Question:

Hello, I’m a bit confused with this notice I got from Delaware revenue division, about not filing and/or paid Personal income tax for years 2004-2007. I conducted business in the state of DE in the tax year 2003 for which I did file my return and paid, but I moved out of DE in December 2003 and I am in business in the state of Pennsylvania ever since where I filed my taxes for years 2004 up to date. I responded to the notice letting them know about my move out of state and now after a month I get a second notice in which there`s still no amount I owe or anything else attached to reply to like the first notice. I really don`t want to get audited right now and I`m asking for your advice in this matter.

Answer:

Normally, when winding up a business it is expected that you mark the last tax return as “FINAL RETURN” then the taxing authority, whether it is the IRS or a local agency knows not to expect a tax return the next year.

You have a number of options, I’ll point out the right way to do it, I leave you to find all the wrong ways.

File a tax return for 2004, with 0.00 income and 0.00 expenses. Mark that return as Final.

You could also file all 4 returns as above, marking the 2007 return as final.

As long as this is the truth, you will have your best shot. Even if you are audited, you have done nothing wrong, and have good foundation to make the argument.

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 Question:

I am a non-resident alien (on L1 visa) working in Texas. I would like to know if I am eligible to claim income tax benefits in the USA if I avail a home loan in my home country (India) to purchase a new home there (in India).

Answer:

Nope.

The deduction only applies to a primary residence (that home that is frequented more than 50% of the time). That would be a very long commute to Texas every day.

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Question:

 I live in Massachusetts and I am considering opening a DBA company and I am a little confused as to how I would pay myself, the owner, a “salary” and not be double taxed. Can you please give me an example with some figures?

What about ROI, how does that work in regards to taxing?

Answer:

A DBA is no a separate business entity, DBA (Doing Business As) is simply a registration of you using an alternate name in business.

There is no separate tax return, all of the money the business makes is your money and you will pay your personal taxes on it.

For example you are operating and have $10,000 of income in your side business, it costs you $1200 for advertising, $3000 in the costs of the goods and $300 in telephone costs. Leaving you with $5500 of net business profit, in addition to your 9-5 income of $45,000 a year.

You will have to pay self employment tax on that $5500 of 15.3% ($841.50), Federal Income taxes of (if you are single) 15% ($825), (if you are married, that will depend upon total family income) possibly 25% ($1375) so the taxes are $1666.50-2216.50, leaving you $3833.50-3285.50 for your hard work.

You mentioned double taxation, which only applies to a real corporation paying you a dividend, but let me run the numbers if you did this as a real corporation, AND took the money as a dividend.

If there was $5500 of profit in a real corporation the tax would be 15% leaving $4675 after tax profit. IF you paid a dividend that would be taxed at 15% leaving $3973.75 to spend.

Hmmm, that would be . . . more . . . so the double taxation myth is not as bad as we first thought. In fact it is quite a bit lower that the “Single Multi Tax” of the personal tax return.

It gets better with larger numbers.

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 Question:

I had a condo in San Diego California and used it as my primary residence for about 1 year before I ran into financial difficulty. I paid $480K for the condo. Because it was a “No money down, interest only” loan, I had to get a first mortgage of $380K and a second line of credit “Heloc” for $100K. Both loans were taken out at origination of the loan. I have foreclosed on the property after trying to Short sale and “Deed in Lieu of foreclosure” but both efforts failed. I have recently found out that this is a recourse loan (I never even knew what that was) and I still keep getting the bills for the “Helloc” as they say it was a line of credit and I have to pay it. It is my understanding that because both loans were taken out on origination, that they should both fall under the foreclosure???? Also, what can I expect on the Tax side of this as the foreclosure sold for $380K which leaves me upside down by $110K ($490K – $380K) Any and all help much appreciated.

Answer:

 You personally guaranteed the loans so you are expected to pay them back.

