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Startup Accounting Basics: What Founders Need to Set Up (2026)

Cash vs accrual, a startup chart of accounts, the monthly close, burn and runway math, Delaware franchise tax, Form 1120 and the R&D payroll tax credit.

Most founders do not start a company to do bookkeeping, and in the first months it is easy to let it slide: one card for everything, receipts in an inbox, a spreadsheet for runway. Then a fundraise, a tax deadline or a due-diligence request arrives, and someone has to rebuild a year of books in a week, usually at a premium.

This guide covers the startup accounting basics to set up from the start: which accounting method to use, how to separate company money, a chart of accounts that investors can read, a monthly close, the burn and runway math, and the US filings that catch first-time founders out, including Delaware franchise tax, Form 1120 and the R&D payroll tax credit. Tax figures are for tax year 2025 returns unless stated.

This is general information, not tax, legal or accounting advice. Your situation may differ, so confirm anything you act on with a CPA.

Cash or accrual?

Under the cash method, you record income when you receive it and expenses when you pay them. Under the accrual method, you record income when you earn it and expenses when you incur them, whether or not cash has moved yet. The IRS describes the purpose of accrual as matching income and expenses in the correct year.

For your tax return, the rules depend on your entity:

  • A C corporation (the usual startup structure) cannot use the cash method unless it is a small business taxpayer. For tax years beginning in 2025, that means average annual gross receipts of $31 million or less for the 3 prior tax years, and not being a tax shelter. The IRS indexes the figure for inflation.
  • A corporation that is not a small business taxpayer must use an accrual method for sales and purchases of inventory items.
  • Once you choose a method, changing it generally requires IRS consent, usually through Form 3115.

For your own books, most venture-backed startups use accrual from early on, even if the tax return could use cash. Accrual shows revenue in the month you deliver the service and costs in the month you use them, which is what investors, lenders and auditors usually expect to see in financial statements. A SaaS company that collects a year’s subscription up front, for example, looks far richer in month one on a cash basis than it really is.

A practical approach: keep the books on accrual, and let your CPA decide which method the tax return uses.

Step 1: Separate company money from yours

The IRS advises keeping a separate bank account for your business, and for a corporation it matters even more: mixing personal and company money makes the books harder to close, weakens your records and complicates due diligence.

  1. Open a business bank account in the company’s name with its EIN, as soon as the company is formed.
  2. Get a company card and use it only for company costs.
  3. Put founder money in properly. If you fund the company yourself, record it as a purchase of shares or a documented loan, not as a loose transfer.
  4. Reimburse, do not mix. If you pay a company cost personally, submit it as an expense report and have the company reimburse you.
  5. Connect the accounts to your accounting software so transactions flow in automatically.

Step 2: Set up a chart of accounts

A chart of accounts is the list of categories every transaction is sorted into. A clean one makes your monthly reports readable and your fundraising data room easy to assemble. A simple structure for an early-stage software startup:

Section Example accounts
Assets Operating bank account, savings or treasury account, accounts receivable, prepaid expenses, computer equipment
Liabilities Accounts payable, company credit card, accrued expenses, payroll liabilities, deferred revenue
Equity Common stock, preferred stock, additional paid-in capital, retained earnings (deficit)
Revenue Subscription revenue, services revenue
Cost of revenue Hosting and infrastructure, third-party software in the product, customer support
Operating expenses: R&D Engineering salaries, contractors, development tools
Operating expenses: Sales and marketing Sales salaries, advertising, events, CRM
Operating expenses: General and administrative Founder and admin salaries, legal, accounting, insurance, rent, office software

Two tips. First, group expenses by department (R&D, sales and marketing, G&A) as well as by type; investors compare startups this way. Second, ask your CPA how to record SAFEs, convertible notes and stock compensation before the first one closes, because the accounting is not obvious and is easy to get wrong.

Step 3: Run a monthly close

The monthly close is the routine that turns raw transactions into finished financial statements for the month. A basic version takes a few hours for an early startup:

  1. Categorize every transaction in the bank and card feeds.
  2. Reconcile every bank, card and payment account to its statement, so the books match the real balance to the cent.
  3. Record bills and invoices: unpaid supplier bills (accounts payable) and unpaid customer invoices (accounts receivable).
  4. Post accruals: costs you incurred but have not been billed for yet, such as a contractor’s hours or a legal bill.
  5. Spread prepaid costs: an annual software or insurance payment is expensed month by month.
  6. Recognize revenue for what you delivered, and move the rest of any prepayments to deferred revenue.
  7. Book payroll from your payroll provider’s reports, including employer taxes and benefits.
  8. Review the reports: balance sheet, income statement and cash flow, compared with last month and with your budget.
  9. Update burn and runway (below) and share a short summary with your co-founders and board.

Aim to close within the first two weeks of the following month. A close that slips by a quarter is the most common reason startups end up paying for clean-up work before a fundraise.

