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Business taxes
Learn what types of tax returns U.S.
businesses have to file and how to
substantiate them.

Patrick McKenzie
Patrick has built four soPware companies
that did business internationally. He now
works on Atlas at Stripe.

Introduction

What is tax planning?

Delaware franchise tax

Sales tax

Corporate income tax

LLC federal income tax

Taxpayer ID numbers

Informational returns

What is transfer pricing?

Audits

Tax is a moving target

Starting an internet business?

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No business owner particularly likes the

amount of work required to calculate taxes
(to say nothing of the actual amounts paid),
but calculating and paying taxes is both a
legal obligation and also a responsibility
entrepreneurs undertake in return for the
substantial support that society affords us.

Beginning entrepreneurs are sometimes

excessively scared about the tax liabilities
involved in starting a business. We want to
demystify them, so that you have a good
understanding of what you’ll be asked to
pay, roughly how much it will end up being,
and how to organize your business such that
calculating and paying taxes will be as
painless as possible.

PwC, one of the world's leading

accounting firms, is the tax and
accounting partner for Stripe Atlas. Some
of this chapter is based upon a more
detailed Atlas Tax Guide written by PwC,
which Atlas users can access.

There are many varieties of taxes in the

United States and worldwide. This guide
covers a subsection of taxes which your U.S.
corporate entity will likely have to pay.
Entrepreneurs or owners of companies may
realize income as a result of working for the
company, receiving dividends, capital gains;
make sure you also handle your personal
obligations.

As we saw in the chapter on accounting, the

entire profession of accounting exists in
large part to help you correctly figure what
taxes you owe. This brief guide is not a
substitute for the professional advice from
your accountant. Get an accountant—their
advice will almost certainly save you money
and stress.

What is tax planning?

Somewhat surprisingly to entrepreneurs,
there are oPen multiple ways to apply tax
law to the economic facts of your business.
This can result in different amount of taxes,
depending on how one applies the law.
Accountants help businesses develop a tax
position which is both compliant with the
law and which is efficient in amount of taxes
required.

Tax planning oPen starts well in advance of

the tax being due or even the transactions
being entered into. For example, given that
one wants to award employees equity in the
business (to attract desirable employees and
reward them appropriately for the hoped-for
success of the venture), one makes
consequential decisions about business
structure at incorporation, perhaps even
before employing one’s first employee. The
eventual realization of the value of that
equity, and the tax consequences for those
future employees, might happen in T to UV
years down the road!

Tax planning is legal and expected of

businesses. As judge Learned Hand wrote in
U[\], summarizing centuries of precedent:

Anyone may arrange his affairs so

that his taxes shall be as low as
possible; he is not bound to choose
that pattern which best pays the
treasury. There is not even a
patriotic duty to increase one’s
taxes. Over and over again the
Courts have said that there is
nothing sinister in so arranging
affairs as to keep taxes as low as
possible. Everyone does it, rich and
poor alike and all do right, for
nobody owes any public duty to pay
more than the law demands.

Tax agencies oPen, however, take a dim view

of abusive tax structuring, where the sole
rationale for some action of the business is
to avoid taxes, and can impose substantial
penalties when it occurs. Tax can be a very
complicated subject, which is one more
reason to have your accountant and/or
lawyer review consequential changes to
your tax strategy. They can provide you
advice on whether you’re doing something
which is mainstream in your
country/industry or something which has a
higher risk of causing your returns to be
judged insufficient by tax agencies you are
subject to.

Delaware franchise tax

Delaware, like many states, charges all
companies incorporated in Delaware a
“franchise tax.” You can think of the
franchise tax as an annual fee to renew the
registration of a corporation—in some
states, the fee is indeed called a fee.

Almost all taxes are assessed on revenue or

profit. The franchise tax is different. There
are two ways to calculate it; both in
principle start at a relatively low number and
scale with the complexity of the company.

You, or your accountant, can calculate your

franchise tax in under two minutes. The
rules and formulas are on the State of
Delaware’s website.

Companies incorporating with Stripe Atlas

will generally owe the minimum tax under
the Assumed Par Value method.

Franchise tax is due with your Annual

Report filing, which you have to do by March
Ust of every year. U.S. corporate tax returns
are generally due on April UTth (assuming
your fiscal year is the calendar year); it’s
generally easiest to file your franchise tax
when doing your tax return preparation for
the corporate tax return, which (since you’re
well-organized) will be done and ready to go
sometime in February.

