- Sales tax & nexusWhere you owe sales tax on software, and registering before it compounds.Learn more about Sales tax & nexus →
- Monthly closeAccrual books with deferred revenue and metrics that tie to the numbers.Learn more about Monthly close →
- Fractional CFOBudgets, cash runway and board reporting.Learn more about Fractional CFO →
- Early-stage companiesFormation, 83(b) elections, QSBS and fundraising.Learn more about Startup accounting →
Sales tax on software isn’t uniform
- New York taxes SaaS as prewritten software, however it’s delivered: 4% state tax plus local tax, 8.875% in New York City.
- New Jersey generally does not tax SaaS that customers access remotely, but it does tax information services and software that customers download.
- Other states range from fully taxable to exempt. Once your sales into a state pass its economic nexus threshold (often $100,000 a year; in New York, $500,000 and 100 sales), you may need to register and collect.
- Bundles matter. Implementation fees, training, support and data services can each be taxed differently, so invoice them separately where it helps.
Subscription revenue and deferred revenue
An annual subscription paid upfront is earned over the year. On accrual books, the cash goes to deferred revenue and is recognized monthly, which is what investors, lenders and acquirers expect. For tax, accrual-method companies can generally defer advance payments to the following year when their financial statements do the same. We reconcile MRR, ARR and churn reports to the books, so the metrics and the financial statements tell the same story.
Research costs: the deduction and the credit
- Section 174A. For tax years beginning after 2024, domestic research and experimental costs, including software development, can be deducted in the year paid. Foreign research costs are still deducted over 15 years.
- The research credit. A qualified small business with under $5 million in gross receipts can apply up to $500,000 a year of the federal credit against employer payroll taxes.
- New Jersey. Eligible technology companies can sell unused net operating losses and research credits for cash through the Technology Business Tax Certificate Transfer Program.
Income tax in more than one state
New Jersey, New York and many other states source software and service revenue to where the customer receives the benefit. Customers and remote employees in other states can create income tax and payroll filings there, so we review your footprint each year rather than waiting for a state notice.
Frequently asked questions
Is SaaS taxable in New York?
Yes. New York taxes SaaS as prewritten software, at 4% plus the local rate (8.875% in New York City).
Is SaaS taxable in New Jersey?
Generally not, when customers access it remotely. New Jersey does tax information services and downloaded software.
When does a software company have to collect sales tax in another state?
When its sales into that state pass the state’s economic nexus threshold, often $100,000 a year, and the state taxes the product. New York’s threshold is $500,000 and 100 sales.
How should annual subscriptions be recorded?
As deferred revenue when billed or paid, then recognized monthly over the subscription term. For tax, accrual-method companies can generally defer advance payments one year.
Can software development costs be deducted right away?
For tax years beginning after 2024, domestic research and experimental costs, including software development, generally can. Foreign research costs are still deducted over 15 years.