Bozo Tax Tip #6: My Business Is Online So I Don’t Have to File State Taxes!

Posted on April 5, 2024 by Russ

Ralph (not his real name) formed a virtual business–a quite common activity these days.  Perhaps he sells products (using Amazon or another large fulfillment company to do the actual movement of goods), or maybe he has a consulting practice or other service without a “real” office.  Ralph resides in Denver, Colorado.   His business is a Limited Liability Company formed in Colorado.

Ralph was not pleased to find that his LLC needed to file Colorado returns.  He has employees–one in New York, one in Fresno–so he has to file New York and California tax returns, too, for the LLC; many states have a rule that if you have one employee you’re doing business in that state.  Ralph’s doing a lot of business, too; he may have sales tax filing requirements in many states.  You ignore state taxes at your own peril.

Now, it is possible to not have a state tax filing requirement for a business.  My business (which is an LLC) is 100% in Nevada, a state with no state income tax.  We do file payroll tax returns with the Nevada Department of Taxation, and we also are required to file a Use Tax return, but Nevada has chosen not to have many taxes that other states do have.  That’s a legal way around state taxation at the business level.

Ralph didn’t like what I told him, and he’s not a client.  He will find out sooner or later that ignoring state tax filing requirements is definitely a Bozo choice.

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Bozo Tax Tip #7: Anger Your Tax Professional!

Posted on April 4, 2024 by Russ

If you are a tax professional living in Las Vegas, and you’re interested in working for me for the 2025 Tax Season (2024 tax returns filed in 2025)–or you are in Las Vegas and you’re interested in becoming a tax professional–we may have an opening for you.  So why am I starting a post in regards to Bozo Tax Tips with my possibly expanding my staff for 2025?

The reason is the “Great Resignation.”  The tax professional community skews older in age: I saw a statistic that the average age of a tax professional is 57 1/2.  Finding good tax professionals is not easy (indeed, hiring in any profession isn’t easy), and I’m blessed to have the staff that I do.

From February 1st through the date this post is being written (March 10th), I have been averaging over an inquiry a day into using our services.  Indeed, my next available appointments are in May!  From talks with my friends in the business, they’re seeing the same things: not enough staff, and demand through the roof.

This equates to a seller’s market.  Our rates have increased over the last few years (and will likely increase for next year).  The law of supply and demand holds in every industry: if supply decreases and demand increases, prices go up.  Yes, you’re going to pay more.

So let’s get back to the title of this post: angering your tax professional.  Those who have met me know my salt and pepper hair is now mostly salt.  I enjoy what I do, but I do not enjoy (and have never enjoyed) dealing with misanthropes.  Given the high demand, your tax professional almost certainly feels the same way.  Every year, tax professionals send letters to clients who are about to become former clients because they’re either no longer a fit for them or the tax professional cannot make a profit from them (because they require too much time or will not pay what the tax professional believes to be a fair price).  I’ve sent these in the past, but I never enjoy doing that.  I’m vowing to send some at year-end unless conditions radically change.

The average tax professional is very stressed out.  Dealing with the IRS has been a disaster for the last few years.  The pandemic hasn’t helped in any way.  Congress (and the IRS) have added new regulations and forms (e.g. Schedules K-2/K-3) that add tremendous busy work with little gain.  My Office Manager recently saw me blow up (and I rarely do that).  I have marked a client that he is getting a “Dear Former Valued Client” at year-end because of what he put me through.  (I’d like to send one to Congress, too, but I can’t do that.)

So do not anger your tax professional…unless you want to find a new one.

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Bozo Tax Tip #8: No Tax Form, No Income!

Posted on April 3, 2024 by Russ

Two years ago I was speaking with a new client:

“Russ, I just found out that I don’t get a tax form for the income I earn. That means I don’t have to report it, right?”

This individual is filing his first tax returns. He just graduated college, and is self-employed. He (thankfully) did keep good books and records, but no one sent him a 1099-NEC (several businesses should have) so his uncle told him he didn’t have to report anything.

Yes, the US has a ‘voluntary’ tax reporting system, but here voluntary doesn’t mean you can skip income without paperwork. A better word than voluntary is “self-reporting.” We self-report our income, and the fact that tax paperwork isn’t sent for everything is one of the causes of the tax gap. As I explained to my client, all income is taxable unless Congress exempts it. Congress didn’t exempt his self-employment income (indeed, it’s over $100,000). I asked him if he might want to buy a home in the next two years (which I already knew he did want to do). I asked him how he was going to qualify for a mortgage without tax returns filed showing income.

I explained to him that his uncle was correct in that many individuals do receive income ‘under the table’ and don’t report it. I also explained to him that not filing a tax return when you have income is a crime, and you can go to ClubFed for it. It’s a lot easier to file and pay your taxes and sleep peacefully at night then to do the opposite. My client agreed, and his return was filed.