The foreclosure was probably done by the first lien holder – the bank – which means they broke even except for foreclosure and sale costs, you can expect that is about 10% of the sale price (realtor fees, closing costs, etc). You will probably be forgiven $38,000 of the first mortgage. That will be attributed to you as income and you will be obligated to pay taxes on it.

The Second, or HELOC is still outstanding. At this point the lender has not written it off as bad debt, they are still trying to collect it. Once they write it off, you will be obligated to pay taxes in that as if it was income.

If you pay off the Heloc then you can deduct any interest payments on your tax return.

I realize that you, like so many others, did not understand that when you were buying your house, you asked these two banks to trust you and put their money at risk, which they did. All they expected and still expect is that you will make it right, that you also put something at risk.

If you had known that you could be expected to pay tens of thousands of dollars if the deal fails, you might have thought twice about selecting a house that you could not actually pay for, and starting in a negative equity position.

Now that you know that the goal of home ownership is not to live in a house you can’t afford, but to build equity in a house that you can keep, you will handle the next purchase differently.

Follow-up Question:

 I understand all you said. This will ultimately mean that I will pay tax on about $140K which will be about $42K (1st and 2nd loan combined) that I will owe the IRS. Correct?

But the problem is compounded by the fact that I lost my job and have not been able to find another for the last 6 months. How will I be able to pay this amount? Would the IRS agree to $10K (This is all I have in savings)? I have no assets. I have nothing left. What am I to do? I feel so hopeless. If you were in this same situation what would you do …..step for step.

Not sure if I said but both my first and second mortgage loans were from the same bank at origination (Countrywide)

Follow-up Answer:

All said and done it could be more than $140k, adding collection costs, etc. It could be less, the bailout that congress passed might force the lenders to discount their loans by 15%.

As to what the IRS might take, you will have to Negotiate it, they might take less, they WILL accept payment plans, but you need to stick with them.

If you have nothing to lose, then the worst case is you will owe the money.

I don’t want to sound harsh, but there is nothing keeping you from getting a job. Don’t believe that jobs aren’t available, they are. It is just that the people that won’t actually work won’t keep their job now.

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 Question:

Can a sub contractor charge a contractor more on per diem than they pay their employees? Our employer charges 95 – 120 per day on the contract but only pays us 85 per day is this legal?

Answer:

The two agreements aren’t really related.

Agreement 1 between you and your employer: You negotiated a per diem rate, you agree to work according to the terms as laid out, you can change them or not work at any time.

Agreement 2 between your employer and the customer. Your employer has negotiated a per diem rate with the customer, they have a right to negotiate something different or refuse to contract with your employer.

Your employer is making a profit. Adding a percentage to costs is one valid, common, acceptable way to determine a profit. Just as your local retailer sells everything for more than it costs.

There are no “legal” questions here, simply a question of whether everyone is satisfied. If a client was not satisfied, he’d look elsewhere for a service provider, if an employee was not satisfied, he’d look elsewhere for employment.

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 Question:

My parents have a trust for their assets and I am the executor. Apparently as part of the trust they each also have a will. When one dies, is it necessary for the will to be read or does the trust automatically take over?

Answer:

The trust only has affect over those assets that are transferred to the trust. Any assets that have not been transferred would fall into the will. The will is a catchall. In a perfect world, the trust would be updated every month and all assets would automatically be registered in the name of the trust. But we’re not all perfect yet, so for the less perfect of us, the Will is still a part of the process.

The will probably doesn’t have much detail.

In fact the only thing a Will actually DOES is provide for minor children, beyond that it is only a list of “Suggestions” to the probate court.

Probate is something to avoid if possible, now we are back to the trust. The trust can avoid probate.

