There are many personal issues that couples face when co-owning a business.
Here are some of the tax issues that spouses co-owning a business should think about.
Tax Filing for Spousalpreneurs
A couple who co-owns and operates a business that is unincorporated and shares in the profits and losses are in a partnership, whether or not they have a formal partnership agreement. Usually they must file a partnership tax return, Form 1065, as well as report the income, losses, etc. on their personal return. However, they can elect to file Schedule Cs along with their Form 1040 instead of Form 1065, saving them from the complexities of the partnership return. To make this election:
Both spouses must materially participate in the business, which essentially means working on a day-to-day basis. (Material participation tests can be found at the IRS.) Neither spouse can be merely an investor.
Each spouse must file a Schedule C to report his or her share of income, gain, loss, deduction, and credit attributive to the respective interests in the business. If they split things equally, then both Schedule Cs will look the same.
Each spouse must file a Schedule SE to pay self-employment tax on his/her share of the net income from the business. This is the same action that would occur if the couple had filed a partnership return.
It’s not uncommon for spouses who co-own a business to get divorced. What happens in the property settlement? Some spouses continue to co-own the business after divorce. Others may transfer interests to the other so that only one spouse owns and runs the business after the couple splits up. How the business interests are addressed all depends on the couples involved.
From a tax perspective, the transfer of property incident to divorce is tax free. This means the transferring spouse does not recognize any gain or loss on the transfer to the other spouse. The spouse who now owns the business steps into the shoes of the other spouse when it comes to tax basis, so that if the business is later sold, the recipient-spouse recognizes the gain on any appreciation the transferor-spouse had but did not recognize at the time of the property settlement.
If spouses try to co-own and run a business after the divorce but it doesn’t work out, they can still part ways tax free. That’s what happened recently to one couple who had co-owned three dance-related businesses. After 17 months following the divorce, one party bought out the other for $1.6 million, and the Tax Court said this wasn’t a sale but rather part of the property settlement.
Innocent Spouse Relief
Spouses who co-own businesses typically file joint tax returns. These tax returns include the couple’s business income. By filing jointly, each spouse is jointly and severally liable for the tax due on the return, plus any interest and penalties. Can an owner obtain innocent spouse relief for the actions of the other spouse? Seems so.
In another recent case, one spouse was the sole owner of the business; the other handled the books and all other back-office operations. This spouse routinely had the tax return prepared and, after obtaining the other’s signature, filed it. The problem: She didn’t file it one year and he was assessed interest and penalties (she had died by this time). While he owed the tax, the Tax Court gave him innocent spouse relief for the interest and penalties.
Spouses who co-own businesses should have very good lawyers and tax professionals so that each spouse’s interests are protected.
Solid Tax Solutions (SolidTaxSolutions.com) is skilled in such matters and can be reached year-round at: (845) 344-1040.
Hello everyone! Recently, a customer of mine and I ‘got to talking’ about the various aspects (and ramifications) of having money and other assets in countries outside of the United States and the U.S. government’s ‘view’ of this. So, from that conversation I ‘got to thinking’ that others should be aware of what is involved when a U.S. citizen (or U.S. resident) has assets in another country.
Many people doubted whether the United States Foreign Account Tax Compliance Act – commonly referred to by its acronym FATCA – was a viable piece of the legislation when approved by Congress six years ago, given its wide extra-territoriality. Yet, six years later, most of the world’s nations have signed up to FATCA in one way or another. This blog post provides an update on FATCA, and looks at how far the legislation’s tentacles have spread.
So grab your favorite beverage and have a read.
What Is FATCA?
Now, some of you may be asking what the heck is a FATCA?
Well, I’m glad you asked.
FATCA was signed by President Barack Obama in March 2010 as a revenue provision to the Hiring Incentives to Restore Employment Act. It is designed to tackle the non-disclosure by U.S. citizens of taxable income and assets held in foreign accounts.
The law is framed to ensure that the Unites States obtains information on accounts held abroad at Foreign Financial Institutions (FFI) by U.S. persons. Failure by an FFI to disclose information on their U.S. clients, including account ownership, balances, and amounts moving in and out of the accounts, will result in a requirement on U.S. financial institutions to withhold 30 percent tax on U.S. source income.
Final regulations for the implementation of FATCA were issued by the U.S. Treasury and Internal Revenue Service (IRS) in January, 2013. Since August 2013, FFIs have been permitted to use an on-line portal for FATCA registration (see below). The final text of the agreement to be entered into by FFIs and guidance for participating FFIs was released in December 2013. FFIs had to complete due diligence and withholding requirements by July 1, 2014 (a deadline pushed back from January 1, 2014) ready for the first reports to reach the IRS by March 31, 2015, regarding accounts maintained during 2014.
However, in recognition of the difficulties that FFIs were experiencing in having the necessary reporting systems in place on time, on May 19, 2014, the IRS announced that calendar years 2014 and 2015 would be regarded as an enforcement and administration “transitional period” with respect to the implementation and enforcement of FATCA. This meant that while FATCA was still considered effective from July 1, 2014, the IRS would refrain from “rigorously enforcing” many of its requirements in the two years in question so as to “facilitate an orderly transition,” as long as FFIs were making a “good-faith” effort to achieve compliance.
