Question

Tax Planning is crucial in the setup and funding of new firm. Presuming an entrepreneur gets good counsel and establishes a “pas-through entity” for tax purposes, how much will the total taxes be on such a firm that has $1,500,000.00 in corporate profits at a 35% individual tax rate?

Mr. X believes that he is an accredited investor and can make an investment in affirm which will garner him an Angel Tax Credit on his income tax return. Mr. X is not married and last year made $190,000 in salary and will make $205,000 in salary this year. Mr. X also has $1.4 million in cash savings and securities and owns a home valued at $450,000 and subject to a $300,000 mortgage. According to IRS Rule 501 of Regulation D is Mr. X considered an accredited investor for the purposes of the Angel Tax Credit? Please explain the reasoning as to why you answered yes or no.

Answer 1

1. The amount 1,500,000 amount will be charged at the rate of 35% in the hands of the owners, even if corporation does not distribute the profits. Formation of pass through entry eliminates the double taxation issues that affect most corporations and their shareholders since only the owners are taxed.
2. Yes, Mr. X is an accredited investor as he has a net worth of more then 1,000,000. He has $1,400,000 in cash, this criteria bring him under the purview of accredited investor. In the United States, an accredited investor is, a person who has a net worth of equal or more then $1,000,000, excluding the value of primary residence, or have income at least $200,000 each year for the last two years (or $300,000 joint income if married) and have an anticipation to earn the same amount this year. The "accredited investor" as per Rule 501 of Regulation D of the U.S. Securities and Exchange Commission (SEC) is the person who is:
3. A bank, insurance company, registered investment company, business development company, or small business investment company;
4. An employee benefit plan, under Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser, or if the plan has total assets in excess of $5 million;
5. A charitable organization, corporation, or partnership with assets exceeding $5 million;
6. A director, executive officer, or general partner of the company selling the securities;
7. A business in which all the equity owners are accredited investors;
8. A person who has net worth, or joint net worth with the spouse, exceeding $1 million at the time of the purchase, or has assets under management of $1 million or above, excluding the value of the individual's primary residence;
9. A natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;
10. A trust with assets exceeding $5 million, not formed to acquire the securities offered, whose purchases a person makes.