Learning Center for Tax and Financial Insights

In the dynamic world of startups, navigating uncharted waters is part of the game. As entrepreneurs, we're often so laser-focused on building the next big thing that we may overlook the importance of structuring advisory relationships with care. It's not uncommon for startups to be overly generous with equity, only to realize down the line that the advisor's contributions didn't align with the initial expectations. This is where the inclusion of milestones and responsibilities in early-stage advisor agreements comes into play—a practice that can be a game-changer for both parties involved.Setting the Foundation for SuccessA well-crafted advisor agreement serves as the foundation of any successful collaboration. It's not just a legal document – it's a roadmap for success. By delineating clear responsibilities and establishing milestones, startups can ensure that advisors are aligned with the company's vision and objectives right from the start.

Starting a new business can feel like stepping into a labyrinth of challenges for new entrepreneurs. However, fear not! We're here to guide you through the maze of entrepreneurship with these essential tax planning to-dos that every aspiring business owner must consider.

Article Highlights:Taxation of Non-resident AliensFDAP IncomeEffectively Connected IncomeForm 1040NR – Non-resident Tax ReturnForm 8233 - Tax Treaty Exemption from Social Security and MedicareForm I-9 - Employment Eligibility VerificationForm W-4 – Employees Withholding CertificateForm W-7 -Application for IRS Individual Taxpayer Identification NumberAs a non-resident alien living and working in the United States, understanding the U.S. tax system can be a daunting task. This guide aims to simplify the process, providing you with a comprehensive overview of your tax obligations, potential tax treaty benefits, and the necessary forms you may need to file.A non-resident alien is defined for tax purposes as an individual who is not a U.S. citizen and who doesn’t have a “green card” or meet the substantial presence (in the U.S.) test. Additionally, an alien individual who qualifies as a resident of a treaty country (see details in IRS Publication 519) or a bona fide resident of Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands, or American Samoa is a non-resident alien individual.Non-resident aliens are taxed on their U.S. source income, which includes both earned income (wages, salaries, etc.) and investment income (interest, dividends, etc.). The tax rates applicable to non-resident aliens are generally the same as those for U.S. citizens and residents. However, the standard deduction is not available to non-resident aliens, except for students and business apprentices from India who meet certain conditions.FDAP income – FDAP income stands for Fixed, Determinable, Annual, or Periodic income. It refers to U.S. source non-business income paid to a foreign person or corporation that is not effectively connected income (ECI). This can include salaries, wages, premiums, and compensation for services performed in the U.S., as well as other fixed or determinable annual or periodic gains, profits, and income. FDAP income is subject to a 30% (or lower treaty) tax rate.It's important to note that a non-resident alien receiving only FDAP income upon which the 30% (or lower treaty) rate has been withheld is not required to file a U.S. income tax return. However, FDAP income can become effectively connected income (ECI) if the income is derived from assets used in or held for the use in the conduct of a trade or business in the U.S., or if the activities of that trade or business in the U.S. are a material factor in the realization of that income.Effectively Connected Income - ECI refers to income earned by a foreign individual or corporation from conducting a trade or business within the United States. This income is subject to U.S. income tax and must be reported on a U.S. income tax return. ECI can include income from various sources, such as the sale of goods or services, rental income, or income from investments that are connected to the U.S. business. ECI is taxed at graduated rates and the foreign person would be required to file a U.S. income tax return. However, ECI is not subject to a withholding obligation.Form 1040NR - As a non-resident alien, you will typically file Form 1040NR to report your U.S. source income. If you are a partner in a U.S. partnership that was not engaged in a U.S. trade or business during the year, you may receive Schedule K-1 (Form 1065) that includes only income from U.S. sources not effectively connected with a U.S. trade or business.Form 8233 - The United States has tax treaties with several countries, which may allow non-resident aliens from these countries to be exempt from certain U.S. taxes. IRS Publication 515 includes Internet links to this information and a IRS website provides additional information.If a non-resident alien claims a tax treaty exemption from Social Security and Medicare withholding taxes, they must complete a Form 8233 and provide it to their employer. The employer must review, accept, and sign the form, then forward a copy to the IRS within five days. The employer must then wait ten days to see if the IRS has any objections to the exemption from withholding.Form I-9 - The purpose of the Form I-9, also known as the Employment Eligibility Verification, is to verify the identity and employment authorization of individuals hired for employment in the United States. This applies to both citizens and non-citizens. Employers are required to ensure proper completion of Form I-9 for everyone they hire. The form serves to document that the employer has verified that the employee is eligible to work in the U.S.Form W-4 - All compensation that is not exempt under the tax treaty will be subject to employment taxes in conjunction with the non-resident alien’s Form W-4. This form is subject to special adjustments that consider restrictions on a non-resident alien’s filing status, ability to claim the standard deduction, and restrictions on claiming certain credits and deductions.Non-resident aliens should review IRS Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens, before completing the Form W-4. It's important to note that non-resident aliens cannot write “exempt” in the space below Step 4c of the Form W-4 (2023 version), must enter a Social Security number at Step 1b, and may only claim “single” or “married filing separate” for their filing status at Step 1c, regardless of their actual marital status.Form W-7 - A non-resident alien who doesn't have a Social Security Number (SSN) but is required to file a tax return or a statement must apply for an Individual Taxpayer Identification Number (ITIN). The ITIN is a tax processing number issued by the Internal Revenue Service for individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain, a Social Security Number.To apply for an ITIN, Form W-7, IRS Application for Individual Taxpayer Identification Number, must be completed and filed according to the IRS instructions. The form should be attached to the federal income tax return for which the ITIN is needed .Please note that an ITIN does not provide work authorization and cannot be used to prove work authorization on an I-9 form. It is used for federal tax reporting only.