When FATCA was enacted, its critics saw its extra-territoriality as its major flaw. Because for the legislation to work as intended, foreign governments would somehow have to be persuaded to break their own data protection and privacy laws in order for the IRS to get its hands on confidential financial account information of America clients of foreign banks and other FFIs.
The U.S. Treasury addressed this situation by developing three model Inter-Governmental Agreements, (IGAs) allowing data exchanges to take place between foreign jurisdictions and the IRS. And crucially, it dangled the carrot of “reciprocity” in front of foreign governments in order to expedite the creation of an IGA network – in other words, the IRS is sharing information about foreign persons with U.S. bank accounts with their country of residence. The three model IGAs are as follows:
The Model 1 IGA requires FFIs in the foreign jurisdiction to report tax information about US account holders directly to the government, which will in turn relay that information to the IRS.
The Model 1A IGA is essentially the same, except that the IRS will reciprocate with similar information about account holders from the signatory country with the partner government.
The Model 2 IGA requires FFIs to report specified information about their US accounts directly to the IRS, to the extent that the account holder consents or such reporting is otherwise legally permitted, and such direct reporting is supplemented by information exchange between governments with respect to non-consenting accounts. FFIs also report to the IRS aggregate information with respect to holders of pre-existing accounts who do not consent to have their account information reported, on the basis of which the IRS may make a “group request” to the partner jurisdiction for more specific information.
As of October 19, 2016, a total of 113 IGAs were in force, had been signed, or had been agreed “in substance.”
However, on January 1, 2017, the Treasury will begin updating its IGA list to provide that certain jurisdictions that have not brought their IGA into force will no longer be treated as if they have an IGA in effect.
FATCA Registration System
The FATCA Online Registration System is a secure, web-based system that FFIs and other entities can use to register for FATCA purposes. Launched in 2013, the system allows the IRS to identify FFIs with FATCA obligations. These entities generally report on foreign financial accounts held by US taxpayers under the terms of FATCA or pursuant to the provisions of IGAs.
In November 2015, the IRS upgraded the FATCA Online Registration System, to allow the registration of sponsored entities, and to make the platform easier to use. In addition, since November 16, 2015, the upgraded registration system has allowed users to update their information, download registration tables, and change their financial institution type.
At the time, the IRS reported that more than 170,000 FFIs, located in more than 200 jurisdictions, had registered with the agency.
In October 2015, the IRS confirmed it succeeded in exchanging financial account information with certain foreign tax administrations by the September 30, 2015 deadline.
The IRS Commissioner, John Koskinen, said of this achievement that: “This groundbreaking effort has fundamentally altered our relationship with tax authorities around the world, giving us all a much stronger hand in fighting illegal tax avoidance and leveling the playing field.”
Koskinen went on to say “Meeting the Sept. 30 deadline is a major milestone in IRS efforts to combat offshore tax evasion through FATCA and the intergovernmental agreements,”. He went on to say “FATCA is an important tool against offshore tax evasion, and this is a significant step in the process. The IRS appreciates the assistance of our counterparts in other jurisdictions who have helped to make this possible.”
IRS’ FATCA Efforts Were Actually Praised…
The IRS is normally used to receiving criticism rather than praise. However, the agency was generally applauded by the IRS watchdog, the Treasury Inspector General for Tax Administration (TIGTA), for its implementation of the Foreign Account Tax Compliance Act.
The 2015 TIGTA investigation found that the agency “has taken steps to provide information to affected stakeholders that explains the FATCA requirements and expectations.” It pointed out that the IRS has a website solely dedicated to providing a variety of FATCA-related information for individuals, financial institutions, and foreign governments.
The audit decided that, “overall, the FATCA Compliance Roadmap is fairly comprehensive,” and “the IRS has made a reasonable effort to keep external stakeholders informed on the status and events related to the implementation of the FATCA.”
It found, however, that the IRS has experienced “some delays in implementing its compliance strategy and anticipates that some of the estimated implementation dates may change due to the availability and accessibility of FATCA data and budget limitations (e.g., information technology and human resources funding).”
The TIGTA also suggested some improvements. In particular, it recommended, and the IRS agreed, that the IRS “needs to update the FATCA Compliance Roadmap to include more information on how the IRS will specifically ensure that FFIs comply with FATCA (such as when, what, and how the data related to FFI compliance will be reviewed and what outcomes are expected).”
…But The Finance Industry Laments
The impact of FATCA in financial terms can only be guessed at. However, it has been estimated that financial institutions and other reporting entities around the world are spending about $8 billion a year to ensure they are compliance with FATCA.
But, is the industry really ready to be the eyes and ears of the world’s tax authorities? Recent research suggests that financial institutions are generally confident about meeting existing and incoming automatic exchange of information obligations. However, the study also found that a significant proportion of the industry is facing higher costs and risking fines by being under-prepared for new compliance requirements.
The research by the Aberdeen Group shows that there is “a large gap in preparedness” for reporting requirements under the OECD Common Reporting Standard (CRS), FATCA. Many institutions, worryingly, related high rates of inaccurate filings and excessive compliance costs, and expressed fears of significant business impacts, including reputational damage and falling customer numbers.
FATCA’s Impact On United States Expats
While the finance industry is assuredly making every effort to comply local FATCA requirements, for some financial institutions this is a regulatory measure too far. Therefore, rather than risking the legal and reputational consequences of failing to meet these requirements, many financial service providers have decided that dealing with U.S. clients is simply more trouble than it’s worth. And the result of this is that many Americans, having had their existing bank accounts closed, and applications for new accounts refused, are struggling to obtain even the most basic financial services while residing abroad.
