LLCs vs. S Corps in California

Posted on January 23, 2006 by Russ

In my practice, I see a lot of S Corporations, but very few LLCs (I can count the number on one hand). Yet, according to Christopher Hoyt of the University of Missouri at Kansas City (writing in the TaxProf Blog), this is the opposite of what’s being recommended in law school. So why the difference?

Hoyt notes the statistics, and presents a graph showing that S Corps remain twice as popular as LLCs (based on new S’s vs. new LLCs). Joe Kristan of Roth Tax Updates then speculates on the reasons behind this. His points on salaries, and the uncertainty of how LLCs are to be treated for self-employment taxes are on point.

Kristan also notes that state issues have a material impact. He notes that in Iowa (his home state), LLCs are tax-disfavored (versus S Corps) for multi-state operations.

In California, there are two major factors working against LLCs. First, all S Corps and LLCs in California must pay a minimum state franchise (income) tax of $800 per year (or 1.5% of net income, whichever is greater). But LLCs also face a gross receipts tax, so LLCs in California are triple-taxed! The current minimum gross receipts tax (called an LLC fee) is $865 per year. Second, some businesses are prohibited from being in an LLC. These include professionals, such as architects and accountants. (They can form LLPs, though).

If you’re at all interested in forming an LLC read the articles. They’ll enlighten you about some of the tax issues facing LLCs.

Hat Tip: TaxProf Blog & Roth Tax Updates

Posted in California, Entity Formation | 4 Comments

Hatch Trial Continues

Posted on January 22, 2006 by Russ

The trial of former Survivor winner Richard Hatch on ten counts including tax evasion continues in Providence, RI. Today’s New York Times has an excellent story on the trial, including reactions from some of his fellow contestants.

Hatch, who took the stand in his own defense on Friday, will return to the stand on Monday. Hatch claims that the producers of Survivor agreed to pay his taxes. However, his Form 1099 does not indicate this. Hatch faces up to 73 years in prison if convicted on all counts.

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Throwing Out the Trash

Posted on January 21, 2006 by Russ

Over ten years ago, in the nearby City of Orange, a trash magnate was born. His name was Jeffrey Hambarian, and he was a hometown hero.

Mr. Hambarian had an interesting method of operating his business. He told his vendors that they had to make phony invoices and/or pad legitimate ones, and funnel most of the phony profits to him. He then laundered the ill-gotten gains through check cashing outlets.

This scam continued for some time, until an accountant noticed a problem during an audit. The accountant told the city, there was an investigation, and eventually Mr. Hambarian found himself convicted of 47 counts including grand theft and filing false income tax returns.

On Friday he was sentenced to 15 years in state prison and to pay $12 million in restitution. While his attorney complained that, “I don’t know what warehousing him in a state prison would do,” a prosecutor noted that, “…these are serious crimes.” Usually, those found guilty of 47 felonies find themselves behind bars.

News Story: Los Angeles Times

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Ohio Is Traded…Again

Posted on January 19, 2006 by Russ

Last year residents of Ohio who made estimated payments sent their payments in the second half of the year to San Francisco (the Fresno IRS Service Center). Well, Ohio has been moved (again), now to the Kansas City Service Center. On the bright side, it’s now much more difficult for your returns to fall into the San Francisco Bay.

This is just one of many changes the IRS announced. So check the label on your IRS package. Of course, if you efile this is irrelevant.

Also, don’t forget that it’s possible that the address you send estimated payments to has also changed.

Posted in IRS, Ohio | 1 Comment

H&R Block v. Intuit

Posted on January 17, 2006 by Russ

While driving this past week, I heard a radio commercial for Intuit’s TurboTax, stating that more returns were prepared on TurboTax than by H&R Block. Well, not so fast, says Block. The Kansas City based Block filed a lawsuit against Intuit in Kansas City on Friday.

Not so fast, says Intuit. We sued you first, in California.

H&R Block got a restraining order in Kansas City against Intuit using that advertisement (with Block’s name). Today, arguments were scheduled to be heard in Kansas City on ending the restraining order.

We’re often asked, by the way, about Turbo Tax and H&R Block. Both are fine (in our view) for simple, basic returns. TurboTax is excellent if, for example, you need to file an extension and you want to get an idea of what you owe (so you can make your payment with your estimate). But when you have a complicated return, you get what you pay for.

News Story: Kansas City Business Journal

Hat Tip: TaxProf Blog

Posted in Tax Preparation | 5 Comments

All Rapped Out

Posted on January 17, 2006 by Russ

After taking a few days off for an annual convention, would I return to an in-basket bereft of the usual tax evaders? Hardly.

Joe Kristan of Roth Tax Updates reported on some of the more felonius evaders, including Richard Hatch (now on trial for not reporting his Survivor winnings) and a West Virginia accountant who stole more than $1 million and still owes over $500,000 in taxes.

But there’s more out there (as always). Rapper Mystikal won’t be on tour anytime soon, as he’s added a concurrent one-year sentence for tax evasion to his 2004 six-year sentence for sexual assault. Michael Taylor (aka Mystikal) failed to report $2 million in income to the IRS. Taylor must make restitution, including interest.

Perhaps Mystikal can, when he gets out, re-record “I Fought the Law [and the Law Won].”

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Virtual Profits = Taxes?

