Question: Hi i was thinking of breeding my dogs and was wondering if this is considered a business if you bred several dogs a year. and would i need to file with the irs as a business. this is going to be a hobby and of course nothing on a large scale as a puppy mill.
thanks for any help you could give me
Marie
Answer: It is a business, but if you intend to handle it as a hobby it will just cost you extra in taxes.
If you intend to do that business as a real business, then you can have better deductions, lower taxes, possible protections from liabilities, etc.
If you are going to go into the business as a Business, then you MUST intend to make a profit.
Question: Sister is Trustee, as well as beneficiary. My Bro and i are also Beneficiaries. 4 months ago, mom passed away.
Since then, sister had hired 2 'estate attorneys'.=20
1st one, she would not give us contact info, or name. Said we had to run everything by her husband, who would run it thru her - (she will not = talk to us)- Then, she would run thru her attorney, and then same "chain of = command" , would follow back down the line, to tell us what was going on-thru her husband. (Who WE have to call, if we want any information at = all-regardless if it is untruthful, or tainted.)
This crap went on, (2 months), till I wrote sister an email at her work.
(She works for Gov't, so email was visible to all her superiors).
Next day, she hired new attorney, and sent us attorney's contact info. = Her attorney gave us very limited info, said her attorney would answer any = of our questions.=20
I have sent her attorney 2 emails, detailing our questions.
Attorney has never emailed/written back. Got frustrated, and called her husband again.
He told me a month ago, that their "attorney" had "advised them" - to = "make us an offer"- to "buy us out". Said they were "on route" with "appraisal = in hand", as well as "survey to 'lot' up the land", to their new attorney. =
He said they were not planning to share the appraisal or survey with us.
We have not heard anything. We have not seen mother's will.
We did get sent, a copy of the trust. (Sister had this done, after mom = had 3 strokes, and was talking about giving my brother the house, after he = quit his job, and moved back home to take care of mom.)
(Sister's attorney- in her only 2 emails to me-stated she was working = for my sister as trustee, and NOT in capacity for ANY beneficiary-including = sister)
Besides disregarding all of our questions, no contact from sister in 4 months, nor her attorney in 2 months, we are getting tired, of waiting = for what she and her husband will decide to do.
Am I crazy, or is my sister And her attorney, in violation of their = higher standards and ethical due diligence?
In addition, Sister's husband, and their attorney told us/(lied), that we/one has to own road frontage, in order to have a land parcel in the = back. I am a Realtor in NC, and I know that this is not true, here. Asked an established Realtor up there in Ohio, and she said it is not true up = their, either. (Only need a right away on a deed)
QUESTION: Can we get my sister, for "mismanagement", or "Non = Disclosure", or LYing, or "with holding of information", no =93arm=92s length = transaction=94, OR
"Conducting business that is not in an arm's length"? What about her attorney?
What about: -making a unilateral decision to receive an unfair benefit = by being able to use the house solely for her and her family, and paying no rent simply because she is the trustee. (Also, not allowing us in the = house)
Any advice you give-even if you practice in another state-
would be much appreciated!
thanks!
Sandy
ANSWER: Your sister does have a "fiduciary obligation" to do exactly = what the trust document lays out. She is personally liable for any proven incompetence or mis feasance, mal feasance, etc.
But that is a lawsuit, and you will spend a lot in attorneys fees to = pursue it.
Her attorney put you on notice that he/she was not representing the = estate but was representing one of the parties in the argument. That attorney Cannot, Will Not and Should not be your representative.
This certainly makes sense to me. What is throwing me off, is in the = second and last email to me from sister's attorney, (over 2 months ago),
Her attorney states that she does not work for the interest
of any beneficiary, including my sister, and works for my sister as the trustee only.=20
In the first email, she states that she will forward all information as = it becomes available, as well as answer any questions I or my brother have. Neither has happened, along with no communication. No corrospondance = with sister is shared.
Doing research, I see that my sister is in violation of the Ohio Trust = Code (Duties of a Beneficiary).
=20
Question: Seems to me, that her attorney is in violation of some sort = of law/code as well, or she would have not given advice for sister to "make = an offer", as well as she have emailed back, and said she is working for benefit of my sister as beneficiary, or would have returned emails?
What would you call this?
Any clues would be appreciated.
