California can be a great market for selling goods with its large and diverse population. However, entering this market is fraught with additional tax requirements and fees. For instance, Corporations are taxed at 8.84% in additional to their minimum $800 yearly minimum franchise tax. Additionally, pass-through entities such as S Corporations are taxed at 1.5% plus an $800 yearly fee and Limited Liability Companies (LLCs) must pay taxes ranging from $800 to $6,800 each year. If you’re an individual residing in California this pass-through income is then taxed again at up to 13.3%, the highest state income tax rate in the country!
It can come as a surprise to some businesses with no sales or business assets in California that there could still be a filing requirement and of course tax due. For instance if a business is headquartered in any state such as Nevada or Arizona, performs all work in their home state, but makes the mistake of hiring some employees that reside in California, then they are considered “doing business” in California. If California considers that you are doing business in their state then tax filings and minimum fees are required. Another example is if you’re a Nevada LLC that has a small ownership in a California company that could also be considered doing business in California.
Most of the time selling goods profitably in California are worth the extra expense and headaches. An individual can easily avoid having all their income, including social security, pensions, business income from outside California, or investment income being taxed by California by becoming a nonresident. There are many tests that California uses to determine if a person is a resident of California. The main qualifiers to be classified as a nonresident and avoid California’s onerous taxes, are to spend less than six months in California, keep your main home outside of California and moving various business contacts, bank accounts, automobile registrations, and professional services such as your CPA outside of the State.
Recently I had the delight to visit Graceland, Elvis Presley’s former home and now an excellent place to reflect on Elvis’ life and get taken back in time to the 1970s. There I viewed many of Elvis’ cars including his pink Cadillac, a couple Rolls Royce’s and Mercedes, Lincolns and his Ferrari. His home was just how he left it back in 1977 with his dozen TVs scattered throughout the home, shag carpeting and roof, the colorful kitchen, his dad’s old office, and many other furnishings that were a flashback to the 70s.
As a CPA and tax guy, I was also fascinated with the financial documents that were displayed detailing many of Elvis’ large purchases and even his dad’s tax return after he was born showing he paid 1% tax on his income . Elvis must have trusted his dad immensely as there were dozens of checks signed by Elvis’ father Vernon as Vernon took care of all of his son’s finances. This is surprising given that Vernon spent a year in jail during Elvis’s childhood for check forgery and only had an eighth grade education.
Elvis would have benefited immensely if he would have utilized a CPA to assist his dad in tax planning and financial management. Even though Elvis was the largest U.S. taxpayer in 1973 and the highest paid entertainer for many years, he died with an estate worth “only” $10.2 million dollars. Apparently Elvis didn’t like to utilize pertinent tax deductions and had a horrible deal with his manager Colonel Tom Parker, who received over 50% of Elvis’ earnings . Parker even convinced Vernon to pay him 50% of the income from the Elvis’ estate after he died! With this mismanagement, Elvis’ estate lost $9 million in value over two years, and was only worth $1 million in 1979.
Many lessons can be learned with Elvis, but one financially is the importance of trusts for estate planning in which attorneys can be invaluable and utilizing competent and qualified CPAs to assist with tax, estate and financial planning.
A trust can be set up for a multitude of purposes in various forms and of course there are tax consequences, with which a Reno CPA can assist you. There are many moving parts with trust taxation, but simplistically nongrantor trusts must file a federal tax return of which the highest income tax rate is assessed on incomes over $12,400, as opposed to a single person with this threshold over $415,050.
Various state income taxes can also be assessed by merely having a trustee in a state like California or Colorado, even if the beneficiary lives in another state that doesn’t impose personal or trust income taxes like Nevada. These states consider the trust to be a resident trust in that state as the trust is administered in that state by having the trustee located there.
As you can probably guess, California’s trust taxes can be quite onerous. The trust tax rate can reach 12.3% of taxable income. Combined with the federal tax rate of 39.6% and the additional tax on investment income to pay for the Affordable Care Act of 3.8%, a California trust could be taxed at up to 55.7%!
This 12.3% California trust tax can easily be avoided by choosing a trustee that resides in the state of Nevada, even if the beneficiary lives in California. A trustee can be a trusted family member, banker, attorney or a CPA. For any trust related tax questions the Reno CPAs at Barnard Vogler can help sort through the regulations.
