I'm going to tell this story as if it happened to you.

You're hired as an employee at Start-up X, VC backed, whippersnapper CEO, SAAS industry, Uber for X business model, etc.  Along with a salary are 1,000 incentive stock options (ISOs). Woo hoo, you're on the road to growing an amazing business and participating in the equity (ownership) of the business. There are many 'decision trees' you'll want to consider but one of them is whether to early exercise your ISOs, and with that decision, whether to file an 83(b) election.

(For the purposes of this blog I'm going to assume you've done all your homework and are familiar with the terms related to stock options. If you aren't, by all means join the narrative, but you may have to backfill for understanding some of the terms.)

With the grant of the ISOs to you comes an exercise price (the price at which you can pay to convert the ISOs into shares of stock), a vesting schedule (the period of time you must stay an employee of the company to actually take ownership of any equity) and an expiration date (N/A for this story...but basically the last day you have to exercise the ISO, aka the last day to convert the ISOs into shares).

So, on the grant date of your ISOs, the exercise price was the same price as the Fair Market Value (FMV) of the company stock. The FMV of the company stock was determined through a 409A valuation performed by a 3rd party (but could have been determined by the Board, either way, the option grant exercise price was issued at the FMV to attract you and others like you to join Start-up X).

On the grant date, when you receive the 1,000 ISOs, you contact HR and let them know you want to early exercise. They let you know that yes, indeed, Start-up X does let employees early exercise (not all companies do). HR says you have to complete a form requesting early exercise and pay Start-up X $1,000 ($1 exercise price * 1,000 ISOs) to receive your 1,000 'restricted' shares. 

(Why 'restricted' shares? Because your ISOs/shares have not vested yet. Your vesting schedule is 50% year 1 and 50% year 2. So, technically, if you don't stay as an employee for 2 years then you wouldn't 'vest' your stock ownership).

Cool, but the timer is ticking. You have 30 days from the early exercise transaction date to file an 83(b) election.

You've already decided that you think Start-up X stock is going 'to the moon' so you send the Internal Revenue Service (IRS) the following information postmarked within 30 days of the early exercise transaction:

• 83(b) election
  • a letter stating your intent to make the 83(b) election, including:
    • your name and taxpayer identification number and address
    • description of shares
    • the date of the early exercise transaction
    • the amount paid for the shares
    • the number of restricted shares granted
    • the fair market value of the restricted shares on the date of the early exercise transaction.

• copy of ISO Agreement
• copy of payment receipts, proving your payments for the 'restricted' shares
• valuation proof from company - could be a letter from HR of Start-up X stating the FMV based on the 409A valuation.

Once you filed your 83(b) election, you are now subject to income tax on the difference between the  exercise price of your 'restricted' shares and FMV of the shares at the date of the early exercise. The cool thing here is that the FMV was equal to the exercise price on that date so you actually don't owe any income tax on the transaction in your case. Score.

(It is important to note that an 83(b) election is irrevocable. Once you have filed your election, you cannot change your mind.)

So, then what happened next?

In the year of exercise you received a form 3921 to help you complete your tax return. It had the following info:

• grant date of the ISO
• exercise date
• exercise price
• FMV on exercise date
• number of shares exercised.

You paid no income tax because the exercise price and FMV were both $1 on the date you early exercised (again, score).

You held your shares for 2 years. 50% were released from restriction after year 1 and the remaining 50% of the shares were released from restriction after year 2. Once you were fully vested, the company had already raised 2 more funding rounds and the FMV of the shares were now $10.

At that point you chose to sell your shares (post vesting) and made $9 per share. You paid long term capital gains tax on $9,000 ($10 FMV at sale date - $1 Cost basis from early exercise) * 1,000 shares = $9,000.

Why was it beneficial that you filed an 83(b) election?

• You didn't have to pay ordinary income tax (and AMT) on the date of early exercise.
• You locked in your cost basis for the restricted shares on the date of the ISO early exercise, with the value of the shares increasing after that date.
• You deferred paying capital gains taxes on the restricted shares until you sold them.
• You paid long term capital gains tax vs. short term capital gains tax.
• You avoided the 10% penalty tax that is imposed on employees who sell restricted shares or stock within one year of vesting.

So, was it a good choice? Well, for you, within these precise sets of circumstances, yes, it was the most tax advantaged choice you could have made. Would it be in all scenarios? No. Tweak any one of the many metrics and the outcome would change. The most existential metric would be if Start-up X died a year later then you would have paid $1,000 to early exercise your ISOs and they'd be worth nothing.

