Success leaves clues. Zapier is a software company founded in 2011 by Wade Foster, Bryan Helmig, and Mike Knoop. Zapier provides a service which helps end users automate the integration of online applications that they use. Let’s take a look at a behind the scenes software integration company that has taken the industry by storm. HOW ZAPIER GOT THEIR START Before becoming a company valued at over $5 billion, Wade Foster (CEO) and Bryan Helming (CTO) were members of a jazz quartet, playing gigs together in their hometown of Columbia, Missouri. In addition to their love for music, they discovered that they both also had a passion for creating web applications and began working on projects together. In September 2011, they came up with an idea that would change the course of their lives. They decided to start a company that helped end users to integrate two different software applications. To help get their idea off the ground, they enlisted a third co-founder, Mike Knoop (CPO) and went to work. They created the first iteration of their software application (known then as API Mixer) and entered a local start up competition. Their idea won, and they knew they were on to something. They continued to develop their idea and submitted it to Y Combinator, where they were initially rejected. Foster, Helmig, and Knoop refused to take no for an answer and continued to submit their application to Y Combinator, until they were finally accepted in 2012. At that time, the project included integrations with 34 applications. Today, that number is over 3,000 integrations, and they have more than 300 application partners. During their early stage, they were able to secure $1.3 million in Series A funding from investors and within two years, they reached profitability. This was the only venture capital funding that they’ve accepted thus far, though they have received numerous offers along their journey. Zapier has gone on to be awarded the #1 company in the early-stage category as evaluated by top venture funds in the industry. KEYS TO SUCCESS Going from zero to a $5 billion company within a decade is no easy feat. Zapier’s success can be attributed to many of the decisions that the founders have made along the way. Building Relationships with the Zapier User Base Zapier believed that building relationships were crucial to helping them to build and grow their user base. Foster, Helmig, and Knoop started out by visiting online forums of larger software applications such as Dropbox and Basecamp and seeking users who were frustrated with their inability to use the functionality of one application along with another, often times having to repeat the same tasks across applications. The Zapier team would reach out to these users and offer to help them resolve their issue. In the early stages of the company, this how they generated their first customers. Customer service continues to be a foundational part of who Zapier is as a company. Customer-Centric Values As an employee of Zapier, each team member will participate in the customer support function. Whether an employee is in HR or IT, the founders believe that hearing first-hand about how customers are experiencing the product and understanding their frustrations will help to create a better products and experience. Teamwork is Key Zapier has been a remote company since its founding. With team members across the company and the globe, it is important for them to be able to communicate with one another to ensure each team member is on the same page. They do this by sharing information across multiple channels and multiple times to ensure that important ideas are communicated. Transparency is one of their keys to success. Tell the Customer’s Story As the function of the Zapier software is to connect other software applications, the company will not be front-of-mind if working properly. As a result, Zapier has had to be very deliberate in how they reach out to current and potential customers. One part of their marketing efforts through their blog is to share the success stories of their clients. Zapier interviews customers, identify pain points that have been resolved through the application and uses this as a guide to assist other customers who might be experiencing the same issue. This attention to detail in addressing customer concerns and success has helped the company grow from its first customers back in 2012 to their current user base of over 600,000 users. Zapier’s success reveals how dedicated client focus can have a huge impact on the bottom line. If you have any questions about turning your business into a success story or you would like to learn more about our services, please feel free to contact us for more information.
Monthly Archives: April 2021
Defer Taxes with Installment Sales
Article Highlights:
Capital gains rates
Surtax on net investment income
How it works
Existing mortgages
Tying up your funds
Tax law changes
Selling a property one has owned for a long period of time will frequently result in a large capital gain, and reporting all of the gain in one year will generally expose the gain to higher than normal capital gains rates and subject the gain to the 3.8% surtax on net investment income. Capital gains rates: Long-term capital gains can be taxed at 0%, 15%, or 20% depending upon the taxpayer’s taxable income for the year. At the low end for 2021 (not over $80,800 for joint filers, $54,100 for head of household status, or $40,400 for other filing statuses), the capital gains rate is zero. If your taxable income is more than $501,600 (joint), $473,750 (head of household), $445,850 (single) or $250,800 (married separate), the capital gains rate is 20%. If your taxable income is between the low and high end amounts, the rate is 15%. As you can see, larger gains push the taxpayer into higher capital gains rates. Surtax on net investment income – Tax law treats capital gains (other than those derived from a trade or business) as investment income upon which higher-income taxpayers are subject to a 3.8% surtax on net investment income. A large gain generally pushes a taxpayer’s income over the threshold for this tax. For individuals, the surtax is 3.8% of the lesser of (1) the taxpayer’s net investment income or (2) the excess of the taxpayer’s modified adjusted gross income (MAGI) over the threshold amount for his or her filing status. The threshold amounts are:
$125,000 for married taxpayers filing separately.
