Third Quarter Tax Updates

Interested in what’s happened over the last three months this year?

I’ve summarized the key tax developments that may affect you, your family, your investments, and your livelihood.

President Trump reveals tax reform plan. The Trump Administration and select members of Congress have released a “unified framework” for tax reform. This documents details a number of tax reformation changes but leaves many specifics unaddressed.

Provisions that would impact individuals include:

  • A standard deduction increase to $24,000 for married taxpayers filing jointly, and $12,000 for single filers;
  • Elimination of the personal exemption
  • A reduction in the number of tax brackets from seven to three: 12%, 25%, and 35%;
  • An increase of the child tax credit;
  • Repeal the individual alternative minimum tax;
  • Largely eliminate itemized deductions, but retain the home mortgage interest and charitable contribution deductions; and
  • Repeal both the estate tax and the generation-skipping transfer tax

Plan provisions affecting businesses would:

  • Applying a maximum 25% tax rate for “small” and family-owned businesses conducted as sole proprietorships, partnerships and S corporations;
  • A reduction in the corporate tax rate to 20% (down from the current top rate of 35%);
  • Provisions for full expensing for five years;
  • Partial limitation of the net interest expense deduction for C corporations;
  • Repeal most deductions and credits, but retain the research and low-income housing credits;
  • Provide a 100% exemption for dividends from foreign subsidiaries; and
  • Tax the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.


For more information on other key tax updates and how they may impact you, feel free to contact our office.

3 Myths About Real Estate Taxation

As an active CPA, I often stumble across forums and blogs on the internet with a plethora of misinformation that makes me want to bang my head against the wall. While this blog isn’t intended to be a PSA, the tax code is complex and you should always consult with a tax professional before acting on advice of a friend, colleague, or stranger on the web.

I assembled a list of the top  3 myths about real estate taxation with the intention of setting the record straight. Here’s the top offenders:

Myth #1: You need a real estate license to be a real estate professional

While you may need a license to hold yourself out to the public as a “real estate professional”, to qualify for real estate professional tax status the IRS only requires that you meet certain annual time thresholds.

The rules are pretty simple, the IRS defines a real estate professional as a taxpayer that materially participates in real estate. Qualifications? Work 750 hours in a real estate capacity and spend more than half your time in a real estate trade or business.

So what is a real estate business or trade? The IRS lists the following: renting and leasing of realty, construction, development, buying, operating, and managing realty, as well as realty brokerage businesses.

Simple enough, right? The full text can be found in full under Code Sec. 469(c)(7)(B).

Myth #2: Flipping income qualifies as capital gain

The IRS says “real estate dealers”, individuals or business involved in the buying, improving, and selling real property (“flipping”), cannot qualify for capital gains – regardless of whether you hold the property for 1 year or longer!

Court cases have made this pretty clear – real estate dealers should treat the business of flipping property similar to any other inventory based business. Meaning, sole proprietors involved in flipping activities would also be subject to self-employment taxes. You should also be aware that “real estate dealer” status could also subject your rentals to “self-employment”.

There are several strategies a knowledgeable CPA can help employ to reduce exposure to some of the negative implications.

Don’t believe me? There are plenty of court cases that support this – email me for a list!

Myth #3: Passive losses disallowed in one year are lost forever

The IRS has rules related to “passive losses”. These rules often limit the amount of loss that can be taken in a given year for a rental property.

The good news is that if your rental shows a passive loss, no taxes are being paid on the rental income you received for the year! Hopefully, that loss being generated is just “tax loss” rather than a hard loss.

So what happens to the losses in excessive of your rents received? When you have a passive loss from your rental activities and cannot use the loss because of your income level or the passive loss rules, they become suspended until they can be used to offset future passive income or offset any gain in the year that property is disposed of in a sale.

While the key to effective tax strategy usually involves obtaining the largest benefit now, the passive loss rules can work out quite nicely in the future.

Oh, and you can and should always write off depreciation. If you don’t write off depreciation, you will run into quite a mess when you go to sell the property.