In a letter to Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, ACA urged Treasury to exempt Americans residing in a foreign country from the rules requiring foreign financial institutions (FFIs) to report on US account holders’ accounts.
Where a U.S. person truly resides in a foreign country and has a normal financial account at a bank or similar institution in the same country, ACA is recommending the FFI should treat it as if it belonged to someone who is not a U.S. taxpayer, and the latter would not have to list the account when returning a Form 8938, Statement of Specified Foreign Financial Assets.
It remains to be seen whether the US Government has listened to the concerns of the vast constituency of US expats.
FATCA Versus Privacy – An Unloved Law
The IRS assures us that it has developed information system infrastructure, procedures, and data use and confidentiality safeguards to protect taxpayer data. The IRS has also stressed that it will only engage in reciprocal exchange with foreign jurisdictions that, among other requirements, meet its stringent safeguard, privacy, and technical standards. Indeed, before exchanging with a particular jurisdiction, the United States conducted detailed reviews of that jurisdiction’s laws and infrastructure concerning the use and protection of taxpayer data, cyber-security capabilities, as well as security practices and procedures.
However, critics of FATCA – particularly in the United States – say that the law is not only massively extra-territorial in scope, but also tramples all over an individual’s right to privacy and could lead to falling foreign investment in the US. What’s more, the US Government has been accused of using FATCA as a sledgehammer to crack a peanut, for the Treasury Department estimates that only $800 million per year in extra tax will be collected under the law – a figure which is viewed as insignificant compared with the money spent by financial institutions and tax authorities to introduce FATCA.
FATCA has been challenged on a number of fronts, both legislatively in the United States, and by the courts in the U.S. and other countries. One of the most vocal critics is Senator Rand Paul, a Kentucky Republican, who has called FATCA “a textbook case of a bad law.” In March 2015, Paul introduced a bill in the Senate to repeal FATCA’s “anti-privacy provisions,” thereby rendering the law redundant.
A similar bill was introduced in the House of Representatives on September 7, 2016, by fellow Republican Mark Meadows (R – North Carolina). Meadows believes that FATCA violates privacy rights guaranteed by the Fourth Amendment of the US Constitution, and his bill would therefore repeal all of FATCA’s information reporting and tax withholding requirements. “Ultimately, it is clear that FATCA goes well beyond what is appropriate and requires a level of disclosing information to the IRS that violates Americans’ Fourth Amendment rights and places unnecessary burdens on taxpayers,” he said.
Paul’s bill is a carbon copy of proposed legislation he introduced in the previous session of Congress. However, that failed to come up for a vote, and with just a few weeks of the current session remaining, his and Meadow’s bill are likely to suffer the same fate.
Senator Paul has been equally as unsuccessful in using the courts to overturn FATCA. In April 2016, the US District Court for the Southern District of Ohio dismissed a case brought by Paul and a group of individuals, who attempted to make several challenges to FATCA and the Report of Foreign Bank and Financial Accounts (FBAR).
In their introduction to the case, the plaintiffs stated that the FATCA and FBAR “laws and agreements impose unique and discriminatory burdens on US citizens living and working abroad,” and that “the challenged provisions are unconstitutional and the defendants [Treasury, IRS, and FinCEN =>Financial Crimes Enforcement Network] should be enjoined from enforcing them.”
The plaintiffs called IGAs unconstitutional, as they had not been submitted to the U.S. Senate for its advice, consent or approval, while they also “nullify the right of individuals to refuse to waive foreign privacy laws that would otherwise prohibit their banks from disclosing their account information to the IRS.”
Furthermore, it was noted that the FATCA and FBAR reporting requirements “require US citizens living abroad to report more detailed information about their local bank accounts than US citizens living in the United States.”
Finally, it was claimed that the 30 percent “tax” imposed by FATCA on payments to FFIs when they “choose not to help the IRS pry into the bank accounts of their US customers … is not a tax at all but rather a penalty designed to accomplish indirectly through financial coercion what the U.S. government cannot mandate directly through regulation.”
However, the court decided that all of the plaintiffs lacked standing to sue in various ways. In particular, they had failed to establish that they had suffered an injury caused directly by the Treasury, IRS or FinCEN.
Court challenges on foreign soil have also fallen short, including in Canada, where in September 2015, the Federal Court denied a request for an injunction to prevent the collection and disclosure of FATCA information to the United States regarding American citizens living in Canada.
While an attempt to block FATCA exchanges by the state of Israel was initially more successful, a later hearing overturned the injunction. Ominously, the judge in the second hearing appeared to suggest that the age of individual privacy was over.
The Israeli lawsuit was initiated by an organization called Republicans Overseas Israel. And it is probably fair to say that, in the US, critics of FATCA have a more sympathetic ear on the Republican side of Congress than the Democratic. Indeed, the Republican Party’s election platform, agreed at its National Convention in July 2016, saying that FATCA and FBAR results in “Government’s warrantless seizure of personal financial information without reasonable suspicion or probable cause” and is of the opinion that “FATCA not only allows ‘unreasonable search and seizures’ but also threatens the ability of overseas Americans to lead normal lives.”
However, the platform stopped short of pledging to repeal these laws, and Republican presidential candidate Donald Trump has not expressed a wish to do so.
