Peter Thiel has been making headlines the past couple of weeks over leaked data obtained by ProPublica.
ProPublica’s report claims Thiel’s Roth IRA was worth less than $2,000 in 1999, which then increased to more than $5 billion at the end of 2019.
When Thiel turns 59 ½, he can withdraw all of the money tax-free.
Thiel used his Roth IRA to buy 1.7 million shares of PayPal in 1999 at $0.001 per share ($1,700 total) – a few years before the company went public in 2002.
Although it may seem unfair, there is nothing illegal about this strategy, and there is nothing to say other startup founders can’t do the same.
In that blog, you’ll find more information on what a ROTH IRA is, potential pitfalls, other examples of success stories, and things to consider before investing.
Additionally, below you’ll find some more reading on the Thiel situation and what it means for yourROTH IRA:
One of the Bay Area “usual suspects” is at it again – this time pushing “Section 139 Plans.”
IRS Section 139 states an employer can reimburse employees tax-free for “reasonable and necessary medical, temporary housing and transportation expense” they incur as a result of a disaster like COVID. The IRS specifically states Section 139 payments cannot be “related to services rendered.”
The Plan being pushed, though, is a salary reduction plan – reduce your taxable salary and your employer will pay you tax-free that same amount through Section 139. Remember, Section 139 ONLY covers increased expenses incurred, not ordinary living expenses that you were already paying before the disaster such as rent, internet, utilities, etc. and never wages.
THIS IS A MINE FIELD.
First, the obvious IRS issue: the IRS would most likely rule that these payments were taxable wages, and the startup will then owe payroll taxes and plenty of interest and penalty. Remember, there is personal liability for Officers for payroll taxes.
More importantly, though, when your startup gets acquired or enters that next round of funding, the tax and employment lawyer doing the due diligence will have a HUGE issue with this and it may cost you the deal.
Be careful. This is all about the “usual suspect” collecting a fee from you, and there is a lot of danger for you. Do not jeopardize all of your hard work. Messing with payroll is very serious.
What is the California Water’s Edge Election? And should your startup use it?
Many startups we work with operate in the state of California and also have foreign subsidiaries. This can lead to complex tax situations, including the issue of determining income for the unitary group of corporations (typically consisting of a U.S. parent corporation and one or more foreign subsidiary corporations). The U.S. parent corporation must decide whether to determine CA income on a worldwide basis or a water’s edge basis.
California allows corporations to elect to compute income attributable to CA sources on a water’s edge combined report (Form 100W, instead of Form 100). This election results in the exclusion of affiliated foreign corps from the combined CA report, since they are usually not subject to CA tax. This means only the U.S. corp would be required to pay CA tax on its own CA sourced income. The election is made via Form 100-WE and must be attached to a timely filed original return Form 100W. The election lasts for 84 months (7 years).
Given the length of the election, it is important to consider which method will be more beneficial in the long run.
If the foreign sub is in a loss and is expected to continue generating losses for years to come:
Including the loss on a worldwide filing could be beneficial by reducing total taxable income.
Important note: If the foreign sub is currently in a loss, but is expected to start generating income soon, you may want to opt for the water’s edge election for the reasons listed below.
If the foreign sub is generating income:
Including the income on a worldwide filing would not be beneficial. This could end up increasing taxable income apportioned to CA.
However, it’s important to note that the foreign sub’s sales could dilute the CA apportionment factor, which may offset some (or all) of the increase in income.
For example, let’s take a look at a California C corp with one foreign subsidiary corp (100% owned) located in the United Kingdom. The CA entity has $100,000 in net income and $500,000 in sales (all in CA). The foreign sub has $50,000 in net income and $150,000 in foreign sales. Let’s see the impact of the water’s edge election below.
Water’s Edge Election
No Election (Worldwide)
Form
100W
100
Income (Loss) from foreign sub
Excluded
Included
Sales apportionment factor
Excluded
Included
CA apportionment %
100%
76.92%*
Net income on CA return
$100,000
$115,385**
*500,000 CA sales divided by 650,000 everywhere sales = 76.92% **150,000 in net income multiplied by 76.92% apportionment = $115,385
Let’s look at the same example, but say the foreign sub has a $50,000 loss instead of profit.