Posted on January 10, 2006 by Russ

The TaxProf Blog links to an extremely interesting article by Julian Dibbell on whether virtual profits in online multi-player games are taxable under the Internal Revenue Code. There’s also a link to a second article on CNET titled “The Tax Man Cometh, Online.”

So, let’s assume you exchange your spells for 100 Gold Pieces. Is there any tax due? Well, since it’s in a game, I’d assume not. But if you sell your spells for $100, haven’t you made $100 in income and owe tax? Luckily for online gamers, the IRS’ response was “That’s so wierd.”

I think it would be humorous if every time there were an online transaction in one of these games, a virtual IRS agent appeared and demanded his cut. Actually, this isn’t as far-fetched an idea as you might think.

The people playing these games pay a subscription price to the companies running the games. Aren’t taxes a fair way for the gaming companies to earn their incomes?

Hat Tip: TaxProf Blog

Posted in IRS | Tagged | 1 Comment

Why the Franchise Tax Board Is “Fun” to Deal With

Posted on January 9, 2006 by Russ

Let’s assume you disagree with a decision that the Franchise Tax Board (FTB) makes on your tax return. You go through the FTB appeals process, and get nowhere. California then allows appeals to the Board of Equalization (BOE). Today, let’s look at a recent decision by the BOE in Appeal of Costco Wholesale.

Costco took advantage of California’s Manufacturers’ Investment Credit (MIC) for its in-store bakery and meat departments. Previously, the BOE had rules in Appeal of Save Mart Supermarkets & Subsidiary that supermarkets were eligible for this credit. Costco asked for a refund of taxes paid between 1996 and 2001 because of the MIC. The FTB didn’t like this decision, and elected not to follow it. Costco appealed the FTBs disallowance of the MIC to the BOE. The BOE faced three issues: Whether Costco qualifies for the deduction, whether bakery and meat departments qualify, and whether the BOE has authority to invalidate an FTB regulation.

The easy part of the decision was that Costco is a qualified taxpayer. The BOE followed the Save Mart case and found that Costco’s bakery and meat departments are just as qualified as Save Mart’s to get the MIC. And finally, the BOE believes that the California Legislature has given the BOE the power to invalidate FTB regulations when the BOE determines such regulations are contrary to statutes.

No word yet on whether the FTB will continue to fight such cases.

Coverage: California Enrolled Agent Magazine, January/February 2006 issue (not on the web), CMTA Capitol archive, 10/27/05.

Posted in California | Tagged , | Comments Off on Why the Franchise Tax Board Is “Fun” to Deal With

Nexus, My Nexus, Where Have You Been?

Posted on January 9, 2006 by Russ

There are two concepts that tax accountants have trouble explaining to clients: basis and nexus. And this leads to two recent items that have as their basis nexus.

First, on December 31st, the New Mexico Supreme Court ruled that a corporation with no physical presence in New Mexico can be forced to pay New Mexico income tax. The case dealt with a subsidiary of Michigan based K-Mart. K-Mart put intellectual property into the subsidiary. The subsidiary had no physical presence in New Mexico. New Mexico claimed that the subsidiary was formed just to lower the corporate parent’s tax bill, and served no real business purpose; thus, the subsidiary must pay corporate income tax. (Also argued was whether New Mexico’s gross receipts tax applied to the subsidiary. The New Mexico Supreme Court held unanimously that it doesn’t.)

Now, this case is interesting, but it likely will not be the last word. I mean, do corporations really structure transactions to avoid taxes? And do states write their tax codes to force businesses to structure deals in bizarre ways just for tax purposes? Well, I should probably tone down my sarcasm….But really, until a case comes up where a corporation has no physical presence in a state, and that state attempts to force the corporation to file and pay that state’s corporate income tax, will I be worried about the impact on small companies.

Separately, Business Week recently commented about the coming of a uniform sales tax allowing all Internet transactions to be taxed. The Streamlined Sales Tax Project is a group of states working on a means for a uniform sales tax so that states can get around the famous Quill Corp v. North Dakota decision. Business Week believes that the streamlined sales tax will happen really soon.

I believe the reality, at least for Californians, is that we won’t see this for many years. Perhaps other states are working towards a streamlined tax, with few differences in rates. California, though, continues to pass sales tax rate changes for numerous special districts. Consider just Fresno County. Fresno County has one tax rate, while the City of Clovis has another. And both of those rates are different from anywhere else in the state. There are at least two sales tax increases on the June ballot in California. Thus, I don’t see sales tax uniformity coming any time soon to the Golden State.

News Story: Santa Fe New Mexican

Posted in New Mexico | 1 Comment

BOE Flood Relief

Posted on January 6, 2006 by Russ

For taxpayers in Northern California impacted by the recent storms, the Board of Equalization has extended deadlines for filing California sales tax and fees collected by the BOE by one month. Returns (and payments) originally due on January 31st are now due on February 28th for businesses in these counties:

Butte, Del Norte, El Dorado, Humboldt, Lake, Lassen, Marin, Mendocino, Napa, Nevada, Placer, Plumas, Sacramento, San Joaquin, San Mateo, Sierra, Siskiyou, Solano, Sonoma, Sutter, Trinity, Yolo and Yuba.

Impacted businesses must complete BOE Form 468 (Request for Extension) and BOE Form 27 (Penalty and Interest Relief for Disaster Victims). The BOE has indicated that they may allow late filers who do not complete the forms relief if they include a statement signed under penalty of perjury that they were impacted by the storms.

News Story: San Mateo County Times

BOE Notice

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