Any questions? Feel free to email me at or leave a message in the comment section below.


How to Handle an IRS Letter

The IRS mails millions of letters every year to taxpayers for a variety of reasons. Many of these letters are computer generated. It’s important to keep the following tips in mind if you are ever the recipient of a letter or notice from the IRS:

  1. Don’t panic. Most notices can be resolved with a simple response providing the requested information.
  2. While you shouldn’t panic, you should certainly not ignore the letter. The majority of IRS notices are sent in respect to federal tax returns or tax accounts. Since every notice is different, be sure to read the notice carefully. Most will require a response in 30 days.
  3. Respond timely. Most notices ask for more information about a specific issue or item on a tax return. Not only will a timely response minimize additional interest and penalty charges (if, any), but it will also prevent the IRS from automatically making adjustments for lack of a response from you.
  4. Some notices will come from the Automated Under Reporting Service Center. These notices will typically indicate a changed or corrected tax return. The most common occurrence is when the IRS has information from another source that was missing on your return, such as stock sales reported by your broker, but not included on your return. Review the information and changes on the notice and compare it with your original return. If you agree with the changes, you should note the corrections on your copy of the tax return for you records. There is usually no need to reply to a notice like this when you agree to the changes unless specifically instructed to do so, or to make a payment.
  5. Respond promptly to a notice you do not agree with. You should mail a letter explaining why you disagree to the address on the contact stub at the bottom of the notice. Include information and documents for the IRS to consider and allow at least 30 days for a response.
  6. There is no need to call the IRS or make an appointment at a taxpayer assistance center for most notices. If a call seems necessary, use the phone number in the upper right-hand corner of the notice. Be sure to have a copy of the related tax return and notice when calling.
  7. Always keep copies of any notices received with tax records.
  8.  The IRS and its authorized private collection agency will send letters and notices by mail. The IRS will not demand payment a certain way, such as prepaid debit or credit card.

For more more information on notices, or for notice resolution, please contact Paul at Launch Consulting, Inc for assistance resolving any IRS issues.


Deciding between QuickBooks Online and QuickBooks Desktop? Here’s What You Need to Know!

It seems like every software company is moving to the cloud, cashing in on reoccurring revenue streams, and Intuit is no different. When QuickBooks Online was first released quite some time ago, the biggest issues were it’s clunky user interface and the lack of features in comparison with their desktop version. Now, I can confidently say that QBO has finally caught up! You’ve ask for it, so here it is! A comparison of QuickBooks Online (QBO) to it’s predessor, QuickBooks Desktop (QBDT).

QBO Features not in QBDT

  • Multiple A/R or A/P in one JE
  • Multiple Budgets per Fiscal year
  • Track Service Dates on sales forms
  • Delayed Charge form to hold sale till ready to invoice
  • Multiple devices (works on any type of device: PC, Mac, tablet, smartphone, etc.) • Phone app takes a pic of receipt, auto creates expense in QBO w/attachment, matches to bank feed.
  • Audit Log – much better than desktop as shows when users log in and out.
  • Unlimited view/read only users (Great for Non-Profits, Shareholders)

QBDT Features not in QBO (Can be done in QBO w/3rd Party Apps)

  • Robust Inventory – units of measure and assemblies
  • Robust job costing: • Allocating labor/payroll to Jobs
  • Progress Invoicing
  • Reporting
  • Sales Orders (QB Premier)
  • Progress Invoicing
  • Auto Send Reports
  • Price Levels

Levels of QBO

Self Employed

  • 1 Company user, 2 Accountant Users
  • Create and send invoices—Does not track A/R. No other transaction forms supported.
  • Separate business and personal expenses
  • Track Schedule C deductions
  • Quarterly estimated taxes calculated automatically
  • Automatic mileage tracking

Simple Start

  • 1 Company user, 2 Accountant Users
  • 20+ Reports
  • Track income & expenses
  • Basic financial & A/R reports
  • Bank feeds
  • Can do payroll and integrate w/3rd party apps
  • No General Ledger, Trial Balance or A/P reporting


