This tax season, we’ve worked through many cases involving transactions like the Scale AI restructuring and Meta-related investments. In particular, one pattern keeps coming up. Clients receive a Form 1099-DIV with a large number in Box 3, and that amount is often much higher than what they originally paid for their shares.

Naturally, the first reaction is confusion. Many clients ask: “I didn’t sell anything… so why is there tax?”

Understanding what Box 3 actually means

First, it’s important to clarify that Box 3 is not dividend income. Instead, it represents a nondividend distribution.

In practice, the IRS applies a simple rule. You recover your original cost first. Then, any remaining amount becomes capital gain. Therefore, the tax outcome depends heavily on your basis.

Walking through a simple example

Let’s look at a straightforward example.

You exercised ISOs earlier:

• Shares: 10,000
• Exercise price: $2.00
• Total cost (basis): $20,000

Later, as part of a transaction like Scale AI / Meta:

• You receive: $150,000 cash
• You still hold all your shares

Now, the math becomes clear.

First, you recover your $20,000 basis. After that, the remaining $130,000 becomes capital gain:

$150,000 − $20,000 = $130,000

Even though you didn’t sell any shares, the IRS treats the excess like a sale.

Adding the AMT layer

Next, we need to consider AMT, especially if your shares came from ISOs.

At the time of exercise:

• Fair market value: $6.00
• Exercise price: $2.00
• Spread: $4.00 per share

As a result, the AMT adjustment equals:

10,000 × $4.00 = $40,000

You report this amount as additional income under AMT, even though you didn’t sell anything.

Why AMT shows a different gain

Because of the ISO adjustment, AMT uses a different basis.

• Regular basis: $20,000
• AMT basis: $60,000

Now, when we recompute the gain:

$150,000 − $60,000 = $90,000 AMT gain

So, you end up with two different results.

• Regular gain: $130,000
• AMT gain: $90,000

The difference is $40,000.

How this appears on your tax return

This difference flows through Form 6251.

• Line 2i shows +$40,000 from the ISO spread
• Line 2k shows −$40,000 from the lower AMT gain

Together, they offset. This outcome is expected and reflects the correct mechanics.

Why this surprises so many people

On one hand, you didn’t sell shares. On the other hand, you received a large amount of cash. Because your original basis was low, most of that cash becomes taxable gain very quickly.

As a result, many clients feel caught off guard by the size of the tax impact.

Common patterns we’ve observed

Across many cases this season, we’ve consistently seen:

• Large Box 3 distributions
• Low exercise cost from early equity
• Significant capital gains without an actual sale
• AMT adjustments layered on top

Final takeaway

In summary, these transactions are not simple income events. Instead, they follow a sequence:

• First, basis is recovered
• Then, capital gain is triggered
• Finally, AMT adjustments are applied if ISOs are involved

If you received a large Box 3 amount, it’s important to review how your basis and AMT were handled. Small differences in calculation can lead to significant changes in tax.

If you’re seeing something similar on your return, you can check with your tax advisor, or feel free to reach out to us. We’ve worked through many of these cases this season and are happy to help review your situation.

#ScaleAI #Meta #StockCompensation #ISO #AMT #CapitalGains #StartupEquity #TaxPlanning #PrivateEquity

The post Scale AI / Meta Transaction — What That Cash Dividend Actually Means for Your Taxes (Simple Breakdown + Case Study) appeared first on Flex Tax and Consulting Group (FTCG).

 

The following offers a general summary of the basic tax law requirements applicable to REITs. To qualify as a REIT, an entity must meet a number of organizational, operational, distribution, and compliance requirements.

• How must a real estate company be organized to qualify as a REIT?
• How do REITs operate?
• What are the dividend distribution requirements for a REIT?
• What are the compliance rules for becoming a REIT?

How must a real estate company be organized to qualify as a REIT?

A U.S. REIT must be formed in one of the 50 states or the District of Columbia as an entity taxable for federal purposes as a corporation. Directors or trustees must govern it, and its shares must be transferable. Beginning with its second taxable year, a REIT must meet two ownership tests: it must have at least 100 shareholders (the 100 Shareholder Test) and five or fewer individuals cannot own more than 50% of the value of the REIT’s stock during the last half of its taxable year (the 5/50 Test).

To ensure compliance with these tests, most REITs include percentage ownership limitations in their organizational documents. Due to the need to have 100 shareholders and the complexity of both tests, it is strongly recommended that tax and securities law counsel are consulted before forming a REIT.

How do REITs operate?

A REIT must satisfy two annual income tests and a number of quarterly asset tests to ensure the majority of the REIT’s income and assets are derived from real estate sources.

At least 75% of the REIT’s annual gross income must be from real estate-related income such as rents from real property and interest on obligations secured by mortgages on real property. An additional 20% of the REIT’s gross income must be from the above-listed sources or other forms of income such as dividends and interest from non-real estate sources (like bank deposit interest). No more than 5% of a REIT’s income can be from non-qualifying sources, such as service fees or a non-real estate business.

Quarterly, at least 75% of a REIT’s assets must consist of real estate assets such as real property or loans secured by real property. A REIT cannot own, directly or indirectly, more than 10% of the voting securities of any corporation other than another REIT, a taxable REIT subsidiary (TRS), or a qualified REIT subsidiary (QRS). Nor can a REIT own stock in a corporation (other than a REIT, TRS or QRS) in which the value of the stock comprises more than 5% of a REIT’s assets. Finally, the stock value of all of a REIT’s TRSs cannot comprise more than 20% of the value of the REIT’s assets.