Recently – particularly since the agency received $80 billion in additional funding as part of the Inflation Reduction Act – the Internal Revenue Service (IRS) has been considering the implementation of a revamped free e-file tax product to simplify the tax-filing process, particularly for low-income taxpayers. The U.S. Government Accountability Office (GAO) notes that fewer than 3% of taxpayers use the IRS's existing free file service, which is limited in its scope and typically is not an option for those who work in the gig economy, own cryptocurrency, or have other complex tax issues. While the proposal to redevelop the current system may seem like a step in the right direction, it has ignited a fierce debate within the financial and tax preparation industries.The Pros of Free E-File Tax ToolsAccessible Benefits For Low-Income TaxpayersProponents of the free e-file tax tool argue that it could greatly benefit low-income taxpayers who qualify for various financial benefits, including valuable tax credits. These individuals often rely on the tax filing system to access credits that could amount to thousands of dollars. Unfortunately, many tax preparers without formal training may miss out on these benefits, potentially costing taxpayers more than the price of professional tax preparation.Challenging this, however, is a ProPublica report that notes “free” tax software like Intuit’s TurboTax, which sometimes charges taxpayers who have complicated returns, relies heavily on minority communities at tax time. “The fact of the matter is that the industry is targeting black and brown communities trying to stoke fear of a direct file tool,” said Brandon Tucker, senior policy director of Color of Change, a racial justice organization that supports direct file. “Black people are critical to their [TurboTax’s] profit margins,” he told ProPublica.Protection From Potentially Predatory PracticesSome firms that offer free tax preparation services may even profit by selling taxpayer information, while scammers may use the guise of free services to steal taxpayer identities.In one situation in January of this year, for example, a tax preparer was sentenced to federal prison for reporting false earnings, fraudulent charitable contributions, and ineligible tax credits to increase their clients' refunds.At the time, Special Agent in Charge Ramsey E. Covington of IRS - Criminal Investigation's Houston Field Office urged Americans to be vigilant, "These three tax preparers not only betrayed the trust of their clients, who counted on them to prepare accurate returns, they betrayed the trust of all taxpaying Americans."“I implore all taxpayers who plan to hire a third-party to prepare and file their tax return to choose their preparer wisely and ask questions before and during the preparation process," he continued.