  • 3 Company users, 2 Accountant Users
  • 40+ reports
  • Manage & pay bills
  • Setup recurring transactions
  • Delayed charges
  • Company snapshot report
  • Group Items (called Bundles)


  • 5 Company users, 2 Accountant Users
  • 65+ reports
  • Up to 25 users, unlimited time tracking & reports only users
  • Class & location tracking
  • Income by Customer (basic job costing)
  • Budgets
  • FIFO inventory & PO’s
  • 2 sided item tracking (Double sided items)
  • Billable Time & Expenses
  • Unlimited view/read only users (Great for Non-Profits, Shareholders)


For clients that have specific needs where QBO may not solve entirely go to to expand usability of QBO and fill those gaps respectively. Here are a few that work really well with QBO and can be found on our website:

  • Inventory—SOS Inventory, Dear, Stitch Labs
  • Construction/Contract/Job Costing/Progress Billing—Knowify, BuilderTrend, CoreCon
  • Report Dashboards and KPIs—Fathom/Qvinci, Finagraph
  • Non-profits—Method Donor
  • Firm Practice Management—Aero Workflow/Harvest
  • Retail POS—Vend POS, Revel POS, SalesPad
  • Ecommerce—Shopify, Bigcommerce, Webgility/Unify

Looking to sign up now? Here’s a link where you can save 30-50% off your QBO subscription!

If you have any questions, feel free to reach out!

Credit: QBO Account Management Team/QBO Account Management Product Specialist Teams

Year-End Tax Moves – Speculating on President-Elect Trump’s Tax Cuts

President-Elect Trump declared in several interviews that lowering taxes is one of his top priorities. Those that are betting on him delivering this promise and passing reformation through a Republican controlled congress should consider deferring income to 2017 in an effort to take advantage of the possibility of lower tax rates.

The Trump tax plan, features only three brackets, down from the current seven, and reduces the maximum tax rate of 39.6% to 33%. The standard strategy for year-end planning has always been to defer income, wherever possible, into the coming year. Here are some ways to achieve this goal, and speculate on the possibility for change:

  1. An employee who believes a bonus may be coming his way may be able to request that his employer delay payment of any bonus until early in the following year. For example, if a bonus would normally be paid on Dec. 15, 2016, an employee may ask the employer before Dec. 15 to defer any bonus coming his way until Jan. 2, 2017. If the employee is successful in deferring the bonus, they will succeed in having it taxed in 2017 as opposed to 2016. But note that if an employee waits until a bonus is due and payable to request a deferral, the tax on the bonus will not be deferred.
  2. Income that a cash basis taxpayer earns by rendering services isn’t taxed until the client, patient, or customer pays. If the taxpayer holds off billing until next year, or bills late enough in the year that no payment can be received in 2016, income will not become taxable until next year.
  3. Defer a traditional IRA-to-Roth IRA conversion until 2017. Conversions are generally subject to tax as if it were distributed from the traditional IRA or qualified plan and not re-contributed to another IRA. A taxpayer who plans to make such a conversion should defer doing so if he believes the conversion will face a lower tax next year.
  4. Defer Property sales. The President-elect’s plan to repeal the Affordable Care Act (“Obamacare”) also would repeal the 3.8% surtax on net investment income. It may also be in best interest to set up an installment sale and recognize income over multiple tax periods.
  5. Trump’s tax plan also aims to increase the standard deduction ($30,000 for joint filers, up from the $12,600 allowed in 2016). Since most taxpayers may not receive the benefit for itemizing property taxes, mortgage interest, and charitable contributions under the proposed increased deduction, it may be wise to accelerate these expenses before year-end 2016. For example, property taxes may be due in January 2017 for the 2016 period, you can opt to pay early, prior to December 31, 2016, and accelerate this deduction.

