Tax tips for startups, content checkin including our go to sources for news, and indexing against sandbagging

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March 9, 2023

Tax season is upon us so we decided to bring on a guest from the Interplay ecosystem to help break down some must-knows for startups when navigating the process. The guest is Kate Kelly, CEO and Co-Founder of Chelsea Capital. Chelsea Capital is a financial services company, offering alternative financing, accounting, tax, and fractional CFO services. Kate shares some great tax season tips for startups.

Here’s what’s covered during the other partner meeting segments:

  • Mike and I discuss our current content intake and strategies for consuming news.
  • Chris and I chat about the last round of Q4 earnings and how those earnings stacked up against estimates. We also chat about Foxconn’s announcement to open up new plants in India and what that means for China.

Enjoy.

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Transcript (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is part of that effort. Today we've got our normal partner meeting. We're gonna have a couple of conversations with partners, but we have a special guest, an internal guest, my partner in crime, c e o of Chelsea Capital, Kate.

Now there are five companies at Interplay where we have co-founded the companies in partnership with the ceo and we work with them closely. And so they're really are partners even though they don't have the title of partner interplay. And we, we care about what they're doing. We're involved in the businesses and we're really supportive.

But we we had this moment internally, we were talking about how this is getting into tax season. It's a crazy time for the folks over at Chelsea Capital, they do accounting tax and cfo. And we thought it would be worthwhile to have her on to shed some light on how to think about taxes for all the entrepreneurs out there, because the reality is there's a bunch of hacks and tricks that no pe most people dust don't know, and it's not rocket science.

And I think the perspective is super helpful. Without further ado, we're gonna jump into this week's session and look forward to introducing you to Kate Kelly of CH Chelsea.

It's tax season and none of the startups, business people or anyone else wants to deal with it, but you need to we thought it'd be appropriate to bring Kate Kelly my partner and CEO of Chelsea Capital on Chelsea Capitals and accounting tax and CFO firm, working with tons of early stage companies to give us some basic tips.

To make it less stressful for entrepreneurs. So Kate first do you want to give everyone a little background on Chelsea just so they know who you are and what you're doing? Sure thing.

Kate Kelly: So founded Chelsea Capital with the mission of taking all things off of founders plates that tend to be stress invoking and often neglected.

Those things being accounting and tax for sure, and also fractional CFO services. Very

MPD: cool. Okay. Tis tax. What's the basic headline? We'll drill down a little bit. What does everyone need to know about taxes? Sure

Kate Kelly: thing. So it is tax time and you mentioned a big word that comes off pretty often and that's stress.

So my number one thing with taxes is don't freak out. Take a couple of deep breaths. I know the i r s can sound daunting and terrifying, but you've got plenty of time to do this right the first time, so it won't come back later.

MPD: Okay, but there's a deadline, right? When's the corporate deadline? And Absolutely.

There's a couple of different dates floating. Yeah,

Kate Kelly: so the big ones are gonna be March 15th and April 15th. However, there's a thing called extensions, which I highly recommend that everyone take advantage of. There's no downside. It gives you plenty of time to get yourself in order, clean up your book, and then you're talking September and October

MPD: deadline.

Okay, so what's the March 15th? What's the April 15? And how do those correlate to the September and October? Yeah,

Kate Kelly: so your March 15th deadline, that's going to be for S-corp and partnerships. And then your April deadline, which will be April 18th this year, that's going to be for your C-corp. If you file those extensions, that pushes those dates out to the fall, which will be your September and October deadlines,

MPD: right?

Cause there's all these dependencies and taxes, right? You gotta get your tax document from other people. You do business. So that you can file your taxes and if they're late, you're

Kate Kelly: host. Exactly. Especially as a business owner, when you're talking like W2 employees, your employer is gonna get you that W2 in early January and you've got plenty of time till April to file your A business owner if you're invested in other companies waiting for those K one s, like I said, can take a long time.

You're also gonna have to close your books which can sometimes take till January and February, and then by the time you're turning around to a March deadline, that can come up pretty

MPD: quick. Okay, let's talk extensions. Cuz as unexciting as this might seem to a lot of people, this is one of the biggest aha moments for me as an entrepreneur.

Your whole life through school, junior high school, all this, you can't churn a paper in late. That's the one thing you can't do. Shit. The bed on the paper , you can make a bad paper, but you can't turn it in late, right? That's no-no, you get an F, but taxes you can turn in late and there's no penalty.

Explain

Kate Kelly: if you file that extension, there really isn't a downside. There's no, consequence for taking that tons of extra time to get things done. If. Wanna take your paper analogy. It just buys you so much extra time that you really should take advantage of

MPD: When this kind of clicked.