Article Highlights:Prior ERC Scam WarningsWhat is the ERC?IRS Shifting FocusLatest Guidance for Withdrawing a ClaimWho Can Withdraw a Claim Under the New ProcedureProcedure for Withdrawing a ClaimDespite warnings from the IRS, the American Institute of CPAs, and other professional tax preparer societies, many business owners have fallen victim to aggressive marketing of the Employee Retention Credit (ERC) by marketers or promoters into filing ineligible claims.As part of a larger effort to protect small businesses and organizations from scams, the IRS has announced the details of a special withdrawal process to help those who filed an ERC claim and are concerned about its accuracy.The ERC is a refundable payroll tax credit designed for businesses who continued paying employees while shut down due to the COVID-19 pandemic or who had significant declines in gross receipts from March 13, 2020, to Dec. 31, 2021. The ERC is a complex credit with precise requirements to help businesses during the pandemic, and since mid-September, the IRS has received approximately 3.6 million claims for the credit over the course of the program.As we revealed in an earlier bulletin, In July, the IRS announced it was shifting its focus to review ERC claims for compliance concerns, including intensifying audit work and criminal investigations on promoters and businesses filing dubious claims. The IRS has hundreds of criminal cases being worked on, and thousands of ERC claims have been referred for audit. This was followed up on September 14th with another announcement by the IRS of a moratorium on processing new claims while continuing to process claims prior to September 14th at a slower pace with stricter compliance reviews in place.The latest guidance from the IRS released on October 19 provides a procedure for withdrawing a claim. Employers can use this new ERC claim withdrawal process if ALL the following apply:The claim was made on an adjusted employment return (Forms 941-X, 943-X, 944-X, CT-1X).The adjusted return was filed only to claim the ERC, and made no other adjustments.The employer wants to withdraw the entire amount of their ERC claim.The IRS has not paid their claim, or the IRS has paid the claim, but the employer hasn’t cashed or deposited the refund check.

Article Highlights:OverviewInnocent spouse reliefSeparation of liabilityEquitable reliefFairness Facts and CircumstancesConfidentialityIf you are or were married and filed your federal tax return jointly with your spouse, and you were unaware of potential errors or underreporting on that tax return for which the IRS is now billing you, you may be eligible for innocent spouse relief.When married taxpayers file jointly, they become “jointly and individually” responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later separate or divorce.Joint filers remain “jointly and severally liable” even if a divorce decree states that a former spouse is responsible for any amounts due on previously filed joint returns. The IRS will use all means to collect the tax from either or both spouses. One spouse may be held responsible for all the tax due, even if all the income was earned by the other spouse. However, a spouse in certain cases may be relieved of responsibility for tax, interest, and penalties on a joint return under special relief rules. There are three types of relief available:Innocent spouse reliefSeparation of liabilityEquitable reliefInnocent Spouse Relief -To qualify for innocent spouse relief, a taxpayer must meet all 3 of the following conditions: Must have filed a joint return with an understatement of tax (i.e., the difference between the amount of tax that should have been shown on a return vs. the tax shown) that was due to erroneous items of his/her spouse. Erroneous items can include unreported income that was received by the non-innocent spouse and not reported on the return, or incorrect deductions, credits, or basis claimed by the non-innocent spouse which are improper or for which there is no basis in fact or law. Must establish that at the time of signing the joint return, he/she didn’t know and had no reason to know that there was an understatement, and Accounting for all the facts and circumstances, it would be unfair (i.e., inequitable) to hold the taxpayer liable for the understatement of tax. Indicators of unfairness are determined based on the facts and circumstances of each individual case. To decide unfairness, the IRS will check several factors, which include:o Significant Benefit - Did the “innocent spouse” receive significant direct or indirect benefit from the understatement of tax? A significant benefit is one which is excessive in terms of normal support.Example: In March 2022, Jenna received $20,000 from Terence, her spouse of 10 years. The funds were traced to Terence’s lottery winnings in 2021. No winnings were reported on the couple’s joint federal return in 2021. The couple’s normal monthly household operating budget was around $4,000. More than likely, the IRS would rule that Jenna had received a significant benefit due to the $20,000 gift, even though it was received in a year other than the one in which the unreported income occurred. o Desertion of the innocent spouse by the non-innocent spouse.o Divorce or separation of the spouses. Relief By Separation of Liability - To file a claim for this type of relief, the understatement of a joint tax liability (including interest and penalty) must be allocated (separated) between spouses (or former spouses). Since this form of relief is for unpaid liabilities resulting from understatements of tax, the relief doesn’t generate refunds.To request relief by separation, a taxpayer must have filed a joint return and meet either of the following when the application is filed:Be divorced or legally separated from the spouse with whom the joint return was filed (widowed counts the same as divorced or legally separated), ORNot be a member of the same household as the spouse with whom the joint return was filed during the 12-month period ending on the date IRS Form 8857, Request for Innocent Spouse Relief, is filed with the IRS. Note: The reason for living apart must be due to estrangement, not temporary absence.Innocent spouse relief by separation of liability won’t be granted in these situations: