Wray Rives CPA CGMA @rivescpa - Tumblr Blog

174: Wray Rives raises foster kids and files tax returns [podcast]

Is it legal for me to spend money from my business bank account on my own personal expenses as long as I pay the necessary tax on the mon...

My answer to Is it legal for me to spend money from my business bank account on my own personal expenses as long as… Answer by Wray Rives:

First off you say corporate income tax, so I assume your business is a corporation. A corporation is a separate tax entity from you individually. Not like a single owner LLC, where all of the tax attributes of the LLC flow through to you personally.

If you are the sole shareholder, sole employee and sole officer of the corporation you probably will not get in any serious trouble paying personal expenses from the corporation. You will suffer some negative tax consequences, because you only have three options for reporting these expenditures, but nothing is illegal.

Reporting Options

Loan to shareholder-you will have to accrue interest on the loan and show an intent to actually repay the loan. Be sure you have a loan agreement between you and the corporation.

Compensation-Since you are paying expenses directly, if this is deemed to be compensation, then you owe payroll taxes on the money. I bet you have not been preparing periodic payroll tax returns for the IRS and your home state to report this as wages. Nor have you sent yourself a W2 for the wages. Potential big problem. You owe FICA/Medicare and unemployment tax on the money you spent.

Dividends-This is probably the category the IRS will push for. Why? Because you are going to be double taxed on the income. The corporation will pay corporate tax on the amount of earnings paid out as dividends and you personally will pay tax on the dividend income. Not usually a desirable tax outcome for you.

So what if you just ignore the proper accounting? I actually had a client who came to me because he had tried this. The IRS gave him two choices 1) Admit that you have completely pierced the corporate vale and therefore no longer have a corporation, so pay tax on all the money you took out as dividends (plus penalties and interest) and officially close your corporation and agree not to open another corporation for 10 years or 2) Go to jail. He chose #1.

Is it legal for me to spend money from my business bank account on my own personal expenses as long as I pay the necessary tax on the mon...

How do I deduct expenses incurred in my own startup that failed?

My answer to How do I deduct expenses incurred in my own startup that failed? Answer by Wray Rives:

I hesitate to even say this because all I can do is give you a general idea. Your specific set of facts will govern the exact right answer. That answer depends on how your startup was structured.

If you set up a corporation and you contributed funds to the corporation for startup expenses, then you have a capital loss. The business will have a final corporate return to file.

If the business was a sole proprietorship and assuming it was an active business, then you deduct your expenses on Schedule C.

If the business was a partnership, then the partnership will file a final partnership return and the losses will flow through to the owners through their K1’s.

In any of those situations, you have to consider if there were any business assets that were distributed to you as part of the business shut down.

I get it you already spent money on fees for a business that failed, but you need to spend some more. I highly recommend you contact a tax professional to help with your tax reporting at least for this year. Shutting down a business has a lot of moving parts and variations in the correct way to report depending on your specific facts.

How do I deduct expenses incurred in my own startup that failed?

Foreign partners do business (LLC) in USA, live outside the country and pay taxes where they live, do they still need to pay income taxes...

My answer to Foreign partners do business (LLC) in USA, live outside the country and pay taxes where they live, do … Answer by Wray Rives:

It is impossible to answer without knowing more about the specifics of your operation. Under the US/Ukraine tax treaty, if your business has a “permanent establishment” as defined in the treaty, then your income is taxable in the US and not in the Ukraine.

The term "permanent establishment" includes:

a place of management;

a branch

an office

a factory

a workshop a mine, an oil or gas well, a quarry, or any other place of extraction of natural resources

a store or any premises used as a sales outlet

I will say that in my experience with other non-resident owner clients who are selling tangible goods online, most of the time, they owe US tax.

Foreign partners do business (LLC) in USA, live outside the country and pay taxes where they live, do they still need to pay income taxes...

What is the best state to incorporate in for a foreign startup?

My answer to What is the best state to incorporate in for a foreign startup? Answer by Wray Rives:

There are so many variables, all I can do is give you some general ideas about foreign owners of US entities and what states make “tax sense” for the non-resident owners. First I assume you mean that you want to set up a US based business entity that will be owned by non-US individuals and so following are some state specific things to consider.

Delaware-the state you probably read about online the most for incorporation. (when I say incorporation, I equally mean forming a C corporation or formation of an LLC) There is probably more mis-information available online about incorporation in DE than reliable information. see https://www.linkedin.com/pulse/w... The pros are DE has favorable laws and court systems that appeal to outside third party investors. If you will have venture capital investors, they will probably appreciate your having a DE C Corp. If no outside investors, then DE is probably not your best choice due to relatively high annual franchise tax and the potential to owe state income and/or gross receipts tax.

Wyoming-There is no state income tax and essentially no sales tax in Wyoming. Added benefit is WY has a flat scale for annual franchise tax. The maximum WY franchise tax will probably be about 1/2 of the minimum for DE and for most small businesses it will only be around $50 per year. Downside is WY is not very populated and if you want to use services in the state like virtual mail addresses and such, it can be a challenge to find service providers.

Nevada-Another state with no state income tax and zero to fairly low annual franchise fees. Nevada does have a number of other business licensing regulations and depending on the type of work, it may not be worth the headache.

Texas-Extremely business friendly state. Low regulations and low annual cost to keep your entity in compliance. TX is also the second most populous state in the US, so unlike WY, you can find anything you want from TX based service providers. Franchise tax rate is actually -0- until you have more than $1.3M in revenue. TX does have a substantial sales tax and might not make sense if you are selling tangible items or taxable services.

New York or California-I get a number of non-US clients who think it looks more prestigious to be a CA or NY company. If you have strong business reasons to want to do this, I understand. You need to understand prestige will cost you. NY and CA have some of the highest state level tax burdens in the US.

Florida-FL comes up occasionally as a state for non-residents to form their LLC and the state is not necessarily a bad choice. While FL has no individual income tax, it does have corporate income tax, which can be a problem if at some future date you convert your LLC to a corporation. FL just does not give me a compelling reason to choose it. If your brother lives in FL, then go visit him for vacation, but set up your LLC or Corporation in WY or TX.

Final advice is have a conversation with a US tax professional. There are so many variables that can change what is “best” for you depending on ownership, potential tax treaties and the type of business you will operate. We have not even touched on potential US federal taxes for your business. You need to consider the pros and cons of your specific situation because there is no “one size fits all” plan for non-residents looking to set up a business in the US.

What is the best state to incorporate in for a foreign startup?

Is it worth creating an LLC in Delaware while operating an e-commerce business out of New Jersey? What are the pro's/cons?

My answer to Is it worth creating an LLC in Delaware while operating an e-commerce business out of New Jersey? What… Answer by Wray Rives:

Probably not, because if you operate the business in New Jersey, you will still have to register the LLC as doing business in New Jersey and pay New Jersey taxes, so what you accomplish is having to file taxes in two states, DE and NJ, rather than in just one, NJ.

You see a lot of publicly traded businesses registered in DE, but that is because of the state’s legal structure and court systems which are favorable to stockholders and boards of directors. While DE does not have an overly cumbersome tax structure for most businesses that actually operate from another state, it does have state level taxes, including a relatively high minimum annual franchise tax. You can probably avoid DE income tax and gross receipts tax, but you absolutely will be paying DE franchise tax if you register there. Add to that the fact that registering in DE, does not relieve you of the burden of registering and paying tax in any other state where your business operates and DE probably does not do much for you from a tax standpoint. It is appealing to outside investors, the one pro.

If you expect to have outside investors in your business, they will probably like that you are a DE entity; however, your outside investors will want you to be a DE corporation not an LLC. You may want to know that DE corporate franchise tax can be as high as $180,000 annually, depending on the size and capital structure of the corporation.

Unless you just like paying more tax or seriously expect to seek outside investors to your business in the near future, register in NJ.

Is it worth creating an LLC in Delaware while operating an e-commerce business out of New Jersey? What are the pro's/cons?

Does California tax non resident IRA early distributions?

My answer to Does California tax non resident IRA early distributions? Answer by Wray Rives:

As a general rule California cannot tax retirement benefits that you receive when you are no longer a resident of California. Prior to 1996, the state of CA did exactly that.

PL 104–95 was enacted by Congress that year to prohibit the so called taxation based on source of earnings.

There are some deferred compensation plans not covered, but the following are covered by this law:

(A) a qualified trust under section 401(a) of the Internal Revenue Code of 1986 that is exempt under section 501(a) from taxation;"

(B) a simplified employee pension as defined in section 408(k) of such Code;"

(D) an annuity contract described in section 403(b) of such Code;"

(E) an individual retirement plan described in section 7701(a)(37) of such Code;"

(F) an eligible deferred compensation plan (as defined in section 457 of such Code);"

(G) a governmental plan (as defined in section 414(d) of such Code);"

(H) a trust described in section 501(c)(18) of such Code; or"

(I) any plan, program, or arrangement described in section 3121(v)(2)(C) of such Code, if such income—"(i) is part of a series of substantially equal periodic payments (not less frequently than annually) made for—"(I) the life or life expectancy of the recipient (or the joint lives or joint life expectancies of the recipient and the designated beneficiary of the recipient), or"(II) a period of not less than 10 years, or"(ii) is a payment received after termination of employment and under a plan, program, or arrangement (to which such employment relates) maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed by 1 or more of sections 401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k), or 415 of such Code or any other limitation on contributions or benefits in such Code on plans to which any of such sections apply.

Does California tax non resident IRA early distributions?

I'm 56 years of age, and I earned my CPA in California in 2011. I'm starting over in my accounting career and I want to do so as an entry...

My answer to I'm 56 years of age, and I earned my CPA in California in 2011. I'm starting over in my accounting car… Answer by Wray Rives:

I don't know about the area of California you are in, but the job statistics for CPA's in some parts of the US is that there is such high demand, I would think you could overcome the age issue, but go in knowing it will be an issue. Since your age will be a factor, you need to do everything you can to head off the age questions up front. Some suggestions:

Dress appropriately for your age, but don't dress like an old man.

On that same note, know going in what the dress code is. Not every firm is dark suit and tie these days. Dress just a little bit nicer than the people you think you will be meeting with. Ask what the dress code is, they won't mind telling you.

You are asking the question on Quora, so I assume you are ahead of the curve on technology and internet, but find ways to show that you are up on current bookkeeping/accounting technology. Learn about or better yet be proficient at Quickbooks Online, Xero, Freshbooks, Net Suite. You may even be ahead of a 20 something candidate because a lot of universities are not teaching about these tools yet, but I guarantee the firm's clients are using them. You may also impress a partner or two who knows he or she needs to learn about them, but has not taken the time.

Technology #2-You absolutely have to be proficient at Excel and need to know how to use Word.

Technology #3-Know about other online business tools like Dropbox, Evernote, One Note, etc.

Technology #4-working remotely is a big trend with accounting firms. Understand what that may involve and be prepared to take a work from home or work from the client's site type job if one comes along.

Get a professional looking email address, preferably your name at gmail dot com. You absolutely will be communicating via email with prospective employers and any email at Yahoo or AOL says I have been around a very long time but grandpa569 at anything says I am not professional.

Get a complete and up to date LinkedIn profile with some connections and even better some connections that will write recommendations for you. Some firms may never really look at your resume, but most will absolutely look at your LinkedIn profile and probably Google you.

Thirty years ago, you probably would not even get an interview, but many firms are understanding now that older entry level workers can be a very good thing. They may get 15 good years out of you whereas a newly minted CPA in his 20's will probably not stay around more than 4-5 years tops. Embrace the belief that 50 is the new 30 and be in good physical shape, upbeat attitude, willingness to learn and project that you have a lot of great years left in you.

I'm 56 years of age, and I earned my CPA in California in 2011. I'm starting over in my accounting career and I want to do so as an entry...

When can employing an independent contractor in CA establish sales or income tax nexus for a Seattle company?

My answer to When can employing an independent contractor in CA establish sales or income tax nexus for a Seattle c… Answer by Wray Rives:

Just using an independent contractor in California would not create nexus in CA; however, there are several common, potential issues that typically come up in this scenario.

If the independent contractor is authorized to act as an agent of the company. This could be as simple as being able to approve customer refund or authorize return of items sold. An agency relationship would create nexus.

If the independent contractor uses, stores or maintains any assets of the company in CA. Inventory, vehicles, equipment or samples for example.

If the company is determined to misrepresent the relationship between the company and the independent contractor. It is very common for companies to effectively use an independent contractor as an employee. Just the fact that you phrase your question as “employ an independent contractor” might be construed that you in truth consider the relationship to be that of employer/employee.

When can employing an independent contractor in CA establish sales or income tax nexus for a Seattle company?

How am I taxed as a non-US resident owning an LLC selling on AMZ?

My answer to How am I taxed as a non-US resident owning an LLC selling on AMZ? Answer by Wray Rives:

As a general rule selling on Amazon is considered US sourced income and requires filing a US federal income tax return. In the case of one non-resident owning an LLC that is selling on Amazon, that means the owner files a form 1040NR with a Schedule C to report the income and expense of the business. If the LLC has more than one owner, then it will require filing a Form 1065 Partnership Return for the LLC and then each individual owner will file an individual non-resident US return.

You also have the option to elect to have the LLC taxed as a corporation, which in many cases will allow the individual owners to avoid filing a US return, but it means the LLC will file a separate US Corporate Tax Return, Form 1120. There are a number of pros and cons to this approach and I suggest you have a conversation with a US tax professional before making a corporate election to be sure you understand how that will impact your tax situation.

Depending on which state the LLC is registered in, you may also need to file a state income tax return and will most definitely need to file a state franchise tax return. In many cases the state franchise tax is coordinated with the state income tax or is simply an annual fee.

You will also probably have requirements to register and pay income tax, franchise tax and sales tax in several other states. FBA by Amazon creates an agency relationship with Amazon which gives the LLC nexus (Understanding nexus and sales taxes) in any other state where Amazon stores your inventory. That will require you to register the LLC with those impacted states and file tax returns with those states.

How am I taxed as a non-US resident owning an LLC selling on AMZ?

When flipping houses, does it make sense to set up a corporation?

My answer to When flipping houses, does it make sense to set up a corporation? Answer by Wray Rives:

From a US tax perspective absolutely not. When you flip houses, you are generally creating taxable capital gains. Individuals can often pay a lower rate of tax on capital gains, but for a corporation capital gains are just another item of ordinary profit and are taxed as such. If you are flipping houses on a constant short term basis, this benefit is mitigated, but in my experience it is not uncommon for a house flipper to hold properties for more than the required 1 year to receive long term capital gain tax treatment.

If you are concerned about liability protection, I suggest you consider conducting your activity through an LLC and buy a really good insurance policy.

When flipping houses, does it make sense to set up a corporation?

What are my tax duties as a non-resident-alien and LLC owner?

My answer to What are my tax duties as a non-resident-alien and LLC owner? Answer by Wray Rives:

First off I need to give you a disclaimer that taxation of non-residents by the US is a complex topic. I am going to give you general answers, but you really should contact a US tax professional and discuss all the details and specifics of your unique situation. I am also required to say that nothing I tell you can be used to avoid paying income tax to the US that you are legally obligated to pay. Now: Generally having a checking account in the US does not subject you to US income tax. You have to look to the nature of the income producing activities. If you are not selling tangible goods and only performing a service and you perform all of that service outside the US, meaning you have no physical presence in the US, you should not have what is known as Effectively Connected Income (ECI) and should not owe US income tax. NOTE: a very small change, such as making a business trip to the US can easily change that. Owning an LLC in the US is likely going to put you one step closer to having ECI but does not in itself mean you now owe US income tax. If you are the sole owner of the LLC and choose the default tax designation for an LLC which is disregarded entity, then the IRS ignores the existence of the LLC and you continue to look at your income producing activity the same way you did as an individual discussed above. Again it takes very little to change these circumstances. Adding an additional owner, even another non-resident alien, makes your LLC a partnership and thus subjects all partners to US income tax on profits from carrying on your business in the US. Finally you are absolutely correct that many people are not aware that in the internet age the US can actually be a great tax haven for US non-resident aliens because of how the US taxes non-resident non-citizens. As long as the non US resident can avoid ECI, and choose carefully where they reside, they can greatly minimize their income tax while still providing services to the US market.

What are my tax duties as a non-resident-alien and LLC owner?

How much do self published eBook authors have to pay in taxes?

My answer to How much do self published eBook authors have to pay in taxes? Answer by Wray Rives:

Since you say self published, I am going to assume you are receiving a percentage of the sales of your books and this is not a situation where you have sold the rights to your books and are receiving royalties. Even if you do receive "royalties" on your published works, it is probably still self employment income to you as I can't think of circumstances where royalties for your original works would not be self employment income. If you wrote one book and never intend to publish another or wrote the book for an employer then a royalty is a royalty, otherwise be careful that some may try to tell you that because royalties paid to a writer is called "royalties" it is reported on Schedule E and not on Schedule C, as this is just not the case.

Your income is considered self employment income. You pay the same progressive income tax rate as any other taxpayer does, the only difference is on top of income tax, you also pay self employment tax equal to 15.3% of your net profits from writing and selling books. This self employment tax is where you are getting the concept that you pay higher taxes than say someone with a W2 job. The W2 employee is having Social Security and Medicare tax withtheld from a paycheck at the rate of 7.65% on the first $118,500 of gross pay.

The key term for you is net profits not gross pay, because you get to deduct reasonable and necessary business expenses incurred in your writing/publishing business

So for a writer/publisher, you should consider things like laptop that you use exclusively or at least primarily for writing and publishing. Do you have a space in your home that you use exclusively for writing and publishing work, if so you might benefit from a home office deduction. Other things like expenses to promote or research a book could all be a possible tax deduction.

The net profit after deducting expenses from your gross receipts is what your self employment tax is calculated on and is also the number that gets added to any other income to determine your income subject to income tax, using the same tax tables everyone else uses.