Therefore, while opponents will probably continue in their attempts to repeal or nullify FATCA, their chances of success would seem remote. A Trump presidency, allied with a Congress controlled by Republicans, would improve these chances considerably. However, with FATCA having effectively gone global under the guise of OECD the Common Reporting Standard, automatic exchange of information seems to be becoming the norm, rather than something exceptional.
After a long, contentious, and heavily covered race to the U.S. presidency, the 2016 campaign cycle is coming to end in only a few weeks. Chances are you’ve been overloaded with news and commentary and—whichever candidate you support—you’ll be somewhat relieved after the results are announced on November 8th.
But that doesn’t mean you should tune out until then. Between the candidates’ platforms, tax plans, and stances on topics such as healthcare, immigration, and consumer protection, there are important issues at stake that may directly affect your business and industry.
Which Election Issues Matter Most to Entrepreneurs?
As a business owner, you have several political agenda items to consider before you vote on Election Day:
What Will the Proposed Healthcare Reform Mean for Your Small Business?
The Affordable Care Act, signed into law in 2010 and commonly referred to as “Obamacare,” made healthcare a focal point of political discourse—in large part because of its effects on America’s businesses. Some business owners support the Affordable Care Act for providing employees with mandatory insurance coverage, while others complain that the law places an excessive financial burden on employers.
Have You Analyzed Each Candidate’s Tax Plan?
Although virtually every presidential candidate in recent history has pledged to make taxes more advantageous to small businesses, tax plans vary wildly by administration when it comes down to the details. A business owner would be wise to scrutinize each candidate’s proposals to determine:
The tax breaks and incentives for business owners
Which types of taxes will be increased
Whether income brackets and business categories are changing, and if so, to what extent
How Will Federal Regulations Impact Your Industry?
From safeguarding consumer privacy to providing accommodations for disabled employees, companies are subject to all kinds of federal regulations, though some industries are more regulated than others. The two major parties fundamentally disagree about the scope and authority of these regulations and the agencies in charge.
Several states have recently passed legislation increasing state minimum wage, and the subject is a hotly debated one in Washington as well. A federal minimum wage hike is not simply an issue of cost versus savings, but large-scale economics and government intervention.
Some business owners advocate for raising the minimum wage, citing that better pay increases productivity and reduces turnover. Others contend that a $12–15 minimum wage would put their organizations out of business or cause them to lose their competitive edge domestically and globally.
What About Federal Loan Availability for Rising Entrepreneurs?
Do you believe it should be easier for business owners to borrow credit? A “yes” or “no” answer places you firmly on one side or the other of the political spectrum. The parties’ stances on banking regulations and Wall Street reform tell you a lot about what the availability of loans under their administrations would look like, but there’s more to the story than that.
Aside from the candidates’ promises to promote small business growth, the various outcomes of the election could have significant repercussions on the economy, as consumer attitudes shift and lenders become more or less confident as a result.
Does Your Small Business Depend on International Trade?
Speaking of broad economic impact, each candidate’s attitudes on international trade could weaken or strengthen U.S. businesses, depending on your perspective. It may be easier or more difficult during the next few years to establish overseas corporate partnerships, reach consumers in different countries, and sell products and services all over the world.
What’s Your Take on Immigration & the Startup Visa Proposal?
So, while border control is a deeply personal issue for many on all sides of the debate, there’s a business case to be made either way—so long as you can differentiate the facts from the rhetoric.
Where Can You Go for Detailed Information About Each Candidate?
In the next few weeks, take the time to educate yourself on each candidate’s positions. Here are a few resources that will help you start researching before you cast your vote:
Compare the candidates’ stances on key issues at ProCon.org.
Check out PolitiFact’s rundown of how each candidate’s presidency may impact the economy: “Clinton has literally decades of experience in the domestic and international policy trenches. Befitting this background, she has offered a wide range of detailed proposals on everything from renewable energy goals to sick-leave guarantees. […] By contrast, Trump is a novice in electoral politics but an experienced CEO. He has offered specifics on a few issues, such as taxes and trade, but for the most part, Trump’s web pages on the issues offer broad statements rather than details.”
Read Entrepreneur’s five-point comparison of Clinton and Trump’s tax plans: “There are many businesses right now that pay little or no tax under the current tax laws. Real estate holding companies, research and development companies, oil and gas developers, agriculture and mining all enjoy major tax incentives under the current tax laws. Presumably, all of these incentives would remain under the Clinton tax plan, as she seems determined to maintain the status quo. On the surface, Trump’s plan is clearly better for business, but the question is whether it will be better for your business.”
Read “The Entrepreneur’s Case for Trump” (Wall Street Journal): “The rise of Donald Trump has exposed a deep chasm in America between the haves and have-nots. I could go on, but you have probably read that story by now. You’ve also likely read about conservatives who think that stopping Mr. Trump is the only way to save their cause. I’m here to explain why they couldn’t be more wrong. What principled conservatives fail to understand is how the nation would benefit from putting a right-leaning entrepreneur in the White House…”
Read “Why I, A Woman Tech-Entrepreneur, And Immigrant, Am Voting For Hillary” (Huffington Post): “Hillary, as the first woman to be a presidential nominee in the U.S., will certainly leave her legacy behind for her perseverance, compassion, and inner strength. I cringe when I think how she will be subjected to the ugliest political invective and insults in our history, partly because she is a woman. It is time we stop castigating Hillary and give her the opportunity to lead our nation and uphold and elevate American values.”