What are the dividend distribution requirements for a REIT?

In order to qualify as a REIT, the REIT must distribute at least 90% of its taxable income. To the extent that the REIT retains income, it must pay taxes on such income just like any other corporation.

What are the compliance rules for becoming a REIT?

In order to qualify as a REIT, a company must make a REIT election by filing an income tax return on Form 1120-REIT. Since this form is not due until March, the REIT does not make its election until after the end of its first year (or part-year) as a REIT. Nevertheless, if it desires to qualify as a REIT for that year, it must meet the various REIT tests during that year (except for the 100 Shareholder Test and the 5/50 Test, both of which must be met beginning with the REIT’s second taxable year).

Additionally, the REIT must mail annual letters to its shareholders requesting details of beneficial ownership of shares. Significant penalties will apply if a REIT fails to mail these letters on time.

If you have questions about the REIT, please consult with Alex Kwan.
E-mail: alex.kwan@flextcg.com
Cell: 415-619-4305

The post How to Form a Real Estate Investment Trust (REIT) appeared first on Flex Tax and Consulting Group (FTCG).

The rules that apply to you do not apply to the rank-and-file employee group. The government puts you, the owner-worker, in a separate “owner-employee” category to limit your business’s PPP benefits.

There are four types of owner-employees:

1. General partners in partnerships
2. S corporation shareholder-employees
3. C corporation shareholder-employees
4. Form 1040, Schedule C filers (e.g., the self-employed, sole proprietors, 1099 recipients, single-member LLCs, and husband and wife LLCs treated as single-member LLCs)

If you own all or part of your business and work in the business, you fall into one of the four categories.

The maximum loan attributable to and forgiveness available for the “compensation paid” to any SBA-defined owner-employee across all businesses is

• $15,385 for borrowers who received a PPP loan before June 5, 2020, and elected to use an eight-week covered period.
• $20,833 for borrowers under the 24-week covered period.

Owners of Multiple Businesses Beware

If you have ownership interests in more than one business, you need to consider that the owner-employee loan maximums apply to all your businesses.

The new interim final rule puts the $15,385 or $20,833 deemed compensation cap on the loan forgiveness for the defined owner-employee, but contains no guidance on how to allocate or otherwise deal with the caps when you have ownership interests in multiple businesses.

Example. Jim operates an S corporation and a proprietorship. He receives his PPP loan on June 17. The cap on Jim’s combined S corporation and proprietorship loan forgiveness attributable to (a) Jim’s employment in the S corporation and (b) his profits from the proprietorship is $20,833.

We know Jim can obtain loan forgiveness for up to $20,833, but we have no guidance on how Jim would allocate the forgiveness between the S corporation and proprietorship. Perhaps by the time Jim applies for PPP loan forgiveness, we will have some directions.

Partnerships

The PPP loan forgiveness begins for general partners at the amount of their 2019 net earnings from self-employment (reduced by claimed Section 179 expense deductions, unreimbursed partnership expenses, and depletion from oil and gas properties) multiplied by 0.9235.

You then take the lesser of the amount determined above or $100,000, divide by 12, and multiply by 2.5 to find the loan amount. With this calculation, the maximum loan is $20,833.

The maximum forgiveness attributable due to the partner’s self-employment income is

• $15,385 if the partnership obtained its loan before June 5, 2020, and elected the eight-week regime, or
• $20,833 if the partnership is under the 24-week program.

Planning note. Under the 24-week program, the partnership with no employees does not need to spend any amounts on interest, rent, or utilities to obtain full forgiveness. It can obtain full forgiveness in 11 weeks using the calculated self-employment income of up to $20,833 for each partner.

S Corporations

As with all owner-employees, the PPP loan and its forgiveness for “compensation” are capped at $15,835 under the eight-week covered period and $20,833 under the 24-week covered period.

Reminder. The $20,833 cap is based on the maximum defined compensation of $100,000 divided by 12 and then multiplied by 2.5.

Under the 24-week program, the S corporation whose only employee is an owner-employee obtains full loan forgiveness after 11 weeks when using the 24-week covered period without spending anything for interest, rent, or utilities.

If the S corporation with no employees other than the owner-employee elects the eight-week covered period, the corporation has to spend money on interest, rent, and utilities to rise above the $15,385.

The Paycheck Protection Program Flexibility Act of 2020 created a new statutory 60 percent payroll rule. Using the 60 percent enables the S corporation with no employees other than the sole owner-employee that elects the eight-week covered period to achieve full forgiveness with payments for interest, rent, and utilities.

S corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement contributions made on their behalf, but employer health insurance contributions made on their behalf cannot be separately added because those payments are already included in their employee cash compensation.

Example. Liz operates her solo busines as an S corporation. Her 2019 W-2 compensation of $68,000 included $18,000 for medical insurance. Her payroll cost for the PPP loan and its forgiveness includes the full $68,000 plus what the S corporation paid into her retirement plan and to the state for unemployment insurance. The total of these amounts is capped at $100,000, which creates the $20,833 maximum loan amount as explained above.

C Corporations

C corporation owner-employees are capped by the amount of their 2019 employee cash compensation and employer retirement and health insurance contributions made on their behalf.