Of course, for those who want to live on the edge you can: Ignore income that doesn’t come with tax paperwork. You may want to remember that if you’re ever audited the IRS might just do a bank account analysis and wonder where those deposits are coming from.

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Bozo Tax Tip #9: Ignore California!

Posted on April 2, 2024 by Russ

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation (or LLC) operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation (or LLC) is a California corporation/LLC, a Delaware corporation/LLC, or a Nevada corporation/LLC.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

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Bozo Tax Tip #10: Email Your Social Security Number or EIN!

Posted on April 1, 2024 by Russ

It’s time for our annual rundown of Bozo Tax Tips, strategies that you really, really, really shouldn’t try. But somewhere, somehow, someone will try these. Don’t say I didn’t warn you!

This is a repeat for the eleventh year in a row, but it’s one that bears repeating. Unfortunately, the problem of identity theft has burgeoned, and while the IRS’s response has improved, that’s just an improvement from awful to mediocre.

I have some clients who are incredibly smart. They make me look stupid (and I’m not). Yet a few of these otherwise intelligent individuals persist in Bozo behavior: They consistently send me their tax documents by email.

Seriously, use common sense! Would you post your social security number on a billboard? That’s what you’re doing when you email your social security number.

We use a web portal for secure loading and unloading of documents and secure communications to our clients. As I tell my clients, email is fast but it’s not secure. It’s fine to email your tax professional things that are not confidential. That said, social security numbers and most income information is quite confidential. Don’t send those through email unless you want to be an identity theft victim or want others to know how much money you make!

If I send an email to my brother, it might go in a straight line to him. It also might go via Anaheim, Azusa, and Cucamonga. At any one of these stops it could be intercepted and looked at by someone else. Would you post your social security number on a billboard in your community? If you wouldn’t, and I assume none of you would, why would you ever email anything with your social security number?

A friend told me, “Well, I’m not emailing my social, I’m just attaching my W-2 to the email.” An attachment is just as likely to be read as an email. Just say no to emailing your social security number.

The same issue holds for a business’s Employer Identification Number (EIN).  These should be treated like your individual social security number: send them using only a secure method.

If you’re not Internet savvy, hand the documents to your tax professional or use the postal service, FedEx, or UPS to deliver the documents, or fax the documents. (If you fax, make sure your tax professional has a secure fax machine.) If you like using the Internet to submit your tax documents, make sure your tax professional offers you a secure means to do so. It might be called a web portal, a file transfer service, or perhaps something else. The name isn’t as important as the concept.

Unfortunately, the IRS’s ability to handle identity theft is, according to the National Taxpayer Advocate, poor. So don’t add to the problem—communicate in a secure fashion to your tax professional.

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The Train to Nowhere Needs $100 Billion More

Posted on March 18, 2024 by Russ

I haven’t written about California’s bullet train in some time, but the news from the Golden State for the train leads me to conclude it will never be completed.  A news story notes that the train needs $4 to $7 billion to complete a segment from Shafter (just north of Bakersfield) to Merced in California’s San Joaquin Valley (and won’t open until 2030 to 2033).  As for completing the line from Los Angeles to San Francisco, let’s add another $100 Billion!  To date, every deadline and projection has been exceeded (in dollars and in length of time); I’ll continue to take the over on this.

California is looking at a budget deficit of $73 Billion.  Sooner or later (very likely sooner), the federal funding propping up this project will cease, and fiscal realities will have to be looked at.  My guess is that there will be a wonderful new bike path in the Central Valley opening in the next few years.

In so many ways this short clip is apropos:

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Corporate Transparency Act Ruled Unconstitutional; Appeal Certain

Posted on March 3, 2024 by Russ

On Friday, an Alabama federal judge ruled that the Corporate Transparency Act (CTA)–the law that authorized Beneficial Ownership Information (BOI) reporting–is unconstitutional.  As of today, this decision impacts one business in northern Alabama, but given an appeal is a certainty this could impact the BOI reporting regime.

Judge Liles Burke ruled that the CTA fell afoul of Congress’ powers.  “The Corporate Transparency Act is unconstitutional because it cannot be justified as an exercise of Congress’ enumerated powers. This conclusion makes it unnecessary to decide whether the CTA violates the First, Fourth, and Fifth Amendments.”  He opened the decision noting,

The late Justice Antonin Scalia once remarked that federal judges should have a rubber stamp that says STUPID BUT CONSTITUTIONAL. See Jennifer Senior, In Conversation: Antonin Scalia, New York Magazine, Oct. 4, 2013. The Constitution, in other words, does not allow judges to strike down a law merely because it is burdensome, foolish, or offensive. Yet the inverse is also true—the wisdom of a policy is no guarantee of its constitutionality. Indeed, even in the pursuit of sensible and praiseworthy ends, Congress sometimes enacts smart laws that violate the Constitution. This case, which concerns the constitutionality of the Corporate Transparency Act, illustrates that principle.

