Selecting the Right Entity for Your Tech Startup

Nebraska, and neighboring Midwest states, have developed a reputation as the “Silicon Prairie,” a prime location for technology startups. The recent tech startup boom in the Midwest can be attributed to the lower cost of living, knowledgeable tech labor force, and willingness of the community to embrace the startup. For many of these startups, besides the intense need to develop and protect the technology, a common issue is picking the right business entity structure.

 

In picking the right entity for the startup, several considerations should be weighed, including the need for liability protection, how the company will fund operations, and the most beneficial tax status. For example, if a tech startup is developing a product that will take a substantial period to produce, and likely need multiple rounds of equity financing involving institutional investors, with other funding coming through debt, the demand for classes of shares, preferences, and conversion rights, may require that the startup to form as a C-corporation, with corresponding tax status. On the other hand, if the startup only intends to have one round of equity financing, through a “friends and family” offering, a limited liability company may be appropriate, providing additional flexibility to select tax status.

 

Picking the right type of entity is important for the success of a tech startup, with many considerations to weigh. Ultimately, as facts change, it may be possible to change the structure of your company, but initial selection should not be taken lightly and can reduce problems as your company grows.

© 2017 Vandenack Weaver LLC
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Guidance Issued on Option for Small Business to Apply Research Tax Credit to Payroll Taxes

The Internal Revenue Service recently issued guidance related to options for qualified small businesses claiming the research tax credit. Prior to 2016, the research tax credit could only be used against income tax liability. The Protecting Americans From Tax Hikes (PATH) Act provided that qualified small businesses may elect to apply the tax credit against payroll tax liability.

Qualified businesses have less than $5,000,000 in gross receipts and did not have gross receipts prior to 2012. Such a qualified business can apply up to $250,000 of the research tax credit against the payroll tax liability.

The election is made on Form 6765, which is included with the businesses income tax return, and Form 8974, which is included with the business payroll tax return. For 2016, if a qualified business has already filed its tax return and failed to timely make the election, an amended return may be filed making the election. Such amended return must be filed before December 31, 2017.

For additional information, see Internal Revenue Service, Notice 2017-23, available at https://www.irs.gov/pub/irs-drop/n-17-23.pdf.

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IRS Issues Final Regulations for Foreign Owned Single Member LLCs

The Internal Revenue Service (“IRS”) issued final regulations that will increase reporting requirements for certain foreign owned single member limited liability companies (“LLC”). When a single member LLC is formed, for federal tax purposes, it is a disregarded entity by default. This means that income, loss, and subsequent tax obligations will pass through the entity to the owner. The final regulations change the default rule when a LLC is wholly owned by a foreign person, requiring the LLC to be treated as a domestic corporation separate from its owner.

By having these LLCs treated as a domestic corporation, separate from its owner, the LLC must obtain an Employer Identification Number (EIN) and annually file an information return, Form 5472. The LLC must also maintain records of reportable transactions with the foreign owner or foreign related parties. Ultimately, the IRS believes that this will ensure that disregarded LLCs aren’t used by foreign owners to shield assets from the IRS.

Although this change is designed to prevent abusive practices, this has a practical impact for foreign owners of a domestic LLC, ultimately increasing administrative requirements. For further information, the IRS regulation can be found at the following address: https://www.irs.gov/irb/2016-21_IRB/ar19.html

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Preparing for January 31st Deadline to File W-2s

Effective for wages paid in 2016, recent federal law requires employers to file W-2s with the Social Security Administration by January 31,, 2017.  Employers are familiar with the January 31st deadline for providing copies of the W-2s to employees; however, previously, employers had until the end of March for electronic filings with the Social Security Administration. The earlier filing deadline is part of the increased focus on detecting and preventing refund fraud.

A 30-day extension is still available; however, the extension is not automatic and is generally only granted under extraordinary circumstances, such as a natural disaster. Applications for extensions are submitted on Form 8809.

Employers must be aware of the filing deadline to avoid penalties, which are determined as follows:

  • $50 per Form W-2 if you correctly file within 30 days of the due date;
  • $100 per Form W-2 if you correctly file more than 30 days after the due date but by August 1; or
  • $260 per Form W-2 if you file after August 1, do not file corrections, or do not file required Forms W-2.

© 2016 Vandenack Weaver LLC
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Non-Resident Income Tax Withholding for Mobile Employees

Having employees work outside the traditional office is becoming more common, especially as technology and travel make it easier to work from different locations. This trend coincides with state governments having persistent budget shortfalls, leading to state audits of employers for income tax withholding. These events have given rise to new problems for employers because of state income tax rules for non-resident employees. Often, this problem becomes pronounced when an employer is located on the border, between states, such as an Omaha employer having Iowa residents as employees.  States are now looking to ensure that non-residents working in their state are paying the proper amount of income taxes, and to the right state.

Every state has unique rules for employer income tax withholding of non-resident employees, but in Nebraska, the employer is responsible for withholding income tax for all non-resident employees working in Nebraska. For example, an Iowa employee working for a Nebraska company must have income tax withheld for the state of Nebraska at the same rate as any Nebraska resident. If the company is not a Nebraska employer, the employer must still withhold Nebraska income tax when the employee performs services in Nebraska and transacts business greater than $600 or maintains an office in the state.

These rules can become complicated for the human resources department, but if not properly evaluated, it may trigger an inadvertent violation. For example, if an employer allows an employee to regularly work from home, but the employee lives in another state, it may be possible that the employer is responsible to the other state for withholding. To avoid these problems, ensure that clear policies for working remotely exist and that the employer has a clear understanding of where employees spend substantial time working.

© 2016 Vandenack Weaver LLC
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SEC Amends Form 10-K to Make Annual Reports User Friendly

The Securities and Exchange Commission (“SEC”) recently issued an interim rule that amends the Form 10-K; a form certain publicly traded companies annually file to give a complete review of the company’s business and its overall financial condition. The rule allows the registrant to include an optional summary page of the information that the form requires. Each item in the summary must include a hyperlink to a more detailed explanation in the filing.

The amendment is pursuant to the Fixing America’s Surface Transportation Act (“FAST Act”), which was signed into law in December 2015. The FAST Act requires the SEC to take various steps to simplify and modernize certain disclosure requirements. The amendment is effective as of June 1, 2016.

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Revised Tax Return Due Dates for Partnerships and C Corporations

President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (“Act”) into law on July 31, 2015. The Act includes a series of revised tax return filing deadlines for partnerships and C corporations.

Returns for partnerships and entities taxed as a partnership filing a Form 1065 are due March 15 or the 15th day of the third month following the end of the organization’s fiscal year. The previous due date was April 15. Extensions are available for up to six months.

Returns for C corporations and entities taxed as a C corporation filing a Form 1120 are due April 15 or the 15th day of the fourth month following the end of the organization’s fiscal year. The previous due date was March 15. Returns for C corporations with a fiscal year ending on June 30 are due on September 15 until 2025. After 2025, the returns are due on October 15. Most C corporations can receive extensions of up to five months until 2026. After 2026, all C corporations can receive extensions for up to six months.

Tax returns for S corporations remain unchanged and are due on Mach 15 or the 15th day of the third month after the end of the organization’s fiscal year.

The new dates are effective for tax years beginning after December 31, 2015. These changes are not applicable to most filers until tax returns for 2016 are due in 2017, excluding short year filings.

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