Example. Don operates his business as a C corporation where he is the only employee. In 2019, the corporation paid Don a salary of $60,000, contributed $12,000 to his retirement plan, paid $20,000 for his family’s medical insurance, and paid $350 to the state for unemployment insurance.

Don’s corporation has $92,350 in qualifying payroll costs. His loan and forgiveness are capped at $19,240 ($92,350 ÷ 12 x 2.5).

Form 1040 Schedule C Businesses

Your PPP loan and its forgiveness for “compensation” are capped at $15,835 under the eight-week covered period or at $20,833 under the 24-week covered period. The cap amounts are computed using your net profit from line 31 of your 2019 Schedule C.

Your easy-peasy road to 100 percent loan forgiveness is the 11-week program. With 11 weeks of taking the loan amount out of the business, you obtain full forgiveness without paying any rent, utilities, or interest.

When Can the Owner-Employee’s Business Apply for Forgiveness?

According to SBA guidance issued on June 22, 2020, you may submit your loan forgiveness application anytime on or before the maturity date of the loan—including before the end of the covered period—if you used all the loan proceeds for which you requested forgiveness.

Example. Ron receives his $20,833 PPP loan on May 19, 2020. During the 11 weeks beginning with May 19, 2020, Ron’s corporation pays qualified payroll costs that total $20,833. Ron can apply for $20,833 of loan forgiveness anytime after the 11th week.

Special allocations are tricky business. We are here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston) and e-mail us at info@flextcg.com.

The post PPP Loan Forgiveness for Partnerships and S and C Corporations appeared first on Flex Tax and Consulting Group (FTCG).

What Is a Special Tax Allocation?

A special tax allocation is an allocation of an item of partnership loss, deduction, income, or gain among the partners that’s disproportionate to the partners’ overall ownership interests.

The best measure of a partner’s overall ownership interest is the partner’s stated interest in partnership distributions and capital, as stated in the partnership agreement.

Example. An allocation of 80 percent of a partnership’s 2020 tax loss to Partner A, whose stated ownership is only 25 percent, is a special allocation of the tax loss.

Pass-Through Taxation

After the partnership allocates its tax items among the partners, the allocated amounts (including any special allocations) are passed through to the partners on their annual Schedules K-1 received from the partnership.

Each partner then takes the passed-through amounts reported on Schedule K-1 into account on the partner’s federal income tax return (Form 1040 for an individual partner).

The partnership itself does not pay federal income tax. You and the other partners pay tax at the owner level. This is called pass-through taxation, because the tax consequences of the partnership’s activities are passed through to you and the other partners.

Key point. If you run your business as an S corporation, the pass-through taxation principle applies there too. But you’re not allowed to make special allocations of S corporation tax items among the shareholders.

Instead, you must allocate all tax items strictly in proportion to stock ownership. So, the ability to make special tax allocations is often a key selling point of partnership status as opposed to S corporation status.

How Special Tax Allocations Work

A partnership special tax allocation arrangement might work like this.

During the first few years of operation, when tax losses are expected, a disproportionately large percentage of the losses are specially allocated to the partners who need tax losses the most.

These may be the partners who supplied most of the initial capital, and they may be passive limited partners who are really just investors.

The other partners may be the ones who actually run the partnership’s business or investment activities, and they may be the general partners of a limited partnership. These partners are allocated a disproportionately small amount of the losses during the start-up phase when losses are expected.

In later years, the partnership is expected to generate positive taxable income and/or gains. Otherwise, the partnership was a bad idea to begin with.

The partnership will allocate a disproportionately large percentage of these later-year income and gain items to the partners who received earlier special allocations of losses. After these later-year special allocations of income and gain have offset the earlier special allocations of losses, all partnership tax items are allocated in proportion to the partners’ stated ownership percentages.

The special allocation phase of the partnership is over, and life goes on.

On a cradle-to-grave basis, you expect that all partners will receive cumulative allocations of taxable losses, deductions, income, and gain in proportion to their stated ownership percentages. So, the special allocations simply affect the timing of when you and the other partners recognize losses, deductions, income, and gain.

While the preceding description of a special allocation arrangement is often accurate, you can also have special allocations of specific tax items, such as depreciation, rather than special allocations of overall partnership losses.

Special allocations are tricky business. I’m here to help you. Don’t hesitate to call our office:415-860-6288 (San Francisco), 917-397-0949 (New York) and 713-396-0107 (Houston) and e-mail us at info@flextcg.com.

The post Take Advantage of Partnership Special Allocation appeared first on Flex Tax and Consulting Group (FTCG).

If your small businesses managed to secure a Paycheck Protection Program (PPP) loan before the well ran dry, your next task is figuring out how to use it. Here’s a list of the expenses that qualify for forgiveness (meaning you don’t have to pay the loan back).

Remember, your lender will perform an audit at the end of the 8-week forgiveness period to see how you spent the loan. Keep the relevant paperwork under each section so you can sail through the audit.

Salaries & Wages

A minimum of 75% of your PPP loan must go to compensating your employees, excluding those who earn more than $100,000 per year. We are still waiting for guidance from the Small Business Administration on salaries over $100,000 and business owner/family salaries.

For the audit: Payroll processing reports, tax reports, or other reports such as paid time off (vacation or sick leave).

Healthcare Benefits

This is for paying any company’s group health insurance plan premiums. Company owners and family are included if they’re on the group plan. However, payments to the owner’s policy or Health Savings Account contributions do not qualify for PPP loan forgiveness.

For the audit: Insurance invoice(s) and proof of payment.

