Technology businesses face several challenges which range from raising funds to scaling up or maintaining a leading product in a constantly-changing industry. Multi-state tech companies also need to dial in on their accounting and pay special attention to different tax laws to avoid run-ins with the IRS. When managing accounting for your tech company, you should look out for the following most common challenges:
1. Revenue and Cost Recognition
Reporting and recognizing revenue and costs are challenging for technology businesses when it comes to grouping and aggregation of financial data in their accounting processes. Some companies in the tech industry can encounter problems with accounting for revenue costs, including accruals, sales commission, cost of goods sold, rebates, and refunds. In a fixed or specified time, a business may need to recognize these costs or amortize the expense to avoid financial risks. If not, tech industry accounting pain points surface with problems in analysis, compliance, restating earnings, errors in financial statements, and auditing.
Deferred revenue accruals: Knowing when to record or recognize revenue may be confusing if your business receives advanced payments or unearned income from customers or clients. When a company receives cash before providing a service or delivering a product, it can create issues recording and reporting the revenue. Problems may arise with erroneous entries before the event occurs or recording the transaction in a period before earned. In your tech business one of the most common challenges, your business may encounter is when you receive cash but still need to deliver the service or product. In these instances, it would be considered a liability in your business. There could be reporting consequences for not recording the advanced payment to the deferred revenue account and reporting and recognizing it as revenue.
2. Research & Development Expense & Capitalization Tracking
R&D (research and development) expenses occur whenever a business introduces a new software, for example, or for further developing an existing product. Under GAAP guidelines, these costs need expensing in the present period because of the uncertainties associated with future economic advantages. Concerning your tech company capitalizing on R&D costs, it is an option for software development, applications testing, overhead, compensating programmers, and other direct, indirect expenses. As of 2022, companies must start amortizing their costs for research and development instead of deducting the total yearly expenses immediately. The change will require tech companies to claim R&D costs over five years, which can cause complications without the guidance of a CPA professional.
3. Integration of Non-QBO/NetSuite Software Solutions
The accounting software your tech business uses is crucial to the accuracy of your business finances. Not only does it aid a smoother tax filing process, but reliable recordkeeping provides investors with a clear view of your business and as such maximizes the potential for investment into new tech innovations that your business may want to lead. Accuracy, integrity, and stability of the numbers within the technology industry are crucial, but not all accounting software is able to keep up with the accounting needs of tech companies. Integrating and implementing non-Quickbooks or NetSuite fintech software solutions may create unexpected losses, inaccurate allocation of funds, inefficient functionality, and improper risk assessment. Be careful to embark on software solutions that eliminate the know-how of a CPA that understands how to implement and integrate your accounting solutions, while taking into account the bespoke needs of your tech business.
4. Commission Calculations and Tracking of Sales Team
Tracking commission can be complex when considering your returns, discounts, installment payments, and other transactions involving selling services and products. In sales management, manually entering your data can be frustrating for calculating sales discounts, bulk orders, and negotiations of your sales team members. Even with accounting software, human errors can happen by failing to enter a contract negotiation and draw against the commission to calculate their pay. All data on a salesperson must be in the calculations, or there will be errors in the commission payment. Calculating and tracking commission draws, salaries plus bonuses and commission, or 100 percent commission, are accounting challenges that the tech industry faces frequently.
5. Multi-State Income Tax Nexus Analysis
If American tech companies and foreign technology corporations are selling in the United States, they should learn the new sales tax nexus standards for compliance. The change to economic nexus states is more aggressive in identifying and requiring entities to comply with sales tax collection and filing requirements. Sellers must collect sales taxes in the states where their sales exceed the monetary threshold in that state. In most states, governments have legislation to determine whether a business has economic nexus under specific conditions, including a yearly retail sales dollar threshold. Your company may have it based on a specified number of sales transactions made in a state you are selling services or products.
Overcoming various tech industry accounting pain points is possible by assessing, streamlining, and analyzing accounting processes. Your tech company can prepare accurate financial statements by simplifying, aggregating, and constricting data into subtotals, totals, and line items. At Fusion, we strive to help tech businesses eliminate problems with reporting and recognizing revenue, accruals, and R&D expenses. Our certified public accountants have the technical expertise to implement and integrate NetSuite or QuickBooks Online for calculating sales commission.
View this article at a glance, here:
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.