$200,000 for taxpayers filing as single or head of household.
$250,000 for married taxpayers filing jointly or as a surviving spouse.
This is where an installment sale could fend off these additional taxes by spreading the income over multiple years.Here is how it works. If you sell your property for a reasonable down payment and carry the note on the property yourself, you only pay income taxes on the portion of the down payment (and any other principal payments received in the year of sale) that represents taxable gain. You can then collect interest on the note balance at rates near what a bank charges. For a sale to qualify as an installment sale, at least one payment must be received after the year in which the sale occurs. Installment sales are most frequently used when the property that is sold is real estate, and cannot be used to report the sale of publicly traded stock or securities.
Example: You own a lot for which you originally paid $10,000. You paid it off some time ago, leaving you with no outstanding mortgage on the lot. You sell the property for $300,000 with 20% down and carry a $240,000 first trust deed at 3% interest using the installment sale method. No additional payment is received in the year of sale. The sales costs are $9,000.
Computation of GainSale Price $300,000
Cost < $10,000>
Sales costs < $9,000>
Net Profit $281,000
Profit % = $281,000/$300,000 = 93.67%
Of your $60,000 down payment, $9,000 went to pay the selling costs, leaving you with $51,000 cash. The 20% down payment is 93.67% taxable, making $56,202 ($60,000 x .9367) taxable the first year. The amount of principal received and reported each subsequent year will be based upon the terms of the installment agreement. In addition, the interest payments on the note are taxable and also subject to the investment surtax. Thus, in the example, by using the installment method the income for the year was reduced by $224,798 ($281,000 – $56,202). How that helps the taxpayer’s overall tax liability depends on the taxpayer’s other income and circumstances.
Here are some additional considerations when contemplating an installment sale. Existing mortgages – If the property you are considering selling is currently mortgaged, that mortgage would need to be paid off during the sale. Even if you do not have the financial resources available to pay off the existing loan, there might be ways to work out an installment sale by taking a secondary lending position or wrapping the existing loan into the new loan. Tying up your funds – Tying up your funds into a mortgage may not fit your long-term financial plans, even though you might receive a higher return on your investment and potentially avoid a higher tax rate and the net investment income surtax. Shorter periods can be obtained by establishing a note due date that is shorter than the amortization period. For example, the note may be amortized over 30 years, which produces a lower payment for the buyer but becomes due and payable in 5 years. However, a large lump sum payment at the end of the 5 years could cause the higher tax rate and surtax to apply to the seller in that year – so close attention needs to be paid to the tax consequences when structuring the installment agreement. Early payoff of the note – The buyer of your property may decide to pay off the installment note early or sell the property, in which case your installment plan would be defeated and the balance of the taxable portion would be taxable in the year the note is paid off early or the property is sold, unless the new buyer assumes the note. Tax law changes – Income from an installment sale is taxable under the laws in effect when the installment payments are received. If the tax laws are changed, the tax on the installment income could increase or decrease. Based on recent history, it would probably increase. Installment sales do not always work in all situations. To determine whether an installment sale will fit your particular needs and set of circumstances, please contact this office for assistance.
How Employee Stock Options Are Taxed
Article Highlights:
Non-statutory Option
Wage Income
Statutory (Incentive) Options
Capital Gains
Alternative Minimum Tax
Many companies, as an incentive to employees to help grow the companies’ market value, will offer stock options to key employees. The options give the employee the right to buy up to a specified number of shares of the company’s stock at a future date at a specific price. Generally, options are not immediately vested and must be held for a period of time before they can be exercised. Then, at some later date, and assuming the stock price has appreciated to a value higher than the option price of the stock, the employee can excise the options (buy the shares), paying the lower option price for the stock rather than the current market price. This gives the employee the opportunity to participate in the growth of the company through gains from the sale of the stock without the risk of ownership. There are two basic types of employee stock options for tax purposes, a non-statutory option and a statutory option (also referred to as the incentive stock option), and their tax treatment is significantly different. Non-statutory Option – The taxability of a non-statutory option occurs at the time the option is exercised. The gain is considered ordinary income (compensation) and is supposed to be included in the employee’s W-2 for the year of exercise. We say “supposed to be” because it is not uncommon to see smaller firms mishandle the reporting. The employee has the option to sell or hold the stock he or she has just purchased, but regardless of what he or she does with the stock, the gain, which is the difference between the option price and market price of the stock at the time of the exercise, is immediately taxable. Because of the immediate taxation, most employees who have been granted options will, when exercising their options, immediately sell their stock. Under that scenario, the W-2 will reflect the profit and Form 8949 (the tax form used to report sales of stock and other capital assets) may need to be prepared to show the sale, essentially with no gain or loss, so that the gross proceeds of sale reported on the return are matched up with the sale reported to IRS (on Form 1099-B). If there was a sales cost, such as a broker’s commission, then the result would be a reportable loss, albeit usually a small amount. Since the difference between the option price and market price is included in wages, it is also subject to payroll taxes (FICA). If an employee chooses to hold the stock, he or she would have to pay the tax on the difference between the option price and exercise price, plus the FICA tax, from other funds. If the stock subsequently declines in value, the employee is still stuck with the gain reported when the option was exercised. Any loss on the subsequent sale of the stock would be limited to the overall capital loss limitation of $3,000 per year. Statutory (Incentive) Options – What makes the taxation of a statutory option different from a non-statutory option is that no amount of income is included in regular income when the option is exercised. Thus, the employee can continue to hold the stock without any tax liability; and, if he or she holds it long enough, any gain would become a long-term capital gain. To achieve long-term status, the stock must be held for:
More than 1 year after the stock option was exercised, and
More than 2 years after the option was granted.
The advantage of long-term capital gains is that they are taxed at lower maximum rates. For example, the capital gains tax rate is 15% for a taxpayer who might otherwise be in the 32% tax bracket. There is a dark side to statutory options, however. The difference between the option price and market price, termed the spread, is what is called a preference item for alternative minimum tax (AMT) purposes. If the spread is great enough, that might cause the AMT to kick in for the year of exercise. If a taxpayer is already subject to the AMT, this would add to the tax; and, even if not, it might push him or her into the AMT. The current year AMT will be in addition to any tax when the stock is ultimately sold but will establish a higher tax basis for the AMT should it come into play in the year the stock is eventually sold. Not all AMT scenarios can be addressed in this article in detail, so additional guidance may be appropriate. If the stock is sold before it achieves the long-term holding period requirements described above, the tax treatment is essentially the same as for a non-statutory option. If you are planning to exercise employee stock options and have questions or wish to do some tax planning to minimize the tax bite, please give this office a call.
Archegos Margin Call: What Happened and Why Wall Street is Shocked
In what is being called ‘one of the single greatest losses of personal wealth in history,’ Archegos Capital Management – owned by Bill Hwang – placed a high-flying bet on derivatives in ViacomCBS Inc, Discovery Inc., and GSX Techedu, and lost. Not only did the company lose an estimated $100 billion in value when their prices unexpectedly fell, but their margin call triggered a downturn in stock values that reverberated through other holding companies. Archegos (pronounced ‘Ar-chee-gos’) is the latest iteration of Tiger Asia, a company that Hwang started in 2001. The name change followed a $44 million settlement of civil allegations which the Wall Street Journal reported at the time. U.S. regulators had accused the company of insider trading of Chinese bank stocks, and after the company pled guilty they changed their structure to a family office and renamed the company. Industry insiders believe that Hwang – who was one of the eponymous ‘Tiger cubs’ mentored by Tiger Management’s Julian Robertson – had been managing approximately $10 billion within his fund, which is far less than the equity exposure brought on by the margin call. To understand exactly what happened, you need to know what a margin call is. Investopedia describes it this way:
‘A margin call occurs when the value of an investor’s margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with borrowed money (typically a combination of the investor’s own money and money borrowed from the investor’s broker). A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value, known as the maintenance margin.’