Retirement Plan Contributions

If you offer your employees a Defined Benefit Plan, Defined Contribution Plan, or SEP IRA, you can use some of your PPP loans to continue funding that plan. There’s no specific guidance about benefits paid to the owner or owner’s family, but we doubt it would be forgiven.

For the audit: Retirement plan statements, funding schedules, and proof of remittances.

Non-Payroll Expenses

Operating expenses that don’t directly benefit employees — a few of which we’ll list below — can’t total more than 25% of the loan. You’ll have to pay back any excess amounts if you go over that percentage.

Rent

The expense must be incurred and paid during the 8-week loan period to be forgiven. Any rent that was already due before the date of the loan doesn’t qualify. Also, the lease must have been signed before February 15, 2020.

For the audit: Signed lease contract, proof of rent payment (canceled check, ACH, bank statement, or wire).

Utilities

Service contract agreements must have been in effect before February 15, 2020. This covers electricity, gas, water, phone, internet, etc. It’s not clear what the SBA means by “etc.”

For the audit: Proof of payment for each utility.

Interest in Business Loans

You may use some of your PPP loans to pay the interest on your business mortgage, practice acquisition loan, build-out loan, or any loan secured by business personal property. The mortgage/loan must have been in effect before February 15, 2020.

For the audit: Bank statement or loan invoice showing principal and interest, plus proof of payment. You may wish to pay principal and interest separately during the 8-week PPP loan period, so there’s no question in the auditor’s mind.

The pandemic has inflicted significant damage on many of America’s small businesses. And the financial relief red tape makes the situation even more difficult. Flex Tax can help make sense of it all and take some of the bookkeeping worries off your shoulders, so you can focus on returning to the “new normal.”

The post What Can You Spend Your PPP Forgivable Loan on? appeared first on Flex Tax and Consulting Group (FTCG).

Many small business owners who have been approved for Paycheck Protection Program loans (“PPP”) are realizing that the loan isn’t as forgivable as they’d hoped.

The amount a small business can qualify to have forgiven must primarily be payroll costs. The SBA’s rule-making has stated that at least 75% of the forgiveness request must be payroll costs but can also contain up to 25% of other approved expenses under the law such as rent, mortgage interest and utilities. That rule seems to be widely understood and so long as small business owners are spending 75% of their PPP funds on payroll this rule won’t frustrate small business owners when it comes time to forgiveness.

Unfortunately, there is an additional restriction on loan forgiveness requests which penalizes a small business if they do not bring back the same number of workers they had before the pandemic. For example, if you were a small business who had 10 employees prior to the pandemic, and now, after receiving your PPP loan funds you only have 6 employees, then your loan forgiveness request will be reduced to 60% of the total amount of eligible expenses. If the small business brought back 10 or more employees, then there is no reduction in the forgivable loan amount. In other words, small businesses who have kept or who re-hire their entire workforce are rewarded while those who can’t are punished. The fact of the matter is, that many who can’t bring back their workforce are those who have been hurt the most.

The pre-pandemic time period used to determine the number of full-time equivalent employees is either January 1, 2020 to February 29, 2020, or February 15, 2019 to June 30, 2019. The business owner can choose either time period and a smart one will choose the period when they had a lower number of full-time equivalent employees.

Using the example of a small business that received a PPP loan of $60,000 that prior to the pandemic had 10 full-time equivalent employees but has only retained or brought back 6 employees over the eight weeks following their loan funding, let’s go through both the 75% Payroll Cost Rule and the Full-time Equivalent Employee Rule to see what amounts a small business borrower would be eligible to have forgiven.

Total PPP Loan = $60,000

75% Payroll Cost Rule (applies from PPP loan funding for 8 weeks)

Amount spent on payroll costs = $30,000

Amount spent on rent = $4,000

Amount spent on utilities = $2,000

Total Amount Spent = $36,000

Payroll costs of $30,000 represent 83% of the total qualifying expenses ($36,000) to be requested and as a result, there is no need to reduce the forgiveness request based on the 75% payroll cost rule.

Side note: If non-payroll costs exceeded 25%, then the forgiveness request is reduced until no more than 25% of the amount to be forgiven is qualifying non-payroll costs. The payroll costs are always 100% eligible for forgiveness but the non-payroll costs will need to be reduced until they are no more than 25% of the total amount requested to be forgiven.

Full-time Equivalent Employee Rule

Even though the small business had a PPP loan of $60,000, they only spent $36,000 on qualifying expenses. They met the 75% payroll cost rule and the entire $36,000 is eligible for forgiveness but only after applying the full-time equivalent employee rule.

Full-time equivalent employees after PPP funding (8-week period) = 6

Full-time equivalent employees pre-pandemic = 10

Ratio of Employees Retained (amount eligible for forgiveness) = 60%

The amount eligible for forgiveness of $36,000 is then multiplied by 60% to get the final amount eligible for forgiveness of $21,600.

In the end, the small business who received a $60,000 PPP loan, spent $36,000 on payroll and other qualifying expenses (within the 75% rule), but then had their forgivable amount reduced down to $21,600 as they were only able to bring back 60% of their pre-pandemic workforce. At the end of the 8 weeks, they will be eligible for loan forgiveness of $21,600 and will need to re-pay the remaining $38,400 to the bank where they received the PPP loan. This amount is subject to 1% interest and must be repaid within two years from the date they obtained the loan.

