Every business needs to plan for taxes, but IoT startups should make tax planning a top priority. IoT business have unique revenue streams and business that can make taxes much more complicated. Fortunately, proper preparation can help you overcome the challenges associated with IoT taxes.

This tax guide for IoT startups will explain some of the most common challenges and provide solutions for overcoming them. We’ll also explain how you could save big money with the valuable R&D tax credit.

Unique Tax Challenges for IoT businesses

Businesses in the Internet-of-Things, or IoT, sector specialize in creating internet-connected products for cutting-edge applications. However, products are only a small piece of the puzzle. IoT companies also provide monitoring services and generate other subscription-based revenues.

Many IoT businesses also make significant R&D expenditures, which makes them prime candidates for the R&D credit. However, claiming the credit requires diligent record-keeping and tax planning. More on that later.

Without a dedicated research team, accurately determining communications taxes and fees is incredibly difficult, if not impossible.

Tax authorities are struggling to keep up with the IoT industry’s rapid advancement. The industry’s complexity make it difficult for tax authorities to apply existing tax laws, leading to a lot of uncertainty and confusion for IoT companies.

These tax challenge can put IoT companies at a disadvantage without proper planning. Fortunately, you can navigate around many potential pitfalls if you utilize some strategy.

Tax Savings Opportunities for IoT Startups

Many companies can take advantage of these tax credits. However, they’re particularly useful for companies in the IoT industry.

R&D credits

The IoT business typically requires substantial spending on research and development. Fortunately, many companies can earn a substantial R&D tax credit to compensate for these expenditures.

Surprisingly, 57% of businesses say they won’t claim the credit, according to a survey conducted by BDO. Unfortunately, companies who don’t claim the credit are probably missing out on huge savings.

The R&D credit can intimidate new business owners, but claiming it is easier than you think. All it takes is a little planning and proper record-keeping.

Our R&D Tax Credit calculator can give you a ballpark estimate of how much you can save by claiming the credit. This free-to-use tool will help you estimate your business’s R&D tax credit savings.

Click here to access the R&D tax credit calculator now.

Section 179

Usually, companies must depreciate the cost of pricey asset purchases over time. However, a typical depreciation schedule can create significant tax costs for young IoT businesses.

Most startups would rather claim the entire deduction upfront instead of spreading it out over time with depreciation. In some circumstances, Section 179 allows companies to forgo depreciation in favor of an immediate deduction.

With Section 179, taxpayers can write off the entire cost of an asset in the same year the purchase occurred, resulting in substantial tax savings.

If your IoT business is making a lot of expensive asset purchase, Section 179 could give you a tremendous advantage at tax time.

Tax Planning Priorities for IoT Startups

Young IoT startups should focus on these tax planning priorities when they’re first getting started.

Determine Your Tax Footprint

When operating an IoT business, it’s important to consider whether your operations will trigger tax obligations in other countries. This is because different countries have different tax laws and regulations that may apply to your business, depending on the nature of your products or services, and the location of your customers and suppliers.

Additionally, it’s important to consider whether your business has a presence, or nexus, in multiple states and whether your sales fall under sales tax regulations in each state where you maintain a nexus. This is because each state has its own sales tax laws and regulations, which can vary significantly.

It is also important to note that, If a company sells a product, it is taxed in one way. If it sells a service, it is very likely taxed in another. If deemed “telecommunications,” it will be taxed more like a regulated utility. It is also important to consider any indirect tax costs such as sales, use, excise, customs taxes, etc which can also have a significant impact on the business.

Plan for Sector-Specific Taxes

Many countries impose sector-specific taxes on mobile consumers, and these regulations create major challenges for IoT businesses. Some examples include as excise duties on mobile handsets, airtime usage, and more. You may also face additional costs for mandatory USF contributions, revenue-share levies on mobile operators, and more.

These taxes can vary significantly across countries. IoT business with international operations should take these costs into account when entering a new market.

Your companies technological developments may also qualify as new Intellectual Property assets under certain tax regulations, potentially triggering additional taxes. IoT companies should have a thorough understanding of intellectual property tax regulations so they can adequately prepare for any additional tax expenses.

Tax Planning to Maximize Savings

Transfer pricing is a complex area that involves various issues that need to be considered. These issues include structuring, value drivers, pricing, cost allocations, and more. All of these issues must be carefully evaluated and addressed in order to ensure that transfer pricing practices are in compliance with relevant laws and regulations and that they accurately reflect the economic reality of the transactions being conducted.

Set Procedures for Efficient Tax Operations

Having set procedures in place for efficient tax operations is essential for any company, especially those in the IoT space. These procedures should include clear guidelines on when taxes are due, who is responsible for collecting and remitting them, and what tax reports need to be filed and when. This will help to ensure that all tax obligations are met on time and in compliance with the applicable laws and regulations.

Your business should consider working with an experienced tax advisors to develop an effective tax plan. A tax pro can provide expert guidance on tax strategies tailored specific to your business model. They can also help you stay up-to-date on the latest tax laws and assist with the preparation and filing of tax reports.

You should regularly communicate with your tax advisors so that hey can keep track of the developments in your business and adapt the tax strategy accordingly.

Final Thoughts on the IoT Tax Planning Priorities

Tax planning for companies operating on the Internet of Things (IoT) space is crucial for ensuring compliance with tax laws and maximizing profits. IoT companies should be aware of the various tax implications of their operations, such as those related to income tax, sales tax, and value-added tax. These companies need to work closely with tax professionals to stay up-to-date on the latest tax regulations and to develop tax-efficient strategies for their operations.

Another important aspect of tax planning for IoT companies is identifying and taking advantage of any available tax incentives or credits. These can include research and development tax credits, capital cost allowance, and other incentives specific to IoT. It’s essential for these companies to stay informed about the availability of such incentives and to understand how they can be claimed.

Tax Hack can assist your up-and-coming IoT business with all of its tax and accounting needs. From tax prep to fractional CFO services, we do it all, and we specialize in dealing with high-tech businesses like yours. Connect with us today to find out how much you save on your next bill with Tax Hack Accounting.