As a start-up company in the technology sector, you likely will encounter a range of complex accounting and tax challenges due to the fast-paced nature of the industry, ongoing product development, and the distinct ways companies in this space are structured and financed. These factors can all contribute to financial issues that not only arise at the inception of your company but continue to affect operations over several years.
Below highlights three accounting and tax areas technology start-ups should proactively address: revenue recognition, state and local taxes, and capitalizing software development costs.
Technology companies, particularly those in the Software-as-a-Service (SaaS) space, often face significant external pressures that complicate revenue recognition. These pressures may stem from rapidly changing product offerings, evolving sales promises or investor demands for more predictable annually recurring revenue (ARR). Start-ups may struggle with whether SaaS implementation services are a distinct service from a subscription, how to recognize revenue from professional services or how to handle contracts involving multiple deliverables.
Proper revenue recognition will demand that you not only have a solid understanding of generally accepted accounting principles (GAAP), but that you also carefully interpret these principles in the context of unique contracts, which often requires applying professional judgment.
Read more in “3 Revenue Recognition Challenges (and Tips) for Software and SaaS Companies in 2025”
In the early years of a technology start-up, a company often experiences operating losses as the software or service is being developed and launched. However, as the business grows, it is important to anticipate the tax implications of future profitability. Start-ups may expand to have remote teams working in various states, sell products across state lines and generate taxable income — all of which can individually create state and local tax considerations.
As a tech company owner, engaging with a tax provisional early on can aid in anticipating state and local tax exposure, helping you make more informed filing decisions and manage tax liabilities and related cash flow. At some point, you also likely will be contemplating future investments, restructuring or exit events. As such, working with your tax adviser can help preserve value and mitigate risk in the area of state and local tax.
Read more in “The Importance of State Tax Planning and Compliance for Startups”
For many technology companies, payroll is the largest expense, with a substantial portion allocated to the development and maintenance of software. GAAP outlines specific criteria for capitalizing software development costs; understanding these guidelines is critical for financial accuracy. Distinguishing which costs you must expense and which you must capitalize requires careful consideration. Clear internal communication, robust documentation, and adherence to GAAP are essential to ensure you properly capitalize software development costs, which in turn can impact both your company’s financial statements and its tax position.
Read “How to Capitalize Your Company’s Internal-Use Software Costs”
Effectively addressing these, and other, accounting and tax challenges requires careful planning from the outset and ongoing attention as your company matures. Overcoming these hurdles demands collaboration across departments, strong leadership oversight and working closely with your advisory team.
Contact Brian Fiedler or a member of your service team to discuss this topic further.
Cohen & Co is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law with your professional advisers.