Side note: There is an additional reduction calculation if you bring back workers but reduce their pay from the pre-pandemic time-period by more than 25%.

The reality is that small business owners are penalized harshly if they can’t bring back employees. In advising business owners in my law firm, we’ve already seen this to be a major concern and have heard of small business owners who are unable to bring back their workers as those workers’ unemployment benefits are more generous than the pay they received when working in the small business. Other business owners are struggling with shelter in place orders being extended, are still unable to open, and are reluctant to simply re-hire workers when there’s uncertainty about whether the PPP loan will just be more debt or whether it will actually function like true stimulus for the small business owner and be forgiven.

The post How to get your PPP Loans Forgivable? appeared first on Flex Tax and Consulting Group (FTCG).

Restricted Stock Units (RSUs) are a common form of equity compensation, especially in the tech and startup sectors. If you’re based in California—particularly in the Bay Area—RSUs may play a significant role in your overall compensation package. At Flex Tax and Consulting Group, we regularly advise clients in San Francisco, Castro Valley, and throughout the Bay Area on how to strategically manage their RSUs and equity-based income.

Below are seven key aspects every California employee or executive should understand about RSUs.

1. RSUs vs. Restricted Stock

RSUs differ from restricted stock. While the names sound similar, they are fundamentally different. RSUs are a promise to deliver shares in the future, while restricted stock grants involve the immediate transfer of shares with forfeiture conditions. The tax treatment and planning opportunities are also distinct. This article focuses exclusively on RSUs.

2. Vesting Schedules

RSUs are not considered yours until they vest. Common vesting structures include:

• Cliff vesting: 100% of RSUs vest after a set period.

• Graded vesting: RSUs vest gradually (e.g., 25% per year over four years).

• Double-trigger vesting: Common in private companies; RSUs vest only after both a time-based condition and a liquidity event (e.g., IPO) are met.

Some RSUs are also tied to company performance metrics. You should also understand what happens to unvested and vested RSUs when you leave the company—sometimes it’s worth staying longer to secure more value.

3. Delivery and Tax Timing

RSUs are taxed as ordinary income upon delivery of the shares—not at the time of grant or vesting. Most plans deliver shares automatically upon vesting, but some allow you to defer delivery. Deferring share delivery can give you more control over when you recognize income and pay taxes, depending on your tax planning strategy.

4. Tax Withholding

RSUs are treated as supplemental income for tax purposes. Here’s what to expect:

• Social Security and Medicare are typically withheld at the time of vesting.

• Federal income tax is usually withheld at a flat 22% (or 37% for supplemental income above $1 million).

• California residents may face combined withholding of up to 40% or more, including state tax.

If your effective tax rate is higher than 22%, you may face a shortfall in withholding. To avoid penalties, you can:

• Adjust your W-4 to increase withholding.

• Make quarterly estimated tax payments.

• Confirm whether your employer uses the flat rate or your W-4 for RSU withholding.

Understanding how your employer handles RSU withholding is critical—many high-earning California residents are underwithheld without realizing it.

5. Trading Restrictions

To prevent insider trading, RSU holders may be subject to:

• Blackout periods: When trading is prohibited.

• Trading windows: Periods when you are allowed to trade.

• Lock-up periods: Typically imposed after a company goes public, often lasting 90–180 days. Even fully vested RSUs cannot be sold until the lock-up ends.

These restrictions are especially relevant for employees at companies nearing or recently completing an IPO.

6. Dividends and Dividend Equivalents

RSUs do not provide voting rights or dividends before they vest. However, some companies offer dividend equivalents—either in cash or additional shares—paid out upon vesting. These are typically reported on your W-2 or 1099-DIV, and you should verify where they are reported to avoid double-counting the same income when filing taxes.

7. Beneficiary Designations

Some RSU plans allow you to name a beneficiary, which can help avoid probate and streamline estate planning. If your plan does not explicitly allow it, consider suggesting your employer add this feature. It can become important if RSUs are still vesting or delivery is delayed at the time of death.

Final Thoughts

RSU plans vary significantly across companies. Each plan may include unique provisions, from performance-based vesting to post-termination rules. Always read your RSU plan documents carefully, discuss them with your HR team, and seek professional guidance.

At Flex Tax and Consulting Group, we work closely with employees, executives, and startup founders across San Francisco, Castro Valley, and the Bay Area to help them navigate the tax implications and planning opportunities tied to RSUs.

Schedule a Personalized RSU Consultation

Whether you’re approaching an IPO, evaluating your vesting timeline, or worried about underpayment penalties, strategic tax planning around your RSUs can make a significant financial difference.

Schedule a consultation with our team to review your equity compensation and tailor your RSU tax strategy based on your income and location.

The post Understanding RSUs: What You Need to Know About Restricted Stock Units appeared first on Flex Tax and Consulting Group (FTCG).

Despite the benefits of Opportunity Zones, this newly created investment territory is unfamiliar to most investors. In this article, we explain the basics of the Opportunity Zones, their tax incentives, and outline ways to invest through an Opportunity Fund.

First, let’s look at what Opportunity Zones are and why they existed.

How do Opportunity Zones Work?

The Opportunity Zone program was created under the Investing in Opportunity Act, which was part of the larger Tax Cuts and Jobs Act of 2017. The act was designed to encourage private investment in economically distressed neighborhoods by offering investors. Accessing to new capital gains tax incentives in exchange for placing qualified investments in Opportunity Zone communities. Through a new investment vehicle called an Opportunity Fund.

