Chart of Accounts for a Startup: Gross Margin, R&D, Burn

What chart of accounts should a startup set up?

A startup's chart of accounts is the list of ledger accounts every transaction is posted to. Build it backward from the statements investors read, then check that the tax return can be filled from it. No tax rule fixes the list: the law does not generally require any specific kind of records, and a business may use any system that clearly shows its income and expenses (Publication 583). The layout below is a plan for investor reporting, not a rule.

Start from this skeleton and add an account only when someone reads it. The numbers are a convention: leave gaps so accounts can be inserted later.

Depreciation and amortization stay in operating costs, in accounts of their own: in cost of revenue or the function that uses the asset (the SEC guide deducts depreciation from gross profit). Burn adds them back.

A case is not simple when:

• the books still run on the accounting software's default chart;
• one Salaries account holds every employee, or one Contractors account holds developers and the bookkeeper alike;
• engineers or contractors work outside the US;
• customers prepay, or SAFEs and notes have come in;
• a raise or board meeting is near and past months need re-mapping.

Gather: the current chart exported, payroll by person with each role, the vendor list with what each vendor does, the cap table with the signed SAFE or note documents, and the reports investors have asked for.

Re-mapping months that are already locked, deciding how to split a founder's time, and tying the same lines to the return are judgment calls. They are where a startup with a raise or board meeting near usually brings in a professional; see the last section.

Which P&L lines do investors read?

Investors read the income statement from the top: revenue, cost of revenue, gross margin, then operating expenses by function. The SEC's guide to financial statements describes a usual sequence of net revenues, cost of sales, gross profit, then operating expenses, though it says the lines can be reported in various orders. The SEC's income statement rule for public companies shows the cost of services apart from selling, general and administrative expenses (17 CFR 210.5-03). That rule has no R&D caption, and FASB's standard requires disclosing total R&D expense (Statement No. 2). Splitting operating expenses into R&D, sales and marketing and G&A is the common startup convention, not something these sources require.

When revenue is recognized is covered in revenue recognition for a startup.

What goes in cost of revenue, and what stays in operating expenses?

Cost of revenue (called cost of goods sold, or COGS, in many default charts) holds the costs of delivering what customers pay for; everything else is an operating expense. It is the investor view, not the Form 1125-A cost of goods sold used on the return (see the tax-return section). A cost placed in the wrong section changes gross margin without changing the loss. For a software company the usual placements are:

A one-page policy applied every month, with notice to the board when it changes, keeps results comparable. GPU, model API and cloud compute need their own split: see cloud compute costs in the books.

How do I split operating expenses into R&D, sales and marketing, and G&A?

Operating expenses split by what the work is for: R&D builds or improves the product, sales and marketing wins customers, and G&A runs the company. Each employee, contractor and vendor goes to one function, or is split by a stated rule.

• R&D: engineering, product, design and data staff; their contractors; development and staging environments.
• Sales and marketing: sales and marketing staff, commissions (some may be capitalized and spread under revenue accounting rules; see revenue recognition for a startup), advertising, events, sales tools.
• G&A: finance, legal, HR, executive administration, insurance, rent, company-wide software.

Two ways to build the split into the books:

• Accounts by function. A set of pay, contractor and software accounts under each function, such as "R&D salaries" and "G&A salaries". It works in any software and survives an export to a spreadsheet, at the cost of more accounts.
• Accounts by type, plus a department tag. Fewer accounts, but every bill and payroll line needs a tag, and a missed tag leaves cost unassigned or in the wrong function.

Either way, payroll must post each person to the right function, so set that mapping up first. Shared costs such as rent can stay in G&A or be allocated by headcount under a written rule. Stock compensation is usually shown in the function of the person who earned it, in an account of its own so burn can add it back.

What counts as R&D in the books, and how does the research credit differ?

R&D in the books follows the accounting standard's definition. The tax deduction and the research credit each use a different test, so one cost can pass one and fail another.

Software development can also be capitalized under separate accounting guidance, which your accountant or auditor applies. If you capitalize any, keep a capitalized software account apart from R&D expense; when to capitalize is not covered here.

Section 174A reaches domestic research paid in connection with a trade or business, and the credit generally needs a business being carried on. For in-house research only, the credit treats that test as met when the principal purpose of the spending is to use the results in a future active business of the taxpayer (26 U.S.C. 41(b)(4)). Keep prelaunch in-house costs apart from contractor research, which that rule does not cover.

Three consequences for the chart. The book R&D line is a starting list of people and vendors, not the credit's cost base. Research done outside the US belongs in its own accounts, because the deduction rule differs. And Form 6765 asks for research expenses by business component, such as a product, process or piece of software, so a product or project tag on R&D costs lets the books answer later. The deduction is covered in deducting US software development costs and the form in the research credit against payroll tax.

How do I split founder and engineer pay between functions?

Split each person's pay by the share of their time spent on each function, record the share and the period it covers, and keep a time record made at the time behind it. The credit generally allocates wages by qualifying time, but an annual "substantially all" rule can change the result (26 CFR 1.41-2(d)). One time record can support both views; the credit still needs each person's full wage and service records.