I, so all of my tax stuff goes in, in the October deadline now. , right? I, the April 15th now is just a administrative, like a little bit of paperwork that's signed, but my taxes are done in the fall. Yeah. Which is a big mental shift cuz it gives all the other things that I'm involved with. Time to.

If they're late, I think still get stuff in and then it gets done. So what's, when I heard that, I thought it was too good to be true. What is the actual downside to filing an extension? Why is everyone not filing an extension? So I

Kate Kelly: think it goes right back to your paper analogy. Nobody wants to hand in their taxes late, even though there is no penalty about it, it's still that anxiety of, Hey, this is the deadline, I'm going to miss it, and the IRS is gonna come and take my house and children away.

That is not going to. So you've got that time and I think it's really just people wanna cross that, that box off their to-do list of taxes are done. So now I can breathe. It is way better to take that extension time to get it done correctly than sprint through it and have to file an amended return. An amended return is going to get looked over by a human being, not a computer and far more likely to

MPD: get audited.

And it costs you more money cuz people have to do a bunch of work. Exactly. Headline for me is I always do extensions. Why would anyone not do an extension? I guess it's just if you have everything upfront and it's super easy, but if you have any complexity, extension, I

Kate Kelly: totally agree with you, and even for the simplest returns.

At Chelsea Capital, we file extensions for everyone with, even if we know we're gonna get 'em done. Plenty of time before the deadline, everybody gets an extension. Again, there's no cost to it, there's no penalty, so you might as well do it even if you

MPD: don't. Yeah. And just six months is way extra months is way more chill.

Kate Kelly: Yeah. And even if it's just end of April, early May, it just gives you that breathing time to take the opportunity to review your return things as little as an address change you might catch. And if you rush through it, you might not, and then you're filing an amend, amended return.

MPD: Got it. Very annoying.

Okay, so that's the high level. What should everyone be thinking about? What are the best practices for people when they're dealing with. Founding team, maybe they're scrappy. No one's ever done this for business before. I know they're gonna go to their tax people and their tax people are gonna tell 'em most of the stuff they need to know.

What are the kind of the tricks of the trade outside the extension that people should be aware of?

Kate Kelly: Yeah, so it starts out with having clean books. So a lot of times people will jump to the tax portion of it, where really the data that's fed into that is going to be from your accounting.

So you wanna make sure that all of your books are closed, everything's buttoned up, and then that makes your tax accountant's job so much easier and you can't do one before the other.

MPD: Okay? If it's a solo practitioner, one person shop is an Excel sheet with the money they made and the expenses they had enough.

Kate Kelly: That could be enough. If you've got really low transaction volume, you can get away with that. We typically put clients on QuickBooks or some other accounting software. It makes things a lot easier. If you're an accrual based company, you definitely wanna go with something like that. We're actively taking on a lot of clients that we're doing that cleanup work for them now, so pretty much taking an entire year worth of transactions, cleaning that up into a QuickBook similar software or QuickBooks.

And and having that reporting available. So that could be something you do on a yearly basis, where right now you do the cleanup for the year. Other transaction volume heavy companies are gonna wanna be doing that monthly just because it's a lot of load and it's really difficult to remember a transaction that you maybe did a year ago that's an accountant has a, has

MPD: a question about, you can't remember how to classify anything.

Nope. Not happening. I remember one of my early lessons as an entrepreneur was you do your proper bookkeeping and account. Early in the business because the year two three cleanup is far more expensive cuz it's all this guesswork, it's all this noise than just keeping the book straight from the beginning.

You'll see first time founders go out and they have to, it's just not here nor there, they're just, they think it's not a priority and it's not the number one priority, but if you can do what you do, the pros, mult, serial founders, they start their accounting on day.

Kate Kelly: And that's something we see very often and I get it.

A lot of these entrepreneurs did not start their businesses for their love of accounting and tax filings, . That's not what they're in this business to do. And exactly where we got our start was I want founders to be able to focus on growth and scaling and fundraising and have the peace of mind behind their accounting and finance.

Everyone agrees that it's really important, but oftentimes it can just trickle down to that bottom of the to-do list and for good reason. You're hiring people, you've, you're grown a company, you're doing a lot more things that tend to take priority in the moment, but when it comes to this time of year, it can be daunting and a little terrifying because you haven't done the proper workload all year

MPD: long.

Okay, so someone's got their book straight. They hired an accounting firm. They're getting their monthly reports, they. End of the year comes and they've got clean books. What else do they need to do? Gosh, that makes our life

Kate Kelly: so much easier. , . But if that's not the case, it probably saves them a lot of money.

