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Capital gains For early-stage companies, it's just as important to find tax savings as it is to drum up new business

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Keeping exposure to taxes low is critical for an early-stage company to survive, says Edward Mendlowitz.
Keeping exposure to taxes low is critical for an early-stage company to survive, says Edward Mendlowitz. - ()

Cash is usually scarce in the early days of a new business startup, but entrepreneurs have tax and operational strategies they can use to preserve precious capital, the lifeblood of the new enterprise.

For high-tech ventures, the state of New Jersey offers a program that allows a money-losing early-stage company to raise cash by selling its losses at a discount to profitable businesses, which use the loss to lower their state taxes. Among the most popular of the state’s business incentive programs, it’s often cited by New Jersey’s tech community for its role in helping the state attract new technology firms.

Companies of all sorts, from restaurants to factories, have a variety of other techniques to minimize their taxes and run day-to-day operations, with an eye to conserving cash.

Edward Mendlowitz, a partner of the accounting and consulting firm Withum, Smith & Brown, said it might be advantageous for the entrepreneur to live off savings, rather than take a salary, during the startup phase. By forgoing the salary, the company also avoids payroll taxes — Social Security, Medicare, unemployment insurance, disability, etc. — that can eat up 20 percent of the salary, and are paid whether or not the new company is profitable. “Taxes are like any other expense. You want to make them as low as possible, and anything that can be saved in taxes is a big plus,” he said.

The new company’s startup expenses are tax deductible: stationery, software, legal and accounting advice. “Make sure you deduct as many expenses as possible,” Mendlowitz said. Credit card interest payments generally are not tax deductible, “but if you borrow from your credit card and immediately put the money into your business, the interest is deductible,” he said. No more than 14 days can elapse between the time the money is borrowed from the credit card and when it is spent on a business purpose.

A home equity line of credit is usually a better source of capital, however: There is no 14-day rule, interest rates are generally lower and the interest is deductible on home equity loans or lines of credit up to $100,000. Mendlowitz said he’d advise the entrepreneur to get a home equity line before quitting the day job to launch a new business. And once the business is generating revenue, taxes can be lowered by putting money away in a tax-deferred IRA or 401(k) retirement account.

Michael LaForge, a member of the Sobel & Co. accounting and consulting firm, said a startup needs a sufficient capital cushion to take advantage of certain strategies that conserve cash. For example, vendors typically give discounts to customers who pay early. “When those discounts are spread over an entire year, it can become big dollars,” LaForge said. “I have clients who live on being able to take those discounts — that is their bottom line.”

A good way to reduce startup expenses is to finance the new venture with free capital from investors, rather than borrowed money, LaForge said. This can work for a high-tech software venture or for a restaurant.

“You see groups get together and invest in a restaurant, and they get a sense of pride from being able to take their friends there,” he said. If a new restaurant has five owners, together they may know 250 people who might dine there: “You have more voices promoting your business.”

Beth Fitzgerald

Beth Fitzgerald

Beth Fitzgerald reports on health care, small business and higher education. She joined NJBIZ in 2008 after a 34-year career at the Star-Ledger and has been reporting on business in New Jersey since 1978. Her email is beth@njbiz.com and she is @bethfitzgerald8 on Twitter.

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