Water’s Edge Election
No Election (Worldwide)
Form
100W
100
Income (Loss) from foreign sub
Excluded
Included
Sales apportionment factor
Excluded
Included
CA apportionment %
100%
76.92%*
Net income on CA return
$100,000
$38,462**
*500,000 CA sales divided by 650,000 everywhere sales = 76.92% **100,000 – 50,000 = 50,000 in net income multiplied by 76.92% apportionment = $38,462
When the foreign sub is generating a profit, taking the water’s edge election is more beneficial, as the foreign income is excluded from the CA return. However, when the foreign sub is in a loss, it is more beneficial to not take the election. There are a number of complexities and nuances to consider before making the California water’s edge election, many of which are outside the scope of this article. Please consult with a qualified tax professional before making any elections.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
If you’re still wondering if you qualify for PPP2, ERC 2020, or ERC 2021, continue reading to find a simple “Yes or No” quiz on whether you qualify for any of these. If you have any other questions on the stimulus bill, Accountalent is here to help.
Stimulus Bill Quiz: Do I qualify for a PPP2 loan?
Do I qualify for the 2020 Employee Retention Credit?
Do I qualify for the 2021 Employee Retention Credit?
The new stimulus bill includes a fresh round of PPP, but the MOSTimportant part of the bill is allowing businesses to take both the new PPP2 and Employee Retention Credit, so how do you maximize the benefit of the two?
Below, we’re breaking down some of the key parts of both benefits, including threshold/eligibility, amount of credit/loan, start and end dates, maximum benefit amount, and more.
1. 50% Reduction in Quarterly Sales for any quarter in 2020 vs. 2019, or 2. Shut down by government order
1. 20% Reduction in Q1 2021 and/or Q2 2021 sales vs. same quarter in 2019, or 2. Option to use the quarter immediately preceding calendar quarter and comparing to corresponding 2019 quarter
Demonstrate at least a 25% reduction in gross receipts in any quarter of 2020 relative to the same quarter in 2019
Amount of Credit/Loan
50% of Quarterly Wages up to $10k per year, so maxes out at $5K Refundable Credit per employee for 2020
70% of Quarterly Wages up to $10K for Q1 2021 and Q2 2021, so maxes out at $14K Refundable Credit per employee for 2021
2.5 times the monthly trailing 12 month payroll up to $2M. 3.5 times if in the hospitality industry.
What are “Wages”?
Salary + Employer-paid Health Insurance
Salary + Employer paid Health Insurance
Salary + Group Health Insurance + Certain Payroll Taxes
What are the start and end dates?
Wages from 1st Quarter of Threshold qualification to end of Quarter when 2020 Quarterly Sales are 80% of corresponding 2019 Quarter
Wages from 1st Quarter of Threshold qualification to end of Quarter when 2020 Quarterly Sales are 80% of corresponding 2019 Quarter
Unknown
What happens if I incorporated in 2019 or 2020?
Compare the 2019 quarter you incorporate in to the corresponding 2020 Quarter. Estimate full quarter 2019 sales if did not incorporate on first day of quarter.
If incorporated in 2020, compare Q1 of 2021 to Q1 of 2020 and/or Q2 of 2021 to Q2 of 2020.
Need additional guidance if not incorporated in 2019
Maximum Amount
$5K per employee for 2020
$14K per employee for 2021
$2M
Comments
Language in new bill is conflicting on process of claiming retroactive credit and does computation include wages and health insurance or just health insurance costs
Cannot use wages for both ERC and R&D Credit.
Forgiveness now can be payroll (not less than 60% of total forgiveness); SW for cloud computing, HR, accounting, etc.; essential suppliers; property damages.
The Treasury and SBA will be releasing additional guidance and application process information for both PPP2 and Employee Retention Credit this week. As always, we will keep you updated as this becomes available.
It’s important to note, when companies are able to apply for both, there will probably be a mad rush. PPP1 was $521B, and PPP2 is only $284B. Also, if you plan to apply for the new PPP and/or the Employee Retention Credit, you should be dusting off your 2019 and 2020 quarterly financial statements. They will be needed to determine if you are eligible.
Accountalent is breaking down the latest stimulus bill – specifically the PPP Loan and Employee Retention Credit – into easy-to-digest answers… instead of making you read the full 5,600-page bill. Here are some FAQs we’ve received since Congress passed the latest stimulus bill.
1. Is it too late to apply for a PPP loan?
No! There is now PPP2. The forgivable loan amount is the same formula as PPP1 –2.5X your average monthly payroll. To be eligible, though, you need a 25% reduction in revenue in any 2020 quarter compared to the same 2019 quarter.