While President-Elect Trump’s proposal has been listed as one of his top priorities, there is no telling what portions of this plan will ever make it into law. The five planning techniques above are just examples of scenarios that could reduce your overall tax burden in the event Mr. Trump follows through with his proposal.


When to File? Important Changes to Due Dates and more

As the 2016 tax year winds down, there is no better time than now to get your finances in order. Let’s face it, the last thing you want to think about during the holiday season is taxes. I compiled a list of the deadlines to follow after year-end. Please note that legislation during the year changed the due dates for many common forms. Below is a summary:

Individual Due Dates:

  • Individual Form 1040 – April 15th (no change)
  • FinCEN Form 114 (FBAR) – April 15th (previously due June 30th)

Business Due Dates:

  • Partnership Form 1065 – March 15th (previously due April 15th)
  • S-Corporation Form 1120S – March 15th (no change)
  • C-Corporation Form 1120 (calendar year) –  April 15th (previously March 15th)
  • Forms W-2 – January 31 (previously February 28 & March 31 if electronically filed)
  • Forms 1099-MISC – January 31* (previously February 28 & March 31 if electronically filed)

*This new due date is only for Forms 1099-MISC using Box 7 to report non-employee compensation.

For a complete list of all updated due dates, including Trust and Estate Forms 1041, and Form 990 for Exempt Organizations, the AICPA has compiled the changes into a PDF table.

The Ultimate Guide to Estimated Taxes (Form 1040-ES)

A common question I receive from small business owners is “how do I calculate my quarterly tax payments?” At the heart of this question is the fear of ending up like Al Capone. I hope to alleviate those fears and provide you with this ultimate guide to estimated taxes.

First, what are estimated taxes? Estimated taxes are payments of tax on income that is not subject to withholding. The most common types of income that are not subject to withholding are self-employment income, business income, rental income, and investment income.

Am I required to make estimated tax payments? You may be required to make estimated tax payments if you expect to owe over $1,000 in federal taxes after subtracting out federal tax withholding and credits.

Is there a difference between “ES taxes” and “Estimated Taxes”? Nope! They are the same. Sometimes estimated taxes are referred to as “ES” taxes because individuals would send payment with Form 1040-ES.

When are estimated taxes due? Estimated taxes are due in four installments, usually on the following dates:

  • 1st Quarter – April 15
  • 2nd Quarter – June 15
  • 3rd Quarter – September 15
  • 4th Quarter – January 15

Does the IRS have to receive my payment by the due date if I mail my check with Form 1040-ES? Nope! The IRS will consider your payment timely if postmarked by the due date.

How do I calculate estimated taxes? I like to break estimated tax calculations into two categories – safe-harbor calculations or actual calculations. The safe harbor provision states that as long as you pay 100% of the prior year tax liability (110%, if your AGI was >$150,000 in the prior year) or 90% of the current year tax, you can likely avoid any penalty on potential under payment. While you may owe additional tax come April 15th, this makes ES calculations much more simple!

Where do I find my prior year Adjusted Gross Income (AGI)? Your adjusted gross income can be found on Form 1040, Line 37 (for 2015).

Where do I find the total tax paid last year? The total tax paid in the previous year can be found on Form 1040, Line 63 (for 2015)

I’m still confused about this safe-harbor non-sense, elaborate! If you expect income (and therefore taxes) to increase year after year, you can simply take last years total tax, subtract out any year-to-date withholding (your spouses withholding from their job as an employee, for instance), and divide by 4.