How much do self published eBook authors have to pay in taxes?

When starting out on Amazon FBA, is it better to form an LLC or sole proprietorship?

My answer to When starting out on Amazon FBA, is it better to form an LLC or sole proprietorship? Answer by Wray Rives:

First off, a single member LLC is still just a sole proprietorship for tax purposes. For may Amazon sellers a sole proprietorship is more than sufficient. A single owner LLC does not of itself change anything from a tax reporting viewpoint; however, it does provide liability protection to the owner and may offer some tax planning opportunities depending on the owners specific situation.

For most sellers, starting out on Amazon as just yourself is the simple and best answer.

About the only downside to not starting out as an LLC is it can create difficulties with Amazon in the future if you decide to switch to an LLC when the account is already established in your individual name.

When starting out on Amazon FBA, is it better to form an LLC or sole proprietorship?

How can I make my father understand he needs to delegate if he wants to grow the business?

My answer to How can I make my father understand he needs to delegate if he wants to grow the business? Answer by Wray Rives:

I hate to tell you, but you are fighting the same battle I see with small business clients every day. The owners see the company as "their baby" and don't you dare tell them their baby is ugly. The Peter principle very much applies to entrepreneurs as much as it does employees and your father's business is only going to grow to his level of incompetence and never get any bigger.

You probably will not be able to make him see this until his sales plateau for a 3-5 year period, so assuming you are somehow involved in the business, start tracking his sales and profit today, so in a few years you can show him that sales are flat and profits are probably dropping.

The good news is he is your father and the child of the owner is usually the one he is most likely willing to delegate to, because there is almost always a part of him that wants to pass the business down to you at some time in the future. (Regardless if that is something you desire, he does.)

Take advantage of that mindset and don't approach the situation from you saying "let me tell you what you do wrong", but rather say "teach me how you do this". After you learn how he does things, then he will be more likely to welcome you saying "what if we did it this way?" or at least "can I try this way for a couple of months".

Some final thoughts for you:

What may not seem risky to you, may seem very risky to your father. You have a lot more runway left in life and can afford to make some mistakes. His runway is much shorter.

You and your father are from different generations. I would guess you are 20's to 30's he is probably 50's -60's. Either way he probably comes from a much more patient generation that did not grow up expecting instant gratification. You probably did. You think everything can and should happen fast, he thinks you pay your dues and take your time to get where you want. Neither of your is right and neither is wrong, you just approach things differently.

The business is "his baby", but you are too and I would guess you are his favorite.

How can I make my father understand he needs to delegate if he wants to grow the business?

What are the obligations and taxation of a U.S. resident telecommuting employee of a foreign company?

What are the obligations and taxation of a U.S. resident telecommuting employee of a foreign company? by @Rivescpa Answer by Wray Rives:

If you are a US resident, physically present in the US and working remotely for an employer in a different country, as a general rule you will need to file and pay taxes in the US. Any tax obligations to the home country of your employer will depend on what country where the employer is located, but if you do owe any tax there, you should generally qualify for a foreign tax credit against your US tax or possibly tax treaty benefits if it is a country that has a tax treaty with the US.

What are the obligations and taxation of a U.S. resident telecommuting employee of a foreign company?

Do I have to file an 83b as a startup advisor?

Answer by Wray Rives:

There is no requirement that you ever file an 83(b) election, doing so is completely optional. When you receive restricted assets, such as stock options with a vesting schedule, you are not required to report the receipt of that asset as income, until you have the full rights to sell that asset or otherwise convert it into cash. The restricted stock is not income in your hands until whatever restrictions, commonly a vesting schedule, expire. Upon expiration of the restrictions the stock becomes taxable income to you at whatever the fair market value is in the future when the restrictions expire.

What an 83(b) election does is accelerate the recognition of income to today rather than in the future when the restrictions expire and fix the current taxable income at the today's fair market value rather than the future fair market value. When you sell the stock in the future, you pay capital gains tax on the appreciation in value from today until you sell the stock.

Obviously stock in a startup typically will have a low current fair market value and if the startup is successful the future fair market value could be significant. Therefore making an 83(b) election means you pay capital gain tax rate rather than ordinary income tax rates on that increase in value. The risk is not every startup succeeds and you are paying some current ordinary income tax today and if the stock value does not go up, you have a capital loss in the future rather than never having to recognize the income at all.

So while there is no requirement to file an 83(b), if you don't you will miss out on the opportunity to pay lower tax rates on any future appreciation in value of the stock.

Do I have to file an 83b as a startup advisor?

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