There is no moral to this story other than to educate yourself and make the choices that make the most sense for you. Good luck and God bless.

Hey, you know what's important when it comes to taxes? Deductions. And when it comes to deductions, one of the more common ones is meals. You know, food, sustenance, social libation, the good stuff. But there's a lot of confusion out there about how you can deduct meals under the current tax regime, so let me break it down for you.

First off, if you're a business owner, you can deduct 50% of your meal expenses if they're business-related. That means you gotta be there (or one of your employees) and there's gotta be a good reason for the meal. Like, you're meeting with a client, or you're trying to get a new contract, or you're actually doing work during the meal, that kind of thing.

Now, the cost of the meal has to be reasonable, too. If you're taking somebody out for dinner at a fancy steakhouse and dropping a grand, the IRS may want to peek at something like that to make sure it's kosher. But if it's reasonable, you're good to go.

Here's the thing, though: you can't just claim meals willy-nilly. You need to keep records of what you spent, who you were with, and why you were there. And that means keeping receipts. But don't worry, you don't have to keep every single crumpled-up piece of paper in your wallet. Take a pic of your receipt. There are apps and software out there that make it easy to upload the pic, provide context and keep everything organized (www.hubdoc.com and www.dext.com do this).

Now, the old 2022 'deduct 100% at restaurants' thing is no longer happening. There are, however, some situations where you can deduct 100% of your meal expenses. Like if you're traveling for work and the meal is included in your travel expenses, or if you're hosting a company party or a fundraising event.

And, as a business owner, if you provide meals to your employees, that can be deducted 100% but it's important to remember that it's considered taxable income to your employees, so you'll need to report it on their W-2s (might want to make this policy clear if you go this route).

Finally, there's a flat rate method (aka per diem method, more info at www.gsa.gov) you can use to deduct meals without having to keep receipts for every single one. There are limits and rules you need to follow, so make sure you do your research.

So there you have it, folks. Deducting meals isn't too complicated and can be a great way to save on your taxes, but you gotta make sure you're doing it right. Keep good records, know the rules, and don't go too crazy with the lobster and caviar. And remember, when it comes to taxes, it's always better to be safe than sorry. Now go out there and get yourself a good meal, but make sure it's for business!"

I just read an article on Farnum Street about habits vs. goals. It got me thinking. I've always been attracted to and somewhat unsatisfied by goals. As a modern day hyper-example, I watched the Rock/Siri 3.5 minute commercial the other day. The Rock, working through a series of 'life goals', uses Siri to accomplish them all in dramatic fashion. While this 3.5 minutes is somewhat exhilarating and entertaining, at the end it struck me as relatively self-serving and meaningless.

So, are all goals like this? I don't know, I don't think so. But the idea that cultivating habits is actually more important/fulfilling than setting goals is an interesting one. After all, habits are what you do everyday. There are certain things we do or ways we think that are how we approach life everyday. And these, of course, will have an impact on the quality of our lives.

But I'm also thinking that it doesn't have to be an either/or thing. We can have big, audacious goals, but then use habits to get there. Or we can have good habits and then set goals to maintain and/or fully experience the fruits of those habits.

The article also got me thinking about what habits I have. Do I have good habits? And can I help other people develop good habits? Or is that up to them?

As a parent and as an accountant I have people either looking at what I do or listening to what I say to do. If I have terrible habits but point my kids in the right direction (i.e. do what I say not what I do) is this effective? OR do we actually have to live out our habits (and then can we say whatever the heck we want?) to be effectively modeling a fulfilling life for our children, clients, employees, etc.

I'll be exploring this and iterations on this for the rest of my life probably...all the while attempting to hone/develop/keep good habits AND set positive/fulfilling/exciting goals.

When you hit the age 70 1/2, the next calendar year you are required to withdraw from your IRA - it is called a Required Minimum Distribution (RMD).

You may know this, but did you also know that you can use those RMDs to give to charity? While getting a credit on your tax return?

When you instruct your IRA holding institution (TDAmertirade, Fideltity, etc.) to distribute directly to qualified charities, this results in a Qualified Charitable Distribution (QCD).

So, here's the scenario: I turned 70.5 on Oct. 5th, 2016 - which would make my birthday what? (April 5th) And now because of this, in 2017, I need to withdraw 2.7% of the total amount of my traditional IRA as my RMD. Assuming I have $100K sitting in my nice Fidelity IRA I have to take $2,700. BUT what if I don't want or need to take it but instead want to give it to a qualifying charity? (very important:the funds have to go directly from Fidelity to the charity. If not, doesn't work, sorry)

So, what I do is instruct Fidelity to wire or ACH the funds to the qualifying charity in the amount of $2,700 (equal to the amount I'm required to take due to RMD).

