Frequently Asked Questions
Top Ten Business Tax Questions
In what case would I make an 83(b) election?
An 83(b) election is optional and only applies if stock options are going to be granted. It has restrictions that will vest sometime in the future.
For example, let’s say you purchased corporate stock in exchange for cash and/or property. The basis of the stock you received is the fair market value (FMV) of the property you contributed. When you sell that stock you will be taxed on the difference of the selling price of the stock and what you paid for it. So, if you bought the stock for $1 and sold it for $100, you would have a capital gain on the sale of $99. When you sell the stock it is a taxable event, and you would pay tax on the gain of $99. In the US, there are preferential tax rates for investments that are held for more than 1 year. You would be taxed at 15% if you held the stock for more than 1 year, so about $15.
The purpose of an 83(b) election is to defer the recognition of tax to a future date. The company will grant you the right to buy shares in the future at today’s FMV. Without an 83(b) election, if you are granted stock rights that vest in the future it is a non-taxable event. When you exercise the option to buy those shares you recognize taxable income that can be taxed at a rate as high as 37%. Then, the basis of the stock is your purchase price and the amount you recognized as gain for when you sell the stock in the future.
With an 83(b) election, you recognize income on the date of the grant for the FMV of the grant. When you exercise the option to purchase those shares in the future, you pay no tax. The tax is deferred until you sell the shares.
If my company ships or manufactures goods from a non-US country, can we be elected as a Disregarded Entity and not pay taxes at all as an LLC?
Unfortunately, no. A Disregarded Entity is for individuals that file an individual tax return. It would not apply.
Will we pay extra taxes if we are non-US citizens? If so, can we avoid it?
Non-US citizens will file a US tax return on income earned in the US. If it is a dividend distribution from the corporation they will be taxed at 15%. You cannot avoid those taxes if you are not from a country with a treaty with the US. Any distributions to you will be withheld at a 30% tax rate.
If you form a C-Corp and make distributions from the corporation you will require withholding at 30%. Taxable income earned by the C-Corp would be taxed at 21%.
Do corporations have to file income taxes quarterly or annually?
You are required to file your income taxes annually.
However, The Tax Cuts and Jobs Act passed in 2017 requires some companies to also report estimated taxes and employment taxes quarterly. To find out if your business falls under this obligation, you can see details in our blog here.
How do I know which incorporation structure (i.e. LLC or C-Corp) will provide me with the best tax results?
Each structure has their own advantage and disadvantages. Corporations are taxed at 21% of net income at federal level while LLCs are taxed on income flowing through an individual partner using graduated individual income tax rates.
How does the taxation process work for businesses in the US?
Most businesses are required to file two returns each year, state tax return and federal tax return. Federal tax returns must be filed each year regardless of business activity. Tax due is computed at 21% of net income at federal level while state income tax varies from state to state.
What are the tax deadlines for US Corporations?
For calendar year C Corporations, the deadline is April 15. For fiscal year C Corporations, other than June 30, tax returns are due on the 15th of the fourth month following the close of the fiscal year. Tax returns of corporations using fiscal year ending June 30 are due on Sep 15th.
Corporations can file for a six-month extension, but the extension should be filed on or before the original due date of the return.
What is an LLC and how is it taxed?
An LLC is more of a legal entity than a tax entity. It gives certain individuals limited liability protection.
If you form a single member LLC and do not make an election (Form 8832) to be treated as a corporation, the LLC is deemed a disregarded entity and does not file a tax return. However, under new rules, you need to obtain an EIN and file Form 5472. Even though the single member LLC does not file a tax return, the individual owner needs to file an individual return. To do that you would need to obtain a TIN if you do not have a social security number.
If there is more than one owner (a multi-member LLC), the LLC files as a partnership unless you make the election to file as a corporation. In this situation, you would need to file a Form 1065 and any distributions from the partnership would need to have money withheld for US taxes. It may also involve filing a 1040NR for each partner.
Finally, you could make the election and have the LLC taxed as a C-corp. In that case, you would just file Form 1120.
I am selling/delivering goods all over US; am I subject to sales tax?
Sales taxes are taxes placed on the sale or lease of goods and services. Sales tax rates and what is being taxed vary by jurisdiction.
If you have sales tax “nexus” in a state, then you are required to register for a sales tax permit in that state. Sales tax registration processes, collection, reporting and filing vary from state to state.
“Sales tax nexus” occurs when your business has some kind of connection to a state. This is also considered as “physical presence” or “economic connection” including having an office, an employee, a warehouse, store inventory or an affiliate.
If we receive income from a crowdfunding platform in January, will we have to report taxes for the following year or count them for the current year?
In general, in the US, funds raised on a crowdfunding platform are considered income.
The receiver of funds can offset the income from their funding project with deductible expenses that are related to the project and accounted for in the same tax year.
For example, if the company owner receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their funding for federal income tax purposes. If the company owner receives funding in one year and spends money on their project in a later year, consider whether their expenses can still offset their funding using the accrual method of accounting.