I think what people often blissfully miss about founder comp is that the business literally supports the founder's entire life. Everything is a business expense. Pay yourself 50k as a little bonus and run almost everything through the business, because if you don't survive, neither does the business. You think founders are paying out of pocket for their fancy SF and NYC apartments at 50k per year living humbly? Think again. IDK, I always thought this part of the narrative was rather misleading.
EDIT: I'm not a tax person, obviously people aren't being illegal and dishonest. It's just smart to write off everything possible in a founder's life as a business expense. Maybe housing or this or that doesn't qualify where you live? Great that's what the minimal salary is for. Everything else goes on the company card.
2nd EDIT: I don't really understand why everyone is so cagey whenever this topic comes up. This isn't news. The IRS isn't reading this saying "gosh darn they figured out a new loophole". The laws are clearly spelled out, it's up to you to apply them to your situation. Remember, tax evasion is illegal. But minimizing tax liability is 100% okay and literally the name of the game. Otherwise, we wouldn't have tax breaks in the first place.
That's...not how it works. You can expense cell phone bills and lunches, sure, but VCs aren't paying for your fancy apartment.
> EDIT: I'm not a tax person
Most non-tech discussions on forums like this one should start and end with this disclaimer. Watching people here regularly talk about topics like law, "money laundering", write-offs and tax shelters is as hilarious and disconnected from reality as a hacking scene from CSI.
Ultimately, VCs are paying for your fancy apartment. They're just paying more the more expensive your personal life is. I wouldn't dismiss the obviously aligned incentives here that encourage minimization of capital expenditure for business entities, especially in the USA.
I'm making no moral or legal judgements, just commenting based on what I've encountered and witnessed. I'm not a founder and never consulted anybody with legal qualifications regarding this matter either in any specific instance. But, in my anecdotal experience, there is a rather broad spectrum of contexts and interpretations on how to do what's best for you and the business in your specific situation. On the flip side, it's not a big conspiracy, in the USA we heavily subsidize the pursuit of new enterprise. And the law reflects that. Smart people and successful businesses minimize their tax liability.
I don't understand your point. Of course at the end of the day VCs are paying for everything in the sense that they funded you, but there's a clear distinction between personal expenses (which come out of your salary) and business expenses (which you charge your business CC on).
Of course you wouldn't have fancy VC dinner on your personal dime but if you're meeting VCs to raise a round, talking to a potential customer, etc., those are legitimate business expenses.
No VC is going to be paying for your rent or your car lease, which is what you implied above. That's patently false.
You say it’s patently false and yet here I am saying I’ve seen startups own houses and cars. Maybe your and their tax accountants would disagree, but that’s a different topic.
My point is simply that the low founder salaries are not because the founders are being particularly frugal or living humbly. The low salaries exist simply to pay for the things that the business’ accountant can’t expense. In every respect, the founder lives their business.
It is my understanding that tax law does not prevent a business from providing whatever compensation they want to- but certain compensation is taxable to the recipient as income. So if a business pays $10,000 per month for the founder/ceo/whatever's rent, that is still an expense to the business. But, the recipient has to pay tax on that 10,000 as if it were income. At least on whatever portion of it is not devoted to the business (If the apartment has an office in it that is used exclusively for the business, the cost of the office square footage is deductible).
So as long as the benefit is reported on the founders taxes and taxes are paid, it would not be tax fraud.
It all really depends on your situation and context. Does your company have an office yet? If not it's probably the founder's residence. I've heard of apartments listed as offices in very early days. It's not about committing fraud, it's about working with what you've got. But for sure paying founders a low salary and running everything through the business is a tax-conscious strategy to minimize overall expenses.
The IRS does not really agree. Home office expenses got quite a bit stricter a few years ago, and even before that expensing your entire apartment because you worked out of it was probably not technically allowed.
Note that if someone get caught doing this, the IRS can and will open other additional tax years for examination.