So, now I have a funny acronym salad. I've made a QCD in the same amount as my RMD, as relates to my IRA. Fun stuff, huh?

But here's the deal: At the end of 2017 I'll get a 1099-R noting that I've withdrawn from my IRA and normally, I'd report this on my tax return and pay ordinary income taxes on this amount. However, because I made a QCD for the same amount (it should be written on your 1099-R - it may not be, though, and if this is the case you'll have to ask the institution to redo it and/or give you a letter noting you've made a QCD) I am allowed to report $0 on my tax return. Nothing on my sch. A, nope, RIGHT ON THE 1040.

This is something, like I said, you probably do not know about. But if this applies to you, your parents or a loved one, let them know because it can be a massive tax savings for you WHILE supporting your favorite qualifying charities at the same time (for something you may already do). ​

G to the izzO, P to the....yah, okay, in case you missed it, last Friday, June 24, 2016, the GOP (Republicans) released their tax proposal. You probably haven't heard anything about it because you've been commenting on Brexit and/or Trump vs. Hillary (both of their tax plans differ from the GOP plan).

The plan, called both A Better Way and The Blueprint, if you cut through the salesy-ness of it, is a breath of fresh air. It is simple and easy to understand. I read through a bunch of it, focusing mainly on the individual and the corporate changes. Below are some of my notes on what I understood of some of their proposals:

​Where are we? Post-tax season. 2Q16 estimated tax payments coming up in the next couple weeks. Still Spring but feels like Summer in NYC (pretty nice). This is a perfect season for CPE. CPAAcademy.com is a pretty decent 'free' source of CPE education hours. 

Bookkeeping issues - machine learning & AI - is it here yet? Yes and no. The biggies (QB, Xero) are still...'analog'...so to speak...BUT in the area of personal finance there is an interesting entry into the space in an app called Penny. They've only been able to capture like 6 categories, so far, but the idea and execution: the practical analysis and helpful insights into your finances, is useful. If applied to business (and more accounts/categories) this would be a pretty great tool for not only small businesses but also for CPAs/Bookkeepers to gain key insights into the finances of the business. Frankly, I'm not sure how nimble the elephants in the room can be on this: Quickbooks & Xero...because their offerings are so core to the General ledger but it wouldn't surprise me if a business 'Penny' came in as an 'add-on' to these guys and possibly as a stand-alone accounting software.

What else? We also have been experimenting with an AI calendar 'virtual assistant'. Note, this is specifically for calendar scheduling, not anything else. The idea is that they handle the mundane back & forth that inevitably happen when 2 or more people schedule a meeting and post everything to everyone's digital calendar. I've used both Genee and Amy (x.ai). Genee is better at multiple person meetings, I've experienced, whereas Amy can take direct commands (like mark x time on my calendar for me to y) without involving others. Both are nascent and will take some improvement before they are as good as a person but it is interesting and kind of fun.

I think the 'Per Diem' may be the most misunderstood concept in all of tax reporting (with auto mileage being a close second). There are some basic rules that apply to everyone, but then there are random exceptions. 

The best way to start out is to understand what a 'Per Diem' is. Literally, it means 'Per Day'. But for tax reporting purposes, the 'Per Diem' method of reporting is basically an optional way to report travel & meals/incidental (M/I) expenses on a 'Per Day' basis (the other reporting option is to report actual dollars spent).

The 2 classifications of Per Diems are:

1. Meals & Incidentals (M/I) - note: it isn't the usual pairing of Meals & Entertainment. This is a reporting option for only meals & incidentals while traveling.
2. Travel - note: the travel Per Diem is only available to organizations filing for their employees' travel, not for sole proprietors or Single Member LLC's reporting on Sch. C.

M/I Per Diem
The M/I Per Diem reporting amounts are based on the # of days traveling and where you happen to be eating while traveling. - www.GSA.gov is the authority on the rates you can use, it has a list of all the rates for each state, for reference.

Exception: if your meals are paid for by someone else while traveling, you can still use the Per Diem option of reporting but would have to exclude the amount of the meal provided for you in the calculation (for example, you would report a % of the allowable Per Diem rate to only include the other 2 meals that day)

Exception: The first and last day you travel, the Per Diem is generally calculated at 75% of the full rate. Refer to General Services Administration (GSA) to obtain the specific Per Diem rates. If you are traveling abroad, you will be able to find your Per Diem rate by visiting the State Department website.