Today, there are more than 8,700 Qualified Opportunity Zones in all 50 states in the US. The District of Columbia, and in five US possessions, which cover approximately 12% of all census tracts in the US. Current Opportunity Zones received their designation in 2018 will retain that designation for ten years.

How does the Opportunity Zone Program Differ from Tax Credit Programs?

Several tax credit programs intended to encourage investment in low-income areas existed before the creation of the Opportunity Zone program. Tax credit programs such as the New Markets Tax Credit Program and Low Income Housing Tax Credit Program. Generally rely more upon government agencies to function, and are more costly to administer. Tax credit programs are also subject to annual Congressional approval. Or tax credit allocation authority, which are limited in supply due to the nature of tax credit programs. Because the tax credit system limits the number of credits which can be issued each year. There’s an intrinsic limit on the number of investors who can participate. The total amount of dollars that can be invested into the development of a community under these programs.

Therefore, the availability of Opportunity Funds open for investment is not artificially limited. Instead, it’s limited only by the number of Opportunity Funds offered in the private market and by the investor requirement of each individual fund.

What Tax Incentives do Opportunity Zones Offer?

In exchange for investing in Qualified Opportunity Zones according to Opportunity Zone program regulations. Investors can access significant tax incentives exclusive to the Opportunity Zone program. To access these tax benefits, investors must invest in Opportunity Zones specifically through an Opportunity Fund.

When an appreciated asset is sold or otherwise divested, an investor realizes a capital gain, which is typically a taxable event. If an investor reinvests that realized capital gain into a Qualified Opportunity Fund, they can defer and reduce their tax liability on that gain. Additionally, they can also potentially realize all capital gains earned from their Opportunity Zone investment tax-free.

However, due to the fact that the Opportunity Zone program is intended to encourage positive growth within economically distressed communities. There are restrictions on the types of investments that an Opportunity Fund can hold.

Which Opportunity Zone Investments Qualify for an Opportunity Fund?

To qualify for tax incentives outlined above, Opportunity Zone investments must be made through a qualified Opportunity Fund. A qualified Opportunity Fund is a US partnership or corporation that intends to invest 90% or more of its holdings in “Qualified Opportunity Zone property.” Qualified Opportunity Zone property is limited to:

• Interests in a partnership that operates as a qualified business in a Qualified Opportunity Zone.
• Stock ownership of qualified businesses whose operations are based mostly or entirely within an Opportunity Zone.
• Property, such as real estate, located within an Opportunity Zone.

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Over the past few months, I’ve been surprised to find that very few angel investors and entrepreneurs are aware of one of the most important developments for startups in a long time. If you are an angel investor or a founder make sure you read this article carefully as it could save you millions.

Recently Congress extended Section 1202 of the Internal Revenue Code, providing significant tax benefits to angel investors and entrepreneurs. Section 1202 tax exclusion provides tax-free gains on 100% of gains related to startup investments, up to $10 million per investment. This provision enables entrepreneurs to exclude up to $10 million of gains as well. A version of this provision has been around for years but previously it was not a permanent exemption. The exemption was less than 100% during certain years and it was generally less straightforward.

The 1202 tax exclusion should make angel investing more attractive than ever before and also provides a major benefit to entrepreneurs. Just make sure you understand the details:

Section 1202 Basics

• 100% tax break for gains made on investments in qualified small business stock (startups or small businesses).
• Maximum exclusion equals the greater of $10 million or ten times the initial investment (technically the adjusted tax basis).
• Alternative Minimum Tax does not apply.
• Companies must be properly incorporated in adherence to Section 1202.
• Founders, employees, angel investors, fund general partners, and taxable limited partners are all eligible for the tax break.

Example of Impact on Entrepreneurs

A company is acquired for $50 million and the founder owns 20% of the company at exit. The founder would receive $10 million before taxes and would have $10 million of gains.

If the company took advantage of the 1202 tax exclusion, he/she could exclude the entire $10 million of gains from taxes.

Example of Impact on Angel Investors

Another company gets acquired for $500 million and an angel investor who invested $100,000 early on now owns 2.5% of the company at exit. The angel investor would receive $12.5 million at the exit and would have a $12.4 million gain ($12.5 million of proceeds less original investment of $100,000).

As long as the company took advantage of the 1202 tax exclusion. The angel investor could exclude $10 million from taxes and would just get taxed on the remaining $2.4 million.

Section 1202 Requirements

• Investment must be hold for at least five years.
• The company must be incorporat as a C Corporation in adherence to Section 1202.
• The company must have no more than $50 million in assets before the investment or immediately afterward.
• Businesses may not be in the service, finance, farming, mining, extraction, restaurant, hospitality, or real estate industries.
• Corporations that make investments are not eligible.

This development should give more credence to the argument for C-Corporation vs. LLCs and likely overrides my prior argument for LLCs. If you are a founder, you might be able to take advantage of this exemption even if you weren’t aware of it upon incorporation. Talk to Flex Tax and Consulting Group. If you are an angel investor, make sure any startup you are investing in is aware of the 1202 tax exemption. It makes the proper elections to comply if they qualify.

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Flex Tax and Consulting Group discusses the QSBS election – a method used to sell shares in a C corporation completely or partially income tax-free.