2. Is it too late to claim the 2020 Employee Retention Credit (ERC)?
No! The new stimulus bill allows businesses to retroactively claim an ERC for 2020. You’ll also need to show a reduction in revenue similar to the PPP requirement above. This can be worth up to $5K per employee.
3. Is there a new ERC for 2021?
Yes, and this one is even better than the one above… and you can get both of them! It can be worth up to $14K per employee, based on Q1 2021 and Q2 2021 payroll.
4. Can I claim the ERC if I already received a PPP loan?
Yes! The new stimulus bill now allows businesses that previously borrowed a PPP loan to go back and claim the ERC for 2020 and apply for the one for 2021. However, no “double dipping” on payroll – you cannot use payroll for PPP forgiveness and in the calculation of the ERC. Considering most PPP loans only covered a limited amount of payroll, there is a good chance you may qualify for the ERC as well.
5. Are my payroll expenses deductible on my tax return if my PPP loan is forgiven?
Yes! Previously under the CARES Act, you could not take a deduction for payroll expenses covered by a forgiven PPP loan. However, under the new stimulus bill, those expenses are now deductible.
There are many moving parts to the PPP Loan and Employee Retention Credit and how they interact, so be sure to reach out to Accountalent before making any final decisions. Our team can help you navigate these complex requirements so your startup doesn’t leave any money on the table.
Last night, Congress came to an agreement on the latest Stimulus Bill (finally). In it are a couple key provisions that could impact startups.
1. Additional funding for the Paycheck Protection Program (PPP)
The program hasn’t taken any new applications since August. If you haven’t taken advantage of this program, check out our article reflecting on the first week after it was enacted.
2. Clarity on whether PPP loan expenses are deductible, even if the loan is forgiven.
The CARES Act clearly stated that forgiven PPP loans would not be included as income. However, it was previously unclear whether the expenses covered by the PPP loan would be deductible on the recipient’s tax return. This new legislation clears up that confusion and indicates that expenses paid with a forgiven PPP loan will still be deductible.
For example: If you previously received a $100,000 PPP loan and spent it all on payroll, and then the loan was later forgiven, you would not be able to deduct that $100,000 of payroll expense on your tax return. This treatment could leave you with a surprise tax bill of $21,000 (assuming a 21% corporate tax rate). The new stimulus bill eliminates this scenario by allowing you to deduct the full $100,000 in payroll expense.
Side Note: If you have not already applied for PPP forgiveness, wait until this new legislation is signed into law. There is no guarantee that this new bill will apply retroactively.
A note from our founder, Joe Faris:
3. Two-year tax break for business meals.
Typically, businesses are only allowed to deduct 50% of meals. The added proposal would allow businesses to deduct 100% of meals for 2021 and 2022.
Stay tuned, as this is unlikely to be the last Stimulus Bill we see come out of Washington in the coming months.
Attention self-employed with children under 18 years old: we have a great tax deduction for you that could reduce your Federal Taxes by 35%!
If you can justify employing your minor child in your business, you get the tax deduction on wages paid to the and your child picks up the income on his tax return (under $12,400 in income, which also ensures your child will not owe any income tax). If the child is under 18 years old, there is no employee or employer Social Security or Medicare tax. The only caveat is that, if audited, you need to demonstrate that the pay is worth the services that your child provided to your business.
As an example, assuming you pay each of your two children $10,000 apiece, your family Federal tax savings are $4,400 under the following scenario. There are additional savings if you live in a state that has a State Income Tax.
Business:
Any unincorporated business (such as an LLC)
Filing Status:
Married with 2 children
Adjusted Gross Income:
$120,000 ($110,000 from business and $10,000 from other sources)
Standard Deduction, Married Filing Jointly:
$24,800
The payment to your children needs to be paid on a W-2, not on Form 1099. Therefore, you will have some filing requirements, such as preparing the W-2, Form 941, Form 940, etc. We can email you a free information packet ([email protected]) so you can easily do these filings yourself, or you can use one of the many inexpensive web services. You can pay these wages on one paycheck at the end of the year.
You can always instruct your children to use this money to pay for items that you would typically pay for them, such as private school tuition, recreation, vacations, gifts, etc. You can also invest up to $2,000 into a Roth IRA for them.
This deduction does not work as well if your business is incorporated, as the childrens’ wages will trigger Employee and Employer Social Security and Medicare tax.