Certainly help with cleanup. Yeah. It's not as daunting when we do it every day. So we can certainly help with, Hey, I haven't touched my books all year round. We can handle it, get you off to a clean start, and then you can maintain those books throughout the year. Okay. So once they have clean books that goes right to our accounting team, or sorry, a tax.

They take a look. We collect all of the documentation that we need, usually financial statements, some payroll documentation. We do a first pass where we'll do a draft return, and then we're gonna ask any additional questions that we have any complexities that we wanna address, get that final return to you, you review, and then we have that scheduled for filing

MPD: dates.

But this is a foreign language, right? You're a business person. Yeah. Your accountant tax person comes and says, here's a draft return. It's 800 pages long. The forms are terrible. Oh, they're the worst . Yeah. It's, they're like, sign here. You don't know what the hell you're looking at. Yeah. So what, what should a ceo, a founder know to look for?

What are the things that they need to know to move this process forward? Us assume they're hiring a professional. Absolutely.

Kate Kelly: And before we do any filings, we try to break down that, Complexity of those monster returns to really high level of here's the amount of income that you took in, here's the tax reductions.

We were able to find here's the ultimate amount that is due. We go through the state nexus analysis, so you don't really have to sift through that return and ask. You don't know the questions to ask a lot of the time.

MPD: Yeah. What are those questions? So first of all, what's the state nexus? You dropped that one.

Yes. State nexus pin is a, this is a big thing for a lot of companies

Kate Kelly: often add a lot of complexity, especially for SAS companies. State Nexus is essentially whether a state is expecting a return from you. So you might think, Hey, I only do business in New York City. I'm gonna file in New York, and that's it.

Not necessarily as cut and. And every state has different rules, which makes it particularly complicated. So some are based on payroll, so if you have employees in other states, you might have to file. Others are based on like where that income was sourced. So again, if you're a SaaS company, selling that all over the country, some states might be expecting a return because you had a client.

Nebraska we're somewhere

MPD: probably applies to e-commerce too, right? . Exactly. You ship to Wyoming. Yes.

Kate Kelly: Whatever. And again, every state is different, so I highly recommend those businesses take advantage of using a tax professional that can do that analysis. And then you make sure that you're filing those state returns that are

MPD: necessary.

And there's some hacks to that, right? A good tax accountant can figure out which system to count you on to minimize. Taxes overall. They do

Kate Kelly: this all year round, right? So they know the states that you know what are expecting. They've got it all broken down. They do this every day. So for them, it's not complicated for the regular person trying to figure out, if you have State Nexus, that can be a big deal for you to take on by yourself.

And this also applies to sales tax as well. So that could be another element that can get tricky. Okay.

MPD: Return comes. It's drafter churn. We got Nexus. What else should I be asking about to kick the tires on?

Kate Kelly: Yeah, another big one is r and d tax credits for startups. That's a really probably the most popular tax credit that we see getting taken advantage of, and I highly recommend getting looking into that as well.

So this is a credit on your return for any r and d related expenses, and that credit can be directly applied to payroll. So if you have software developers, for example, on your team that you're paying a salary that can be count counted towards those r and d expenses, and you would get a credit that would be applied to your future payroll taxes.

MPD: Huh. So this is like government incentive for innovation. This is the

Kate Kelly: big one. Yeah. And it can really add up. So we've seen r and d tax credits in the, a hundred thousand range. So absolutely worth looking into even if you're. A lot of r and d tax credit shops will take a small fee. They'll do the heavy lifting for you, which I won't get into that, but yeah, it's pretty simple as a founder to take advantage of.

And really

MPD: should be checked out. Any other things to kick the tires on that we should be asking about or you just sign on the dotted line after that and move on? ,

Kate Kelly: I would definitely take a peek at it. We take a handhold approach where we, if you wanna schedule time with us to go over the nitty gritty of your return, we can tell you all of the credits that we've looked at and taking advantage of.

Really break that down to, to be as simple as possible. So your review is actually done along.

MPD: I got one more for you. I'm beginning spammed by a lot of inbound marketer email marketers. Oh, yes. Let me guess. Yeah, the e r c something so

Kate Kelly: close. What is it? It's the employee retention tax credit. Okay.

MPD: Yeah.

What is that and is it a real thing and should I respond to those emails?

Kate Kelly: It is a real thing, but it's gotten really spammy. So this came about during covid, this followed the P funding. And this was in to incentivize people, to retain their employees and reduce the number of layoffs. So the government wanted to keep people working.