Reno, Nevada CPAs in the office of Barnard Vogler & Co. can assist individuals in many ways. We offer the traditional CPA services of 1040 preparation and tax planning. More specifically, our Reno CPAs have tax experience with California residency issues, cancellation of debts of recourse and nonrecourse, Chapter 11 bankruptcy tax matters and various trusts issues beyond just the preparation of the tax return.
Our CPAs in Reno, Nevada are also versed in a wide array of business matters. Some areas of expertise are the customary services that Certified Public Accountants typically provide such as financial statement preparations, compilations, reviews and audits. Additionally, we have assisted businesses with a congressional tax audit returning to the taxpayer a multimillion dollar tax refund, entity selections to provide the most beneficial business types, or controller/CFO services of remote bookkeeping, budget assistance and development of accounting policies and procedures. At our downtown Reno, Nevada location CPAs have also helped unravel and report on multimillion dollar frauds, been Chapter 7 bankruptcy examiners, and performed business valuation and expert witness testimony.
Give our office a call if you need a Reno CPA for yourself or your business.
An issue that can still have tax ramifications today, years after the great recession hit Reno, is that of debt forgiveness. If you think that since you never received any cash, debt forgiveness is not taxable, think again!
Whenever there is a loan balance that gets reduced in any way, either with debt forgiveness, a foreclosure, a short sale, or a cancellation of debt, there is a taxable event. Depending on whether the debt held was recourse or nonrecourse makes a difference as to whether the forgiveness will be classified as cancellation of debt income or a capital gain.
A taxpayer wants cancellation of debt income when they are either insolvent, the home is their principal residence or they are in bankruptcy. In these situations the income is excluded from taxable income. If these situations don’t apply then the debtor wants a capital gain. In this instance the gain will be taxed at lower rates and if they have any capital losses then the gain can be reduced by these losses.
Generally, if a loan is nonrecourse and the property backing the loan is foreclosed upon to satisfy the nonrecourse debt, then the excess of the debt over the tax basis of the property is a gain. However, if the lender merely reduces the principal of the nonrecourse debt, then cancellation of debt income occurs.
The rules are different for recourse debt. If there is a foreclosure of property to satisfy recourse debt than the taxpayer recognizes cancellation of debt income by the difference between the fair market value of the debt versus the debt discharged. The difference in the fair market value versus the tax basis is then recorded as a gain or loss.
This brief summary just hits the surface of the complex rules regarding debt forgiveness. When this situation occurs, consult a Reno CPA to figure out the tax consequences.
In December of 2015, I wrote about many tax provisions benefiting taxpayers for 2015 and beyond that had expired. Most CPAs were anticipating these to be retroactively approved by Congress. After much anticipation, Congress ended up extending and in many cases making the provisions permanent. Below is a summary of the main legislation:
With a month left in 2015 it is that time again for Congress to act on the uncertainty of some beneficial tax breaks for taxpayers. This has been an ongoing problem with Congress, as in 2014 these tax benefits weren’t approved until December of 2014. This inaction has led to heartaches for CPAs, individuals and business owners as to their income tax planning.So as we move into December of 2015 we are back in the same opaque situation, except this year there is talk that these benefits might be approved through 2016!
There are many tax provisions that Congress could extend that, as I write this blog, are not allowed. Some of these include the benefit of allowing Nevada (and all states without state income tax) residents to deduct sales tax paid on Schedule A, allowing a 50% immediate deduction of new equipment and leasehold improvement purchases (bonus depreciation), allowing up to $500,000 as an immediate deduction for most capital equipment (section 179 depreciation) and the 100% exclusion of gain from the sale of small business stock.
Of course all of these will cost the American government lost revenue, as just the sales tax deduction could allow most taxpayers utilizing itemized deductions a $250 tax savings. I’m sure many businesses are holding off purchasing equipment that could expand the economy, waiting for the law to provide them with a 50% or 100% immediate deduction.
As a Reno CPA I look upon the inaction of Congress with frustration. Either keep these tax provisions in the IRS code or stop the bantering so we can accept what the law is and move on. And plan for the future.
