The Tax Rebel

Nexus, or Out of State Trouble

2011-06-03T14:09:00.004-05:00

Nexus is becoming an even hotter topic as the states attack. Nexus means connection, and in the tax world, it’s about who you owe returns and money to. In our electronic world, it’s easy to conduct business anywhere, and that has some challenging ramifications. If you never have out of state sales, skip to the next article. If you do, keep reading.

In the past, in order to have nexus in a state, you had to have some sort of physical presence or connection there. That has usually been defined as an employee providing some service or sales, in person. Employment was the key. For a travelling sales rep or service provider, there’s no easy way for anyone to know you’re there. And just how much time in the state is necessary before you have nexus? For pro athletes, one game! (The money is huge for them and it’s easy for the state to know they’re there.) For everyone else? That’s in the Courts’ hands. Of course, the abuses started by companies using contract workers/outside contractors instead of employees, to do the sales or install work. Clearly, that's a fairly close connection to the corp, but an independent relationship is just that: independent! But the states were able to pierce that thin veil and for the corp to file and pay taxes. And the states have just been pushing that rock further and further up the hill.

What’s driving this is that many states are broke, so they’re fighting for dollars that they believe belong to them. New York is one that believes that nearly everyone owes them money! And NY has been one of the most aggressive about passing rules that say that not only employees establish nexus, but any company that you use that provides services in the state for you. Think about that. Does that mean that if you’re in New Mexico and have a relationship with a firm in New York to install something that you sold, that you’re now operating in NY? NY says yes. And some courts have upheld it so far. Other states are following that lead. All this makes it extraordinarily expensive to do business since the books have to separate sales and payroll by state, and then we have to file and pay in each of those states. Failure to file opens up the worst penalties when you get caught, and often occurs too late for you to then amend your resident state returns to avoid double tax. And did I mention that for LLC’s and S Corps, this all opens up not only the business filing, but the personals as well since the income flows through? It’s ugly. It puts us on the defensive, often forcing us to file, costing you a lot of money in registration, fees, taxes, and accounting costs...just because the risk of losing is too great.

1099 Law is Dead, Ding Dong Ding Dong

2011-02-03T15:48:00.003-06:00

Finally, some fortitude has been discovered on Capitol Hill after even the IRS said they could not handle the silly 1099 reporting rules created in the Healthcare Bill. So the Senate overwhelmingly just repealed it, and the House will soon follow, and the President has already said he'll sign it.

YAY! Sad to be this happy over something that should never have happened. And the reason it took so long? Well, this is the first leak in the dike of the Healthcare Bill, and you know that the supporters are terrified that once you break a hole in it, you might break open some more.

We can only hope.

(Note that this does NOT apply to landlords' mandatory 1099 reporting in 2011 for expenditures for services of $600 or more to unincorporated entities/individuals. So that's still on.)

Escape to Wisconsin stickers back?

2011-01-12T15:25:00.004-06:00

Well, the IL dead duck legislature, before leaving office in minutes, thumbed their noses at big business and individuals in the state. IL now reportedly has the highest corporate income tax rates in the industrialized world. Think about that a moment. So while WI has learned that the big government/high tax experiment of the past dozen years was an utter failure, IL is figuring that they can pull it off. Meanwhile, Caterpillar and most other large companies are lining up the moving vans to go somewhere else, anywhere else, to do business. You'd think that high unemployment problems would give the politicos pause enough to wonder how to get more jobs, not less.

And while IL kindly doesn't tax pensions or social security benefits to try and encourage retirees to stay in the snowbelt, they just bumped the income tax rate by 67%!! which is unconscionable.

Kiss new employment goodbye, which will certainly strip off all that new revenue planned by the tax increases. Oh, and did I mention, every state that has ever raised taxes to get new revenue, actually saw a decrease in revenue as a result? Yes. History means nothing to some folks. Who pretend to represent us.

So dig out those old bumper stickers, Escape to Wisconsin, where they are now open for business, which has become the new slogan for the governor and legislature there. They're on to something. IL isn't.