So if you experienced hardship as a business during those years and saw a decline in revenue and kept your employees on staff, there was a credit that you can apply for. So right now, The, there's still time to look into that. So if you did have, there's criteria, but a significant decrease in revenue during that time, you can apply for this credit, it's pretty simple to apply for, but there are a lot of spammy companies out there that are taking huge chunks of whatever they can find as their fee.

Ah, and a lot of founders are like, great, this is money I didn't have. I'm happy to pay a 50%. But you could also hire someone else to do it for a flat fixed cost. That would be much less.

MPD: Isn't this just in scope for a standard tax accountant? Do you need these outside firms or is the e r c just something that should be part of your tax

Kate Kelly: filing?

So it's not really part of your federal and state tax filings? It's a separate program. Similar, if you went through the P process that had nothing to do with your income tax. So it is something that would be done addition. A lot of accountants are just gonna be focused on that state and federal filing, so won't necessarily dabble in this.

And it does take a little bit of analysis to do. You've gotta run some payroll reports, you've gotta look at your revenue to make sure you hit all the criteria. So it really is a separate credit outside. So

MPD: I should state, federal, respond to those spam emails and say, yes, please. , or is there, how do you do this?

Kate Kelly: Yeah. So it's pretty simple to do a back of the envelope analysis to see Hey, am I even close? You would have to show at least a 20% decline in revenue quarter over quarter. If you were, upward trajectory all through covid, then it's not even worth taking a look. Got it. But you could do, a kind of spitball analysis to see if you're in the ballpark, and then you could either talk to your tax advisor to look into it further or find a service provider to do it for you.

But I would be on the lookout for what those fees are gonna cost you.

MPD: Okay. But I'm just trying to get one piece I feel like you get a certain number of good advisors in your business orbit. And the specialists who come out of the woodwork are sometimes they're selling snake oil that your generalist.

Is this the kind of thing that most business tax advisors should be advising on? Should the average company out there assume that their tax professional is gonna say, Hey, check this out, we can help you with it, or,

Kate Kelly: no, I wouldn't assume that your tax professional is gonna guaranteed. Look into this credit.

It's, like I said, it's outside of the traditional scope of your tax accountant that's gonna be focused on state and federal. So I would either bring it up to your tax professional directly and say you want this analysis done? And really take ownership of it because yes, there's a lot of spammy companies out there that are gonna be trying to push.

But I think it really starts with the founders that it's worth taking a quick peek, or at least having your outsourced financial advisor take a look for you. If

MPD: people are looking for a solution for those who should they contact?

Kate Kelly: You can talk to whoever's doing your tax filings. And then there's, I would just do a quick search of the best firms that are doing this.

There's a lot of spammy ones, so you're gonna have to do some digging, but I would start with the people that you. They'll be able to do that back of the envelope a analysis for you and at least give you the green light of whether it's worth looking into

MPD: or not. Cool. Thank you. Kate from Chelsea Capital.

Appreciate you. My

Kate Kelly: pleasure. Thanks for hanging out with me. Cool.

Mike Rogers: What's up, man?

MPD: Welcome, Mike. You're tired. Yeah. You know what? I had a little bit of a grinder weekend just doing Oh, too much stuff. Too much stuff. Yeah. . Yeah. The couch chore. No, I actually had real work. And then I

Mike Rogers: called you on Friday and you said that you were gonna do something

MPD: that night.

Yeah, no, I'm not saying I didn't have a life. Oh, okay, cool. And then I just, Monday came around and Yeah. Then you were, then it was too late. It's too late. But I'm good. But I like working, so whatever.

Mike Rogers: What'd you watch this weekend? What's on your content agenda

MPD: list right now? What kind of content are we talking news or entertainment or what's.

I wanna do it

Mike Rogers: all. Let's start with, let's start fun like entertainment. What are you watching about shootings? Good.

MPD: Okay. Man, there's a theme for me. The content I like, and I had this realization the other day, it's super nerdy. The base levels around how humans organize in society function.

Okay. And so my entertainment content right now is the Handmade Tale, which is totally dystopian social reorganization. The book I just crushed was Dalio's second book, rise and Fall of Empire. And those are the two entertainment bits that I'm working through Now what about you? That's a cool thread,

Mike Rogers: but you mentioned you don't really love Last Of Us, which is also a dystopian reorganization, but maybe this haven't gotten to reorganizing yet,

MPD: which is like you don't like Yeah.

The reason why is cuz it's more about a couple of characters and setting versus I get like when I'm watching the Handmaid's Tale and I'm like, oh, and here's another implication of what they would've. For example I'm early, I'm in season three. , and I think like season six is out.