Thanks,
Sandy
Answer: The attorney is advising your sister, not you. Your sister is = the client, and her attorney is giving her advice. The attorneys advice, = based upon what is best for your sister is to make you an offer.=20
The attorney is NOT doing what is in your best interest, the attorney is = NOT involved in the Trust. The Attorney is NOT representing you or your interests.=20
That is not wrong. The attorney is operating in the capacity they hold, = as advisor to a woman that is trying to get as much for herself as = possible. The attorney is just helping her do that.
Question: As a new Treasurer to our Home Owners Association, it looks like somewhere around 5 years ago, the new Treasure was not filing 1120H with IRS. How can I amend or file for past years not filed. I have all records for dues and interest and based on my calculation the amount of taxes due would have been less than $30 each year. I know there is a 25% penalty, but my question is how to file for all those passed years? Any thoughts?
Answer: You can download the form for each year from the IRS website. Mail them in with the taxes due, the penalties, etc.
Here are the potential repercussions:
Penalties:
You already understand that one. There aren't "Extra" penalties because you are extra late. They don't get to arbitrarily "pile on" penalties, just to be mean.
Audits!!:
Potentially, but let's look from the IRS side. They don't want to do any extra work unless it is likely to provide revenue. If your numbers are remotely close to actual, even if the IRS could justify Double the taxes, and thus double the penalties, it is still nominal.
The IRS also doesn't want to do any leg work if they can have a computer do it. If your numbers are correct, they will reflect what exists on the bank statements, which the IRS can get from the bank at any time.
Disappointment by the IRS resulting in increased scrutiny in the future:
You, the new treasurer, just filed taxes for the past 5 years that the IRS did not get before. In my mind you are a hero for the IRS, you are a stand up guy, someone that does the right thing, even if it is uncomfortable. Are they going to be as concerned about you as they are about the guy that never files even after he is caught.
Question: I am doing a IT consulting and formed a husband and wife LLC in NC. Got EIN and it says we need to file 1065. Can we do Schedule C on 1040?
Answer: The 1065 will provide no different results than the 1040. Neither provides any tax advantage. The reason your are expected to file the 1065 is that you are a partnership. You see the LLC is a disregarded entity by the IRS. The IRS has already deemed you a general partnership.
If you were looking for a tax advantage, you did not get it.
If you were looking for proven liability protection you do not have it.
If you were looking for a better way to run a successful business, you did not find it.
Question: my wife died Friday 6/19/09 she and i were married for 1 year 2 months and 5 days. she and i had yet to set up her life insurance policy. My life insurance policy was set up through my work to be paid to her. she did have a policy to pay 10,000 $ through her car insurance in the event of her death. i was asked if i had an estate set up and I do not. My wife had many medical bills. do I and if i do how do set up an estate in order to conduct her business since my wife is no longer with me.
Answer: I am sorry for your loss.
We are going to standardize on a few terms,this will help you in the future as you resolve the issues ahead.
The "estate" already exists, it is all that your wife had, including the assets (the car, bank accounts, property, the business assets, etc) and the Liabilities (bills, debts, lawsuits, businesses debts, etc.). You are now trying to "Settle" the Estate.
There is a "Probate Process". Probate is the legal process used to settle an estate. The "executor" is the person charged with the responsibilities of probate. That is probably going to be you. Unless you want to pay someone else to do it.
The Executor is required to find:
All the assets, such as insurance policies, bank accounts, property, etc.
All the people and businesses that are owed money by your wife (the liabilities).
Determine what is really owed, pay those debts.
As to the life insurance policy, there is a beneficiary named, if it was her estate, then that money is part of the assets that would be used to pay off the debts.
If there are not enough assets to pay off all the debts, then you try to negotiate a reasonable payoff.
If there is anything left, the executor is then supposed to distribute the remaining assets. There are two standards that are used. The "Will" which is her written intent of how the assets would be distributed; AND the standards of the Probate court.
Did she have a "Will"? Probably not.
Does that make a difference? Not really.
The standards of the Probate Court, would say that all assets would be transferred to the spouse. Which is what you would expect.
As to the negotiations, you can use all your skills and efforts to reduce what is owed on any debts, including the medical debts. It is not unreasonable for a skilled negotiator, who is willing to invest the time to reduce the medical costs drastically. If you are unsuccessful in doing so, try again in a few days, you might very well speak to someone else in that department that will be more willing, or you may be able to better explain the circumstance to resolve the debt at a discount.
And the Business. . . You will need to contact the bank about the accounts, contact the creditors, contact the vendors, etc. I don't know what type of business so I can't be really precise.
