In practice
The answer isn't always where you'd expect it.
Tax software is good at calculating what you tell it to calculate. The harder part is knowing what else to ask.
Details have been changed for confidentiality.
Entity choice / QSBS
He asked us to file an S election. We asked why.
The election he asked for wasn't the answer he needed.
The founder had a single-member LLC and came to us specifically to make an S corporation election. Sales had grown from roughly $50,000 to $500,000, so the payroll-tax savings looked attractive.
But he lived in New York City, which reduced much of the expected benefit. Then we asked what he planned to do with the business. He was already considering a sale within the next three to five years.
That changed the analysis. Preserving the potential QSBS benefit could matter far more than modest annual payroll-tax savings, so we recommended a C-corporation path instead.
R&D credits
The federal R&D credit was only part of the answer.
Once we identified the qualifying research for the federal return, we looked at where the work was actually performed.
That uncovered additional state opportunities, including Texas's new refundable R&D credit and the potential to use Georgia R&D credits against payroll withholding.
One R&D study. More than one place to claim it.
State tax / QETC
New York was taxing the company's capital. We checked whether it had to.
The New York return was producing tax on the company's capital base. The calculation itself wasn't the problem.
We checked whether the company qualified as a New York Qualified Emerging Technology Company. It did — which meant a 0% capital-base tax rate instead.
The calculation was right. The exception changed the answer.
Corporate tax / Form 5472
Everyone thought the first return was late. We asked whether it was due.
A foreign-owned C corporation appeared to have missed its first calendar-year filing deadline. That mattered because a late or incomplete Form 5472 can carry a $25,000 penalty.
Before filing late and dealing with penalty relief afterward, we reviewed the company's first-year facts and determined that a fiscal tax year was available. That changed the filing deadline.
The return wasn't late after all.
Equity compensation
The option exercises were in the cap table. They weren't in the tax workpapers.
At a growing company, equity administration, payroll, accounting, and tax were being handled in separate systems.
We reconciled the option activity to the payroll and tax records so the compensation reporting and tax treatment reflected what had actually happened during the year.
Equity compensation doesn't stop at the cap table.
Delaware franchise tax
Before our clients pay the Delaware bill, we recalculate it. Delaware franchise-tax notices can show a dramatically higher amount under one calculation method than the company actually owes under the alternative. We check the calculation before payment.