In this case, when Discovery and ViacomCBS stocks experienced their most dramatic tumble in their histories, Archegos’ creditors had to execute complex derivatives trades to offset the decline in value of their margin accounts. The impact was fast and far-reaching. Credit Suisse Group AG and Nomura Holdings Inc. both indicated that market turbulence had led to significant disruptions and losses, though they did not mention Archegos by name, and the Wall Street Journal reported that Mitsubishi UFJ Financial Group Inc. might lose $300 million, also without directly referencing Hwang’s company. Block trades, which are massive stock positions, had to be liquidated. The Wall Street Journal reported that the losses were equivalent to $30 billion in value, but others estimated that Hwang’s exposures may have been more than three times that amount. Michael Novogratz, an ex-hedge fund manager now at Galaxy Digital, told Bloomberg News, ‘I’ve never seen anything like this —how quiet it was, how concentrated, and how fast it disappeared,’ he said. ‘This has to be one of the single greatest losses of personal wealth in history.’ A company spokeswoman issued a statement saying, ‘This is a challenging time for the family office of Archegos Capital Management, our partners and employees. All plans are being discussed as Mr. Hwang and the team determines the best path forward.’ Hwang himself did not return calls for comment. Following the activity, markets including the S&P 500 index, the Nasdaq Composite Index and the Dow Jones Industrial Average all ended Tuesday, March 30th lower, though the stocks at the heart of the episode closed significantly up.
SBA Raises Loan Limit For COVID-19 EIDL Loans to $500,000
As U.S. businesses continue to recover from COVID-19’s economic devastation, the U.S. Small Business Administration (SBA) is expanding loan opportunities. The agency announced that beginning the week of April 6th, nonprofits and small businesses will be able to borrow up to $500,000 for up to 24 months. This expansion of the COVID-19 Economic Injury Disaster Loan (EIDL) program more than triples the existing limit of six months and a maximum loan amount of $150,000. In a news release announcing the change, SBA Administrator Isabella Casillas Guzman said, “More than 3.7 million businesses employing more than 20 million people have found financial relief through SBA’s Economic Injury Disaster Loans, which provide low-interest emergency working capital to help save their businesses. However, the pandemic has lasted longer than expected, and they need larger loans.” Businesses that had already applied for a COVID-19 EIDL loan need not worry about reapplying, as all applications in process will automatically be considered for the increased amounts. Similarly, instructions will be published to allow those who have already been approved for a loan to apply for the expanded amounts. A loan increase can be requested via SBA.gov, and an email will go out to all previously approved borrowers containing the same information. The COVID-19 EIDL program has been extremely successful, with over $200 billion in loans already approved by the SBA. Small businesses, including independent contractors and sole proprietors, have been provided 30-year maturity loans at a 3.75% interest rate, while not-for-profits will pay 2.75% in interest. In more good news for borrowers, on March 12th the SBA announced that borrowers for all disaster loans, including the COVID-19 EIDL loans, would be provided extended deferment periods. Interest will still accrue on all outstanding loan balances, so though payments are not required until 2022, borrowers do have an incentive to begin paying their balance off sooner. If you have any questions about the EIDL loan limit expansion and how it could affect your business, please contact our office.