Read about the ramifications a Clinton or Trump presidency could have on small businesses, as per Sujan Patel, writing for Inc.: “One of the most appealing things to Donald Trump supporters is the perspective he brings as a business owner; a perspective that isn’t marred by lobbyists and political favors. Many business owners feel like the country needs the fresh, non-political perspective of Trump, given the state of the current economy.“On the other hand, some small business owners, like Brian Smith of Brooklyn’s Ample Hills Creamery, think Hillary Clinton is better suited for the job. Smith’s company is trying to secure a bank loan for a factory. He told CNBC that he believes Clinton’s proposals will make it easier to allow business owners like himself to secure capital for expansions. This is a critical issue for small businesses in the U.S.—lack of cash flow is the number one reason businesses fail.”
If at any point during your research you wonder how certain regulations and tax codes will affect your specific business don’t hesitate to contact us.
So, what other small business issues would you like the candidates to talk about?
A lot of people think that the first step to starting a business is incorporating or organizing a Limited Liability Company (LLC). While both types of entities can provide your business with additional protection, they’re not the answer for everyone. And that protection comes at a cost. I’ve created a list of some factors that should be reviewed before deciding on an LLC, a corporation, or a sole proprietorship. For the sake of this post, I will assume that your business, at least in the beginning is a one-person show with no partners and no employees. While that leaves out many startups, it encompasses many more.
Here Are Some Points to Consider:
Potential Liability. If you’re designing and importing a children’s toys, you will need all the protection you can get. On the other hand, if you’re a carpenter your insurance should be able to handle most liability issues. Many professionals are likely to be sued personally even if the business is incorporated. Things quickly change if you have employees. If that’s the case a corporation or LLC can protect you personally.
Business Debts. In earlier times the corporate form was used mostly to protect owners from being personally liable for corporate debts. Today, it’s used for personal protection from a range of lawsuits. But for most small businesses, owners will be required to personally guarantee any bank, etc. loans. The only advantage to a corporation or LLC may be avoiding accounts payable on a default. And even a corporation or LLC won’t protect you if don’t respect the formalities of the entity.
Cost. If you do it yourself, the cost of setting up (and dissolving if it doesn’t work out) a corporation or LLC may be relatively small (generally between $125 and $800). Using an attorney will add to the cost. There may be annual fees such as filing fees and franchise taxes. These vary widely. Not much of an issue if the business is nicely profitable, but a burden if you’re suffering losses. If you do business as a corporation (S or C) you’ll have a separate return to file. That is a consideration if you have a professional prepare it.
LLC vs. S Corporation. While you could do business as a regular C corporation, you could find yourself subject to double taxes. Most small businesses elect S corporation status where profits and losses are passed through to the shareholders. An LLC with only one member is a separate entity for legal purposes, but is disregarded for federal tax purposes. That is, instead of filing a partnership return (the normal return for an LLC with more than one member (owner)), a single-member LLC reports its income and expenses on the owner’s Schedule C. That, plus the fact no balance sheet is required, can save some preparation costs at tax time.
DBA. If you’re doing business as a corporation or LLC you will decide on a name when filing with the state. While you could use your own name (e.g., Ralph Kramden, Inc.) that’s usually not the case. As a sole proprietorship, the default is to use your own name. That’s fine if you’re Ralph Kramden, Attorney-at-Law, but not so attractive if you want to brand the business. The solution is filing with your state for a Doing Business As (DBA) to do business under an assumed name (e.g., Ralph Kramden doing business as Brooklyn Auto Body). You have to decide if you want the extra work of a DBA.
Transactions Between You and Entity. If you’re doing business as a separate entity, you’ve got to respect the formalities. Business assets are purchased and titled in the name of the entity. Assets transferred to shareholders or LLC members should be accounted for on the books and for tax purposes. Loans are taken out in the name of the entity. Not in your name personally. Paying a corporate loan (or other expense) with a personal check won’t get you a deduction. The proper approach is either to make a loan or equity contribution to the business so the business can pay the expense and get the deduction. Alternatively you can submit an expense report and have the business reimburse you. Paying personal expenses with a business check as well as not respecting other formalities such as making customers, creditors, etc. aware that you’re doing business as an LLC or corporation can allow outsiders to challenge the existence of the corporation or LLC. It sounds simple enough, but most small business owners don’t follow through. A sole proprietorship doesn’t have these problems.
Switching Entities. If you start a business as a sole proprietorship and later decide to incorporate or change to an LLC, doing so is relatively straightforward and there are generally no tax consequences. Going in the other direction can be more complicated, particularly if you have fixed assets. In some cases there may be tax consequences.
The Best Approach? If you have or will have shortly, owners in addition to yourself, you might as well use a corporation or LLC from the businesses inception. If additional owners are unlikely (at least for some time) a sole proprietorship should be considered if the liability protection of an LLC or corporation isn’t needed. You should discuss the issue with your attorney and with your tax advisor.
Keep in mind that this discussion is in no way inclusive of all factors to be considered in starting a business.
So, if you are considering starting a business (or already have a business) give us a call for a consultation. Your business will thank you.
We can be reached at: (845) 344-1040. You can also learn more about us at our website: SolidTaxSolutions.com.
