VC Funds and Tax

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Choosing the best type of entity for a company can be a challenge.  C corporations are the norm for most emerging growth businesses, particularly those raising money from investors.  However, LLCs are becoming more widespread, even for operating businesses.  Founders may want to have the tax benefits of LLCs, which are not subject to a company-level tax (as is the case with C corporations) and may enable more tax deductions.

This potential for tax savings does not, however, come without a cost.  LLCs tend to be more complicated and expensive to setup and manage, particularly for operating businesses.  LLCs can become even more tricky for businesses that want to issue equity to incentivize employees or other service providers.  This article addresses some of the ways LLCs can use equity to incentivize service providers, and the implications of each option (pardon the pun).Continue Reading Options for Issuing Employee Equity in LLCs

Article prepared by and republished courtesy of Drew M. Young and Joseph H. Langhirt of DLA Piper; originally published here http://www.dlapiper.com/maryland-proposes-tax-credit-to-support-investment-in-cybersecurity-industry/.

Maryland Governor Martin O’Malley’s recently released proposed Fiscal Year 2014 budget provides funding to support private investment in the cybersecurity industry.

Most notably the budget proposal would provide US$3 million for a new refundable state tax credit, the CyberMaryland Investment Incentive Tax Credit Program, to generate investment in early-stage cybersecurity businesses in Maryland.

The credit would be available for taxable years beginning after December 31, 2013 and would provide a 33 percent refundable tax credit (up to a maximum of credit of US$250,000) to investors in qualifying businesses that (1) are headquartered and operated in Maryland, (2) have been in operation for five years or less, (3) have at least one full-time employee primarily engaged in development of cybersecurity products for commercial and federal markets and (4) have at least US$100,000 in contributed owner’s equity.Continue Reading Proposes tax credit to support investment in cybersecurity industry

Just a reminder to those who have Delaware corporations, your annual report and franchise tax payment are both due on March 1. At this point, you should have already received from Delaware your notification of annual report and franchise tax due, which is sent to a corporation’s registered agent in December or January of each year. Delaware requires these reports to be filed electronically.

As you will notice, there are two methods that you can use to calculate the amount of Delaware franchise tax due for your corporation (i.e., the “Authorized Shares Method” and the “Assumed Par Value Capital Method”), which result in vastly different amounts due. The default payment amount listed on your notification is set by Delaware using the Authorized Shares Method, which method will almost always result in a much high amount due for startups with limited assets. The minimum franchise tax is $75 and the maximum franchise tax is $180,000.

Franchise taxes are generally due in arrears for the prior calendar year. However, note that Delaware requires corporations owing $5,000 or more for the prior year to make estimated payments for the current (going-forward) year’s franchise tax with 40% due June 1st, 20% due by September 1st, 20% due by December 1st, and the remainder due March 1st.

Here are some examples showing how the different methods can dramatically impact the amount of Delaware franchise tax due:Continue Reading Franchise tax due March 1 for Delaware corporation: two methods of calculation, two vastly different results

Article prepared by and republished courtesy of Alan Granwell and Witold Jurewicz of DLA Piper; originally published here http://www.dlapiper.com/the-final-fatca-regulation-highlights/.

The US Treasury Department has issued the final FATCA regulations.

Although simplified and clarified, the Regulations are lengthy (544 pages) and more than 150 pages longer than the Proposed Regulations.

In drafting the Regulations, the US Treasury Department adopted a targeted, risk-based approach to implement FATCA by balancing policy considerations and administrative burdens and more fully incorporating local AML/KYC documentation practices. The Regulations detail the operational aspects of implementing FATCA – to reduce administrative burdens and clarify the interaction of the unilateral regulatory regime with the bilateral intergovernmental (IGA) regime.

Of particular importance is that the Regulations fill in many of the gaps that foreign financial institutions (FFIs) had as to how to implement FATCA. Nevertheless, FFIs, particularly global financial institutions, will have continuing challenges implementing the rules under the Regulations and IGAs within the current timelines among geographies, lines of business, clients and products.Continue Reading The final FATCA Regulations: Highlights

A friend of mine at a major investment bank sent me their market outlook for 2013.  In 2012, the world markets were up 16%.  For 2013, they are projecting:

  1. Interest rates are likely to remain low for a few years,
  2. investors should lower their return expectations, and
  3. “policy” will remain incremental in key developed and emerging markets economies.