As of today, only the one company (and possibly the Northern District of Alabama) are impacted by this decision.  However, it’s a certainty that the decision will be appealed to the 11th Circuit Court of Appeals.  If that court upholds this ruling, BOI reporting will likely be dead.

To date, we’ve advised most of our clients to hold off on BOI reporting (unless they formed entities this year)–not because of possible constitutional issues; rather, we’re still waiting on guidance from FinCEN on community property issues related to BOI reporting.  Entities in existence as of 2024 have until January 1, 2025 to report.  Friday’s ruling adds another reason to delay BOI reporting.

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San Diego County Gets Extension Until June 17th

Posted on February 28, 2024 by Russ

Heavy rains and flooding in San Diego caused the area to be declared a federal disaster zone.  The IRS extended all tax deadlines in San Diego County from January 21, 2024 onward until June 17, 2024.  This includes individual, business, and employment tax returns.  California’s Franchise Tax Board granted the same relief for state taxes.

And there’s a blizzard warning for the Sierra Nevada, Lake Tahoe, and nearby areas from 10am PST tomorrow through 10am PST Sunday.  I’m expecting other areas in California to join San Diego County as federal disaster areas in the coming days.  Be safe!

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A Reminder for Charities and Officers in Charities

Posted on February 15, 2024 by Russ

I live in a swing district in a swing state.  One of the things we dread is election mail.  The primary for state offices is in June, and already we’re receiving flyers.  I’m sure the robocalls are soon to come (the robo-texts have already begun). The television and radio ads have begun (there was an advertisement during the Super Bowl for a candidate). November 6th can’t come soon enough.

I happened to need to link to a blog post I wrote four years ago, and I noticed the previous post dealt with charities and the election.  Charities are defined in Section 501(c)(3) of the Tax Code.  It’s seems quite timely to remind everyone that one of the things charities cannot do is endorse a candidate.

So what does this cover? It includes the obvious (making political contributions, endorsing candidates, or speaking in favor or against a candidate) and some less obvious items (leasing space to a political campaign and using the organization’s mailing or email list for a campaign). There’s no de minimis rule, so if your 501(c)(3) gives $1 to the Trump or Biden campaigns, you could lose your 501(c)(3) status.

There’s a corollary that I want to emphasize: Officers (and employees) of 501(c)(3) charitable organizations must be very careful about their public statements for (or against) any candidate or cause. I am officer of and on the Board of Directors of a 501(c)(3) charity.  Let’s say I am for Assemblyman Smith in her candidacy for Nevada State Senate. I publicly endorse her. Of course, I, as an individual, can endorse whomever I wish. But I’m also an officer of a 501(c)(3). In my endorsement, did I note that this was my endorsement, and that nothing I’m saying is attributable to that charity? Am I careful doing that in all social media?

From a practical sense, it’s unlikely the IRS would go after a charity or a public foundation (which are 501(c)(3) charities). But they can, and an ounce of prevention is worth a pound of cure. If you’re an officer of a 501(c)(3) organization, it’s an excellent idea to make sure all officers and employees are aware of the rules.

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Do I Really Have to Wait for that $10 K-1 to Arrive?

Posted on February 12, 2024 by Russ

Earlier this week, a client came in for his annual visit (call him John).  John invested in a new investment partnership this year, and he was told by the partnership that the only item on his K-1 will be exactly $10 of interest income.  But John does not have the K-1; indeed, he won’t have it until sometime in July.  Does John have to wait until July to file his tax return?

Yes, he does.

The statement can be used to determine how much tax John owes for 2023; however, it cannot be used for filing.  You must have all your tax documents including all K-1s before you file.  It is far, far better to extend than amend.  Yes, that K-1 (for John) results in $3 or so of tax and is close to irrelevant for his tax situation.  But who knows what other items are on it?

When the K-1 is actually issued there could be:

  • A change from the $10 in interest income to something else;
  • Perhaps some of the interest income isn’t taxable on either the federal or state level; and
  • Perhaps there are other items that will be on the K-1 that have to be entered.

The K-1 is determinative in preparing (and filing) a tax return; the statement is not.  I know this personally: I’m an investor in a partnership whose K-1 shows up every year in early August.  In late March I’ll get a statement (similar to the one John has) noting their projected items of income and deductions so I can file an extension (and make an extension payment).  In the case of the partnership I invested in, they’ve invested in other entities and have to wait for the results of those underlying investments to formally arrive before issuing the K-1s.

When you invest in a partnership or S-Corporation, you need to be aware that to file by the April deadline you will have to have that K-1.  Partnerships and S-Corporations can (and these days often) obtain extensions until September 15th.  If you invest in an entity that takes the extra six months, you will be extending your tax return. 

John knew coming in that he would be extending.  He spoke to me last year about the new investment, and I told him an extension was likely.  If you make such an investment, be aware that an extension is likely in your future.

 

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