We are filing for the first time the US Federal Tax in 2020 and it feels like new territory. We missed the initial deadline without even knowing it, April 15th 2020, but with Convid-19 necessitating US state lockdowns and extreme financial strains, the IRS pushed back the filing deadline for federal tax returns to July 15th 2020. Now, finally, Tax Day is over but it was an experience that is hard to forget.
Frankly, taxes feel complicated, even more because of Pandemic when so much was happening and everything feels so different.
When we first heard of tax, we thought we had paid it, since we did in February 2020. To our surprise there are two must have tax filings. The United States of America is a group of states with a central government, The Federal. Hence we have to file taxes in both the Federal and any State we operate or registered.
State Tax in the form of Delaware Franchise Tax: In February 2020 we covered the first filing, state of Delaware franchise tax just on the deadline. Everything was confirmed online and the correct amount was set based on our current asset, shares and how we choose to file. It was easy, just like online shopping, filled an online form and paid the dues.
The Federal Income Tax : The second filing requirement, Federal Income Tax filing to IRS is a different story. Taxes can be bewildering as there are so many moving parts and complicated instructions to follow. We had two choices in how to go about this, to do it on our own with tools like TaxAct or have professional help and yes, it’s a paid service.
To confirm all these we hired a US accounting firm specialized in financial matters of non-US owners, they provide bookkeeping, reporting, payroll, CFO and more importantly tax filing services. For a startup they were expensive but we can’t afford to face fines, especially while half the world apart. No wonder the tax preparation industry makes billions in revenue every year.
What we learned is, based on each company, ownership status, activities in the US and/or international, filing requirements differ and whether we had any transactions or not, whether we had any profits or nor, having incorporated our company in 2019, we are obliged to file for the Federal Income Tax return. As a non-US person, in addition to the filing requirement of a pro forma form 1120, we are also required to complete form 5472 with all relevant attachments.
It was rather frightening to learn that the IRS has increased the penalty for not timely and/or incorrect filing of Form 5472 to $25,000. This is very material and something that every non-US person need to be mindful about.
Today, as the Federal Tax filing is out of the way, now we are free to continue focusing on growing our business with peace of mind, until the next tax season.