This is one of the best tax deductions for self-employed, if you can justify these wages. It reduces your Federal Taxes by 35% – a very significant tax savings.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
Since COVID, we receive several emails per week with this exact question about a startup moving out of the Golden State. The “from” tends to always be San Francisco, CA and the “to” is often Austin, TX.
The following list gives some good pointers on the “to-dos” for a startup moving out of CA:
If you are TOTALLY moving out of CA (meaning all employees leaving) and will have less than $600K in sales to customers located in CA (or 25% or less of your total sales) going forward, file a SURC with the CA Secretary of State to surrender your CA Foreign Qualification. You will then have no Income Tax or Secretary of State filing requirements going forward in CA.
File a Final Income Tax return in CA and ensure that that “FINAL RETURN” is selected.
If you have a CA Sales Tax registration, file CDTFA-65 to close out your sales tax account and file a Final Sales Tax return on the regular filing date subsequent to filing CDTFA-65.
Instruct your payroll provider to file Final payroll tax returns in CA.
File a Change of Address with the IRS (click here).
Instruct your local Post Office to forward your mail to the new location (click here).
The following list gives some good pointers on the “to-dos” for a startup moving into TX:
Register for Employer Unemployment Tax in TX (click here).
Secure TX Workers’ Comp insurance. TX is the only state where Workers’ Comp is not required – if you do not secure it, though, there is too much risk on the Company. It is cheap, costing about $250 per year per $100,000 in salary.
Instruct your payroll company of your new TX work location for your employees – TX has no personal income tax, so you want to ensure the payroll company does not continue to withhold CA income taxes.
Instruct your lawyer or DE Registered Agent to file a foreign qualification with the TX Secretary of State.
Register for TX Franchise Tax (TX does have a corporate tax) once you receive your letter from the TX Secretary of State. Click here to register.
Register for TX Sales Tax (click here). (Note: All software sales to TX customers are subject to TX sales tax. For SaaS sales, though, only 80% of the sales price is subject to TX sales tax.)
Shortcut: You can use a service like CorpNet to register for Unemployment Tax (#1 above) and Sales Tax (#6 above). Their fee is $200 per filing and will save you a TON of time.
When it comes to the topic of wealth preservation, there is no shortage of strategies. One method startup founders could take involves putting a percentage of their startup stock into a ROTH IRA retirement accountto create a tax-advantaged nest egg.
What is the ROTH IRA?
The ROTH IRA allows you to put up to $6,000 in 2021 ($7,000 if you’re 50 or older) into an account which grows tax-free and can be removed without restriction or taxes due starting at age 59 ½.
There is no cap to the amount of money one can accumulate in a ROTH IRA, making it a popular vehicle for any investment that you want to grow without penalty and without any tax consequences when you withdraw.
Founder’s stock and potential pitfalls
The ROTH IRA is permitted to invest in private businesses not controlled more than 50% by the plan holder, so what about using the ROTH IRA to invest in your startup’s stock?
As long as you control less than 50% off the company, the IRS has no restrictions on investing in a business you partially own.
Real world ROTH IRA success stories
Forbes.com reported that in 2010 the chairman of Yelp sold 3.1 million shares of Yelp stock held in his ROTH individual retirement account, receiving around $10.1 million in profit, tax-free. Assuming he did not withdraw early, there are no taxes on that gain.
In 2014, the Government Accountability Office (GAO) released a report discussing the impact on the federal government from the revenue loss that occurs with this “circumvention of the longstanding rationale for IRA contribution limits.”
The report included an example in which one company’s shares were valued at $0.00125 each in 2008 and 4 million shares were placed in a Roth IRA. The company eventually got a venture capital investment, went public, and saw its share price go to $60. The founder could end up with $196 million in the IRA, according to the GAO. (The company and founder were kept anonymous.)
What to consider before investing
If you’re considering pursuing this strategy with your own startup, here are some guidelines you need to follow regarding restricted transactions with ROTH IRA’s before investing in your company’s stock.
Make the investment as early on in the company life as possible, so no arguments can be made that the stock has experienced an appreciation in value.
Control less than 50% of the company at the time of investment.
Get a valuation done immediately before the investment to ensure the FMV of stock is what your ROTH IRA pays for it.
There should be no mismatch with the value vs. purchase price. This will keep the IRS from looking at the investment as “abusive.”
Be sure to hold your founder’s stock in multiple investment vehicles, so it is not concentrated in one account.
If this tax-saving method worked for the founders of Yelp and other successful startups, there’s a good chance it could work well for you.