1. Post single-function people entirely to their function, and keep a list of each person's role and dates. For mixed roles, such as founders who code and also sell, set a monthly percentage and write down how: ticket or project records, or a short log kept as the work happens.
2. Keep wages apart from employer payroll taxes and benefits. FASB counts the salaries, wages and other related costs of the people doing R&D, so the books may add employer payroll taxes and benefits to a function. The credit counts wages as defined in section 3401(a) (26 U.S.C. 41(b)(2)(D)). Separate accounts keep both views.
3. Split contractors by what each does. A developer goes to R&D and a bookkeeper to G&A. Keep each signed agreement and its date: the credit counts only part of contract research, and only under an agreement made before the research starts (26 CFR 1.41-2(e)). Contractors outside the US get their own accounts, or a sub-account per country, and the agreement should say where the work is done; see software development done abroad.
4. Keep officers traceable by person. Officers' pay is reported apart from other wages on Form 1120 line 12, with Form 1125-E above a receipts threshold (Form 1120 instructions, Form 1125-E instructions), so give each founder's pay its own account. See founder salary in a venture-backed corporation.

A partnership's founders are paid by guaranteed payments or draws, not payroll, because partners are not employees (IRS: Partnerships); Form 1065 reports guaranteed payments on line 10, apart from salaries and wages on line 9 (instructions). See guaranteed payments vs partner draws.

Which balance sheet accounts should a startup open on day one?

Open these on day one: cash by account, receivables and prepaid, payables and accruals, deferred revenue, SAFEs and notes, and equity. Unlike income and expense accounts, which close each year, they stay open permanently (Publication 583). A starter set:

Whether a SAFE is carried as a liability or as equity depends on its terms under US GAAP; it is a judgment the company's accountants make and an auditor, if any, reviews. Conversion is in recording a priced round, and LLC equity in LLC equity accounts. Net burn is rebuilt from the cash flow using the non-cash, deferred revenue, prepaid, payable and financing accounts above.

How many accounts is enough?

A common test for opening an account: someone outside the bookkeeper reads it by name, as an investor line, a board line, a return line or a record the research credit needs. If merging two accounts changes no answer any of them needs, merge them.

How do the P&L lines map to the tax return?

The return asks for costs by type, not by function. Form 1120's deduction lines include officers' compensation, salaries and wages, rents, taxes and licenses, interest, depreciation, employee benefit programs and other deductions listed by type (instructions); none is R&D, sales or G&A. The chart therefore needs both views, function for investors and type for the return. Keep a one-page map from each account to its return line. The line numbers below follow the 2025 forms; check the current year's form before relying on them.

Form 1125-A is built around inventory, purchases and production labor, and applies when the entity reports a deduction for cost of goods sold (form). Whether a software or service company's cost of revenue belongs there is a fact question; see cost of goods sold for a service business and books to the business tax return. An S corporation files Form 1120-S, which has its own line numbers.

Which chart changes are safe mid-year, and when does history need re-mapping?

Adding accounts is safe at any time; moving cost between sections is not, because it changes a comparison.

When history needs re-mapping:

1. Write the new policy with its effective date.
2. Keep a list that maps each old account to its new one.
3. Restate every month that will sit next to the new months in a board package or data room, using each month's own records, so the change is not read as a swing in results. Do not apply a later time split backward.
4. For months already locked, or used in a filed return or issued statements, recast in the report from the mapping list instead of editing transactions. See closing date after taxes are filed.

A move between lines that does not change when income is included or a deduction is taken is not, by itself, a change in tax accounting method; a switch such as cash to accrual is, and generally needs IRS approval (Publication 538). See switching from cash to accrual accounting.

Example

These examples are illustrative; figures are in US dollars.

Cost of revenue sets gross margin

A seed-stage SaaS startup has monthly revenue of $50,000. Hosting is $8,000, payment fees $1,500 and support pay $4,500. These $14,000 go in cost of revenue, so gross margin is 72%. If the default chart books the same three costs in G&A, cost of revenue is $0 and the P&L shows 100%; investors then rebuild the 72% from the invoices.

One engineer's time split

Two engineers are each paid $15,000 a month. Each spends 80% of their time on the new product and 20% on fixes for live customers. Under the startup's written policy, R&D shows $24,000 and cost of revenue shows $6,000. A time record kept at the time supports the split in the books. The book split does not set qualified wages for the credit: its own tests, including an annual substantially-all rule, can give a different result.

One Contractors account

One Contractors account holds $12,000 a month: a US-based developer at $9,000 and a bookkeeper at $3,000. Splitting it moves $9,000 to R&D and $3,000 to G&A. For the credit, at most 65% of the developer's $9,000, or $5,850, can count, and only if the developer is based in the US, the research qualifies and the agreement was made before the work began.

Different for you?

• A raise or board meeting is a few months out and the P&L cannot show gross margin or R&D by function, or the books sit on a default chart and past months need re-mapping: which accounts to keep, how to restate history and how the lines reach the return depend on your records; see startup accounting help.
• Your LLC taxed as a partnership is becoming a C corporation, often before a seed round: equity accounts and the return column in the table above change from the conversion date; see moving a startup into a Delaware corporation.
• You need the board package and monthly close: see monthly financials for investors and the board.
• GPUs, model APIs or cloud hosting drive your costs: see cloud compute costs in the books.
• Customers prepay annual plans: see deferred revenue for SaaS subscriptions.
• Your books are behind or in a spreadsheet: see cleaning up your books before fundraising and get bookkeeping help.
• You are choosing software or planning the first year after a raise: see startup accounting software before funding and bookkeeping for a venture-backed startup.
• You want the research credit against payroll tax, or developers work outside the US: see the research credit against payroll tax and software development done abroad.