Client Background:
A startup SaaS company in the pharmaceutical space, known for its innovative software solutions to lower drug costs to consumers, has been experiencing rapid growth. Despite its high growth potential, the company faced significant financial challenges, including fluctuating profits and losses. The company had a net operating loss (NOL) carryforward from previous years that had not been properly accounted for in the prior or current year’s tax filings.
Issue Identified:
During a routine review of the investor’s tax filings, Kelly Mattarocci, CPA, Founder of Market and Margin, discovered that the NOL was not calculated correctly resulting in a carryforward of $389,00 not being rolled forward correctly. This oversight led to the investors missing out on significant deductions, causing them to overpay on their personal income taxes.
Analysis and Correction:
- Review of Tax Records: Kelly meticulously reviewed the investor’s past tax returns to confirm the existence and amount of the NOL carryforward.
- Recalculation of Tax Liability: She recalculated the investor’s percentage of the company’s taxable income from inception to the current year, incorporating the $389,000 NOL carryforward. This adjustment significantly reduced the taxable income.
- Amended Tax Returns: She prepared and filed amended tax returns for the affected years, correctly applying the NOL carryforward.
- Documentation: Detailed documentation was prepared to support the amended returns, including explanations of the error and the corrections made.
Outcome:
- Tax Savings: The correction resulted in a substantial reduction in the investors’ income tax liability for the current year and future years. As the SaaS company continues to grow and become profitable, the investors can offset their taxable income with the NOL carryforward.
- Improved Cash Flow: The tax savings improved the investor’s cash flow, allowing for reinvestment in business operations and further development of their innovative software solutions.
- Compliance and Accuracy: The investor’s tax records were brought into compliance, reducing the risk of future audits and penalties.
Conclusion:
This case study underscores the critical importance of accurate tax record-keeping and the value of a thorough evaluation by a knowledgeable CPA. By identifying and correcting the missed carryforward basis roll forward, our Founder significantly reduced the client’s tax burden and improved their financial position. This provided additional capital for reinvestment into the startup, enabling it to focus on growth and innovation in the pharmaceutical industry.