Final Tax Bill 2010

2010-12-24T13:10:00.002-06:00

First off, I need to give credit where credit is due: The President demonstrated real leadership by corralling the ENTIRE Congress into doing the right thing this time. It was remarkable to watch as I watched it unfold, recovering from emergency surgery. We should hope that this continues.

The tax extensions we've been waiting on for over a year have now been passed. The news articles are fairly accurate, so I'll keep this short and simple, since most of the changes are indeed pretty simple. Some filings will be delayed while IRS reprograms now.

First off, a correction from my Dec. newsletter. The energy credits are available for heating/AC units INCLUDING the installation. You're still limited to a max of $1500/30% credit. Nothing else can include installation.

Basically, all that has been under the tax law is extended for two years: rates, exemptions, deductions, cap gains, etc. And the energy credit for your home is extended for one more year, but reduced to $500/10% credit for those of us who had something we wanted to do, but haven't yet!

Changes include a reduction of the employee share of SS/SE tax of 2%, which is basically in lieu of the Making Work Pay Credit that we've had. So you'll see increases in your net pay for those on payroll, beginning 1/1/11. The tuition DEDUCTION has been increased from $2000 to $4000 for those eligible to take it and can't take the credits. We have a new bonus depreciation for businesses for one year, of 100% of the cost of the asset. (This does not apply to cars.) Now the really aware might wonder, what's the difference between that and Sec. 179 where we write the whole thing off anyway? The difference is that to use the 179, we must have a profit, or it carries over to later years. The bonus depreciation allows the write off even if there is a loss, which can then offset other income from W2's, etc. The estate tax is reinstated for 2010 retroactively, at the $5 mil level, or you can opt for the pre-existing 2010 rules where there was no tax but you had to adjust basis of inherited assets. (Call it the Steinbrenner rule.) And there is now the opportunity for spouses to double that $5 mil when the second spouse dies. It requires filing an estate return for the first spouse, even when unnecessary otherwise, so some planning and updating with your estate tax attorney is advisable.

Finally, in IL, without any notice, fanfare, or news from the media, there is an AUTOMATIC presumption that you owe some use tax for web purchases out of state, and everyone will pay a few bucks based on an income table. It is literally only a few bucks, usually less than $20, and hopefully the property tax credit will offset it for the retirees who likely don't even use the internet to buy stuff!

And...my world is getting complicated. The IRS is really forcing accountants into some very difficult positions as we're expected to police you, without compensation, of course. The penalties that they are leveling against preparers are scary: $500 or $1000 per return, depending on the mood of the auditor, BECAUSE WE SHOULD HAVE KNOWN SOMETHING YOU DIDN'T TELL US! And the penalty is non-appealable! We must go to court to have it rescinded. So the auditors now have power beyond belief. While preparing an audit is expressly NOT an audit by the rules, they're taking a mid position that we need to be asking more questions and not ignoring things that the IRS thinks are obvious. Example, you're self employed, and show me net profit of $15k, your wife doesn't work, yet you manage to make mortgage payments, eat food, and clothe the kids. That's pretty clear that something's up! But when it comes to mileage, charity, entertainment, and many others, you really need to provide me the info and have documentation to back it up. If I have any reason to suspect that you might not, I have to leave it out. Don't make me do that! I'll be asking more questions now, make sure you have the right answers.

Post Election...now what?

2010-11-04T15:40:00.003-05:00

Now we enter the land of deadlock and loggerheads for two years. The bad news? Nothing much good can get done, or the bad undone. The good news? Nothing much worse can happen!

There is now bipartisan agreement to quickly get the silly 1099 reporting law repealed. As it turns out, it was inserted into the HealthCare bill by a staffer who'd never worked in small business before and figured that you could just punch a button and out the 1099's would come. This is why our officials need to read their legislation BEFORE they vote on it. Novel concept, I know.