Question: As an attorney going "solo" which is better to form in the state of NY for tax purposes...an LLC or PLLC...
Answer: You decide:
Neither provide any liability protection since it your license to practice law personally that will be leveraged to hold you personally liable. It is the Bar Association that will keep you personally liable. Your oath will keep you liable.
Neither creates a true separation between you and the business, so any personal litigation can still take your ownership interest of your business or at least all the assets in the LLC that YOU OWN can be taken from you as an asset. the "Charging Order" argument was eliminated when it was first claimed in the Limited Partnership, see Tupper v Kroc.
Neither provides a tax advantage, Since the LLC is a Disregarded Entity by the IRS you are filing the General Partnership form (1065). No tax breaks here.
You didn't mention the Newer LLP (Limited Liability Partnership) or the even newer LLLP (Limited Liability Limited Partnership), but no matter, they still provide no proven benefits,they simply are another stab at the liability protection, just like the LLC was when replacing the LP.
You are in NY so you have some significant taxes.
Which is better? as long as you don't expect much, you won't be disappointed with either.
If you are looking for a liability advantage, it has to be outside of your practice. Call me.
If you are looking at a tax advantage it has to be outside of your practice and Outside of NY. Call me.
Question: Hello Richard and thanks for your time. In a c corp, is the interest on a loan for a work vehicle (100% business use) deductible? Also, is the interest on a line of credit for a c corp deductible? Thanks again for your time.
Answer: If it is a reasonable and necessary business expense, the interest paid on the loan is always deductible.
As we proceed from here we start to blur into grey. What really matters is what YOU can justify to an IRS auditor.
If you take a deduction, and the IRS notices it and feels it is outside of the norm, they will be contacting you. If you can't explain, support and defend it, it will be disallowed, penalties and interest will be added.
If you can explain it, support it with the proper documentation and defend it, it will be allowed. If you can't explain it well enough that the IRS auditor can understand it, but you hold that you think you are right, they may disallow it, but probably won't penalize you for it.
Question: Recently my mother passed away; and my two sisters are named executors. They have informed me that most of the monies associated with the estate are being maintained in a independent-dealers brokerage account.
I have been told by the executors that I/and all other beneficiaries in my family "must" open an account with the brokerage firm to permit them to transfer the funds into our names.
I have been asked to sign a customer agreement with a pre-dispute arbitration agreement, and a disclosure of credit terms on transactions. I have asked for, but have not yet received these documents and have therefore been unwilling to sign the legally binding document to "open a brokerage account".
I have asked the executors if the monies could be (a) transferred directly into my own brokerage account; or (b) transferred into my own personal bank account.
The question I am posing is:
The executors are indicating the only vehicle for me to receive the funds is by opening an account with "Company, LLC", having the funds transferred- and then I could immediately transfer the funds into my own accounts.
The brokerage firm and estate are being managed under Minnesota State Law. My mother dies in January of 2009.
Is this really the only legitimate way to receive the funds available to the executors? There is nothing in the will to preclude a distribution of funds by other means that I can discern.
Thank you in advance.
Thomas
Answer: I could be wrong, but. . .
I don't believe there is a brokerage firm in this country that does not have the ability to issue a check. Since that is the form that any account closing would take.
Hold fast and simply say that you will need a check made out to you personally for your portion. Put that demand in writing and Send a copy of that demand to the brokerage firm.
The Brokerage firm will not want to appear to be unwilling to send payments where payments are due.
Once you get the check, you can deposit it anywhere you choose.
Question: I have just read one of your responses, but need it clarified for my situation. A Manufacturer's Rep out of NYC, wants to know S Corp vs LLC, AND if it will benefit for him to incorporate outside NY. Am foggy on what you explained about the S COrp and NYC handling of income. BEST tax rate. Only one person/shareholder setting up this entity.
Answer: Having answered a few thousand Q's over the last 5 years, I don't recall that one.
The S corp/LLC discussion is similar to asking if it would be better to ride an ass or a mule if you were racing in the INDY 500. There could be much discussion about the differences between the beasts, and one could probably, with great research, and review determine one to be better than the other. Completely missing the important point that neither will be sufficient to WIN THE RACE.
Both the S corp and LLC are pass through entities. While one could argue that the S corp might reduce some portion of the payroll taxes under certain circumstances, neither provide a real tax advantage.
Both make claims to limit liability, but neither has been PROVEN to do so. Both have shown failures.