Burn rate and runway

Gross burn is the total cash the company spends in a month. Net burn is cash out minus cash in. Runway is how many months the cash will last at the current net burn.

Net burn = cash out − cash in

Runway (months) = cash balance ÷ net burn

Worked example

At the end of September, a seed-stage startup has $1,800,000 in the bank. In September it spent $165,000 (payroll, tools, rent, contractors) and collected $45,000 from customers.

  • Gross burn = $165,000
  • Net burn = $165,000 − $45,000 = $120,000
  • Runway = $1,800,000 ÷ $120,000 = 15 months

Now the founders plan to hire an engineer at a fully loaded cost of $15,000 a month. Net burn rises to $135,000, and runway falls to $1,800,000 ÷ $135,000 = 13.3 months. The hire costs nearly two months of runway, which is the trade-off the founders should see before they make the offer.

Three habits make the number trustworthy:

  • Average over 3 months. One-off costs, such as an annual insurance payment or a legal bill, distort a single month.
  • Use cash, not profit. Runway is about cash. Accrual books are right for measuring the business, but runway comes from the bank balance and cash movements.
  • Re-forecast, do not just divide. If you plan hires or expect revenue growth, build a month-by-month cash forecast. The simple formula assumes nothing changes.

Delaware franchise tax and annual report

Many startups incorporate in Delaware. Every Delaware corporation must file an Annual Report and pay a franchise tax, according to the Delaware Division of Corporations:

  • Due date: taxes and Annual Reports must be received by March 1 each year.
  • Annual Report filing fee: $50 for non-exempt domestic corporations.
  • Minimum tax: $175 under the Authorized Shares method, $400 under the Assumed Par Value Capital method.
  • Maximum tax: $200,000, or $250,000 for corporations identified as Large Corporate Filers.
  • Late penalty: $200 for not filing a completed Annual Report by March 1, plus interest of 1.5% per month on unpaid tax.
  • Corporations owing $5,000 or more pay in quarterly estimated installments.

Why founders get surprised

Under the Authorized Shares method, Delaware charges $175 for 5,000 shares or fewer, $250 for 5,001 to 10,000 shares, and $85 for each additional 10,000 shares or part of 10,000. Startups often authorize millions of shares, so the default calculation can be startling.

Example: a startup with 10,000,000 authorized shares. Shares above 10,000 = 9,990,000, which is 999 blocks of 10,000.

$250 + (999 × $85) = $250 + $84,915 = $85,165

The Assumed Par Value Capital method instead uses your total gross assets (Delaware says these are the total assets reported on Schedule L of your federal Form 1120) and your issued shares. You divide gross assets by issued shares to get an “assumed par,” and the tax is $400 per $1,000,000 (or part of a million) of the resulting assumed par value capital, with a $400 minimum. For an early startup with modest assets, this is often far lower. Delaware says corporations should use the method that results in the lesser tax; its online calculator lets you compare both.

Federal income tax: Form 1120 basics

A startup set up as a C corporation files Form 1120, the US Corporation Income Tax Return. From the IRS instructions for tax year 2025:

  • Who files: all domestic corporations, unless exempt, whether or not they have taxable income. A pre-revenue startup still files.
  • Due date: the 15th day of the 4th month after the tax year ends, which is April 15 for a calendar-year company. Corporations with a fiscal year ending June 30 file by the 15th day of the 3rd month.
  • Extension: Form 7004 extends the time to file, not the time to pay. The IRS charges interest on tax paid late even when an extension is granted.
  • Rate: taxable income is multiplied by 21%.
  • Estimated tax: a corporation that expects to owe $500 or more for the year must pay estimated tax in installments due on the 15th day of the 4th, 6th, 9th and 12th months of its tax year.

You may also owe state income or franchise taxes, and need to register, in the states where you have employees or operations. Ask your CPA which apply.

The R&D tax credit against payroll taxes

The research credit (Internal Revenue Code section 41) rewards spending on qualified research. Because most startups have no income tax to offset, the law lets a qualified small business apply part of the credit against payroll taxes instead. According to the IRS:

  • Who qualifies: a corporation (including an S corporation) or partnership with gross receipts of less than $5 million for the tax year and no gross receipts for any tax year before the 5-tax-year period ending with that year.
  • How much: up to $500,000 a year can be elected against payroll taxes, for tax years beginning after December 31, 2022 (it was $250,000 before).
  • What it offsets: first the employer share of Social Security tax, up to $250,000 a quarter, then the employer share of Medicare tax. Unused credit carries forward to the next quarter.
  • How to elect: on Form 6765, attached to a timely filed original income tax return (including extensions). The IRS says the election cannot be made on an amended return.
  • When it starts: from the first calendar quarter that begins after you file the income tax return with the election. You claim it on Form 8974, attached to your Form 941.
  • How many years: the election cannot be made for a tax year if you made it for 5 or more preceding tax years.

Worked example

A calendar-year startup’s Form 6765 for 2025 shows a research credit of $60,000, and it elects to apply all of it to payroll taxes. It files its 2025 Form 1120 on April 10, 2026. The first quarter that begins after that date is the third quarter of 2026 (July to September).