Don't Overlook Foreign Account Reporting Requirements
Article Summary:
Foreign Account Reporting Requirement
Financial Crimes Enforcement Network
Penalties for Failure to File
Type of Accounts Affected
Form 8938 Filing Requirements
Some of the largest penalties for failing to file a report with the Government are associated with reporting dealings with foreign financial institutions. U.S. citizens and residents with a financial interest in or signature or other authority over any foreign financial account need to report that relationship by filing FinCEN Form 114 if the aggregate value of the accounts exceeds $10,000 at any time during the year. Although the official designation of the report is FinCEN 114, it is commonly referred to as the FBAR (foreign bank account report). The due date for 2020’s report is April 15, 2021, with an automatic 6-month extension to October 15, 2021. Failure to file can result in draconian penalties. Non-willful failure to file or timely file an FBAR is subject to a maximum penalty of $10,000, while willfully failing to file or timely file the report can result in a maximum $10,000 penalty for each foreign account that’s not reported. Form 114 is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) BSA E-Filing System and not as part of the individual’s income tax filing with the IRS. Keep in mind that ‘financial account’ includes securities, brokerage, savings, checking, deposit, time deposit, or other accounts at a financial institution. Commodity futures and options accounts, mutual funds, and even non-monetary assets such as gold are also included. It becomes a ‘foreign financial account’ if the financial institution is located in a foreign country. If you own shares of a foreign stock or a mutual fund that invests in foreign stocks, and the stock or fund is held in an account at a financial institution or brokerage located in the U.S., this is not considered a foreign financial account, and the FBAR rules don’t apply to it. An account maintained with the branch of a foreign bank physically located in the U.S. also is not a foreign financial account. You may have an FBAR requirement and not even realize it. For instance, perhaps you have relatives residing in a foreign county and they have put you on their bank accounts in case something happens to them. If the combined value of those accounts exceeds $10,000 at any time during the year, you will need to file the FBAR. Or if you are gambling on the Internet, that online casino may be located in a foreign country, and if your account exceeds the $10,000 limit at any time during the year, you will have an FBAR reporting requirement. You may also have an additional requirement to file IRS Form 8938, which is similar to the FBAR requirement but applies to a wider range of foreign assets with a higher dollar threshold. If you are married and you and your spouse file a joint return, you must file Form 8938 if the value of certain foreign financial assets exceeds $100,000 at the end of the year or $150,000 at any time during the year. If you live abroad, the thresholds are $400,000 and $600,000, respectively. For other filing statuses, the thresholds are half of those amounts. The penalty for failing to file the 8938 is $10,000 per year, and if the failure continues for more than 90 days after you receive an IRS notice of failure to file, the penalty can go as high as $50,000. Unlike the FBAR, which is a separate stand-alone filing, the 8938 is included with an individual’s annual tax return (1040, 1040-SR or 1040-NR). The following chart illustrates commonly encountered foreign reporting requirements.
COMMONLY ENCOUNTERED FOREIGN REPORTING REQUIREMENTS
–
FORM 8938
FinCEN FORM 114 (FBAR)
Financial (deposit and custodial) accounts held at foreign financial institutions
Yes
Yes
Financial account held at a foreign branch of a U.S. financial institution
No
Yes
Financial account held at a U.S. branch of a foreign financial institution
No
No
Foreign financial account for which you have signature authority
No, unless you otherwise have an interest in the account as described above
Yes, subject to exceptions
Foreign stock or securities held in a financial account at a foreign financial institution
The account itself is subject to reporting, but the contents of the account do not have to be separately reported
The account itself is subject to reporting, but the contents of the account do not have to be separately reported
Foreign stock or securities not held in a financial account
Yes
No
Foreign partnership interests
Yes
No
Indirect interests in foreign financial assets through an entity
No
Yes, if sufficient ownership or beneficial interest (i.e., a greater than 50 percent interest) in the entity. See instructions for further detail.
Foreign mutual funds
Yes
Yes
Domestic mutual fund investing in foreign stocks and securities
No
No
Foreign accounts and foreign non-account investment assets held by foreign or domestic grantor trust for which you are the grantor
Yes, as to both foreign accounts and foreign non-account investment assets
Yes, as to foreign accounts
Foreign-issued life insurance or annuity contract with a cash-value
Yes
Yes
Foreign hedge funds and foreign private equity funds
Yes
No
Foreign real estate held directly
No
No
Foreign real estate held through a foreign entity
No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate
No
Foreign currency held directly
No
No
Precious Metals held directly
No
No
Personal property, held directly, such as art, antiques, jewelry, cars and other collectibles
No
No
‘Social Security’- type program benefits provided by a foreign government
No
No
As you can see, not complying with the foreign account reporting requirements can have some very nasty repercussions. Please call this office with questions or if you need assistance in meeting your foreign account reporting obligations.
Writing Off Your Business Start-Up Expenses
Article Highlights:
$5,000 First-year Start-up and Organizational Expense Write-off
Timely Filing Requirements
Qualifying Start-up Expenses
Trade or Business Purchase
Qualifying Organizational Expenses
Expense Write-off Limitations
How to Make the Election
Other Considerations
Unfortunately, as a result of the COVID pandemic many small firms have gone out of business. Fortunately, with the help of vaccines, new businesses will be opening as the economy returns to near normal. New business owners, especially those operating small businesses, may be helped by a tax provision allowing them to deduct up to $5,000 of the start-up expenses and $5,000 of organizational costs in the first year of the business’s operation. These type of expenses not deductible in the first year of the business must be amortized over 15 years. If a taxpayer who incurred start-up expenses does not make the election, the start-up costs must be capitalized, meaning that the expenses can only be recovered upon the termination or disposition of the business. Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.
Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs. Examples of qualified start-up costs include: o Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.; o Wages paid to employees and their instructors while they are being trained; o Advertisements related to opening the business; o Fees and salaries paid to consultants or others for professional services; and o Travel and other related costs to secure prospective customers, distributors, and suppliers. For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for, or preliminary investigation of, the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.
Qualifying Organizational Cost – include fees for legal services, such as for drafting LLC documents, partnership agreements, corporate charter and by-laws; incorporation fees; temporary directors’ fees; and organizational meeting costs.
As with most tax benefits, there is always a catch. Congress put a cap on the amount of expenses that can be claimed as a deduction under this special election. Here’s how to determine the deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months. If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceeds $50,000. For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)). These limits are applied separately for the start-up and organizational costs. The election to deduct start-up and organizational costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date. The decision to write off these expenses should take into consideration other tax benefits available in the first of year of the business, including bonus deprecation and Sec 179 expensing, and the overall result in the first year of the business. If you are starting a business, it may be appropriate to formulate a business plan in advance. If you have questions or would like an appointment to discuss how to establish your business and the types of business structures that are available, please give this office a call.
Video: Tax Filing Deadline is Rapidly Approaching
For those who have not yet filed their 2020 federal tax return, time is running out. The deadline to either file your return and pay any taxes owed or file an extension and pay any estimated balance due is May 17, 2021.
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Tax Filing Deadlines Are Rapidly Approaching
Article Highlights:
Filing Due Date
Balance due payments
Contributions to a Roth or traditional IRA
Estimated tax payments for the first quarter of 2021
Individual refund claims for tax year 2017
Just a reminder to those who have not yet filed their 2020 federal tax return that thanks to the IRS extending the filing due date, May 17, 2021, is the due date to either file your return and pay any taxes owed, or file for the automatic extension and pay the tax you estimate to be due for 2020. In addition, the May 17, 2021 deadline also applies to the following:
Tax year 2020 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.
Tax year 2020 contributions to a Roth or traditional IRA – May 17 is the last day contributions for 2020 can be made to either a Roth or traditional IRA, even if an extension is filed.
Individual refund claims for tax year 2017 – The regular three-year statute of limitations expires on May 17 for the 2017 tax return. Thus, no refund will be granted for a 2017 original or amended return that is filed after May 17. Caution: The statute does not apply to balances due for unfiled 2017 returns
Individual estimated tax payments for the first quarter of 2021 – Caution – The IRS did not extend the deadline for the first installment of the 2021 estimated tax payments, which continues to be April 15, 2021. Even though the filing due date for individual returns has been extended, in many cases the amount of estimated tax payments required for 2021 is predicated on tax determined for 2020. So, although your individual return for 2020 is not due until May 17, it may be necessary to estimate your 2020 tax liability prior to April 15 in order to determine your first 2021 quarterly estimated payment which is due April 15. If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the deadlines. Keep in mind that the ending days of tax season are very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the May 17 deadline, then let the office know right away so that an extension request, and 2021 estimated tax vouchers if needed, may be prepared. Is your return completed but you are unable to pay your tax liability? Please call to discuss your options. If your returns have not yet been completed, please call right away so that we can schedule an appointment and/or file an extension if necessary.
