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Navigating Taxes for the Self-Employed

If you’re one of the many people who work as an independent contractor or self-employed individual, you’ve probably wondered if you’re doing the right thing when it comes to your tax returns.  Are there tax benefits you’re missing out on?  Should you form a business entity?  These are common questions and the answers will vary depending on circumstances.  Let’s explore some basic guidelines for dealing with taxes when you’re self-employed. What’s deductible? I tell my clients that nearly every dollar you spend in relation to your business is tax deductible in some fashion.  There are three keys to remember for staying out of trouble: Expenses should be ordinary and necessary. You can’t deduct personal expenses. Don’t spend more money than […]

Qualified Small Business Stock Is An Often Overlooked Tax Windfall

Editor’s Note: This post was originally published on February 26, 2015. Given recent changes to the tax code, we are updating and re-publishing it. It’s no secret that small businesses have long been the growth engine of the US economy. With that in mind, Congress has packed the tax code with lots of breaks for those investing in small companies. One of the best, but little known breaks became permanent with the passage of the Protecting Americans from Tax Hikes (PATH) Act on December 18, 2015. I am referring to qualified small business stock (QSBS), a big reason for venture capitalists, angel investors, and entrepreneurs to smile in 2016 and beyond. What is QSBS? Like all things in tax, the IRS […]

Qualified Small Business Stock Is An Often Overlooked Tax Windfall

It’s no secret that small businesses have long been the growth engine of the US economy. With that in mind, over the years Congress has packed the tax code with lots of breaks for those investing in small business. One of the best breaks around — and no secret to experienced angel and venture capital investors in Silicon Valley — is qualified small business stock (QSBS). What Is QSBS? Like all things in tax, the IRS definition of qualified small business  can get complicated, and it changes depending on the section of the tax code in question. For our purposes, we’ll be focusing on Section 1202 of the Internal Revenue Code (IRC). To qualify as QSBS under Section 1202: The […]

Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 3

Wrapping It All Up: Tax Strategies In this third and final part to our series on the taxation of stock options and restricted stock units (RSUs), we’ll outline some strategies you can use to achieve better tax consequences. While the list below is definitely not comprehensive, it does cover some impactful strategies. Remember that — based on the various types of taxes described in Part 1 of this series — through good tax planning, you may be able to achieve a 19.6% improvement in your federal taxation rate. This improvement represents the difference between the federal ordinary income tax at 39.6% and the long-term capital gains rate at 20%. Early-Stage ISO Exercise and Hold While this may seem like it […]

Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 2

Applying the Tax Law to Common Employee Stock Situations In the first part of this three-part series, we discussed the four main taxes relevant to individuals. Now we’ll apply that knowledge to show what taxes would be incurred in five common situations faced by employees who work for venture-capital-backed companies. 1: Angel Investment or Founder Stock For many start-up companies, the first money in comes from angel investors or the founders themselves in exchange for preferred and common stock, respectively. In exchange for cash, investors (perhaps through a limited partnership) and founders receive shares of stock. The capital gains holding clock starts with the purchase of these shares, and it stops upon disposition of the stock. The shareholder realizes a […]

Improving Tax Results for Your Stock Option or Restricted Stock Grant, Part 1

Silicon Valley is again abuzz with stock option fever (and the option’s cousin, restricted stock units) due to several years of very successful local IPOs — but along with financial success often comes anxiety about taxes. To help assuage its clients’ fears, Wealthfront has asked me to write a three-part series that outlines what tax rates apply to individuals, how different types of stock options and restricted stock units (RSUs) are taxed, and some strategies to achieve improved tax results. Part 1: An Overview of Personal Tax Rates If you’ve already filed your 2013 tax returns, you may have noticed that your tax rates went up quite a bit from 2012. This is likely true if you reported income in […]