Here’s an example: Last year, the total tax on Line 63 was $40,000. You work freelance and your spouse works as employee. Your spouse’s federal income tax withholding on their paycheck for the current year is $2,500/month or $30,000 for the year. Your business is growing, and just by looking at your financials on QuickBooks you see that you are on pace to increase net profit by 20% for the year! You know that you will owe more in tax, but you would prefer to hold on to the money for short-term capital needs or an equipment purchase, so you decide to make a safe harbor payment. Since your AGI was greater than $150,000 for the prior year, you will need to have a minimum of $44,000 ($40,000 x 110%) of federal taxes paid in for the current year to avoid penalty.  We subtract the amount your spouse will have in withholding, and arrive at $14,000 ($44,000 “safeharbor” tax that needs to be paid in at a minimum, less $30,000 estimated withholding from your spouses paycheck). We divide the $14,000 by 4, to arrive at $3,500. We will make four $3,500 tax deposits by each quarterly due date. Please note, this doesn’t necessarily mean you won’t owe any additional tax at the year of the year, but it does mean you will not owe any interest or penalty for underpayment of taxes.

I know it’s not that easy, do you have any other resources with examples? Okay, maybe your right, maybe estimated taxes are a little more complex than I am making them out to be. The IRS does try to simplify the process and put out instructions and resources on the topic. Estimated tax worksheets and instructions from the IRS website can be found here.

When should I use the safe-harbor provisions and when should I do an actual estimate? I recommend using the prior year tax safe-harbor calculation if you expect taxes to increase from the prior year. The current year safe harbor (90% of the current year tax) is ideal for individuals that may have had a high paying job prior to becoming a consultant or self-employed, and expect their tax liability to decrease significantly. Occasionally, we will calculate an actual tax due amount – if a client has a large unusual transaction, such as a investment property disposal, a large stock transaction, option exercise, or company exit OR if the individual prefers to not owe any tax at the end of the year.

What about Self-Employment taxes? Yikes! The dreaded self-employment tax. If you are subject to the self-employment tax, and want to use the current year safe harbor (paying 90% of the current year tax, as opposed to 100/110% of the prior year tax), refer to the worksheets on the IRS website previously mentioned.

How do I make estimated tax payments? You can make estimated tax payments by mailing Form 1040-ES with a check, using DirectPay on the IRS website, or EFTPS with the Treasury Department.

Do you have any other tips? That’s all I have for now – if you have questions, feel free to leave them in the comments!

If this post was helpful, feel free to share it with your friends! Since quarterlies are often overlooked, individuals sometimes end up paying penalties or interest that could have been easily avoided. Why give the IRS any more than you have to?



Five reasons you should open a Health Savings Account Now!

We’ll save you some time and start off by saying, HSA’s only benefit individuals and families who are in a high deductible health insurance plans (HDHP), not enrolled in Medicare, and are not claimed as a dependent on someone else’s return. If you are in one of these HDHP’s, keep reading, because HSA’s are the perfect vehicle to save you money on taxes and stretch your medical spending. Here’s why:

  1. Pre-Tax Earnings: Contributions are typically pre-tax. Meaning, if your employer makes a contribution to your HSA, it’s not included in your gross taxable income.
  2. Tax write-off: Contributions can be made towards a HSA up until April 15 after the close of the previous tax year. These contributions can be used as a deduction on your tax return, saving you money on taxes. For example, if you are in the 25% tax bracket, a maximum family contribution of $6,750 (for 2016) to an HSA can save you up to $1,687.50 in taxes! Individuals 55 or older can make “catch-up” contributions; these catch-up payments increase the contribution limits by $1,000 for even greater tax savings.
  3. Tax-Free Earnings: Any interest or income earned on the assets in your HSA are earned tax-free, even upon taking the money out to pay for qualified medical expenses. Different banks will allow for and offer different types of investments, so be sure to do your research.
  4. Roll-Overs: Funds in your HSA roll-over from one year to another, meaning you don’t “use it or lose it” like Flexible Spending Accounts (FSAs).
  5. Portable and transferable: Not only can you transfer a HSA from one bank to another or from a previous employer to a new employer, you can also use an HSA like an IRA. If an HSA participant has a balance upon death, the balance of the HSA can be inherited tax-free by a spouse named as a beneficiary on the account. For non-spouse individuals, the HSA ceases to be a HSA and the balance is included at the fair market value on the date of death as taxable income to the person who inherits the account. This is similar to the treatment of a traditional IRA that has been inherited and liquidated.

