The Ventura Pranas Quarterly Newsletter: October – December 2020
Hope you’re well and that this year is off to a promising start.
In the last few months we’ve done some restructuring and reorganization to roll out new services, as well as re-think our existing systems and processes.
One crucial process we are introducing is a master engagement letter. Tax notices from the Indian government arrive without prior notice, and they usually require a response within 2 working days. We often lose time if we have to get client approvals every time we receive a notice, and procedurally we can’t start the work until the engagement letter is signed. Our workaround is to introduce a Master Engagement letter that you will receive before February 20th. By signing this engagement letter, we will undertake all notices that come for you. Finally clients who need careful year end planning and payroll decisions are chargeable at our hourly rates as well as are advance & estimated taxes computed each quarter for India and US respectively. We have ensured that for those of you this does apply to, they are shows as separate line items in the EL. (Please note that this part of the letter is optional, however by signing it you will ease the process).
We would like to thank the clients who got back to us with feedback about processes and customer service (such as streamlining notices) advance tax numbers especially those that are predictable. Keep the feedback coming, because it’s just what we need to grow in a direction that takes you along with us.
-Prabha Srinivasan and the Ventura Pranas Team.
Second PPP Application
We are now helping clients with their second PPP application. If you require help with this, now is the right time to get in touch with us. The process is a lot simpler for this round, and with your financial statements run on a quarter-by-quarter basis, we could walk you through this.
If you do require our assistance for this, we ask that you gather the following paperwork:
- Driver License for business owners.
- Void Check (image must show the check horizontally).
- Addendum A (control of Interest in other firm if any).
- Form 940 from 2019.
- Bank Statements for all of 2020.
- Proof of active conduct of business before the pandemic hit (this may vary from lender to lender).
- 2019 Tax return copy of the entity applying for the loan.
- Your PPP SBA Loan account number for the 1st round.
- Need to prove Quarterly loss in revenue in 2020 compared to 2019 by mentioning quarterly sales amount for both years. Therefore it would serve you best to get your 2020 books accounted ASAP and be able to produce a Quarterly financial statement pulled for 2020 and 2019, showing a comparison Year-On-Year.
- The PPP II loan amount is determined based on the 2019 Form 940 plus health Insurance, Retirement benefits, State and Local taxes after adjusting wages in excess of $ 100,000/ year. So make sure all your payroll reports (quarterly and annual) are kept ready.
If you work with ADP or Paychex you should have easy access to this.If Ventura Pranas handles your books we should be able to pull 8 and 9 quite easily for you.
As always if you have any further questions do not hesitate to contact us at firstname.lastname@example.org.
Highlights of the $900 Billion COVID-19 Relief Bill
“Highlights” might make you believe this is a brief list, but we’re here to breakdown some of the fine-print, and that has resulted in a long list of points to note. Here’s what you need to know about the $900 Billion Covid-19 Relief Bill signed into law on December 27, 2020.
- Stimulus Payments to Individuals: Stimulus checks could be sent out as early as January 2021.
- Economic Impact Payments (EIP): The bill includes a second round of EIPs for qualifying Americans.
- The IRS will use the data it already has in its system to begin making payments at the end of December 2020 through the first two weeks of January 2021. If the IRS has your direct deposit information, you will receive a payment that way. If it does not, you will receive your payment as a check or debit card in the mail. If you are eligible but haven’t received your check for any reason, you can claim the payment when you file your 2020 taxes in the spring of 2021.
- In regards to eligibility, any person who has a valid work-eligible Social Security number (SSN), is not considered as a dependent of someone else and whose adjusted gross income (AGI) does not exceed certain thresholds (see below) is eligible to receive the credit.
This means workers, those receiving veterans' benefits, Social Security beneficiaries and others are all eligible.
Spouses of military members are eligible without an SSN.
An adopted child can use an Adoption Tax Identification Number to be eligible.