Entrepreneurs can file their own Annual

Report and franchise tax relatively easily
through Delaware’s website, in most cases
without requiring professional advice. Your
accountant can also do it for you; expect to
pay a nominal amount (perhaps $UVV or so)
for this.

LLCs formed using Stripe Atlas will generally

pay an annual Delaware LLC tax of $\VV,
which is due on June Ust of each year.

Sales tax
Here. Be. Dragons.

In the United States, businesses can be

required to collect sales tax by their local
jurisdiction (city, county, etc) and by their
state. This happens in every jurisdiction
where the company both a) has a
transaction take place and b) has a “nexus”
of economic activity.

In general, internet companies only have a

nexus in locations where they have physical
property or employees doing work on their
behalf; however more and more states have
had recent changes in law that subject sales
tax obligations to those who sell into their
state. You may not have a nexus simply by
means of incorporating in a state, by having
customers in a state, or by having your
website be accessible in a state. (This is,
regrettably, difficult to say with certainty, as
some states have been getting more
aggressive at claiming that internet activity
constitutes a nexus and each state has
different rules.)

Accordingly, many internet companies,

particularly smaller ones, only charge sales
tax on a relatively small percentage of their
transactions.

You will generally be required to collect the

tax from customers, display on each
transaction how much tax you are
collecting, and remit the tax to the
appropriate government agency on a
monthly or quarterly basis.

Many localities in the U.S. also have a “use

tax”, which corresponds to the sales tax. A
use tax is paid by the customer in a
transaction, not by the seller—customers
are supposed to tell the local taxation
agency “I am using some property which I
purchased outside of this jurisdiction; here’s
the tax payment.” Some people believe that
compliance with use taxes is very, very, very
low. Nonetheless, you may have a filing
requirement if your business has a presence
in a U.S. state—check with your local state
and/or city/county.

The complexity of a sales tax filing depends

greatly on the specifics of your business,
including what you sell, how you record the
locations of transactions/buyers, how easy it
to determine where your business’ nexus or
nexuses are, and the like. As a rule of thumb,
most internet businesses will get their sales
tax returns filed by the same accountant
who handles their corporate income tax
return. It will generally cost a few hundred
dollars in professional services fees, but this
depends on the complexity of the business.

Corporate income tax

Profits of C corporations are taxed at the
federal level and at the state level. The main
form for the federal return is Form UUlV.

Some tax returns or government filings are

simple enough to do yourself. This is not one
of them. While it looks simple (only five
pages at first!), you should absolutely,
positively have a professional tax preparer or
accountant involved in the preparation of
any corporate tax return. It is relatively easy
to make consequential mistakes, and sorting
them out will be a distraction from running
your business. Additionally, there are a
variety of ways to characterize things which
are not mistakes per se but which will result
in you paying excessive amounts of tax
relative to equally valid ways to characterize
the same economic facts.

Income tax is only levied on income, rather

than revenue. Income is, generally speaking,
revenue minus expenses. Most things which
you purchase on behalf of the corporation,
including the salaries of the founding team
and employees, can be deducted
immediately as expenses.

A relatively smaller number of things cannot

be expensed but have to be capitalized; their
(generally high) upfront cost gets
apportioned to the business over the useful
life of the thing. This is also referred to as
“depreciation” or “amortization.” Internet
businesses do not typically have high capital
expenses early in their lives, particularly as
the historic sources of capital expenditures
(servers, networking equipment, custom
soPware development, etc) are increasingly
rented at-need from cloud providers for
fairly small (and expensible) sums of money.

Your accountant can provide you with

authoritative advice on whether any
particular expenditure needs to be
amortized.

If you have a physical presence in a U.S.

state, your corporation may owe state
income taxes in addition to federal income
taxes. Your accountant can advise you on
whether your company has a filing
requirement in the state(s) in which it
physically exists or does business, and can
help you prepare those filings. Some states
have been getting more aggressive at
claiming that internet activity can, in some
circumstances, give rise to a filing
requirement.

LLC federal income tax

Profits of an LLC are generally passed
through to the LLC’s owners and taxed on
the owner’s federal tax returns. LLC’s that
are owned by just one member are treated
as disregarded entities by the IRS, and LLC’s
that are owned by more than one member
are treated as partnerships. While the
profits of the LLC flow to the owners, there
still may be a tax return filing requirement
for the LLC itself. For example, an LLC owned
solely by a non-US individual is required to
file Form T]kl with the IRS, and LLC’s owned
by multiple members are required to file a
partnership return, Form UVmT.