For tax purposes, both will drop ALL of the net income to the stockholder and that "one person/shareholder " will be responsible to pay their personal tax rates on ALL the money.
If you were a NON-NY resident owner of an S-Corp or LLC, operating in NY, the State of NY will apply a tax to the profits, so you'd still pay the NY taxes.
If you are looking to lower the taxes in NY the most effective way is:
Don't make a profit.
Then your taxes will be zero. This applies whether you are an S-corp, an LLC, LP, LLP, LLLP, General Partnership or Sole Prop.
If you fail to make a profit because your costs to operate are about equal to your income, and part of your costs of operation are to a real corporation in Nevada, that provides a reasonable and necessary business service, and that real corporation in Nevada is profitable; THEN the taxes will be much much much, lower.
At this point you have a lot more questions and I can only guess at them. So. . . call me.
I'm an average 47 y/o Floridian. I mean, my house is paid off, I have some savings, mutual funds, 401K. Nothing much. I'm trying to decide between a will, and a living trust, but I can't figure out the approximate costs of each. I'm not sure if there are any tax implications in having a living trust? And what are the expenses to set-up, administer, and run a living trust?
Would you please explain approximately what the expenses of each option be?
Thank you in advance,
Richard
Answer: Free and clear on your home is not "Average" but I appreciate what you mean.
These are not mutually exclusive.
A will "DOES" one thing. It determines the fate of Minor Children. A Will "DOES" nothing else. It is simply a list of Suggestions to the probate court.
If you die 'intestate' (without a will) the Probate Court will apply a standardize decision tree to the distribution of you estate.
First the spouse, then the kids, then the kids kids, if no spouse or kids then to siblings, then nieces and nephews. . . etc.
If you die with a will then the Probate court will consider your will in making the appropriate distributions and if there is no opposition it will probably do as stated. If it opposed, then the court may go back to the order above.
A living trust does 4 things. And 4 things only.
1 A Living trust actually avoids probate for those assets that are in the trust.
2 A living trust provides for specific distribution. That list of assets and that list of beneficiaries are not reviewed and modified by the probate court.
3 A living trust provides in case you are unable to manage your own affairs. You have already named someone that you want to manage the affairs. Without that, there is a judge that will make that decision.
4 It maximizes the "prepaid tax credit" for married couples. Allowing each to get full use of the generation passing exemption.
It does not reduce taxes, limit liability, protect assets, make coffee, or clean widows.
No one can do a "GOOD" Living Trust for you. At any price. SoI wouldn't pay anything for it.
As far as 'manage' and 'run'. These terms don't really apply. The trust in simply a declaration, a piece of paper. It is not a business, it is not a legal entity.
I said no one can do a "Good" living trust for you, because a good living trust is one that is "Funded" with all your assets. No attorney, or trust writer knows what your assets are nor are they authorized to make any transfers for you. The bank won't change your account because they asked, nor would the county change the title on your house at their request. you see, YOU are the only one that can do a good living trust.
So as far as cost. . .
With a little work you can find completely acceptable examples to use for both of these documents. You could even photocopy someone else's trust, white out the name and asset list and all the other specific info. Handwrite in over the top of it with your info, make another copy, and sign it. Then contact your bank, broker, title company, etc. Notify them that these accounts are now to be in the name of the trust. <--That, if properly funded is better than any document drafted by a very expensive attorney, where one, some or all of the assets failed to be listed and transferred correctly.
The true cost of a proper trust is you keeping it up to date. ASsets change, accounts change, personal property changes. These need to be updated in your trust. The trust is a dynamic document.
Question: I won $1500 playing bingo. I know if you win up to $1199 there are no taxes but because I went over it is taxable. Is just the amount over the $1199 taxable or is the whole $1500 taxable?
Answer: All of your winnings are taxable, but the IRS only requires that amounts of $1200 or more are formally reported.
You must pay tax on all of it. If you have been keeping real good records you may be able to deduct your losses.
Question: Dear Richard - I have a client that incorporated as of 1/1/06. At that time, he did not start a new QuickBooks file, so his previous preparer did not have a good balance sheet to start with showing assets transferred into the corp, etc. I have gone back through his QB file for the last 3 years and determined what the beginning balance sheet should have been (as well as determining that income was understated all three years due to inappropriate postings in QB). However, a building was included on his 2006 and 2007 returns as well as corresponding depreciation on that building. Question #1 - Is it possible to amend his prior year returns and take the building off of the depreciation schedule, and rather have the building be a personal asset? Question #2 - If the client decides not to amend, at least not right now, do I simply make an M-1 adjustment for a prior period mistake in order to report the corrected 2008 balance sheet on the Sch L? I appreciate any guidance you can provide.