The IRS has attempted to use private contractors twice in the past, both times finding it not cost effective. Now, under the law, the IRS is required to use qualified contractors to collect inactive receivables. An inactive receivable is one that meets one of the following requirements:
At any time after assessment, the Internal Revenue Service removes such receivable from the active inventory for lack of resources or inability to locate the taxpayer,
More than 1/3 of the period of the applicable statute of limitation has lapsed and such receivable has not been assigned for collection to any employee of the Internal Revenue Service, or
In the case of a receivable which has been assigned for collection, more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection of such receivable.
Certain receivables are not eligible for collection using private collectors. They include:
Those subject to a pending or active offer-in-compromise or installment agreement,
Those classified as an innocent spouse case,
Those involving a taxpayer identified by the IRS as being:
Under the age of 18,
In a designated combat zone,
A victim of tax-related identity theft,
Currently under examination, litigation, criminal investigation, or levy,
Subject to pending or active offers in compromise,
Subject to a right of appeal, or
In a presidentially declared disaster areas and requesting relief from collection,
those currently under examination, litigation, criminal investigation, or levy, or
those currently subject to a proper exercise of a right of appeal under this title.
The new program, authorized under a federal law enacted by Congress last December, enables these designated contractors to collect, on the government’s behalf, outstanding inactive tax receivables. As a condition of receiving a contract, these agencies must respect taxpayer rights including, among other things, abiding by the consumer protection provisions of the Fair Debt Collection Practices Act. The IRS has selected the following contractors to carry out this program:
These private collection agencies will work on accounts where taxpayers owe money, but the IRS is no longer actively working their accounts. Several factors contribute to the IRS assigning these accounts to private collection agencies, including older, overdue tax accounts or lack of resources preventing the IRS from working the cases.
The IRS will give each taxpayer and their representative written notice that their account is being transferred to a private collection agency. The agency will then send a second, separate letter to the taxpayer and their representative confirming this transfer. Private collection agencies will be able to identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies must follow the provisions of the Fair Debt Collection Practices Act and must be courteous and respect taxpayer rights.
The IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continual phone scams where callers impersonate IRS agents and request immediate payment.
Private collection agencies will not ask for payment on a prepaid debit card. Taxpayers will be informed about electronic payment options for taxpayers on IRS.gov/Pay Your Tax Bill. Payment by check should be payable to the U.S. Treasury and sent directly to IRS, not the private collection agency.
If you owe back taxes to the IRS, give Solid Tax Solutions a call (we are open year-round) at: (845) 344-1040.
The IRS is proposing a revised schedule of user fees that would take effect on Jan. 1, 2017, and apply to any taxpayer who enters into an installment agreement.
The proposal, which is one of several user fee changes made this year, reflects the law that federal agencies are required to charge a user fee to recover the cost of providing certain services to the public that provides a special benefit to the recipient. Although some installment agreement fees are increasing, the IRS will continue providing reduced-fee or no-cost services to low-income taxpayers.
Installment Agreement Fees
The revised installment agreement fees of up to $225 would be higher for some taxpayers than those currently in effect, which can be up to $120. However, under the revised schedule any affected taxpayer could qualify for a reduced fee by making their request online using the Online Payment Agreement application on IRS.gov website. In addition, there would be no change to the current $43 rate that applies to the approximately one in three taxpayer requests that qualify under low-income guidelines. These guidelines, which change with family size, would enable a family of four with total income of around $60,000 or less to qualify for the lower fee. Also, for the first time, any taxpayer regardless of income would qualify for a new low $31 rate by requesting an installment agreement online and choosing to pay what they owe through direct debit.
The top rate of $225 applies to taxpayers who enter into an installment agreement in person, over the phone, by mail or by filing Form 9465 with the IRS. But a taxpayer who establishes an agreement in this manner can substantially cut the fee to just $107 by choosing to make their monthly payments by direct debit from their bank account. Alternatively, a taxpayer who chooses to set up an installment agreement using the agency’s Online Payment Agreement application will pay a fee of $149. Similarly, they can cut this amount to just $31 by also choosing direct debit.
Here is the proposed schedule of user fees:
Regular installment agreement: $225
Regular direct debit installment agreement: $107
Online payment agreement: $149
Direct debit online payment agreement: $31
Restructured or reinstated installment agreement: $89
Low-income rate: $43
Further details on these proposed changes can be found in proposed regulations (REG-108792-16 in case you were wondering), now available in the Federal Register. The IRS welcomes comment on these changes, and a public hearing on the regulations will take place in Washington, D.C. For details on submitting comments, just take a look at the proposed regulations.
By law, federal agencies are required to charge a user fee to recover the cost of providing certain services to the public that confer a special benefit to the recipient. Installment agreements are an example of a service that confers a special benefit to eligible taxpayers. Agencies must review these fees every two years to determine whether they are recovering the costs of providing these services.
In the past, the IRS often charged less than the full cost for many services in an effort to make them accessible to a broader range of taxpayers. But given current constraints on agency resources, the IRS can no longer continue this practice in most cases.
Nevertheless, the IRS intends to continue providing reduced-fee or no-cost services to low-income taxpayers. For that reason, the IRS will continue subsidizing part of the cost of providing installment agreements to low-income taxpayers.
Hello Everyone! I just wanted to share some good news with you about a possible change regarding itemizing medical expenses.
