Taxable Talk

California is not a low-tax state. The corporate tax rate is 8.84% for C Corporations (1.5% for S Corporations); both must pay a minimum $800 tax each year. If I’m in my car for any appreciable length of time, I’ll hear a commercial advising you to establish a Nevada Corporation. And, of course, my clients who hear that call me.

There’s a fundamental problem with having a Nevada corporation and doing business in California and hoping you will avoid California tax on the corporation: nexus. If a corporation is doing business in California (have a “nexus” in the state), the corporation is liable for California income tax. Yes, foreign (out-of-state) corporations must pay California income tax.

So if a California business reincorporates in Nevada, you will still have to pay California tax. Now, a Nevada corporation can make sense…if you’re going to operate in both California and Nevada, for example, or if you plan on moving to Nevada. Just realize that if you have a Nevada corporation, and you operate in California, you are liable for California tax, and if you don’t pay, you’re committing a crime. ClubCal is no more fund than ClubFed….

When I was in college, I was taught that there is a right way journal entries should be written and many wrong ways. There’s an appropriate structure to a journal entry, and you want to make sure you keep the appropriate backup.

That has nothing to do with this post.

Indeed, since we’re dealing with bozos here, an incorrect structure is where we need to start. The United States has various financial and currency reporting requirements. If you deliberately structure transactions to avoid these laws, you’re guilty of the crime of structuring.

So don’t deposit $10,000 in cash; make sure your deposits are $9,000. I’ve written on several occasions about individuals who have structured transactions. One bozo did just this, and made sure he never used the same bank branch on the same day (he used $5,000 transactions). Unfortunately for him, the bank manager of the second branch he used happened to be visiting at the first branch he used earlier on the same day. When she wrote up the currency transaction report, she glanced at the account history and noticed the pattern…a pattern that the IRS learned about. That bozo is now spending time at ClubFed.

Today, transactions of as little as $3,000 can be reported if a bank employee is suspicious, and you probably won’t be told of the report. What’s the solution for the crooks of the world? Well, the simple solution is to report your income on your tax return, whether it’s in cash, checks, or credit cards. For the bozos, unfortunately cash is very difficult to deal with, and money laundering is quite illegal.

The truth is that structuring continues, because many get away with. Just be aware you are committing a felony if you structure your transactions (in an attempt to avoid tax or reporting), and if you get caught ClubFed might be in your future.

A few weeks ago, I had lunch with a friend who is a fellow tax preparer. He told me a story of “Abe.”

This Abe definitely wasn’t like Honest Abe. He had gone fifteen years without filing a tax return. He had a cashed-based business, had owned his home for years, didn’t have a bank account, and knew enough about currency rules (he never spent more than $7,000 in cash on anything) so he wouldn’t get caught.

And then one day the IRS knocked on his door. And presented him with a very large bill.

Abe has no idea how the IRS found out about him, but my friend was going to prepare 15 years of tax returns for Abe, until he started saying that the tax system is voluntary, and no one has to pay taxes. My friend told Abe that he’s about to find out otherwise.

The moral of the story is fairly obvious. In these days of currency records and suspicious bank activity reports on transactions of as little as $3,000, it’s pretty difficult to escape the IRS and the FTB.

Have you heard about Kyle McDonald, the guy who bartered his way from one red paperclip to a house in Saskatchewan? Yes, barter can do that for you.

Say you have a box of binders you don’t need. Meanwhile, your neighbor has a box of pens he doesn’t need. So you swap. Everyone’s happy.

So Mr. McDonald bartered his way from one paperclip (worth less than $0.01) to a house (we’ll estimate that it’s worth $100,000). And he didn’t have to pay a penny in taxes.

Now to the real world. Mr. McDonald is Canadian, I believe, and exempt from US tax laws. For Americans, barter transactions must be reported to the IRS. If you swap a box of binders worth $10 for a box of pens worth $10, no one has gained any income. But suppose you swap $100 worth of pens for $10 worth of binders. The person who received the pens “earned” $90. And, yes, he must report that as income.

Barter exchanges have sprung up, and if you participate in one, they function as intermediaries and issue BarterDollars. You don’t have to spend cash at Joe’s pen shop, you just spend BarterDollars. And Joe buys his binders with BarterDollars. At year-end, you each will receive a 1099-B from the intermediary showing your sales.

Bartering can be a good idea. It’s the first form of commerce for man. But the taxman expects his cut, and if you don’t give it to him, and he finds out, you won’t be very happy.