Answer: Q1:
You could file amended tax returns. Were you going to have him hold the property personally and then amend his personal returns to show the depreciation? If so, what was the advantage? Or were you going to not depreciate the property? The IRS can and does "Impute" depreciation, which would have a bad tax effect. opening all of those tax returns to an extended window for audit can be bad. I'm not saying there "one correct" way to handle a poorly executed previous tax return.
Q2:
You said there was under reported in come, that cannot be addressed by an adjustment to the balance sheet.
If you are applying the Strip Mall Accounting Dogma that "you shouldn't put assets in a corporation because you can't get them out". Then we have some talking to do.
Question: how can the beneficiaries of an irrevocable trust remove the trustee and appoint another one? Does the originally granter
have any legal avenues to change or dissolve the trust?
Can all of the beneficiaries refuse the "gift" of the trust and would the trust then be null?
Answer: AS I see the backstory of this question you have realized that Irrevocable Trust can be a Nightmare.
It is "IRREVOCABLE" (Not Revocable) by design. The Grantor loses all control of the trust, its assets, and the management.
The Beneficiaries "Might" be able to remove the trustee if they can prove malfeasance, misfeasance, incompetence, negligence, fiduciary mismanagement, etc. This is not easy, the courts give a lot of latitude for the trustees interpretation of the terms of the trust, and there is no set standard of operations that is a hard and fast threshhold to determine these points.
However, if you mount that fight, you use your money to push forward, while the Trustee gets to use the trusts money and assets to push back.
Refusing the gift would not effect the trusts stand in any way.
The trust probably named a subsequent trustee, if the current trustee dies or can no longer serve.
Question: Can a CRUT be dissolved with the proceeds then being paid back to me---if the Trustee agrees? Are there tax consequences?
Answer: Most Charitable remainder trusts are written by the charity (the Beneficiary). These are generally irrevocable trusts. They have bee written specifically to protect from being dissolved.
The Charity spent a lot of effort, paid healthy commissions and was willing to wait a long time to ultimately get the asset.
As many people who have gotten involved in CRTs, you realize too late what you have given up.
Obviously, I have not read the trust, so I can't tell you absolutely what might come, but. . .
you might spend lots and lots of money fighting to dissolve and have a high possibility of losing.
Sorry if this is not what you were hoping to hear. Be proactive and make sure that others understand your mistake so that they don't make the same one. Most tax dodges like CRTs have real downsides that are not explained in the marketing materials.
We are a company located in Bangalore, India. We are structured like a US 'C' Corp. Our company is planing to partner with two US citizens to form a LLC. Our question is how will the Indian Coproration pay Income taxes on its income in USA? Would the LLC withhold the taxes? Can the Indian Corporation apply for a EIN? and file returns with the IRS?
Thanks for all your help
Regards
Suresh
Answer: The LLC will file a 1065 General Partnerhip tax return in the US each year, there is approximately a 30% withholdings tax on income attributed overseas. You may (depending upon tax treaties) get credit of that withheld tax on the Indian corporations tax return in India.
I know individuals are limited to $3000 loss from investment losses and I know day traders are not--but to qualify as a day trader you need to trade well every day. Is there a category for an investment company that could invest and trade in securities and options and take any losses [should they occur] as a write off against income from other business I'd own. IF the answer is yes, I assume it would mean forming some kind of corporate entity for the company--either a C or S corp. Any advice in this regard would be appreciated.
thanks,
Marshall
Answer: The answer is no. Corporations apply losses to gains. But if you are losing more than your gaining . . . quit. Or more poetically (can't remember who said it): "If you find yourself in a hole, quit digging".
This sounds obvious and it is, but the strip mall accountants seem to miss this point. They actually encourage people to create losses as a form of deductions; this is foolhardy. But you need to know their motivation in making that recommendation.
First, deductions are not good. deductions make bad things less bad. The bad thing is that you gave up 100% of that money, the less bad part is that you didn't have to pay taxes on it too.
That's it.
Accountants will go into great detailed explanations why you should buy property so you can become a night time plumber and weekend landscaper, just so that you can shave a few bucks off your tax return.