You have a moment where they arrive in DC and the statue of Abraham Lincoln's been destroyed. And you're

Mike Rogers: like, so you, it's your planet of the Apes moment where you see the,

MPD: all of those little, to me, what's fascinating about the show Yeah. Is discovering the different implications of this parallel multiverse.

Yeah. Okay. I got you. The, with the last of us, which I'm March. When another zombie comes out and they kill it I'm just not, the action's cool, but it's not the main thing for me. Okay,

Mike Rogers: cool. There's some compare there with, they're moving through cities

MPD: And I also watched too many episodes or seasons of the Walking Dead.

I think I did eight or 10. You're over zombie and I think I think it ruined it for me. Okay. What about you? What are you watching?

Mike Rogers: I'm watching The Last of Us excited for the final season of success. Which will be cool. I like that. It's the final season. Yeah. They nailed it with that.

They nailed it cuz they, if they go one more after this, they're gonna blow it.

MPD: Season five six was gonna be shitty. They would've made more money. Yeah. But HBO cred right? HBO put something out and I'm like, it's gonna be good. Cousin Greg is gonna get his own show. Yeah. That makes sense to me. Yeah.

Yeah. Has he been in anything else? I don't know. We gotta scout on him a little bit. Yeah. So I want to figure that out. Yeah. But anyway, content

Mike Rogers: more generally, like you mentioned you like this dystopian stuff. What do you, is that, does that thread run through to

MPD: podcasts? Yeah.

It's not dystopian. It's I had this realization. That's one of it, yeah. It's one like manifestation of it. I'm really into how humans organize and so cool. I know that's weird and I, but I literally wrote down the other day, I was like, this would be my thing. And it's a little bit psychology, right?

How the different types of personalities that are out there with humans and how those fit together as puzzle pieces. Interesting, I love history and it's seeing patterns and machinations. I'm into frameworks like Dalio's latest thing on the rise and fallen of empires, which is a framework for how things going up, top it down.

So yeah, for podcast content that I'd consume, not for news per se, but more casually, but intellectually, I like Sam Harris. Waking up, like if folks aren't, give us a quick on that. Yeah. Yeah. Sam Harris. It's a big, it's a major podcast. If you haven't heard it, it's not some edge case thing.

He's got millions of subs. What does he do? He talks about, thank you, . He talks about social issues. Okay. Current social issues. What I think is novel about Sam, and he's controversial. Is he is violently rational and that has made him put him at odds with both the left and the right through a lot of the things he's talking about.

I'm sure not everyone agrees with everything he says but what's fascinating about it is the degree of the logic of the bullying statements, if this and that, where it really takes you through a journey. Thinking deeply about topics that you may not have thought deeply about or you might just be reacting to.

The headlines and the brainwashing we're all getting. Whereas Sam's gonna go down to the base assumptions and build it back up and come out with a conclusion. Got you. And it doesn't sit, it doesn't align well with our either party, which I quite like. Cool. What

Mike Rogers: about you? I, let me ask a question about that podcast is because our producer Will and I, were having this conversation before, I think it leads in nicely.

Do you, is the podcast conversational or is it just him spewing?

MPD: It's conversational. He has lots of guests on, they're big names. It's Neil Degra Heiss. It's, you name it. It's the who's who. Cool. He's the best guest on the show. Gotcha. That's great. And he'll stop and drop knowledge and wisdom and perspective and, it's rare that the host is the art.

They're usually the frame. In the picture. In this case, I think Sam is like a big part of the art. That's super

Mike Rogers: cool. We were talking about, and just, I've been thinking a lot about what makes a good podcast and we're on one right now, but more like just for my own, like what have I enjoyed and I've I've run through lots of different ones now.

Had a hard time finding some I like, some I don't like, I think there's a thread that is as a VC I see patterns, so I'm starting to like pattern match on podcasts of what I think works really well for me, but also like clearly has just become more popular. And I think the idea with podcasts, For most people, I think the content matters, but I think most people are listening to podcasts.

To feel like they're in the conversation with the podcast host. I think it's interesting that you mentioned the host as your favorite person. Cuz it, I feel like when you put on look at like the All In, which is one that I'm sure everyone listening to this also knows. Yeah. Terrific. What's great about that podcast?

Forget the content. The content's good. I think people like feeling like they're hanging out with those guys. They're in the room with them as part of the conversation, even though they're not. That's as close as they can get. Look at smart lists, which is probably one of the top five podcasts in the world right now.

I don't know where it ranks, but I don't know if everyone's listening to it to listen to the guests. To your point, they're there because the hosts are awesome fun guys, and when they put their ears in and they're listening to them, they smile and they feel like they're part of that conversation.

But

MPD: I think these all harken back.