So, last week (September 13 to be exact), the U.S. House of Representatives passed a bill titled ‘Halt Tax Increases on the Middle Class and Seniors Act’ (the bill is H.R. 3590 which you can view right here => H.R. 3590), by a vote of 261 to 147, that would lower the Adjusted Gross Income (AGI) threshold for an itemized deduction for unreimbursed medical expenses—from 10% to 7.5%—for all taxpayers, regardless of age under the Affordable Care Act (ACA).
Under the ACA, taxpayers may deduct from their AGI, to reach their taxable income, the cost of unreimbursed medical expenses that exceed a certain percentage of their AGI. Following a law change in 2013, individual taxpayers under the age of 65 could only deduct medical expenses when they totaled at least 10% of their AGI – the value of expenses above this 10% threshold can be deducted.
The Bill passed by the House of Representatives would prevent a change to the threshold for those over 65 years of age, which from the end of this year (2016) would have increased the threshold applying to this category of taxpayers from the current 7.5% to 10%.
The House Ways and Means Committee Chairman Kevin Brady (R – Texas) welcomed the Bill, he said: “Before Obamacare, Americans could find some relief in their ability to deduct high-cost, out-of-pocket medical expenses on their taxes. … This Obamacare provision is a tax hike, plain and simple. It makes paying for care even more difficult for individuals, families, and seniors who may already be struggling to afford the care they need.”
The National Taxpayers Union added that the Bill would “have an enormous impact on the budgets of American families. … Over 10 million taxpayers every year use this deduction to cushion the burden of medical expenses and this tax increase would cause an undue financial burden to seniors and those struggling with chronic medical conditions.”
However, the Center on Budget and Policy Priorities noted that “Congress has already delayed the medical device tax, the health insurance tax, and the excise tax on high-cost health plans (the so-called Cadillac tax). Repealing the increase in the medical expense deduction threshold would encourage efforts to scale back still other revenue provisions of health reform.”
Ways and Means Committee Ranking Member Sander Levin (D – Michigan) also criticized the unfunded nature of the legislation, and pointed out that it would reduce revenues by $32.7 billion over 10 years, according to the Joint Committee on Taxation. He went on to say, “approximately two-thirds of the tax benefit from [the bill] will accrue to taxpayers earning $100,000 or more.”
Mr. Levin noted that the White House has issued a Statement of Administration Policy that “strongly opposes” the Bill and confirmed that it would be vetoed if presented to President Obama for his signature. The Statement added that the Bill “would repeal a provision of the Affordable Care Act that limits a regressive, poorly targeted tax break for health care spending.
If you would like to see the results of the final House vote for this bill you can view them here.
Do you think this has any chance of actually becoming law?
Running for office presents candidates with a number of opportunities to slip up. This is particularly a problem when the issue is a complicated one. As an example, let us take a look at taxation (surprise. surprise, surprise). Taxation can present traps for unwary candidates who are not careful with how they articulate their position.
Recently, there has been a call for exempting the value of Olympic medals from gross income. Some people think it’s wrong to require winning athletes to pay taxes on pieces of metal symbolizing their achievements. I will stay neutral on this, but the point of this post isn’t whether an Olympic medal exemption makes sense. It’s to point out what happens when that issue becomes campaign fodder.
Senator Charles Schumer of New York, a Democrat, has introduced legislation that would add an Olympic medal exemption to the Internal Revenue Code. According to this news story, his Republican opponent, Wendy Long, has criticized both Schumer and the proposal. She called the proposal “another example of cronyism in the tax code.” She went on to say, “It makes no sense. My contention is that giving tax breaks as he does to his favored ones – the Broadway stars, the Olympic medalists, the hedge funders – means that a greater burden is placed on the average New Yorkers who toil in obscurity but work just as hard and are as deserving of a tax break.” She made mention of members of the military, asking “Where’s the tax break for them? Even if they come home victorious and have won a war, instead of the 400 meter freestyle, no tax break for winning?”
So, three thoughts ran across my mind when I read that article. All three, thoughts, kind of “didn’t make sense”.
First, the Broadway tax break to which Long apparently was referring is not a tax break for Broadway stars. It is a tax break for those who invest in live theater productions, making available to them the same tax break already in existence for television and movie productions. On top of that the measure in question was the extension of the tax break, which had been enacted previously with an expiration date. I’m not necessarily a fan of this particular tax break, but I’m even less of a fan of a tax break that treats television and movie productions more favorably than live theater. What matters is that this tax break accelerates tax deductions for investors who, Ms. Long states, are not members of “….the middle class that Schumer pretends to champion.” Therefore it is a tax break pretty much for the wealthy among us, a tax break in line with many others supported by the political party under whose flag Long is running. It would be great if she made it clear that she opposes the long-standing pattern of Republican tax breaks for the wealthy, but if she is elected she might find herself at odds with at least some of her political colleagues in the Senate. But still, describing the tax break as one for the actors casts the issue in the wrong spotlight.
Second, the tax break for hedge funds has been attacked primarily by Democrats and although some Republicans have joined in the criticism, perhaps seeking something that dresses them in populism, most Republicans and their supporters have opposed any attempt to change the tax break. Some even demand lower taxes for carried interest, as described in this article. Again, it is great to see another tax break for the wealthy coming under attack from a Republican, but what happens to Long’s Senatorial career if she is elected? And what happens to Schumer, a Democrat, who breaks ranks with his party and opposes elimination of the tax break for carried interests? Politics is a strange, wacko world and, in this instance, the two candidates are taking positions contrary to their labels. Perhaps they should switch parties? Hmm!
