management.  The main advantage of a PEO is that it allows the start-up to focus on future growth while at the same time address the complexities of human resources.

PEOs can also help to provide start-ups with more attractive benefits packages. PEO's are often larger companies, so they can negotiate with insurance companies for better benefits at cheaper prices. University start-ups can take advantage of these superior benefits to attract and retain talented employees.

Research & Development Tax Credit

Start-ups often generate an opportunity for the federal Research and Development Tax Credit. It is important to calculate the R&D credit on a contemporaneous basis. Even in initial tax loss years, the credit can be a deferred asset that can be used to offset future perspective tax owed by the company.

Conclusion

The number of university start-ups is on the rise. It is important to provide these start-ups with sound business advice. It is recommended for accountants and tax professionals to over communicate when dealing with university start-ups.  Professionals working with start-ups can play a valuable role in this growing sector.

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Authors

Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Peter Saenz is a Tax Analyst with R&D Tax Savers.