The statute of limitations is currently 3 years from when the return is filed, 6 years if the deficiency (between the reported amount and the tax calculated due by the IRS) is 25% or more and the disparity is unintentional or the result of good faith efforts by the taxpayer to report their liability.
However, if a deficiency is deliberate, there is no statute of limitations on how far back the IRS can go to audit the tax year and assess penalties (and possibly also refer to the DOJ for criminal charges).
The home office thing is a personal deduction that an individual can claim. I'm talking about scenarios more akin to "the founder sleeps in the company office".
Where the "company office" just happens to be a (from GP comment we are all replying to) "fancy SF and NYC apartment" in a residential building?
I mean, I'm not a lawyer or CPA, and I'd advise any HN readers to consult such before deciding on a tax strategy based on HN thread. Because, also, yeah, no.
Honestly, if you are sleeping in an actual office as your primary residence, you probably technically have to include the fair market value as income on your personal taxes, but if you're really on a couch in an office building maybe you can get away with it (until the landlord of the office building kicks you out because it's not zoned for or up to code for residential and thus illegal for them to rent to you for that purpose). If it's a residential apartment... sounds like out and out tax fraud to me. I am not a lawyer and this is not legal or tax advice.
I mean I've actually seen founders living out of work/life spaces. Not the WeWork type. The type where a large commercial or industrial building is converted into a "co-working-living" space. Not a lawyer either so I have no idea if it's legal to the letter of the law, but it exists.
I have never heard of a "co-working-living space", so you know things I don't!
Sounds like a different thing than just trying to deduct 100% of your apartment as a business expense because you don't have an office yet though. Which is what I thought we were talking about from the GP. Like, maybe lots of people are doing that, but maybe lots of people are committing tax fraud, the IRS instructions are not too fuzzy here.
I never said 100%. I am not sure if I put off the wrong vibe by accidentally insinuating that founders are lavishly burning money or something. That’s not my intention. My point is that 50k/yr is not enough to live in SF or NYC. Something is filling the gap.
The logistics aren't really the point. No I don’t know how exactly founders do their taxes. But I do know that when you work 24/7, a lot of things look like business expenses.
My guess would be what's filling the gap is pre-existing savings/family money.
My point is just that the IRS has standards for what you can deduct or treat as a business expense (rather than wages), and it is not "when you work 24/7 a lot of things look like business expenses".
Not paying for your own apartment and instead treating it like a business expense still sounds like tax fraud to me, whether or not the business has it's own office yet.
The rules around home offices are very strict — it has to be a physical space that is used exclusively for work purposes. Even if it's a guest bedroom that is used mostly for work, but also occasional guests, then it doesn't qualify. That doesn't mean you'd necessarily get caught, but it does mean that it is not allowed.
And if you tried to claim your entire residence, that would definitely not fly, and would be much more likely to be found out by tax authorities.
Yes: there's a weird temporary limitation on this until 2025.
The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy. However, the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.
2. The IRS also allows deductions for a home office. The rules about this are pretty strict, but again, there are gray areas here about what counts as an office.
And by "tons of gray areas" you actually mean "a laser-sharp line between what is allowed and what is not."
A founder using the company to pay for their own housing is subject to income tax on the value of the housing provided. Full stop. There are no defensible situations that will survive a tax audit in which the founder gets away with using the startup to pay for their housing without getting taxed on it.
And the IRS no longer allows a deduction for home offices for employees, and won't allow this deduction again until 2025. The home office deduction is strictly for those running a separate business out of their home, and may only be used to offset income reported on the return from that separate business.
This is how fake news happens. I really wish we all took a bit more time to research things before we publish them, because I guarantee you there will be more people today running around and sharing this exact same fake news about founders living in apartments paid for by their startups.
I've also seen cases where pretty well-funded startups (and, honestly, not just startups, I've also seen this with large public companies) have tons of expenses flow through a founder's/upper level exec's personal credit card. The expenses are all legit, but this results in at minimum multi tens of thousands of dollars in credit card bonus points accruing to the exec.