Note: whether you report M/I Per Diem or actual M/I expenses, they are still only 50% deductible.

Travel Per Diem
The travel Per Diem reporting option is also based on days traveling and where you happen to be traveling. However, again, not for sole proprietors, they must use actual $ spent.

 The best way to see this is by using an example:

You are an employee of Google. You are from Chicago. You go to a conference in San Francisco for 3 days.

• Day 1 travel to SF
• Day 2 conference day
• Day 3 travel home.

You buy airline tickets, hotel and Uber/taxi transportation for your trip. In total you spend:

• $750 airfare
• $600 hotel
• $200 taxi/uber

Your actual travel total amount is: $1,550

While traveling you also spend on M/I (there are no meals provided at the conference):

• Day 1 $10 starbucks
• Day 2 $5 starbucks for breakfast, $8 McDs for lunch and $10 Taco Bell for dinner
• Day 3 $10 starbucks

The actual M/I total for your trip is: $43

So, what Per Diem reporting options do you have, as an employee of Google, for getting reimbursed (that Google will then report on their taxes)?

The IRS will never, unsolicited, call you on the phone. Period. 

The IRS will never email you. Period.

The IRS will never message you. Period.

If this happens to you, do not panic. But do get up to speed on how to report it using this link:
​https://www.irs.gov/uac/Report-Phishing

Well, this is a first for me. The guidance from NYC is that some C-Corp. Tax returns won't be ready by the filing deadline (March 15th). This will mean that we'll have to file extensions for businesses that really don't need them. Not an insurmountable explanation, but it is what it is. For more, check this out: ​http://www.nysscpa.org/news/publications/thedaily/blog-posts/corporate-tax-forms-for-nyc-nys-missing-in-action-snarls-filing-process-020216

This is one of the most bizarre NYC winters I've lived through, I think. We had Snowmaggeddon just a few weeks ago and today is 52 degrees and raining/blowing cats & dogs. These are some pics from lunch time:

Aside from being a bit scary, it was somewhat exhilarating. The wind gusts were so powerful and the rain so ridiculous it was really just funny.

It coincides with another tumultuous time, tax season. 1099-Misc.'s have been distributed (for the most part) but now is the time for Corp. returns (due March 15, 2016). We can guarantee a timely filing if your support docs are to us by the end of Feburary, but after that we can't guarantee. 

And the next push after that is LLCs, Partnerships & Individuals on April 18th, 2016 (an extra few days this year). We'll need that info by the end of March to guarantee a timely filing.

Either way, stay dry, if you can and enjoy the weather.

The IRS issued this statement regarding the temporary efiling outage: 
https://www.irs.gov/uac/Newsroom/IRS-Statement-on-Experiencing-Systems-Outage

Both New York State and IRS opened for e-filing yesterday. Which means, we're open for business to help you with your tax filings. Reach out to david@tunstallorg.com to get started.

Additionally, the deadline for filing this year is April 18th (not the traditional date of April 15th).

https://www.irs.gov/uac/Newsroom/2016-Tax-Season-Opens-Jan-19-for-Nations-Taxpayers

If you have minimum wage workers this is no secret to you but for everyone else, the minimum wages for workers went up starting in 2016.

NYS minimum wage is now $9/hour (vs. $8.75 in 2015) for most workers. If you work in a restaurant and make tips, the minimum wage is now $7.50/hour but if you're working "overtime" then the minimum is $12/hour. Additionally, there is is meal allowance of $2.50/meal.

The highlights are here:
Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) went to:

• 54 cents per mile for business miles driven, down from 57.5 cents for 2015 (-3.5 cents/mile).
• 19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015 (-4 cents/mile)
• 14 cents per mile driven in service of charitable organizations. Rate is based on statute.

​for more click here

I got cap. gains, I got no pain...

Remember that song? It was Insane Clown Posse, right? No, wait, it was the marijuana guys, right? Ah, yes *Google Search*: Cypress Hill. Actually, I may have mis-remembered the lyrics a little bit but the substance of the mangled lyrics remain intact, the tax rates on Capital Gains are relatively insane. Relative to what? and Why? Let me explain...