House Ways and Means, which controls the money, will now be headed by one of the best and brightest people in our land, not to mention in Wash. DC, Wisconsin's Paul Ryan. So there is much hope now that the financial controls can get put into place. I'm not sure that any of us will like it! We're all pretty spoiled, frankly, and the hard decisions will make us all hold our breath until we turn blue. But it won't matter. It has to be done.

Pray for our leaders. They really do need it. And so do we.

Registration of Tax Preparers

2010-09-02T15:06:00.005-05:00

Beginning this Fall, a new registration and testing scheme is being implemented by IRS under the guise of ensuring that the public is protected and that all preparers are minimally competent. I call it a guise, since it won't have anything to do with that, of course. The reason? For those who already have some letters after their names, no testing will be required. So attorneys (most of whom have little no knowledge of taxes), CPA's practicing in large corporations or conducting audits of large corporations (most of whom have little to no knowledge of taxes), will be exempt. They'll be required to register and pay the fee/tax, but are not required to pass a competency test.

The original aim of this was indeed to ensure some level of minimal competency, (AND raise money!) and the target was clearly, though never ever spoken, the large chains and franchise stores who hire seasonal preparers with no experience and who return to some other life as soon as it's April 15, not to be seen again. When the AICPA and the Bar Association successfully lobbied to exclude their members, regardless of their tax knowledge, the competency aim missed the target. Many of the strangest questions that we get on the tax professionals' forum come from CPA's or attorneys who end up having to do a return or counsel someone. But they would be allowed to prepare returns without testing.

The truly sad thing is the unintended consequence of this shortsightedness. Much as new gun laws don't make gangsters turn in their guns, this registration and testing is really more about politicians being able to say they did something. Worse, they're hurting people who are already hurting. Who uses the chains and franchise stores that specialize in cheap returns and refunds today? The poor. The poor are the very ones who will suffer under this new scheme, since the chain stores may have to increase prices to cover the registration and testing fees, and the continuing education requirements for seasonal employees. Or, be more selective about those employees, cutting their staffs. Either way, it'll be a little harder and/or more expensive to get services by the people who already don't have many options. Most can't even go get TurboTax and do their own returns unless they have a computer. So they're stuck.

It makes me sad, and a bit angry.

1099 Insanity Update

2010-07-08T16:13:00.005-05:00

There is now word from IRS that they will NOT require 1099'ing on any credit card transactions. Imagine that. So what that does is force us to set up TWO vendor accounts for each vendor instead of one. Since the CC transactions can be ignored, you'd still 1099 for everything else. I don't see how that helps much.

And I wonder what the credit card reporting system turns into then. For some reason, the hair stands up on the back of my neck now. Something's afoot, and it can't be good. Kiss a big chunk of your freedom goodbye.

For anyone who thinks this is as bad an idea as I do, lookkee here: IRS Seeks Comments on New Form 1099 Reporting Requirements

In Notice 2010-51, the IRS invites public comment on how to most effectively carry out a law change that will require businesses to report a wider range of payments to contractors, vendors and others, usually on Form 1099. The new reporting requirements take effect for payments made after December 31, 2010. These comments will help the IRS issue guidance that implements this provision in a manner that minimizes burden and avoids duplicate reporting.

Under a proposed regulation, many business purchases made with credit or debit cards would be exempt from the new reporting requirement because they are already reported by banks and other payment processors. The IRS seeks comments on additional circumstances in which duplicate reporting might otherwise occur and on rules that would prevent such duplicate reporting.

To submit comments:

Via e-mail to Notice.Comments@irscounsel.treas.gov. Include "Notice 2010-51" in the subject line.

Mandatory 1099 Insanity

2010-06-09T12:23:00.004-05:00

Buried in the 2000+ page Health Care Bill (or lack thereof, frankly), that no one in Washington bothered to read, is a provision that will change the face of business in America. That is not too strong a statement. The actual language is fairly minimal, merely adding corporations to recipients required to get 1099'd for revenue paid to them by businesses, and then adding a provision that it applies to ALL payments, products AND services. Effective 2012!

This one you have to stop and think about. So for a business, and remember that 95% of business in the US is small business, EVERY dollar of payment will be reported either on a payroll form, or a 1099. Every expenditure at Office Depot, or Home Depot, WalMart, UPS...ALL vendor payments. This is amazing in its scope. Literal forests will be chain-sawed to the ground to create the paper that will then be semi-trucked to WalMart headquarters. Unemployment will cease, since accountants will now have to engage bookkeepers to do the detailed accounting work for each client, or the client will have to hire one, the WalMarts will have to create whole new departments to receive the truckloads of 1099's and then do something with them, the trucking industry will grow, and fuel for the trucks will be used in record amounts! I wish I was making this all up.

And...every small business will have increased accounting or bookkeeping costs as a consequence, since EVERY vendor will have to have a detailed profile, a FEIN on file, and every transaction recorded in detail. Basically, Quickbooks will be required for even the very smallest businesses, because when errors and disptues come up, it will be necessary to substantiate where your reported numbers came from. This is hard work, something that I've managed to avoid in the 25 years that I've been in business, since the 1099 reporting was directed to unincorporated businesses providing services only. Which might be about 10% of the expenditures for many companies. Now, every business will have to conduct its accounting just like a large company. No options.

Note that while the business community will be buried under paper and reporting requirements that they will NOT be able to handle or pay for, the IRS will not be affected at all. Why? Because all this reporting will be done electronically and pushed into a computer somewhere. No human work at all. They'll be completely insulated from this insanity. Nice, huh? (I do wonder if even the IRS computers are capable of handling this increased reporting, tho'. It will be overwhelming even to them.)

Now, let me explain the ramifications, as if what you've read isn't bad enough already.

The IRS will now have EVERY transaction of EVERY business that's not retail. Every business to business transaction will be reported. So the IRS will now know every dollar of income unless you're in retail, and every dollar of expense. Getting a little spooked yet? And they'll be able to match all that with your tax returns. You want to claim an expense? Better have issued a 1099 for it, or disallowed! You trying to trim a bit off your income? Whoops. They know what you got paid now, so no cheating. And, in my mind, they can pretty well eliminate the audit staff since the computer can simply send out bills for the mismatches.

This one needs to die now, but sad to say, I can see that this will come one day anyway. Are we ready for this level of intrusion?

Attack on S Corps/LLC---and small business!

2010-06-07T17:53:00.002-05:00

Big news is the attack on S corps and LLC’s in the annual extensions bill, which is the legislation that extends certain expiring tax provisions. The attack is to treat the profits of small ‘professional’ service firms the same as sole proprietors, throwing out decades of case law defining reasonable salaries and completely ignoring the corporate structure. It pits small firms against larger ones who are not subject to the rule. ‘Professional’ services is defined to include most service businesses. The SS ceiling is around 106k this year, and the Medicare tax runs beyond that. A firm earning around that 106k, who has used a reasonable salary of 60k, for example, will see increased taxes of $7000. It would take effect next year. The same rule applies to LLC’s, and includes spousal ownership. It seems to have enough support for passage...stay tuned. This will change everything in entity choices. and is a blatant attack on small businesses for revenue raising in the SS system.

Small businesses, by and large, start as sole proprietors, and all profits are subject to both income and SS taxes. As businesses grow, generally they migrate to either an S corp or an LLC depending on the particular situation, where they have been permitted to set a reasonable salary for services performed, just as larger corporations do. This has been upheld in the Courts, who have defined the issues used to arrive at a reasonable salary. Sadly, due to much abuse by S corp owners and their accountants over the years, rather than auditing those corps who do NOT report reasonable salaries, Congress had decided instead to issue the death sentence to all small business owners using these entities. By requiring ALL profits of these firms to be subjected to SE or SS taxes will double those taxes, which are generally already far more than the income taxes reported. And it completely removes any reasonable options for the small business owner in choosing an entity. For all practical purposes, they'll remain taxed as a sole proprietor, or taxed as a large corporation with oppressive burdens of reporting and taxation not intended for the small business.