Similar to the federal taxes for a C

Corporation, you should absolutely,
positively have a professional tax preparer or
accountant involved in the preparation of
any federal tax returns related to the profits
earned by your LLC. Tax reporting depends
on how your LLC is set up, and it is easy to
miss where reporting is required or how
profits are allocated to the owners of
the LLC.

One advantage of LLCs is that they provide

for flexibility with respect to how the profits
are taxed. For example, LLC’s have the
option of filing an election with the IRS to
be taxed as a C Corporation. If you are
interested in this option, it is recommended
to talk with a tax advisor to understand the
tax implications and election filing
requirements.

Taxpayer ID numbers
All tax returns are associated with taxpayer
identification numbers. There are several
varieties of this. The ones you’ll see most
frequently are:

Social Security Numbers (SSNs): U.S.

citizens and people authorized to work in
the U.S. are issued a number by the Social
Security Administration. This is widely used
by governmental agencies and private
entities alike to identify them. The SSN is
considered very sensitive (because knowing
it is oPen used to authenticate whether
someone is a particular person).

The general form of a SSN is Ul\-Tm-mkp[.

Companies do not have SSNs. You may not

have a SSN if you are not a U.S. citizen or
have not been employed in the U.S. before.
You will instead provide one of the following
when asked:

Individual Taxpayer Identification Numbers

(ITINs): Any natural person (a living,
breathing human) who needs to file taxes
but cannot receive a SSN (because the SSN
typically requires legal right to work in the
U.S.) can ask the IRS for an ITIN, which
functions as a substitute SSN. They are not
very tricky to get—you simply file an W-k
form and wait roughly six weeks.

Most owners of Stripe Atlas companies will

not themselves need an ITIN; your company
will file U.S. taxes, but you yourself might
not have U.S. tax filing obligations. If your
accountant tells you otherwise, file an W-k
and get one issued. You can also get one
issued contemporaneously with any tax
filing; submit the tax filing on paper with the
ITIN listed as “pending” and include a W-k
form. This generally introduces a delay in the
processing of your tax filing, and should be
avoided where you can, but it is always
better to file in a timely fashion and have
the processing delayed than to fail to file or
file late.

An ITIN looks like a SSN, but the first digit

will always be [.

Employer Identification Numbers (EINs):

EINs identify corporate persons (i.e.
companies) not natural persons (actual
people). You receive an EIN aPer filing an SS-
] with the IRS; if you incorporated through
Atlas, we took care of this for you.

You will routinely be asked for your EIN by

financial institutions in the U.S., and
occasionally by other businesses. It is
probably not a good idea to publish it, but
they’re not treated as sensitive as SSNs are.
(The disclosure of your SSN to an
unauthorized person is an immediate
emergency; the disclosure of your
company’s EIN happens rather routinely.)

An EIN looks like Ul-\]Tmkp[. Note that this

is the same number of digits as a SSN but
the hyphen placement is different. It is,
unfortunately, not the case that the
hyphens don’t matter—some SSNs have the
same numbers in the same order as some
EINs, so make sure you’re always filling in
the right box and including the hyphens in
the right spaces.

Informational returns
Companies, including your own, have an
obligation to report certain transactions to
the government via “informational returns.”
The government matches informational
returns against the tax filings of individuals
and corporations, to make sure that
taxpayers do not forget to pay taxes on
income they have received.

Your company will routinely issue

informational returns. You may occasionally
receive them, and so should understand how
that process works as well.

There are several varieties of informational

returns. The two you are most likely to issue
are the W-l, which records wage income to
an employee, and the UV[[-MISC, which
shows payment for services to an individual
contractor. (You will not ordinarily issue a
UV[[-MISC to a company, even if you buy
services from them.)

Your accountant will take care of filing W-ls

and UV[[s on your behalf, early in the
calendar year. You will provide one copy to
the taxpayer you’re reporting on, one to the
IRS, and keep one for your own records.

To issue any informational return, you need

someone’s tax ID number—typically SSN for
W-ls and either an SSN, ITIN, or (rarely) an
EIN for UV[[s. There is a form to formally ask
someone’s tax ID number; it is the W-[. One
only uses the W-[ with U.S. taxpayers; if
someone is not a U.S. person (for example, if
you’re employing someone overseas), you’ll
want to get them to give you a W-pBEN
instead. (This provides a paper trail in the
event the IRS asks “Why didn’t you file a
UV[[ for that contractor?” “They don’t have
U.S. tax liability so we don’t have to.” “Oh
really?” “Here’s their W-pBEN.” “OK then.”)
Because the IRS loves its forms, there is a