I can go two ways with this: my first recommendation is to buy real estate only if you are confident that it is a good and positively cashflowing investment. That is true for any investment. If you are going to make money don't do it.
Second best recommendation, if after this explanation you still are scrounging for deductions, but now realize you are looking for low maintenance deductions, ones that won't require constant effort. I can offer the lowest effort deduction available. It can be any size, if you feel you need a $100,000 deduction. . . this is it. If you want to deduct $2 million dollars (That's right 2 million) this will work. It is such a little bit of effort it is incredible. In fact it is just a couple of hand written lines and your signature.
That's it a few words on a piece of paper, sign it and you can have as large of a deduction as you please.
Question: An S Corp buys a foreclosed property in March for $100.000. In June it sells the property to a private individual for $150.000. Immediately after quitclaim deeds it back to the S Corp.
In other words the corporation uses the individual's credit to refinance the property.
Is the corporation responsible for paying income tax for the $50.0000 it got from the bank by selling (refinancing) the property?
Answer: In a vacuum, the answer is yes; the corporation pays the taxes on the gain at income tax rates. However. . .
You would be unsuccessful at quit claiming the property to the corporation. You forgot about the lender, who can, and would, refuse to allow the transfer. You will also find the lender has a clause in the mortgage that would require repayment of all the money immediately if the property is sold or transferred.
Your prior explanation of PSC taxation was very useful, but I have a follow-up question. With regard to the specific stipulations of a Personal Service Corp, does it matter whether the services are performed for a corporation or an individual? Is the spirit of the term "Personal" meant to imply that the services are performed *by* a person, or *for* a person, as opposed to for a corporate entity? Or is this irrelevant? It seems to me that, for example, business consulting services performed for a corporate entity might be held in a different light than, say, home decorating services performed for an individual, but perhaps this is just wishful thinking. I am a business consultant who works solely with corporate entities, and I am trying to determine if I might satisfy all the requirements but still _not_ be classified as a PSC due to the intent of the law.
Many thanks!!!
Alan
Answer: Good try, but. . .
If I can take license with the explanation:
The term "Personal" would apply to the "Servicor" not the "Servicee"
Neither of these words probably exist in the English vernacular, but seem to most directly apply.
In other words, it is the entity that is Providing the service and not the entity receiving the service that is described by the word "Personal".
I think I will try googling those words now and in a few months.
Question: My question is somewhat loaded in its content. My brother and I formed a partnership about 7 years ago and opened a construction business. I would like to know if the partnership structure is the best for us to lessen our tax burden. Every year we seem to get hammered come tax time based on our income for the year and the profit the business has made, as well as paying the self-employment tax. The second part of my question regards a part-time job that I have recently begun delivering newspapers on a motor route. I took the position as a result of our business losing much of the overtime that we were used to for the last couple of years. Based on the construction business I have already is there a way in which to handle the additional income from the paper route which would lessen my tax burden on that income. My goal is to provide for family and also pay my fair share of taxes as a American citizen, it just seems the harder you work the more taxes you are obligated to pay. Any direction on these issues would be greatly appreciated.
Answer: You are right, you are getting hammered, you are right, self employment tax is a big bite out of the spendable dollars.
No, a partnership is not a good idea.
It is not a good idea for tax purposes;
It is not a good idea for liability purposes;
it is not a good idea for administration purposes;
In fact you will find that generally it is considered the worst business entity available.
You are paying ALL the personal taxes on ALL the money; and personal taxes are terrible. But you already know that.
Don't feel bad, there are lot of businesses that have started and are running without the best advice at start up.
Let's see what might be the best business entity for you as a successful business (I use successful business here because if you were failing and losing money, you wouldn't have any taxes to pay).
Name for me the 3 most successful businesses that you can think of.
Question: Forming a 3 person LLC. I am doing most of the work and we wish to setup so that the LLC has equal percentages in shares but that I would get first 60K out of 100K in profits. Is it better to setup as a guaranteed payment or as profits interest such as "B" shares? Or other better alternatives?
Answer: LLC's don't issue shares, there is no option to create different classes. The owners are members. Distribution to members has to be commensurate with ownership percentage.
There are much better alternatives but all of them start with "Not an LLC".
If you are dead set on the LLC the most expredient way for you to pay the highest tax soonest is to put you on salary for $40k. then when the next 60k comes in you can get 1/3 of that. I think that gets you to 60 out of a hundred.