Will let you decide how ethical that is (or not). After all, many/most companies allow their employees to keep points earned for business travel. But it's one thing for an employee to keep bonus points for expenses they themselves incurred, which is very different, I think, than putting tons of corporate-wide business expenses through one person's card.
As a counterpoint, the founder is effectively providing financing via revolving credit line to the co in this scenario (which the consumer bank issuing the card might not appreciate, but that’s another topic). You mention well funded startups but it’s also common among small businesses for the owner to use personal credit cards (at their own risk) when the business is having cash flow issues.
Agree completely here! When we were getting everything up and running, we were making decisions about which SaaS platforms were worth our money. Having the company pay for something personally never once crossed my mind.
Yeah I interviewed at a recruiting startup and the founder was writing off his brand new sports BMW and at the time I was like omg that's so cool and now I'm like omg that's so shady
Yeah no, this is bullshit and won't pass tax inspection. I founded and exited a company and yes I did live humbly until we actually managed a significant raise. Even then I still took a low salary. I only expensed things that were actually company related.
Writing off parts of your rent as a founder or business owner is perfectly ok with the IRS. Such a space needs to have "regular and exclusive use" for running your business and be your principle place of business (i.e. you do not maintain an office outside of your home).
In my experience CPAs consider it reasonable to take the square footage of the dedicated office area and divide it by the total square footage of your home and deduct that much from your rent.
> You think founders are paying out of pocket for their fancy SF and NYC apartments at 50k per year living humbly? Think again. IDK, I always thought this part of the narrative was rather misleading.
In what situation would a founder have a company with meaningful investor backing and not use that money to pay for an office for employees and instead use it to pay for their rent?
The tone and insinuation of your message is that founders pay themselves $50k/year but then splurge excessively using company funds on "fancy SF and NYC apartments" (which, depending on how fancy you mean, could go for $10-2k/month), which would almost certainly qualify as both tax fraud and fraud against the company. Your edit doesn't really do anything to alleviate the messaging, because you basically say (a) founders often commit fraud (b) ok maybe not, but I'm not erasing my earlier statement.
FWIW when I started a company in SF in 2012, my cofounders and I did indeed pay ourselves $50k/year and pretty much 100% of that money after taxes went to rent and living costs (maybe saved $5k/year, I wasn't keeping track that closely). This was after paying ourselves $0 for a while of course. We did not live in fancy apartments or use a penny of company funds to expense rent or any other personal living costs. In fact, even after we raised $35m for our company, we still only paid ourselves $90k for another couple years.
I this true? Wouldn't the IRS have something to say about apartments being classified as a business expense when it is used as housing in addition to "office space?"
One thing that can fly under the radar is when a founder uses their personal credit card for things like social media ad spend, and then gets reimbursed by the company. It's a very easy way to rack up tens to hundreds of thousands of dollars on a credit card which equals tons of points for things like travel, electronics purchases, gift cards, etc.
In the short-term this might work, but if you're trying to build a company that grows, then it doesn't work so well, because other people you hire will ... want the same thing.
If you expense your cell phone bill every month, then it's reasonable for other employees to expect the same, if they're also using it for work.
Better to get the board to sign off on a slightly higher salary to offset these expenses, IMO.
EDIT: I'm not a tax person, obviously people aren't being illegal and dishonest. It's just smart to write off everything possible in a founder's life as a business expense. Maybe housing or this or that doesn't qualify where you live? Great that's what the minimal salary is for. Everything else goes on the company card.
2nd EDIT: I don't really understand why everyone is so cagey whenever this topic comes up. This isn't news. The IRS isn't reading this saying "gosh darn they figured out a new loophole". The laws are clearly spelled out, it's up to you to apply them to your situation. Remember, tax evasion is illegal. But minimizing tax liability is 100% okay and literally the name of the game. Otherwise, we wouldn't have tax breaks in the first place.