Tag: Tax

How Peter Thiel saved millions in taxes and so can other startup founders

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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.

We previously detailed how founders can utilize a ROTH IRA last year with our blog: How one founder could pay no taxes on a $196M gain with a ROTH IRA.

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 your ROTH IRA:

Photo of Peter Thiel courtesy Inc.

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

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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.

How the latest Stimulus Bill will impact your startup

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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.

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

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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.

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

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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:

  1. 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.
  2. File a Final Income Tax return in CA and ensure that that “FINAL RETURN” is selected.
  3. 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.
  4. Instruct your payroll provider to file Final payroll tax returns in CA.
  5. File a Change of Address with the IRS (click here).
  6. 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:

  1. Register for Employer Unemployment Tax in TX (click here).
  2. 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.
  3. 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.
  4. Instruct your lawyer or DE Registered Agent to file a foreign qualification with the TX Secretary of State.
  5. 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.
  6. 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.

How one founder could pay no taxes on a $196M gain with a ROTH IRA

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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 account to 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.

What does a President Biden mean for the R&D Credit for startups? Here’s our prediction.

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Will a President Biden change the R&D Credit for startups?

The answer is maybe.

Biden and his campaign have not made any specific statements on the R&D Credit. Though, he has committed to greatly increasing federal spending–most likely through the Small Business Innovation Research (SBIR) program and tax credits–on R&D, especially when it comes to AI, quantum computing, clean energy, and 5G.

Both parties acknowledge that federal R&D spending needs to increase.  Current federal R&D spending is now half, as a percentage of GDP, compared to the 1980s. Part of this R&D spending will probably be through increased tax credits, including enhancing the PATH Act R&D Credit. 

Keep in mind, the Obama-Biden Administration (through the PATH Act) introduced this refundable, very startup-friendly credit.

Our prediction

Currently, the PATH Act R&D Credit maxes out at $250K per year for the first five years. In the past, certain members of Congress have floated the idea of raising the annual limit to $500K and received bipartisan support, but somehow that got buried in the committee process. 

We feel that the Biden Administration will likely rekindle this $500K limit and also expand it so that startups with more than $5M in annual sales will be eligible (currently, you are not eligible if your annual sales exceed $5M per year).

An Interesting statistic

For Tax Year 2017, $53M in PATH Act R&D credits were claimed, per the Treasury Department. (This is the latest stat on the R&D Credit).  For Tax Year 2019, Accountalent helped clients claim over $11.8M in PATH Act R&D Credits.

Not only can Accountalent help you find out if your company is eligible for the R&D Credit–and claim that $$$–but we can also recommend a firm that can put together an IRS-compliant R&D Credit study in an inefficient, inexpensive manner that will take very little of your time or involvement.

Want to find out if Accountalent is right for your startup? Click here to schedule a free consultation call.

California startups beware: Moving your business out of The Golden State might not be such a golden idea…

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A lot has happened since the start of 2020. More companies and employees than ever are working remotely. Since the onset of COVID, several of the California startups we work with have moved their headquarters and employees from CA to another state (TX seems to be very popular).  The client is often very happy because they will not be required to pay the annual CA minimum $800 income tax anymore. 

For startups, though, beware before withdrawing officially from CA and filing a Final Income Tax return. The long-term implications could far exceed the short-term benefit.

Most startups will accumulate Federal and State net operating losses (NOLs) during their initial few years before they become profitable.  These losses can be carried forward to eventually offset taxable income.

In other words: These losses are very valuable.  

For California (and most states, in general), if a Final Income Tax return is filed, any CA NOLs are lost forever.  This is not a problem unless the startup decides to move back to CA or has future nexus (an employee, property, etc.) in CA.  In that case, there is no shelter from CA income taxes if, or when, the startup becomes profitable.

Example: California Startups NOL Mistake

  • Startup operates for initial 2 years in CA and has accumulated taxable losses of $2M at the end of Year 2.
  • At the end of Year 2, startup files a Final CA tax return and moves to another state.
  • In Year 4, startup has $1.5M in profits and moves back to CA. 
  • CA taxes for Year 4 are $135,000.
  • If the startup had kept filing in CA for Years 2 and 3, the NOLs would have offset taxable income in Year 4, with an additional $500K of NOL available for Year 5.  
  • So, to save $1,600 ($800 CA minimum tax in Years 2 and 3), it ended up costing the startup $133,400.

Be careful before withdrawing from any state where there is a Net Operating Loss Carryforward. Accountalent has helped over 3,000 startups with their taxes. Contact us today and avoid any costly mistakes.

7 Ways Your Taxes Will Change Under a President Biden

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Calling all startups and startup founders: now that the election is almost finalized, the time to start tax planning is now. Although many specifics are not yet fully developed, here is what we know right now about how a President Biden plans to change your taxes:

1. Corporate Tax Rate

Joe Biden plans to increase the corporate tax rate from 21% to 28%.

2. Foreign Subsidiary Tax Rate

Per Biden’s campaign website, he will double “the rate of the Trump offshoring tax rate and it will apply to all income.” This would increase the Global Intangible Low-Tax Income (GILTI) tax rate on foreign subsidiary income from 10.5% to 21%.

3. Manufacturing Tax Credit

Biden will seek to implement a 10% “Made in America” tax credit for certain costs of businesses that invest in “revitalizing closed or nearly closed facilities, retooling or expanding facilities, and bringing production or service jobs back to the U.S. and creating U.S. jobs.”

4. “Claw Back”

A startup that moves jobs overseas that could have been offered to Americans will be denied certain tax benefits and will need to return any public investments previously received.

5. Qualified Business Income Deduction (QBID)

IRC Section 199A currently provides a 20% deduction that reduces LLCs’, contractors’ and consultants’ taxable income. Biden plans to eliminate this deduction. However, you may still qualify if your taxable income is less than $400,000.

6. Capital Gains Tax

When you sell your startup and your gain exceeds $1M+, your long-term capital gains tax rate will increase from 20% to 39.6%.

7. Estate Tax

When you die, your estate tax rate will increase from 40% for estates over $11.6M to 45% for estates over $3.5M.  Therefore, an estate of $10M will now pay estate taxes of about $3M instead of $0. This change will make estate planning more important than ever.

As of right now, Biden has not indicated whether he will change the R&D Credit. However, with the amount of changes on the table, there is no telling what could happen next year.

In tax year 2019 alone, Accountalent helped 250+ clients claim over $10 million in PATH Act R&D Credits. Don’t leave cash on the table. Contact us now for a free consultation before these changes take place.

Header photo courtesy JoeBiden.com.

Beware of The IRS 1099-K Startup Trap

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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.  

 

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