- Subject to phaseout rules, individuals will receive a maximum of $600 and married couples filing joint tax returns will receive a maximum of $1,200. An additional $600 per qualifying child will also be paid through the stimulus benefit. These payments will be treated as an advance rebate of a 2020 tax credit. The phaseout range begins (based on 2019 adjusted gross income ("AGI")) at $75,000 for individuals and $150,000 for joint filers. For those above this income level, your tax rebate amount will be reduced by $5 for each $100 your AGI exceeds the above thresholds.
- An individual without children will not receive any rebate if their AGI exceeds $87,000.
- A couple without children will not receive any rebate if their AGI exceeds $174,000.
- A family of four will not receive any rebate if their AGI exceeds $198,000.
- The IRS will use the same methodology for calculating payments as it did for the first round of economic impact payments.
- Unless obtained by fraud, rebate checks do not need to be repaid. If an individual experienced an income loss in 2020, or if they have an increase in family size, they may be able to claim an additional credit of the difference when the individual files their 2020 tax federal income tax return in spring of 2021.
- If you are eligible and the IRS does not have your direct deposit information, you will receive your payment as a paper check or a debit card as long as the IRS has your address. If the IRS does not have updated contact information for you, you can claim the payment when you file a tax return in spring 2021.
- Someone who is claimed as a dependent on another taxpayer’s tax return is not eligible to receive the $600 refund check themselves. Children 17 and older are not eligible for the $600 per child tax credit.
- For those with taxable income, you will need to file a tax return for the 2020 tax year, which you can do during the coming filing season that is expected to begin in late January and end on April 15, 2021. Those with little or no taxable income are encouraged to use the IRS’ free file program.
- Other than Social Security beneficiaries (retirement and disability), railroad retirees and those receiving veterans' benefits, individuals with no taxable income will be able to file a simple form provided by the IRS specifically for the purpose of receiving the rebate check.
- Social Security retirement and disability beneficiaries, railroad retirees and those receiving veterans' benefits do not need to file to receive their rebate. The IRS has worked directly with the Social Security Administration, Railroad Retirement Board and the Veterans Administration to obtain information needed to send out the rebate checks the same way benefits are paid.
- The credit is not taxable, consistent with other refundable tax credits.
- The rebate is considered a tax refund and is not counted towards eligibility for federal programs for both income and asset test purposes. The rebate checks are not subject to the majority of offsets, including student debt and state debts. The only administrative offset that will be enforced applies to those who are subject to a child support garnishment court order.
- A family with a child born in 2020 is eligible for the $600 per child rebate amount (assuming all other requirements are satisfied). The IRS will calculate the payment based on the most recent tax data in its system. If a child was born since the family’s last filing, the family will not automatically receive the $600 rebate amount for the child born in 2020. To receive the credit the family can claim the $600 credit on their 2020 tax return filing made in spring 2021.
- If you believe you are eligible for an economic impact payment but did not receive a round one or round two payment, you will have the opportunity to claim the payment on your 2020 tax return. This year’s tax forms will provide a place for individuals to claim the payments. If you don’t normally file taxes and are eligible for a payment, make sure to file a return this spring to claim the payments.
- The IRS has not announced the exact date the coming filing season will begin, but it typically begins near the end of January. If you need to update your information by filing your tax return, keep an eye out for an IRS announcement about the start of the filing season.
- Individuals can claim the payment by filing a simple tax return when the tax filing season opens in late January 2021.
- Unemployment assistance: For those who are unemployed, the pandemic unemployment insurance program will be extended by 16 weeks. Supplemental federal unemployment benefits of $300 per week will continue into April 2021 instead of ending in December.
- Rental assistance: The current CDC eviction moratorium will be extended until January 31, 2021.
- Student loans: Extension of student loan forbearance provisions created in CARES and extended by executive order, from the current expiration date of Jan. 31, 2021 through April 1, 2021.
- NATP will continue to monitor the rollout of this new legislation and keep you informed.
- Federal Unemployment Benefits: According to the Bill, Federal unemployment insurance benefits will be extended for ten weeks through mid-March 2021 with a $300 supplement payment per week.
If you have questions or need further assistance, get in touch with us at email@example.com.
You Ask, We Answer
What is QSBS?