The “reading of the will” as in so many old movies in Hollywood is a fiction. You can get together in a musty old wood paneled office and have some grey-haired guy slowly and methodically read the passages of the will. But the probate court is where the work is done. As executor of the WILL, it will be your responsibility to gather a list of all the assets of the deceased (not those correctly held by the trust) advertise for creditors, fight, negotiate, and pay off those creditors, deal with the probate court that will have a standard order and organization of how assets should be distributed, and explain that the Will may have a different plan. Work out a reasonable distribution process; as long as nobody contests the will, and finally make distribution of any assets that might be left.

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Question:

I live in Texas and on August 1 became a partial owner in an S Corp engineering firm. From January 1 to August 1 there was just one owner. On August 1, 4000 additional shares were issued. The original owner has 100,000 shares and each of the 4 new partners has 1,000 shares, I being one of them. The original owner has taken quarterly disbursements on the corporation profits. Of course, he took 100% for the first two quarters. He is ready to take the 3rd quarter disbursement, and we will also get a disbursement, based on our 0.96% share of holdings. My question is this. He said that our disbursement would also be prorated based on the fact that we were not partners for the entire year. Is this the correct way to do it? Would it be prorated on our share of ownership for the quarter, being 2/3. Would it be done on our share of the year to date, being 2/9? Or some other formula. Please respond and inform me of the proper accounting principles that would apply.

Answer:

 Your disbursement of the “tax liability” is well defined. At the end of the year, you will be required to pay taxes on .96% of the profits generated by the sub-s during the time you were an owner. This has nothing to do with how much of a check you get during the year. The exact process is well explained on pages 20-21 of the 1120-s instructions, you can download it from the IRS website IRS.gov, but in brief, each stockholder is responsible for the taxes on profits or losses for each day they were a stockholder. So from the day you received your stock until the end of the year you are a full sub-s stockholder, and for all the days you were not a stockholder you do not get any benefit.

I make this distinction, because you have mixed two separate concepts, the required distribution by law (and in a Sub-S the only thing that is required to be distributed by law is the tax liability) and the payment of dividends to stockholder (which is a matter of decision by the board of directors). Now distributions to stockholders must be commensurate with percentage ownership, so you would have a right to .96% of any dividend that is paid out.

You will be required to pay taxes if the business is profitable whether you ever get a nickel as a dividend or not. Let me restate, it is possible and even painfully common that minority stockholders of a sub-S end up paying more in taxes then they ever receive from the company.

Not that your boss has any intention of doing that to you. Obviously making you less than happy in the business would be counter productive, I just don’t want you over expecting and then being disappointed. But it is something you need to know. So, next year, if the company is profitable in the neighborhood of $100,000, you will have to pay taxes on $9600.

You do not however have an automatic 3.5 days on the company boat as a stockholder, or 1 nights use of the company ski cabin, or any other perk the company may have available.

Follow-up Question:

Thank you for your explanation of Sub S liabilities. So am I correct to think that I should receive 0.96% of a September 30th distribution, without any proration for partial year ownership?

Follow-up Answer:

I’m not trying to be evasive or hard to understand, I am just trying to be accurate:

There are no standards or requirements or expectations that can determine what you might receive other than what the board of directors chooses to distribute. They might distribute each month, or they might choose to distribute quarterly, once per year, or not at all. the amount of the distribution is also at their discretion.

If there was a single distribution at the end of the year, it would be reasonable although not necessarily defacto that you’d receive 0.96% of the percentage of the distribution that would be applied to those months that you held the stock.

If they distribute monthly, then there is less play in the numbers. And you would have a right to a full part of that distribution for any month you held stock the entire time.

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 Question:

We currently are operating an LLC out of the state of Arizona for our software organization.

We have been looking into adding members to the LLC to ensure the future of the organization, however, two of those that we would like to add do not live in the United States. One of them lives in the Netherlands, and the other resides in London, UK.

Here is the thing that throws a monkey-wrench into this. None of our partners or “members” make any profit or personal gain off of the operation. Every representative of our organization is unpaid. We are not nonprofit, but rather, all income goes back into the project.