Managing out-of-State Employees: The Payroll Tax Conundrum
As the COVID-19 global health event continues, employees across the country are still working at home and will likely keep doing so for the foreseeable future. If you have employees who live in a different state from where your business is located, this can create additional tax and payroll challenges. Here’s what you should know about managing payroll taxes for employees working out of state, with insights from ADP’s recent webinar, Strategies for Surviving Year-End Reporting. State income tax withholding When it comes to tax withholding, payroll primarily follows the rules of the state where the work is performed. If employees who live out of state come to your business for work, payroll would follow the withholding rules for the state where your business is located. These employees may owe income tax to their state of residence. Employers often withhold partial amounts for the residence state in addition to the worked-in state, or in some cases the employees handle that themselves when they file their personal income tax returns. There is an exception when two states have a reciprocity agreement wherein the governments agree that residents only owe income tax to the states where they live, not where they work. If this applies to your workers, you should already be withholding taxes for the state where your employees live. Without a reciprocity agreement, taxes may need to be withheld in both the state in which work is performed as well as the residence state. Check with your state Tax or Revenue Department for details. Income tax rules for working out of state If your employees work from home in a different state for number of days that exceeds the established threshold for that state, the employer must generally recognize the change and begin to submit taxes to the state where the employee is working, not where the business is located. This threshold varies by state — for instance, in New York it’s 14 days, but in Illinois it’s 30. Other states have an income threshold, or a combination of time and income. Another factor some state governments consider is whether the employee is working from home for their convenience or as a necessity for their job. If it’s for the employee’s convenience, then tax withholding should be sourced for the state where the business is located. If working from home is a job necessity, then payroll is sourced through the employee’s state of residence. But state laws and rules vary considerably on the specifics. Before COVID-19, employers could avoid managing payroll taxes for employees working out of state by having everyone work on site. Now, safety precautions and stay-at-home orders may have forced your organization to account for a multi-state workforce, especially since the pandemic has pushed many employees beyond the temporary thresholds for working from home. COVID-19 complications If your business suddenly has employees performing significant out-of-state work due to COVID-19, you may need to register your business with these states to withhold taxes for these employees. What complicates this matter is that state governments have taken different approaches to the crisis. Some have offered temporary guidance. Alabama and Georgia announced that they would not enforce their payroll withholding requirements for employees who are temporarily working from home in their states due to government-mandated stay-at-home orders. As another example, Pennsylvania announced that if an employee is working from home temporarily due to COVID-19, the state will not consider that as a change to the sourcing of the employee’s compensation. For non-residents who were working in Pennsylvania before the pandemic, their compensation would remain Pennsylvania sourced income for all tax purposes. For Pennsylvania residents who were working out-of-state before the pandemic, their compensation would remain sourced to the other state and they would still be able to claim a resident credit for tax paid to the other state on the compensation. However, these rules may not apply depending on whether the states involved have a reciprocal tax agreement. Pennsylvania has reciprocal tax agreements with Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia. In addition, some states like Connecticut have ruled that employees working from home due to COVID-19 is a necessity for work, while others, like New York, have ruled that it is for the employee’s convenience. These conflicting rulings mean your business could be in a situation where you need to collect withholding on behalf of two states for an employee working from home. Another related problem deals with tax “nexus”, which is the concept that where a business has an established presence in a state, it may be required to pay sales, income and other business taxes for that state. In some states, having employees working in the state is enough to establish nexus, which could lead to further tax compliance requirements for your business. Again, some states have issued guidance to address the effect of COVID-19 and people temporarily working from home. Pennsylvania, for example, will not seek to impose Corporate Income Tax or Sales Tax nexus solely on the basis of this temporary activity. However, this guidance is only in effect until the June 30, 2021, or 90 days after the emergency in Pennsylvania is lifted. In some cases, employers may need to assess whether remote workers are likely to return. If remote work locations are likely to persist, employers may need to consult with Legal and Tax advisors and register with any states in which a legal presence has been or will be established. New legislation Even with extra guidance, employers must navigate a wide range of possible laws and payroll requirements, especially if they have employees living in several states. To improve the situation, the federal government is considering legislation that would establish a uniform rule for employees working from home due to COVID-19. The Mobile Workforce State Income Tax Simplification Act would standardize rules for tax withholding for cross-border employees. For instance, the act would set up a uniform threshold of 30 days of at-home work before withholding laws would apply. The HEROES Act and HEALS Act proposals both contain provisions for this issue as well, but Congress is still debating these bills. Payroll compliance Unless state laws are changed and/or the federal government standardizes the rules, employers need to understand and comply with their regional requirements around managing payroll taxes for employees working out of state. Organizations will also need to understand the possible nexus impact on their business. To accomplish these objectives, consider speaking with a legal and payroll expert who is on top of the latest state laws. They can help you update your payroll system to manage the new requirements as your employees continue working from home. This story originally published on SPARK, a blog designed for you and your people by ADP®.