I could write the standard blog on how Mr. Bush’s income went from nothing in the 1980’s to topping $1,000,000 for many years in the 90’s, becoming in the low six figures in the 2000’s while he was governor to ballooning to over $2,000,000 for almost every year after 2007. How his income went above $6,000,000 for 2011 & 2013 while he was getting rich from speaking fees and consulting for banks. Or I could write about how his net worth has gone up 14 times since he left the governor’s mansion in Florida in 2007 or question how he got in excess of $1,000,000 consulting for Lehman Bros and over $10,000,000 in speaking fees since 2007.
But as a Reno CPA that wasn’t practicing during the 1980s & 1990s, I found it interesting how much the tax code has changed just from reviewing Mr. Bush’s return. For instance, when Mr. Bush sold his first home in 1981 he wasn’t allowed to exclude from income up to $500,000 from the sale of his primary residence as taxpayers can now. His gain of $34,980 decreased the basis in his new residence he purchased to give him a higher gain and tax in the future when that home was sold.
I also found it interesting how in the 1980s political contributions were allowed to be deducted and up until 1986 charitable contributions were deducted without having to itemize on Schedule A. This was the same in 1983 when employee business expenses were an above the line deduction; today they must be on Schedule A and less than 2% of adjusted gross income. There was also the deduction for married couples that both worked that was present in the tax code in 1982, which Mr. Bush and his wife did not utilize. In the 1980s it was also possible to deduct interest expense on credit cards and car loans as a personal interest expense. With the somewhat new tax regulations associated with the Affordable Care Act and constant bickering and promises by Congress about changing the tax code I’m sure in 20 years the tax code will again be drastically different.
Drones have been in the headlines here in Northern Nevada as we compete to be a player in their research and manufacture. Sensational headlines are appearing on how drones will revolutionize the delivery of packages. But for all the excitement, I for one am lamenting the day these become more ubiquitous.
The home is supposed to be the one place in a person’s life for solitude. Well that and getting to the outdoors. I can already envision a future where people’s drones are intruding on my private time at home while flying overhead or when I’m out hiking in the mountains and get to hear the whine of a drone overhead from somebody wanting a picture.
The only practical personal application I can see is that of taking pictures. But aren’t we taking enough pictures already now that everyone has a camera phone in their pocket? I do see some worthwhile business applications for drones. I see their usefulness in assessing damage after natural disasters, with military applications or helping farmers monitor their crops. However, I can never see a day where drones are economical in delivering the millions of packages that are delivered each day. And if they do find an economical way I don’t look forward to that day when hundreds are buzzing in the sky each day for me to dodge while delivering packages to their various destinations. Today it is hard enough just walking down the street dodging people immersed in their cell phone.
So while we develop drones and more people use them I think there are going to be more knuckleheaded people landing their drones on the White House lawn or taking pictures of some strangers lounging in their backyard or buzzing overhead while I’m checking out Yosemite. But if this is the future then at least Nevada should be at the forefront.
If you’ve started your own business since 1993, and funded it with your own money as a C Corporation there could be some valuable tax savings if you’re planning on selling the company. This comes in the form of the section 1202 exclusion.
The Section 1202 exclusion allows a person to exclude up to 100% of the gain on the sale of qualified small business stock (QSBS) that has been held more than five years.
The amount available to be excluded varies depending on when the business was started and funded. If the corporation was started between Aug 10, 1993 and Feb 17, 2009, 50% is excludable; if between Feb. 17, 2009 and Sept 27, 2010, 75%; and if you were lucky enough to start the corporation between Sept 27, 2010 and before Jan 1, 2014 100% of the gain is excluded.
So what are the catches? The taxable portion of the gain is taxed at 28% (excluding the possible Medicare investment tax of 2.8%) as opposed to the regular long term capital gain rate of 20%. The maximum amount of gain that can be excluded is the greater of $10 million of 10 times the taxpayer’s basis in the stock. Further, QSBS is defined as a C Corporation that the taxpayer funded directly with no more than $50 million of gross assets, 80% of its assets must be in an active trade or business, the corporation cannot own real property or stock/securities exceeding 10% of its total assets, and stock/securities cannot exceed 10% of its total assets in excess of its liabilities.
As you have read the 1202 exclusion can save a lot of money, but there are many complexities not outlined above including possible alternative minimum taxes. All the more reason to contact a CPA!