Fom an asset class return perspective, there were six key projections:

  1. Bonds will have virtually no nominal returns for the foreseeable future.
  2. High yield and emerging market local debt will provide attractive

…
Continue Reading Equity and Bond Market Outlook 2013

Article prepared by and republished courtesy of Perrie Weiner, Patrick Hunnius and Stephanie Smith of DLA Piper; originally published here http://www.dlapiper.com/sec-staff-preview-top-hedge-fund-enforcement-trends-for-2013/.

In a recent speech before the Regulatory Compliance Association,1 Bruce Karpati, Chief of the Securities and Exchange Commission’s Enforcement Division’s Asset Management Unit, suggested where the SEC may be heading regarding hedge fund oversight in the months to come.

Mr. Karpati both highlighted the SEC’s past enforcement activity concerning hedge funds (including several cases where the SEC alleged funds fraudulently overvalued their holdings) and signaled that the SEC’s emphasis on such activity will continue.Continue Reading SEC Staff Preview Top Hedge Fund Enforcement Trends for 2013

A reminder to companies that had incentive stock option exercises in 2012, Section 6039 of the Internal Revenue Code requires a corporation to furnish a written statement to any employee or former employee who either exercised an incentive stock option during 2012 or during 2012 first transferred legal title to shares acquired under the corporation’s Section 423 employee stock purchase plan. The corporation must furnish these statements on Forms 3921 and 3922 no later than January 31, 2013.

These corporation must also file information returns providing the same information…
Continue Reading Filing deadline reminder for companies with incentive stock options; reports must be delivered by January 31

Asher Headshot - Resized.pngCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

The National Venture Capital Association (NVCA) had a good post about the implications of the new tax bill significant to the venture capital community.  Significantly, they note that this bill did not address any changes to the tax rate for “carried interest”, but they do “fully expect” carried interest tax rate increases to remain a topic of discussion as part of the larger pending tax reform discussion, although they project that discussion to be delayed until the second half of 2013.

We’ve written a number of posts about the bill…

Continue Reading Tax Changes – Implications for Venture Capital

One provision included in the fiscal cliff bill (aka the Taxpayer Relief Act of 2012), but seemingly unnoticed by the general press, was the unexpected renewal of the 100% tax exclusion for capital gains on Qualified Small Business Stock (“QSBS”). This QSBS tax exemption, which had previously expired at the end of 2011, would be extended for investments made through the end of calendar year 2013 (and would be retroactively effective for investments made in 2012). A summary of the QSBS renewal provisions covered in the fiscal cliff bill can…
Continue Reading Fiscal Cliff Bill to Renew 100% QSBS Tax Break

Article prepared by and republished courtesy of Evan Migdail of DLA Piper; originally published here http://www.dlapiper.com/congress-pulls-back-from-the-fiscal-cliff/.

Following an unprecedented New Year’s session, Congress has passed legislation, the Taxpayer Relief Act of 2012, negotiated with President Barack Obama to partially prevent the US economy from going over the fiscal cliff.  You may read the full text of the bill here.

At a cost of US$4 trillion over ten years, the main provisions are as follows:

  • The 2001 individual tax rates are made permanent, except that the highest rate, 39.6 percent, starts at US$450,000 in taxable income for married filing jointly, US$400,000 for individuals.
  • Tax rates of capital gains and dividends are set permanently at 15 percent, and 20 percent for those above the thresholds at which the individual 39.6 percent rates start.
  • The estate tax rate goes up to 40 percent with a US$5 million exemption (US$10 million for married couples).
  • The limitations on itemized deductions and personal exemptions phaseout for high earners are restored at US$250,000 for individuals and US $300,000 for married filing jointly.
  • The alternative minimum tax “patch” to keep middle class taxpayers from paying the AMT is enacted permanently (previously the patch had to be renewed yearly).
  • The Senate Finance Committee package extending most expired and expiring provisions through the end of 2013 is adopted as part of the bill.
  • Bonus depreciation at 50 percent is extended at 50 percent.
  • The payroll tax cut enacted in 2010 is allowed to expire, but long-term unemployment benefits are extended for a year.

The most important features of the compromise may relate to what is not in the bill, rather than what is enacted: i.e., business tax reform, entitlement reform and raising the debt ceiling. Many Republican members preferred to address all of the tax provisions (individual and corporate) together as part of comprehensive tax reform.Continue Reading Congress pulls back from the fiscal cliff − for the time being