If you have any questions about HSA’s and how they can benefit you from a tax perspective, feel free to contact our office.

Three Tips for Starting a Business

When starting a business, understanding your tax obligation is one key to business success. With the internet and the wealth of information found on the web, it’s easy to be misinformed. Hopefully this post will clear up any questions or concerns you may have when starting your business.

  1. Business Structure. One of the first decisions you will make when starting a business is deciding on a business structure. Business structures can have a huge impact on the tax liability of your operations, therefore it is always best to seek council from a CPA or lawyer. The most common forms of businesses are:
    • Sole Proprietorships
    • Partnerships
    • Corporations
    • S-Corporations
    • Limited Liability Company (LLC)
      • There are many misconceptions surrounding the LLC as a business structure.
      • Here are the facts: An LLC is a business structure that is allowed by state statute. Each state has it’s own statutes regarding the requirements for ownership. An LLC has default treatments for federal taxation that may only be changed by timely filing the correct elections. The default treatments are as follows:
        • An LLC with one member (whether individual or another business) is disregarded for federal tax purposes (but still a separate entity for employment taxes and excise taxes)
        • An LLC with two or more members is by default a partnership
      • If an LLC would like to elect a treatment other than the default, it can do so by filing Form 8832 or Form 2553. An LLC can elect to be treated as a Corporation or S-Corporation. An LLC is NOT by default, either of these entities.
  2. Business Taxes. There are four general types of taxes that businesses pay:
    • Income Tax – All business except partnerships must file an annual income tax return. Partnerships, however, file an information return.
    • Self-Employment Taxes -these are social security and medicare taxes primarily levied on individuals who work for themselves (examples would include sole proprietors, single member LLC’s where an individual is the sole owner, and in some cases, partnerships)
    • Employment Taxes – businesses with employees have a responsibility to pay and file forms related to social security taxes, medicare taxes, federal income taxes, and federal unemployment (FUTA) taxes.
    • Excise Taxes – some businesses may be required to pay excise taxes, more information on these taxes can be found on the IRS website.
  3. Employer ID Number (EIN). An EIN or Federal Tax Identification Number is used to identify a business entity. Most businesses can apply for an EIN on the IRS website free of charge. An EIN is recommended, even for sole-proprietors, to obtain a bank account and provide to vendors who may request tax information.

If you have any questions about entity selection or getting your business Launched!, feel free to contact our office or schedule a consulting meeting.

What every founder should know about Equity Compensation

Equity Based Compensation – Influencing the Choice of Entity

One of the most important decisions you make when starting a business is entity selection. Many factors affect the choice of entity, from legal, to tax, to initial cost, complexity, and exit alternatives. While I am a big proponent of the lean startup, there are two moments in your business timeline where going lean will actually cost you more in the long run – forming and exiting your business. It is important to have a knowledgeable CPA and lawyer working together to maximize the legal and tax implications of your selection.

Among to the most common choices of entities include Limited Liability Companies (LLC’s) and Corporations. Both of these entities offer great legal protection and limit liability to their owners but from a taxation standpoint are fundamentally different. Since offering equity as a form of compensation has become all the norm in the start-up world, this article will explore the differences between these two type of entities and the tax implications of incentivizing employees with a share of your company.

Limited Liabilities Companies

Since LLC’s came into existence in the late 1970’s they have added quite a bit of complexity to the U.S. Internal Revenue Code. Since LLC’s are formed under state law and LLC statues vary by state, the Internal Revenue Service (IRS) has taken the position that LLC’s are “flow-through” entities by default. This means any LLC with two or more members automatically becomes a partnership for federal tax purposes, unless an election is made to treat it otherwise.

Flow through entities typically don’t pay any federal entity level tax. Instead, the members, or owners, of a flow-through entity report their share of the LLC’s income on their individual tax returns, paying tax at their personal marginal income tax rates. The LLC reports income to each member on Schedule K-1. This income is allocated based on the LLC’s operating agreement. Selecting an LLC can limit your choices on equity based compensation, but LLC’s still remain a popular choice for service based businesses. The most common types of equity based compensation are “capital interests” and “profits interest”. Capital interests in a LLC can be viewed similar to issuance of stock in a corporation, while a profit interest offers the opportunity to share in future profits of a business.