Each quarter, its employer share of Social Security tax is $18,000 and its employer share of Medicare tax is $4,200.

  • Q3 2026: credit used = $18,000 + $4,200 = $22,200
  • Q4 2026: another $22,200
  • Remaining $15,600 carries forward to Q1 2027

Note the timing: filing the return early brings the cash benefit forward. Filing late, or missing the election on the original return, can lose it.

Related: for tax years beginning after December 31, 2024, new section 174A lets businesses deduct the domestic research and experimental expenditures they pay or incur, or elect to amortize them over at least 60 months instead, according to the IRS Form 6765 instructions. The research credit rules interact with this deduction, so have a CPA prepare the calculation.

Bookkeeping cadence

How often What to do
Weekly Categorize bank and card transactions, file receipts, check cash balance
Monthly Close the books (the 9 steps above), update burn and runway, send a short update to the board
Quarterly Review the forecast, pay estimated taxes if you owe them, file Form 941 for payroll (your payroll provider usually does this)
Yearly Delaware Annual Report and franchise tax by March 1; Form 1120 (calendar year: April 15); contractor 1099s; Form 6765 election if you have qualified research

When to hire a bookkeeper or CPA

  • Bookkeeper: as soon as the monthly close takes a founder more than a few hours a month, or the books are a month or more behind. That is usually around the time you hire your first employees.
  • CPA: before your first tax return, and in any year you plan to claim the R&D credit. A CPA should also review how you record SAFEs, convertible notes and stock options.
  • Before a fundraise: have your books closed and reconciled through the latest month. Investors will ask for financial statements, and clean accrual books shorten due diligence.
  • Fractional CFO or controller: when you need forecasting, board reporting and investor metrics more than once a quarter.

Common mistakes

  • Mixing personal and company spending. It is the single biggest source of clean-up work.
  • Running the books on cash basis until the fundraise. Converting to accrual after the fact is slow and costly.
  • Ignoring the Delaware notice. A large authorized-shares bill is often far smaller under the Assumed Par Value Capital method. Recalculate before you pay, and file by March 1 to avoid the $200 penalty and interest.
  • Not filing Form 1120 because there was no revenue. Corporations must file whether or not they have taxable income.
  • Missing the R&D payroll election. It must be made on a timely filed original return, so a late or amended return can mean losing that year’s election.
  • Calculating runway from profit, or from one month. Use cash and a 3-month average, and re-forecast when plans change.
  • Leaving equity paperwork out of the books. Every share issuance, SAFE and option grant needs an accounting entry and a document behind it.

Tools for startup accounting

Most of this runs on three pieces of software: an accounting system, a payroll provider and, later, a spend management tool. Choose accounting software that handles accrual entries, deferred revenue and department reporting, and that your CPA already knows. We compare the options in our guide to the best accounting software for startups.

Payroll matters here too, because it feeds both your burn and the R&D payroll credit; see the best payroll software for startups. If you sell physical products, our explainer on how to calculate COGS covers the IRS inventory rules.

Frequently asked questions

Should a startup use cash or accrual accounting?

Most venture-backed startups keep their books on the accrual method, because it matches revenue and expenses to the month they belong to and is what investors and auditors usually expect. For taxes, a C corporation can only use the cash method if it is a small business taxpayer: for tax years beginning in 2025, average annual gross receipts of $31 million or less over the prior 3 years, and not a tax shelter.

How do you calculate burn rate and runway?

Gross burn is the total cash you spend in a month. Net burn is cash out minus cash in. Runway in months is your cash balance divided by net burn. A startup with $1,800,000 in the bank and $120,000 of net burn has 15 months of runway.

Why is my Delaware franchise tax bill so high?

Delaware calculates the tax by the Authorized Shares method by default, and a startup with millions of authorized shares can get a large bill that way: 10,000,000 authorized shares works out to $85,165. You can instead use the Assumed Par Value Capital method, which needs your gross assets and issued shares and often gives a much lower figure. Delaware says to use the method that results in the lesser tax.

Does a startup with no revenue need to file a tax return?

Yes, if it is a C corporation. The IRS says all domestic corporations must file an income tax return whether or not they have taxable income, unless exempt. For a calendar-year corporation, Form 1120 is due by the 15th day of the 4th month after year end, which is April 15.

Can a pre-revenue startup benefit from the R&D tax credit?

Often, yes. A qualified small business (gross receipts under $5 million for the year and no gross receipts before the 5-tax-year period ending with that year) can elect to apply up to $500,000 of its research credit a year against the employer share of Social Security tax, and then Medicare tax, on its payroll. The election is made on Form 6765 with a timely filed original return.

Sources and updates

Facts in this article were last checked against the official sources below on . Rules and thresholds change, so confirm anything you act on with the official source or a qualified professional. Spot something out of date? Tell us and we will re-check it. How we work: editorial policy.