We are concerned that adding our two members as members of the LLC will result in them being taxed for income they did not technically make.

Could you please clarify a bit what, if any, tax liabilities our two overseas members may incur?

Answer:

To answer your explicit question:

The LLC would be obligated to withhold (and pay to the IRS) 30% of the money attributed to non-us members.

Depending upon the tax treaty between countries they could get credit for those withholdings in their home country.

Now to point out from your explanation:

You say you are profitable, but that no one is taking any personal distributions, that all of the money is reinvested back into the business.

YOU DO UNDERSTAND THAT THE LLC HAS COST YOU THOUSANDS IF NOT TENS OF THOUSANDS IN EXTRA TAXES.

You have had either less money to put back into the projects or the members have paid a lot more in taxes for the privilege of being associated with this business than they needed to.

Either way it is bad.

You are operating in an entity that is designed for failure, not success.

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 Question:

The Tribe wants to give out bonuses to its employees (6) at $300.00 for Christmas. We have an upcoming payroll on 12/23/08. I would like to know if this can be given out separately, but am unsure of how much to deduct in taxes. Do I do it without a flat 25%? How do I deal with this with the taxes?

We provide our taxes electronically to the IRS with each payroll.

Answer:

Bonuses are handled and taxed just like payroll. All the same taxes, all the same withholdings, all the same paperwork.

You can “give it out separately,” but it is not separate or different as far as taxes go.

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 Question:

 I prepared my S Corp tax returns for the first time this year and made a MAJOR mistake(so much for trying to cut cost!). I reported an income but found out in doing my personal income tax that the 1099 was made out to me not the Corporation. As the deadline has passed for the Biz tax return and I filed the return with the error(that I realized after the fact) I wanted to know if it would be an automatic audit if I went ahead and filled out an amended return explaining the situation and also rectify the problem on the return. I would then have a correct schedule K-1 to accompany my personal tax return and at least that would be correct… and most of all… all would be legal…I think!

Because I did receive a 1099 and I did deposit the check in my biz bank acct., so I can always prove this!..

My question then is…if I do that do you think that I would automatically get audited? Does being audited mean I’ll have to pay a fine? I’ve gotten advice to just wait and see if I get audited and to report the income on the schedule C and also report an expense in the same amount on the Sch C, call the expense Nominee income expense and add the TAXID of the SCorp. So the balance on the schedule C should be zero. This last advice I was told was not a “solution by any tax literature”… hence my hesitation. Please advise.

Answer:

Filing an amended return does not automatically trigger an audit. It could increase the potential for one. Leaving a tax return wrong may also increase the potential for an audit. Even if you were audited, if you did nothing wrong you will not pay any fines. Anyone that claims to know what will cause or avoid an audit absolutely is lying. Audits do not normally appear out of the blue.

When your tax return is sent to the IRS it is input into a computer, the computer cross references all the info it has such as w-2, 1099, etc. verifies the math, checks for typos; it also compares you to a profile, if you fit profile of a common tax payer it moves onto the next return. IF it finds an error it can resolve, determines you broke profile, or some other determinant, it kicks it out to a person that reviews it and tries to resolve any issues. If the person cannot resolve the issue, they will send you a letter called a “letter of inquiry” (we call them nastygrams). If you can competently explain away the problem then it ends there. If you can’t it could expand into a full blown audit. (This last part of being able to explain it away is a good reason for you to continue to do your own taxes. You don’t think your accountant will remember any details of your tax return in 3 days do you, much less in 3 years when audits normally happen).

Making mathematical and accounting errors is very common. Correcting those is not a problem. Not being able to explain it . . . that would be a problem.

As an aside, since the Sub-S is a pass-through entity, and you personally pay your personal tax on all of the income, it becomes a moot point, there is no effective difference in the tax that is due.

Now if you wanted to lower your potential for audit, AND pay lower taxes within the rules, then I would recommend you start doing business like all the most successful businesses do.

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