This is a special provision under section 1202 that the IRS has enacted providing incentives particularly to entrepreneurs in path breaking fields to benefit from capital gains exemptions in the event of an exit in the future. The term QSBS stands for Qualified Small Business Stock.
Therefore one has to be the owner of this stock to qualify.
Do I have to be a founder to qualify or can I also be an employee?
You can be both as long as you own the stock outright for 5 years and meet some of the conditions of the section
How much of a tax break does it give?
Higher of $10MM during the lifetime sales of this stock or 10 times basis.
Is it only a fed law or a state law?
It is a federal section but most states comply. There are exceptions where some states do not. If the state complies then the gains are also exempt from state tax. If a state does not then there will be a tax at the state level although not at the federal level.
- So if I am thinking of starting a new company, I should seriously consider the possibility of making sure my stock is QSBS eligible?
- Which states comply, and which don’t?
The following states do not comply: Alabama, California, Mississippi, Pennsylvania and Wisconsin
All other do comply.
Which businesses are eligible for QSBS?
I.R.C. § 1202(e)(3) Qualified Trade Or Business
For purposes of this subsection, the term “qualified trade or business” means any trade or business other than:
I.R.C. § 1202(e)(3)(A) — any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.
I.R.C. § 1202(e)(3)(B) — any banking, insurance, financing, leasing, investing or similar business.
I.R.C. § 1202(e)(3)(C) — any farming business (including the business of raising or harvesting trees).
I.R.C. § 1202(e)(3)(D) — any business involving the production or extraction of products of a character with respect to which a deduction is allowable under section 613 or 613A.
I.R.C. § 1202(e)(3)(E) — any business of operating a hotel, motel, restaurant, or similar business.
- Will the operations in India count towards the QSBS testing?
Yes, if the Indian operation is set up as a subsidiary of the US parent entity, then subsidiary operations should sound towards the 80% activity test.
- Does it make sense when I start a company in the US with India operations to set them up as a parent – US sub. Will I get QSBS benefits if my US and India operations are brother – sister entities?
Yes it does make sense to set up India as a sub as the provisions of section1 202 specifically cover this aspect whereas a brother-sister entity is not.
What entities qualify for QSBS?
C corps only. If you incorporate as an LLC and later want to convert to a C corp can be done through a 1045 exchange and certain cool-off period requirements.
What is the holding period required?
What is the asset limitation for a QSBS business?
Is the exemption 100% no matter when the US entity is incorporated or does it vary?
It does vary. Most new companies qualify.
In the case of QSBS stock acquired after 2020 the exemption is 100% of the gains subject to the limits of the section namely $10MM or 10 times basis.
If the company was incorporated earlier and stock acquired earlier than 2020 the % eligible for the exemption under the section can be lower.
If I’m an Indian citizen, can I also incorporate a QSBS entity in the US?
Yes you may but you may not be able to get the entire QSBS benefit if you are an Indian tax resident as you might still be subject to capital gains tax at home (as in India). You might have to do some advanced planning to see how to maximise the QSBS benefit.
If I have incorporated as an LLC and I want to convert to QSBS, is that possible?
Yes, it can be done as a 1045 exchange and certain cool-off period conditions. If you have this situation you should talk to your advisor ASAP so that the conversion can be done sooner than later.
What is considered a basis for QSBS exempt gains calculations?
Original investment in the acquisition of the stock
Do preference-shares issues by the same company count towards QSBS?
What about convertible debt?
Yes, preference-shares issued will count towards QSBS. The convertible debt will not be considered towards QSBS until conversion happens.
Upon conversion to stock it will be considered as the QSBS and the holding period starts from the date of conversion.
Is an 83(b) election required for QSBS benefit?
It is not a requirement to tap into QSBS benefits. The election allows you to count the clock towards the 5 years from the day you are granted the shares although you might exercise later. Therefore, in the event you exercise and hold for 5 years the filing or nonfiling of the 83(b) will not have a bearing on the QSBS eligibility.
If I am a married filing joint filer does that mean my wife and I could each qualify for $10MM in exemptions?