Grant of a Capital Interest in an LLC

Compensating an employee of your company with a capital interest allows the company to write-off the grant as a deduction similar to that of W-2 wages. This taxable event doesn’t occur until the interest is fully vested, at which point, the employee recognizes ordinary income equal to the Fair Market Value (FMV) on the vest date1. The amount of the deduction received by the LLC is equal to the amount of ordinary income the employee recognizes as a result of the equity award. If the LLC was liquated today, the members would receive a portion of the LLC assets based on their capital ownership.

Grant of a Profits Interest in an LLC

Granting an employee an interest in profits of your LLC is a more flexible incentive that allows the individual to share in the future success of the company. Unlike the transfer of a capital interest, generally there is no deduction allowed by the LLC for the transfer of a profits interest. This also means that no income is recognized by the employee receiving the grant as a result of the transfer. The employee receiving the grant will however be taxed on future profits of the company. An important distinction between a profits interest and a capital interest is this – if the company were to liquidate the same day the grant becomes fully vested, a profits sharing individual would not be entitled to any of the assets of the LLC, while an individual with a capital interest would be entitled to a proportionate share of the LLCs assets (or capital).


Corporations are widely known in the start-up world as being the entity preferred by VC’s – mostly because of their ability to raise large amounts of capital, their flexibility from an equity standpoint, and as an added bonus, the investors don’t have any Schedule K-1s to wait on. While corporations do have their downfall – notoriously, double taxation, a tax at the entity level, and again at the individual level when profits are distributed to shareholders – they still are the preferred choice for businesses that plan to scale and want to offer compensation in the form of equity to their employees. There are quite a few ways to incentivize employees and offer the opportunity to participate in the financial success of your corporation through equity.

Below are the most popular types of equity compensation and a brief overview of the tax implications for individuals and the corporations.

Stock options – this includes Incentive Stock Options (ISOs) and non-qualified stock options (NQSOs). Stock options offer an employee or in the case of NQSOs, any person providing services to the corporation, the opportunity to purchase stock in the corporation at a future date for a price less than the current fair market value (FMV).

Incentive Stock Options are typically more favorable to employees, as a grant of ISO’s does not trigger a taxable event. When the options are exercised however, the difference between the FMV and the exercise price (“bargain element” or “spread price”) is an adjustment to the individual’s Alternative Minimum Tax (AMT) calculation. Corporation’s typically don’t net a deduction for offering this type of incentive, although there are exceptions.

Non-qualified Stock Options (NQSO) are similar to ISO’s, as there is no tax deduction for the corporation at the date of grant. With a NQSO, the taxable event occurs at the date of exercise, where the spread price is reported as ordinary income subject to FICA taxes. The corporation is entitled to a deduction for the amount of ordinary income recognized by the recipient.

Restricted Stock – Restricted Stock Units, or “RSUs” as they are commonly referred to as, are another common type of stock compensation utilized by corporation to incentive employees. Typically, RSUs are offered with a vesting period of 4-5 years, with the unvested portion forfeited if the employee resigns or is terminated. At the grant date, an employee can elect to pay tax on the current spread, or defer taxation until the RSUs are vested. The corporation is entitled to a tax deduction for RSUs issued and vested by an employee. In the eyes of the IRS, RSUs are viewed very similar to wages, as the corporation is required to pay FICA taxes, withhold federal taxes, and report the FMV of the vested portion in the employee’s W-2.

As always, every taxpayer’s situation is unique. If you have any questions about what entity would be the best solution for you, feel free to contact Paul Glantz, CPA at


1 Since a grant of a capital interest in a LLC falls under the rules of IRC 83, an exception exists for the characterization and treatment of this transaction.