Do-It-Yourself Tax for Startups Archives

What is the California Water’s Edge Election?

Posted on February 12, 2021July 13, 2022 by admin

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.

PPP Loan and Employee Retention Credit: Your top 5 questions answered

Posted on December 29, 2020July 13, 2022 by admin

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.

The BEST tax deduction for Self-Employed (2020 update)

Posted on December 14, 2020June 30, 2022 by admin

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

“Our startup is moving from California to Texas – What do we need to do?”

Posted on December 9, 2020June 30, 2022 by admin

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.

Good luck, and enjoy the Lone Star State.

Beware of The IRS 1099-K Startup Trap

Posted on August 28, 2017 by admin

1099-K: Clearing up the Confusion

If you’re a startup company who receives payments for your goods and services through credit card merchant accounts or third-party processors, then you’ve likely received one or more Form 1099-K’s. And if you’re like many recipients, you may have given them a quick once-over, filed them away, and not thought much about them since. The simple fact is that ignoring a 1099-K can end up costing you a lot of money in the form of an unexpected tax bill. What’s worse is that it’s a bill you probably shouldn’t be paying at all. So, unless you’re running a startup with plenty of cash to burn, we recommend that you familiarize yourself with 1099-K’s: what they are, why they’re important, and what you can do to avoid paying the unnecessary taxes they can bring with them.

What is a form 1099-K?

A 1099-K is simply a tax form, like a W-2, that reports the recipient’s earnings. In the case of the 1099-K, it’s the gross amount the recipient was paid through the credit card company or third-party processor. The form’s purpose is to ensure that taxpayers are accurately reporting and paying the full amount of taxes they owe to the IRS on their sales.

Who receives a 1099-K?

Anyone who uses an online-based service to collect payments. Examples include:

Sellers of apps on Google Play and Apple’s App Store.
Uber and Lyft drivers.
Amazon and Ebay retailers.
Attorneys, doctors, architects and any other professionals who accept and receive credit card merchant or online payments for their services.
Freelancers (writers, graphic artists, bookkeepers, etc.) who are paid through PayPal, Etsy or other third-party payment services.

The frequent problem:

As mentioned above, 1099-K’s report the gross amount earned by the recipient – that is, the full amount earned before any commissions or fees are taken out – not the net amount, which is what the recipient is typically paid by the credit card company or third-party processor.

Herein lies the problem: The IRS requires your company to report the gross amount earned on its tax return, not the net amount the company was actually paid. Many startups, however, mistakenly report the net amount (this is the amount that downloads from your bank into your accounting system or a spreadsheet) instead of the gross amount. When the IRS receives the return, it compares the total income figure stated on the return to the total amount of the gross payments reported on the 1099-K’s. When the figure on the tax return is, inevitably, smaller than the total amount reported on the 1099-K’s, the IRS presumes you’ve understated your income and – you guessed it – your company owes more in taxes.

The solution:

Here’s what you can do to help prevent a 1099-K tax problem for your business:

Be sure to report the correct amount of total income on your corporate tax return – which is the total combined gross payment figures reported on all of your company’s 1099-K’s.
Then, report all commissions and processor fees as expenses on the return. The result is an accurate net income figure upon which your company will pay the proper tax amount.
Check the figures listed on your 1099-K’s and compare them to those in your accounting system. There’s always the possibility that a mistake has been made.

One last thing:

If your company uses Stripe, Paypal, or another third-party payment service, make sure to open the account with the company’s EIN, not your SSN. This is a frequent occurrence and creates tons of problems when the IRS sends the owner a 1099-K instead of the company.

Do It Yourself Guide to Prepare Your Startup’s Taxes

Posted on January 11, 2016 by admin

OK, you have a startup (let’s assume a DE C Corp) and are low on funds. You would like Accountalent to prepare your taxes for you, but cannot afford the $150 per month, yet. Here is a guide to do your taxes yourself and not get in trouble. We will even review these filings for you at no cost.

First, what taxes are due? Here is a list sorted by due date:

Form 1099s – due January 31^st

DE Franchise Return – due March 1

Income Tax return – due March 15^th

Form 1099s:

Form 1099s are required for independent contractors or LLCs (none are required for corporations) to whom or which you have paid $600 or more in the calendar year. They are also required for rent payments and law firms (even if they are corporations). A Form 1099 is also required for the interest (not principal) amount of any notes converted to equity during the year.

Go to Track1099 and register for an account
Track1099 has two modules – Track1099 and TrackW9
Go to TrackW9 and enter your Company information and then enter the name and email address for anyone needing a Form 1099. They will send a request to enter their W9 information (name, address, SSN, etc.)
When they have completed this process, you can then transfer the TrackW9 information to Track1099
In Track1099, you enter the amount paid each recipient
The following are the box numbers to use:
Box 7 – Independent contractors and lawyers
Box 1 – Rent
Form 1099-INT – interest
The recipient will then get an email from Track1099 to securely download their Form 1099
The cost is about $2 per 1099 form

DE Franchise Return:

The DE Franchise return is required for all DE C Corporations. The amount of tax is a function of the Total Gross Assets, shares outstanding, and shares authorized. The return can be filed only online at https://icis.corp.delaware.gov/Ecorp/logintax.aspx?FilingType=FranchiseTax and the tax is calculated when you enter this information. The names of the Board of Directors and an Officer are also required. The tax for most startups is about $400 per year.

Income Tax Return:

Before you file your Income Tax return, you will need an accurate set of financial statements (Income Statement and Balance Sheet). There are many software programs to file your business taxes, though we recommend TurboTax. It costs about $150 per year for the software and includes the federal return, one state return, and e-filing both returns. If you have more than one state, you may need a professional, as multi-state taxation can get complex. You can download (PC version only) from Amazon.

TurboTax will bring you through an interview that facilitates the filing process. One of the most important elections that you will make on the first-year return is the method of accounting. You can choose either Cash Accounting or Accrual Accounting. Give this decision some thought, as it can make a big difference in the amount of taxes paid.

How Accountalent Can Help You:

You need not be a paying client to enlist our help in this process. We are here to assist you and much prefer you utilize your funds to grow your business rather than use them to pay government fines and penalties.

So, before you file any forms, save to pdf and shoot our founder, Joe Faris an email at [email protected]. We will set up a ShareFile folder where you can upload and house these filings in a secure manner. We will review and get back to you with any necessary changes. Please do not “attach these filings to an email message, as these filings may contain sensitive, personal information.

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IRS Circular 230 Disclosure