No, it is only $10MM for married filing joint filers.
If I gift some of my QSBS stock, can I get a multiplier on the $10MM or 10 times basis?
Yes. Gifts are considered eligible transfers and yes in that case transferees get the QSBS benefit.
It is quite common for US shareholders to set up irrevocable trusts for their kids to get this multiplier effect.
Parallel Universes Story
(Please note that the following is simply a case study. Any references to names and situations are entirely coincidental)
In this issue of Parallel Universes (similar situation, different residency), we address exits from a company with relation to QSBS eligibility. Consider an Indian citizen living in the US vs a US Citizen living in India. How is the outcome dramatically different for the Indian citizen in the US on an H1B visa (resident of the US) Vs a Citizen of the US (resident of India)?
Rahul went on an H1B to the US a few years ago after his MBA. He’s an Indian citizen and got an offer right out of business school to work at a technology product firm in the US in 2012. He was issued stock options in the company, but he didn’t know too much about stock options at the time, and he didn’t think anything would come of it. Still, the job offer seemed full of growth opportunities and he wanted to move to the US, so he took the offer. At the young age of 24, his future looked bright.
Govind had been working in the US for over 10 years at the same technology product firm, and in fact he founded the company and ran it successfully. He is from India, and since his mother is elderly, he has been wanting to spend more time with her. Govind is in his late 40s, with a wife and son in the US. His mother didn't want to move to the US, so when Govind was given the responsibility of heading the subsidiary out of India, it aligned with his personal goals to be closer to his mother. He and his wife moved to India in 2012 and became tax residents, while his son started school in India.
8 years later in 2020, the logistics firm is making a partial exit. Both Rahul and Govind are eligible to receive proceeds for the sale of a percentage of stocks (qualified small business benefit – or QSBS- which is an entrepreneur friendly benefit in the US that allows for the greater of $10 million or 10 times basis in gains as tax exempt when you exit).
Rahul is not a US citizen, but he’s a US resident now so he’s both liable for US taxes as also any benefits under the tax code that would otherwise apply to Citizens. When he makes his exit, he gets $1MM dollars and it’s all tax exempt. Govind is eligible to sell a proportionate percentage of his stock amounting to $5MM (as he was the founder his stake was far higher than Rahul’s), but because he’s an Indian resident he loses approximately 28.5% in taxes payable to India. When Govind files his returns, he won’t have to pay anything to the US government as he can invoke the QSBS provisions. However, because he’s an Indian resident, he won’t get the benefit on a world wide basis. Granted he can try to reinvest some of the proceeds in India under section 54F and avail an exemption from capital gains.
Govind makes peace with this, because being with his mother was ultimately more important to him, but how could he have done things differently? There are opportunities, even for Govind, to have planned his residency better from a FEMA and an income tax angle so when life changing opportunities come along, he would have done things differently. In Govind’s specific case, his son became a resident of the US to pursue college, so he managed to pass some of this amount by gifting it to his son and still took advantage of the QSBS benefit partially.
We are looking to staff our Los Angeles office in California and we have a variety of positions open in the accounting and administrative space. Before we put out notices, we wanted to throw this open to our own network. If you know anyone in the public accounting space in the US (working in US time zones is essential), do ask them to get in touch with us. It isn’t critical that the candidate is in LA, although it certainly is an advantage. The positions range from temp to full time. The primary role that needs fulfillment is assisting the office head, which involves tax preparation, review and finalization, in addition to taking calls with clients and interfacing with them.
For those who are interested, send in your resume and a brief about why you’d like to work at Ventura Pranas to firstname.lastname@example.org
Prabha’s Office Location
Prabha Srinivasan, our Director, is scheduled to make a trip to the US in February. She is currently in Chennai, and will be available at our Santa Monica office between February 20, 2021 and April 20, 2021.
To speak with Prabha, get in touch with her scheduling team at email@example.com and tell us in brief what you would like to discuss with her. Alternatilvely, email Prabha directly at firstname.lastname@example.org or send her a message via Whatsapp at +919940095879.