Q 01Can a founder owe tax on stock they have never sold?
Yes. If shares are subject to vesting and no 83(b) election is made, tax is generally due as the shares vest, based on their value at that time minus what you paid. That can be a large bill on an illiquid asset.
Read more →Q 02Why can an 83(b) election cost almost nothing at the start?
If you pay the full value for the shares at grant, there is generally no income to report, and future growth is taxed as capital gain. The risk is that if you forfeit the shares you generally cannot claim a loss for the amount you paid.
Read more →Q 03What does the word qualified mean in QSBS?
Generally a domestic C corporation, stock acquired at original issuance, an asset test at issuance, and an active business that is not in an excluded field, such as health, law, financial services, hospitality or farming.
Read more →Q 04Can an LLC taxed as a partnership issue QSBS?
No. QSBS must be stock of a C corporation. An LLC that has elected to be taxed as a C corporation can qualify, and the date of the election matters.
Read more →Q 05Why do investors prefer a Delaware C corporation?
Venture funds generally want preferred stock, a familiar legal framework and a structure that does not pass taxable income through to the fund. A C corporation also supports QSBS.
Read more →Q 06Can startup losses be used later?
Net operating losses from recent years generally carry forward indefinitely, but can offset only 80% of taxable income in a later year. An ownership change can limit how much of the loss can be used.
Read more →Q 07Can a pre-revenue startup use research credits against payroll tax?
Qualifying small startups may be able to apply up to $500,000 a year of the research credit against payroll taxes instead of income tax. It requires meeting gross receipts and age tests, so check eligibility before the first payroll.
Read more →Q 08How is a SAFE taxed?
The tax treatment of a SAFE is not fully settled, so the way the company and the investor report it should be reviewed with a CPA. Consistent treatment between the parties matters.
Read more →Q 09What happens to ISOs when an employee leaves?
To keep ISO treatment the options generally must be exercised within three months after employment ends. After that they are treated as non-qualified options.
Read more →Q 10Can you roll over QSBS gain into new QSBS?
Possibly. Section 1045 can allow deferral of gain from selling QSBS held for more than six months if the proceeds are reinvested in other QSBS within 60 days. The rules are specific, so plan before you sell.
Read more →Q 11Are startup costs deductible before the business opens?
A limited amount, up to $5,000, can be deducted in the first year, reduced when total startup costs pass $50,000. The remainder is generally amortized over 180 months starting when the business begins.
Read more →Q 12Do foreign founders face special filing rules?
Yes. Nonresident aliens cannot own S corporation stock, and a U.S. corporation that is 25% or more foreign-owned generally must file Form 5472 each year, with a significant penalty for failing to file.
Read more →Q 13Why can a Delaware company still owe tax in other states?
Delaware is where the company is formed, but states tax businesses that operate or have employees there. A company can owe Delaware franchise tax and income or franchise tax where it has nexus.
Read more →Q 14Do founders have to be on payroll?
A founder who works for the corporation as an employee generally must be paid reasonable wages, and wages bring payroll tax. Unpaid work for stock has its own tax issues, so decide how founders are compensated before the first paycheck.
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