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File Away Your Tax Return and All Related Records

Once you’ve filed your return, it’s a good idea to create a single location to keep all the information related to the tax year for which you just submitted. If you keep physical records, this means printing off your return. Including all additional schedules, and sticking everything in a file, along with all the forms you received that reported income, expenses, or other tax-related information. These are forms like the 1099 MISC, 1099 INT, etc.

It’s also a good idea to include receipts for purchased items you’ve claimed as deductions and other records. You’ve used for filing your taxes, such as accounting reports and mileage records. Then if by chance the IRS chooses to audit your tax return, you won’t have to scramble to find all the records you need to prove why you claimed these deductions and credits.

Get Organized for Next Year

There’s no better time for organizing tax records than right now. Since you just filed your taxes, you’re aware of what was hard about the process and what parts of filing you can streamline. This may mean creating a physical file or a file on your computer where you can store receipts as they come in. Since more and more receipts arrive via email, you may want to create a separate receipts folder in your email account so they’re easy to find.

If you think you’ll be able to claim new deductions or credits next year, now is the time to start gathering the information to do so. Or if you expect to lose a credit or deduction you claimed last year, you can start considering other ways you can lower your tax burden to compensate. This may mean contributing more to your retirement plan or donating to charity. Being proactive makes it a lot easier to find everything you need when you’re ready to file your taxes next year.

Keep Receipts

You may be able to itemize your deductions, consider keeping all your receipts. When you itemize deductions, you can deduct the amount of sales tax you paid on goods throughout the year. Although the IRS provides a sales tax calculator that calculates a standard tax deduction. It based on your income and ZIP code. You may have spent more than the standard, especially if you made a large purchase. Likely buying a car or building a house, and paid sales tax on the supplies.

If you create a spreadsheet where you can enter the amount of sales tax on everything you’ve bought, it will ultimately save you a lot of time during tax season. This way, you’ll know whether you spent more than the standard tax deduction you’re eligible for.

Consider Storing Your Records Online

When you prefer to keep the amount of paperwork you acquire to a minimum, you can choose to store all your current and past tax information on your computer. Or — even better — online using a cloud service. You do store it on your computer, and be sure you make regular backups. If you subscribe to a cloud service, the information you store on your computer will automatically backup anytime you’re connect to the Internet, ensuring you never lose those records. If you have paper records, you can scan them and upload them onto your computer so you can store everything in one convenient location.

By getting organized now, you can save yourself a lot of time and more than a few headaches when the next tax season comes around. These tips on organizing tax records after you file will make the process a whole lot easier.

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When it’s time to file a federal income tax return for your small business, there are various ways you can do it, depending on whether you run the business as a sole proprietorship or use a legal entity such as an LLC or corporation.

Each type of entity requires a different tax form on which you report your business income and expenses. Regardless of the form you use, you generally calculate your taxable business income in similar ways.

Step 1—Collect your records

Gather all business records. Before filling out any tax form to report your business income, you should have all records in front of you that report your business earnings and expenses.

If you use a computer program or a spreadsheet to organize and keep track of all transactions during the year, calculating your income and deductions is much easier than trying to remember every sale and expenditure that occurred during the year.

Step 2—Find the right form

Determine the correct IRS tax form. You always need to report your business earnings to the IRS and pay tax on them but choosing the right firm to report earnings on depends on how you operate your business.

Many small business owners use a sole proprietorship which allows them to report all of their business income and expenses on a Schedule C attachment to their income tax return. If you run the business as an LLC and you are the sole owner, the IRS also allows you to use the Schedule C attachment. However, if you use a corporation or elect to treat your LLC as one, then you must always prepare a separate corporate tax return on Form 1120.

Step 3—Fill out your form

Fill out your Schedule C or Form 1120. If you will be reporting your business earnings on Schedule C, you can search the IRS website for a copy to generate the form for you after you input all of your financial information.

Schedule C is a simple way for filing business taxes since it is only two pages long and lists all the expenses you can claim. When complete, you just subtract your expenses from your business earnings to arrive at your net profit or loss. You then transfer this number to your income tax form and include it with all other personal income tax items.

However, if you use Form 1120, you calculate your taxable business income in the same way, but the form requires more details that may not always apply to a small business. The biggest disadvantage of filing Form 1120 is that it is separate from your income tax return.

Step 4—Pay attention to deadlines

Be aware of different filing deadlines. When you use a Schedule C, it becomes part of your Form 1040 and therefore, no separate filing deadlines apply. It is generally subject to the same April 15 deadline.

If you are taxed as a C-Corp, you need to file a Form 1120, you must file it by the 15th day of the fourth month following the close of the tax year, which for most taxpayers is April 15. If you are taxed as an S-Corp, you need to file a Form 1120S, you must file it by the 15th day of the third month following the close of the tax year, which for most taxpayers is March 15. You cannot send this form to the IRS with your income tax return.

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If you are thinking of starting a company, then one of the best steps you can take is to understand the structure options you have before you start your own business. Today we are going to introduce the options you have and how to handle the taxes with those structures.

Small Business Taxes Depend on Business Structure

These are the basics of paying your small business taxes:

What types of taxes do you need to pay?
How much do you have to pay in taxes?
When do you have to pay small business taxes?
And how do you pay small business taxes?

When it comes down to it, these four basics depend on your business’s legal structure. Whatever your business entity is, you’ll first need to know how it affects your tax burden.

Small Business Taxes for Sole Proprietors

A sole proprietorship is a business that’s owned and operated by one individual. Because the owner of a sole proprietorship is flying solo, filing taxes under this business structure is relatively simple.