You did notice the HIGHEST TAX SOONEST phrase. All of the money, not just you salary, but also all of the distribution will be subject to Social Security, Medicare, Workers Comp, UnEmployment, Federal Income tax rates, State and local income tax rates. And whatever is left is all yours. If you want to use it invest in the business, go ahead, but you won't have much.
On the other hand, if you keep all, most, or some of the money at the business level, then taxes are much more friendly on that money. No social security, no medicare, no workers comp, no unemployment, AND you would be paying lower federal taxes. If you can operate it properly you that would also mean NO STATE OR LOCAL taxes.
My wife and I want to have wills drawn up, we have one child (5 years old). I've checked with a few attorneys here in Maryland and the lowest price I can get is $1,000. That just seems rather high to me. Can you recommend an alternative, such as a particular website or form download we can use to do ourselves? Would you recommend we do this ourselves?
Thank you,
Shane
Answer: There are huge differences between a Will and a Living Trust.
A Will does nothing. It is merely a list of suggestions to the courts. (I used to believe that it did determine the guardianship for minor children but the Michael Jackson case proves that wrong.) It is only a list of suggestions to the probate court, an entire court system set up just to "prove" the will. If you died without a will, the courts would assume that everything you have would go to your wife, if she predeceased you it would be assumed to go to your children. I'm just going to take a stab and say that was what you intended anyway. If You choose any other avenue, someone can argue with the probate court that they shouldn't follow your will. You aren't able to make a good argument in your defense.
You are right $1000 to have an attorney print out a piece of paper is ridiculous. . .BUT Beware the low price guys. Many scams exist. Wills at one time dropped in cost to free, attorneys would draft the will for free. The kicker was they would name themselves as executor and charge huge fees once you are dead and can't argue about it.
A will is simply a declaration and there is no magic voodoo verbiage, or mystical magic dust that must be sprinkled by the annointed ones.
If you found one laying in the trash, and you whited out the names on it, photo copied it (no white out on a legal document) and hand wrote your name in the blanks, you'd have a will. For what good it does.
If you wanted to take the legaleze route, go down to the local court house and look through all the wills on file there. Probate is Public Record.
So the living trust.. .
Living trusts do 4 things. and 4 things only.
Provides in case you are incompetent and can no longer manage your personal affairs.
Provides for specific distribution, what you though the will would do.
Avoids Probate. Worth doing.
Maximizes the "Prepaid tax credit for married couples". As the estate tax rates climb and personal wealth declines this become an issue for fewer and fewer couples.
A living trust does NOT:
Protect Assets
reduce taxes
limit liability
etc.
If these are even remote concerns then we have more to discuss, call me.
No One Can Do a Good Living Trust for You.
A good living trust is one that is funded with ALL of your personal assets. No attorney, no financial advisor, no trust guru knows what assets you have, nor are they authorized to make any changes to those assets.
YOU are the only person that can do a GOOD Living Trust for YOU.
Same drill, no fancy phrases or long indecypherable paragraphs will make a living trust good. You are on the right track, look for a couple of examples and edit yourself one that you actually understand.
I don't at my fingertips have a copy (not that I shouldn't since you are not alone in your plight.) Ask you parents or even a close friend if you can't find an example on the web.
Question: I currently work for a Transportation company as a Project Manager making around $60,000 salary. I am suppose to be switching over to commission, which would change my monthly salary to a draw, which I was told would never go negative.
I started an LLC for a consulting business that I will be doing on the side, and I have already been guaranteed a lump sum around $40,000 a month for getting my customer some very valuable business. I also have to say that I have to somehow give a portion of this money to my father for his help in securing the deal...(by paying his bills, etc..) My company said that they would pay my commission through this LLC if I wanted to go that way...
What would be the best way to do taxes on this? Remain as LLC as disregarded entity, or should I change classification as Corporation? Should I have the company I am working for pay me commission through my LLC or not?
I am only 27 so all of this is pretty new to me, and I have been doing all my own research. Thinking its about time I talk to a professional.
Any help would be great.
Thank you,
Stephen
Answer: As you have already pointed out, the LLC is a disregarded entity, it provides no tax advantage. If you run the numbers on the total income going to you and you pay the self employment taxes along with all the income taxes, you will lose quite a bit to taxes.
Obviously, you will still need to have personal income. you have to support your personal overhead (lifestyle expenses: rent/mortgage, groceries, utilities, personal vehicle cost).
