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Why Tax Breaks Could Be the Key to Startup Success

By: Rob Biederman

 

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Starting a business is an expensive venture. But tax breaks do exist to help businesses get off the ground. For example, a startup can deduct any expense deemed “ordinary and necessary,” which reduces financial barriers to opening its doors.

But how effective can one-time write-offs be for startups past year one? Growing a company can be as fiscally demanding as starting one, and many small businesses need help to stay afloat beyond the first year.

An implicit subsidy could be the support 80 percent of failed startups need to endure past the 18-month mark.

The Proposed Tax Breaks or Incentives

Caps often limit how much entrepreneurs can deduct in a year, and every dollar counts in the startup space. If the following tax-break options were available, many more startups could survive the competitive entrepreneurial landscape.

  1. New hire tax credit: Giving a tax credit to startups for every new hire—”new” being the operative word—could free up headhunter funds when recruiting top talent and direct these savings toward other growth initiatives.
  2. New acquisitions refunds: Office furniture, computers, copiers, fax machines, and the like are all deductible expenses, but refunds for these acquisitions would put money back in the pockets of small business owners. These refunds could also stimulate hiring and help startups sustain long-term growth.
  3. Employee tax breaks: When it comes to salaries, startups can rarely compete with the big guys. If tax breaks went directly to employees, it would prompt a migration to the startup space. Top talent would consider taking less money with a tax break that recoups the loss. And with fewer funds dedicated to payroll, you could sink more money into recruiting, which would create a snowball effect.
  4. Deferred payroll taxes: If the government isn’t on board with complete tax breaks, allowing newer companies to pay payroll taxes on a deferred basis could also mitigate financial burdens. Most startups report annual losses, anyway, so they wouldn’t be subject to income tax payments. Those with profits, on the other hand, could pay off income taxes at a low interest rate.
Take, for example, a three-year-old startup. If it were allowed to implement one or more of these tax breaks, refunds, or incentives into its financial model, it would ease the hiring process and reserve more money for long-term growth efforts.

Implementing the Tax-Break Model

Getting local government approval is no small feat. Many hoops line the path to making these incentives a reality, but that doesn’t make them impossible. Applying these strategies could help tax breaks become commonplace for small businesses.

  1. Start locally. Contact local and state governments to consider tax breaks for startups. Gather a group of entrepreneurs in your area—a collective voice can amplify a message louder than a solitary voice in the wind. Position it as a win-win; government tax breaks will keep startups and talent from moving to other locations.
  2. Shop around. Looking at areas with fundamentally strong asset bases is another option. Reach out to cities with underutilized and low-cost real estate, such as Detroit, or with a massive wealth of tech talent, such as Boston, with your proposals. If these areas were to implement tax breaks, refunds, and incentives, it could entice entrepreneurs to set up shop in the area.
  3. Double down. Also consider cities with stagnant economies. Small businesses are important contributors to the economy and could help inject some life into inactive ones, so local governments may be open to hearing your proposals. Not only can a new business bring much-needed funds to the area, but it can also create employment opportunities for locals.
When choosing a location for their business, many tech entrepreneurs flock to places like San Francisco to take advantage of their networks and talented workforce. But isn’t there something we could collectively do to keep small businesses at home? My solution rests in marginal tax breaks. What suggestions do you have for incentivizing new startups?
Published: September 10, 2014
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Rob Biederman

Rob Biederman is the co-founder and CEO of HourlyNerd, a service that connects businesses to top MBA students and alumni to solve critical business problems at affordable prices. Connect with Rob on Twitter and Google+.

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