Instead of filing your small business taxes on behalf of the business, as a sole proprietor, you’ll report business income and losses on your income tax return. Business profits will tax at your income tax rate. Sole proprietors must also pay self-employment taxes, which cover the business owner’s medicare and social security obligations.

If you run a sole proprietorship, you’re generally required to file a Schedule C or a Schedule C-EZ with your Form 1040 and pay quarterly estimated taxes.

Estimated tax is the method that all businesses use to pay social security and medicare taxes along with income tax. If you were an employee, you wouldn’t worry about this—your employer would withhold these taxes for you. But as a sole proprietor, you are responsible for making quarterly payments with the estimated tax method.

To figure out what you’ll need to pay in self-employment taxes—and if you have to pay quarterly—use Form 1040-ES, Estimated Tax for Individuals.

Small Business Taxes for Partnerships

Partnerships are businesses operated by two or more owners. Most partnerships are known as general partnerships, but there can also be limited partnerships or limited liability partnerships. Business owners who are a part of the partnership must pay income taxes, self-employment taxes, and quarterly estimated taxes.

If you operate a partnership, the business has to file Form 1065, which is an annual information return that shows the income, deductions, gains, and losses from the business’s operations—but the business itself doesn’t pay any income tax. Partnerships enjoy what’s called “pass-through taxation,” meaning the income is taxed on the owners of the business instead of being subject to corporate tax rates.

To file taxes, owners who are included in the partnership have to file their respective share of the business’s income and losses on their tax returns. Each partner’s share of the business’s income and losses are shown on Schedule K-1.

Small Business Taxes for C-Corporations

If your small business is structured as a C-corporation, your business is legally separate from you as the owner. C-corporations are subject to what’s called “double taxation.” To start, C-corporations are subject to a flat income tax rate of 21%. Then, shareholders are taxed on their tax returns when profits are distributed as dividends. The primary income tax form for C-corporations is Form 1120.

Shareholders who actively participate in the work of the corporation are considered employees. Only the employee’s salary is subject to self-employment taxes. Dividends are subject to a different dividend tax rate. Many corporations save on self-employment taxes by paying themselves a smaller salary and taking more money out of the company in distributions. There are several other tax advantages to C-corporations as well.

Small Business Taxes for S-Corporations

S-corporations are pass-through entities like sole proprietorships and partnerships. This means that each shareholder reports business income and losses on their tax return and profits are taxed at the personal income tax rate. An S-corporation files an informational tax return, called Form 1120S, but the business itself doesn’t pay a corporate tax. This allows an S-corporation to avoid double taxation.

Similar to C-corps, S-corps can also divide business income between salary and dividends. Salary is subject to self-employment taxes, and dividends are not. You can strategically try to save on self-employment taxes by paying yourself a salary. However, the IRS requires you to pay yourself a reasonable salary given your job title, industry, and qualifications. Both C and S-corporations must pay estimated taxes quarterly.

Small Business Taxes for Limited Liability Companies

A limited liability company (LLC) is a business entity that keeps the owners legally separate from the company’s debts or liabilities. As the owner of an LLC, you’ll have the liability protection of a corporation with the tax benefits of a sole proprietorship or partnership.

If you operate an LLC, you’ll be subject to pass-through taxation, just as you would be as a partnership. In other words, you won’t be taxed twice like corporations are. Instead, as an owner of an LLC, you’ll make quarterly tax payments on your income tax forms. On top of that, you’ll also have to submit Form 1065 each year for informational purposes.

LLCs, offer you additional tax flexibility compared to other business entities. From a legal standpoint, you can exist as an LLC. However, from a tax standpoint, you have the option to be taxed as an S-corporation or C-corporation.

When to Pay Small Business Taxes

No matter what type of small business entity you have, you have to pay quarterly estimated taxes if the business owes income taxes of $1,000 or more. Corporations only have to pay quarterly estimated taxes if they expect to owe $500 or more in tax for the year.

Before you owned a business, filing taxes was a one-time thing. But as a small business owner, you’ll have to pay the IRS four times per year. On one hand, that’s four more tax deadlines you might miss. But on the bright side, by the time your yearly tax deadline comes around, you’ll have already paid three-quarters of your tax return.

To make things even more complicated, businesses must deposit federal income tax withheld from employees, federal unemployment taxes, and both employer and employee social security and Medicare taxes. Depositing can be on a semi-weekly or monthly schedule.

Quarterly Estimated Small Business Taxes

To calculate your quarterly payment, estimate your expected adjusted gross income, taxable income, deductions, and tax credits for the year. The best way to gauge these is by just looking at your taxes from the previous year as a guide.

Once you’ve put a number of these figures, you’ll just have to calculate how much you’ll owe in your estimated quarterly small business taxes. The easiest way to do this is to use the IRS’s Form 1040-ES Estimated Tax Worksheet.

These are the deadlines for quarterly estimated small business taxes:

April 15 (covering the period from Jan. 1 to March 31)
June (covering the period from April 1 to May 31)
September (covering the period from June 1 to Aug. 31)
January (covering the period from Sept. 1 to Dec. 31)

Flex Tax and Consulting Group have served and managed all types of tax and revenue collection for the U.S. for more than eight years. Our value-added services and solutions are based on innovative thinking that fits our valuable clients’ needs. If you have any questions, please don’t hesitate to contact us at 415-860-6288 or info@flextcg.com.

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