Third, there exists a variety of tax breaks for members of the military. Long is playing on emotions when she suggests there are no tax breaks for them. Internal Revenue Code (IRC) Section 112 excludes from gross income compensation paid to members of the Armed Forces for serving in a combat zone, or was hospitalized on account of injuries incurred while serving in a combat zone. IRC Section 122 excludes from gross income certain portions of retirement pay way too complex to describe in one sentence. IRC Section 134 excludes from gross income the value of most allowances or in-kind benefits provided to a member or former member of the Armed Forces. I am not aware of any instance in which the IRS has required a member of the Armed Forces to include in gross income the value of any military honor, medal, badge, bar, or ribbon awarded to that person. Making it appear as though there are no federal tax breaks for members of the military does not nurture confidence in a candidate’s tax policy prowess.
So, I feel that there are far better ways to criticize an exclusion for Olympic medals than to confuse the issue with references to tax breaks for Broadway stars, hedge funds, and members of the military. The merits, or lack thereof, of an Olympic medal exclusion are, and should be, a separate matter.
A recent post (August 26, 2016) on the Tax Justice website was titled: Why We Must Close the Pass-Through Loophole? Well that ‘kinda’ caught my attention as I was trying to think what the “loophole” might be? A loophole is a provision that can be used beyond its intended purpose because the rule is not written specifically enough. When a rule is being used as intended, it is not a loophole. So, for example, sometimes the mortgage interest deduction is called a loophole, but it is not. People deducting interest on the mortgages on their primary and vacation homes are using the rule as intended.
The “loophole” that was the subject of that blog post is large businesses operating as partnerships rather than as corporations. Partnerships, S-Corporations and Sole Proprietors do not pay corporate income tax. Instead, the income is taxed directly to the owners and only one level of income tax is paid at the federal level (and state level). In contrast, C corporations pay the corporate income tax AND when they distribute earnings (dividends) to shareholders, the shareholders pay income tax. Therefore, C corporation income is taxed twice.
That just happens to be the way it works in our (i.e., the United States for readers abroad) tax system. It doesn’t have to work that way and not all countries double tax corporate income. In the U.S., there is some relief in that ‘qualified dividends’ received by individuals are subject to the lower capital gains tax rate.
Over the years, there have been numerous studies by the government and various organizations on how to ‘integrate’ the corporate tax. In other words to have corporate income taxed only once. There are numerous ways this can be done. Two easy ones would be to not have a corporate tax (only tax dividends) or not tax dividends (only tax corporate income at that level when earned). Neither is ideal because not all corporations pay dividends and not all corporate shareholders are taxable (a lot of corporate stock is owned by tax-exempt organizations).
The Tax Reform Act of 1986 called for the United States Treasury to study corporate taxation. This resulted in two reports issued in 1992 on corporate integration (January 1992 and December 1992). Most recently, Senator Orrin Hatch, chair of the Senate Finance Committee (SFC) reported that he is working on a plan for corporate ‘integration’ and the SFC held two hearings on an approach called the ‘Dividends Paid Deduction’ model (May 17, 2016 and May 24, 2016. You can also see the Joint Committee on Taxation report prepared for the hearings right here.
Some of the advantages of corporate ‘integration’ include:
Treats all business entities similarly (although this also depends on the corporate versus individual tax rates applicable to business income).
Removes or lessens a corporation’s tax preference for debt over equity.
So, I will ask the question a bit differently from the The Tax Nook blog post: why not eliminate double taxation of corporate income and find a way to tax all business entities similarly?
Identity theft has so many ways to rear it’s ugly head and and it has, over the years, found its way into the employment sector.
Having known people who have fallen victim to this type of debilitating scam I decided to look to see how that can affect a person’s taxes and what the IRS either has done or is doing to counter or at least make the victim aware.
Well I found that the IRS does not currently notify taxpayers it identifies as victims of employment-related identity theft, nor has it established an effective process to ensure that it sends the required notice to the Social Security Administration (SSA) to alert the SSA of earnings not associated with a victim of employment-related identity theft.
These are two significant findings in an audit report by the Treasury Inspector General for Tax Administration (TIGTA). Employment-related identity theft occurs when someone uses the identity of another person to gain employment. So, taxpayers may first realize that they are victims of this type of crime when they receive an IRS notice of a discrepancy in the income they reported on their tax return. The IRS’s Automated Underreporter (AUR) program identifies such discrepancies when it matches taxpayer income reported on third-party information returns (e.g., Form W-2, Wage and Income Statement) to amounts that taxpayers report on their individual income tax returns.
The TIGTA conducted this audit to evaluate the IRS’s AUR processes to identify and assist victims of identity theft. During the period February 2011 to December 2015, the IRS identified almost 1.1 million taxpayers who were victims of employment-related identity theft. In April 2014, the IRS started a pilot initiative to begin notifying taxpayers that they may be a victim of employment-related identity theft. The TIGTA’s review of the pilot notification initiative found that the IRS did not sufficiently design the pilot to include a representative sample of employment-related identity theft victims. Furthermore, the TIGTA found that the IRS has not established an effective process to ensure that it sends the required notice to alert the SSA of earnings not associated with a victim of employment-related identity theft.