Remember in 2012, all the people (Democrats) were incredulous about the wealth of Mitt Romney? They were shocked (shocked) that Mitt Romney paid a lower tax rate than someone in the middle class. There was much outrage and yet after he released his tax returns it was pretty clear why his tax rate was so low even though he made so much money: he owns a lot of assets that pay him Dividends and he sold bunch of assets that resulted in Capital Gains. Those 2 types of income made up most of his taxable income (poor guy didn't even deduct his "speaking fee" expenses...lotta good that did him) and they are treated differently than Ordinary Income.

The point here is that contained within our current tax code there is a character difference between different types of income. For example, the progressive Federal tax rates most people think about:
Taxable Income of $0-$9,224 = 10% tax rate*
Taxable Income of $9,225-$37,449 = 15% tax rate*
Taxable Income of $37,450-$90,749 = 25% tax rate*
Taxable Income of $90,750-$189,299 = 28% tax rate*
Taxable Income of $189,300-$411,499 = 33% tax rate*
Taxable Income of $411,500-$413,199 = 35% tax rate*
Taxable Income of over $413,200 = 39.6% tax rate*
*the taxable income thresholds in this example are for Unmarried people.

Those rates only apply to Ordinary Income and not to Capital Gains.

Capital Gains rates look like this:
Taxpayers (unmarried and married) in the 10-15% tax bracket pay 0% tax on Capital Gains.
Taxpayers in the 25%, 28%, 33% or 35% tax bracket pay only 15% tax on Capital Gains.
Taxpayers in the 39.6% tax bracket pay only 20% tax on Capital Gains.

Now, do you see why Capital Gains tax rates are relatively insane?

If Mitt Romney had simply said "Don't hate the player, hate the game" do you think he would have been able to mute some of the outrage over his relatively low tax rate?? I guess we'll never know.

Some other notes:
Unrecaptured Gain on Real Estate (sec. 1250 gain) pays 25% tax on gain.
Collectibles and qualified business stock gains result in 28% capital gains tax.

If you have any other questions on Capital Gains (line 13 of the Form 1040), please reach out to info@tunstallorg.com

Here are the 2015/2016 updates to salary deferral limits:

• Maximum to 401(k), 403(b), 457 and Thrift plans: $18,000 (over 50 can add $6,000)
• Maximum to  SIMPLE 401(k) and SIMPLE IRA: $12,500 (over 50 can add $3,000)
• Maximum to Traditional and Roth IRA: $5,500 (over 50 can add $1,000)
• Maximum to Defined Contribution Plan and SEPs: $53,000

Like many other things in the tax code, the above are subject to income limitations and thresholds:

• Annual compensation limit for determining contributions: $265,000
• SEP minimum compensation amount: $600
• Limit of Annual benefits under a Defined Benefit Plan: $210,000

And then there is the distinction of being a highly compensated employee:

• Highly compensated employee threshold is: $120,000

For more questions about retirement planning please reach out to info@tunstallorg.com

This is a great time of year for gift giving. The calendar year is about to wind down and a new one will begin. Some basic reminders:

• The total lifetime Federal exclusion for Estate & Gifts is now: $5,430,000
• The maximum Estate & Gift tax rate is: 40%
• The amount one can give to a Donee without paying a gift tax is: $14,000 (per Donee)
• The Donee (one that receives gift money) doesn't pay tax on amount received.

Happy Holidays and happy giving!

You've all seen the cute little onesies that people gift to infants that say "tax deduction". Or all the comments to parents of December babies congratulating them on their "tax deduction". Well, they're cute and humorous sentiments but the idea that children are a "tax deduction" is a myth. Well, not a myth, technically, but a misnomer. Those cute little kids aren't "tax deductions" they are actually exemptions.

The IRS code for personal tax returns, in some areas of the 1040, is one step shy of being a lottery scratch-off ticket. There are deductions, credits and exemptions; some before tax is computed, some after. The current 1040 tax return is a Rube Goldberg-esque, 100 years in the making, attempt to ensure that you aren't cheating your fellow Americans by paying less than you're supposed to in tax.

In the case of exemptions, everyone gets one (for example, if you're married, filing jointly, you automatically get 2). Additionally, if you have dependents (a status granted to those cute kids referred to earlier) you are entitled to an exemption for each of those, as well.

The personal and dependent exemption amount for 2015 tax returns is: $4,000.

Similar to itemized deductions, though, exemptions are phased out as your income reaches certain limits.

Married, filing jointly: $309,900
Head of Household: $284,050
Unmarried: $258,250
Married, filing separately: $154,950

A family of 5, earning less than $309,900, would report a $20,000 exemption amount.

Feel free to reach out with any questions regarding exemptions (line 42 on the 1040) to david@tunstallorg.com