The first critical question that must be answered is: will all of the income be required to cover the personal overhead?
If yes, then it makes little tax difference how you will take the money.
If no, then we can do some things using a properly structured real corporation.
From the numbers you have stated, It would appear to me that you will have more than "just barely enough" to pay for the rent, groceries, utilities and vehicle costs.
Question: I have two rental properties. Presently, I just collect the rent, make repairs, and file my taxes. Recently, I have been informed that I should establish a LLC so I protect my assets in case a tenant hurts themselves and sues me on my property. First question is do I need a LLC. My understanding is that I am only limited to what I have listed under the LLC. If this is true the second question is should I set up a LLC for each rental vice putting both under one name? Thank you.
Answer: I'm going to take the other side and explain why it would be less than effective to go through the effort to set up an LLC to hold these real estate holdings. Then I'll start you on an entirely new path.
As you already suspicion simply filing an LLC and transferring the properties to them is a cycle of action with no real benefit. Yes, if you put your assets (the rentals) in the LLC, and the LLC is sued, then all the assets held by the LLC can be taken.
Moreover, the LLC has not been proven to limit liability for the owners. So a lawsuit against the LLC will still drag you personally into the lawsuit. You "Might" be able to argue your way out, but you "Might Not". That is not a very good guarantee.
You second question also tells me you have been exposed to the Jay Mitton program (directly or indirectly). Where each asset is held by another entity (for Jay Mitton it was costly limited partnerships, which was a profitable sales program).
You say you collect rents, make repairs and file taxes. You did not mention profit. If there is no profit motive, I'd recommend: Get out.
If you are profitable in the rental portion, then separating that successful business into its own entity that pays its own tax would be prudent.
If long term gain is the goal then we need to talk about how to handle that.
If you were encouraged to get into real estate for the deductions, go back to that person and slap them across the face. Deductions are not good, deductions make bad things less bad. Getting into real estate so that you be the night time plumber and weekend landscaper is a tragedy. Deductions are not good, because to get the deduction, you have to give away 100% of the money, just so you can keep from giving the IRS 15-35% of the money. That is not good.
If you wanted a deduction with much less effort, I can give you an alternative, in fact I have a deduction that you can exercise that takes almost no effort, well it does require that you handwrite a couple lines of text and it does require your signature. But it can be as large as you want.
Do you want a $10,000 deduction? $50,000? 2 million dollars?
Here is how simple it can be. Get out your checkbook. Write my Name on the first line and the amount of deduction you are looking for on the next line. Sign it and mail it to me. Congratulation you now have a deduction.
That is of course is tongue in cheek; but it illustrates the inanity of looking for deductions.
But that was not your question.
You use the phrase limiting liability but I am going to change that to asset preservation.
You realize that anyone can sue you for any reason. Filing a piece of paper with some state agency will have little real effect on that potential.
What we want to do is insure that if something bad happens we won't lose everything in a lawsuit. That is Asset Preservation.
You have not given me a list of what you are afraid to lose in a lawsuit. That will ultimately determine what needs to be done. but let's start with the rentals.
What if you don't make any changes to how they are held. You still are the titled owner, but that you end up with another $200,000 lein/mortgage against them? Would that turn you "Upside Down"? And then what happens if someone sues because of the rentals? Can they take them away? No. . . not without paying off the underlying debts.
Did we just preserve those rentals through this theoretical lawsuit? Can't the opposing attorney get that debt information off the public record and figure out that there is no equity? How hard will he work on a retainer if there is no way to get paid? Didn't that just reduce the likelihood of a lawsuit?
We of course have not touched on other assets such as your primary residence, or your personal bank account, or brokerage accounts, cars, boats, etc.
But what I hope you can see is that Debt is good.
Oh yeah, this makes no sense until you consider that the Lein/Mortgage could be held by a corporation that you have control over. Then you are in debt to yourself.
I know individuals are limited to $3000 loss from investment losses and I know day traders are not--but to qualify as a day trader you need to trade well every day. Is there a category for an investment company that could invest and trade in securities and options and take any losses [should they occur] as a write off against income from other business I'd own. IF the answer is yes, I assume it would mean forming some kind of corporate entity for the company--either a C or S corp. Any advice in this regard would be appreciated.
thanks,
Marshall
ANSWER: The answer is no. Corporations apply losses to gains. But if you are losing more than your gaining . . . quit. Or more poetically (can't remember who said it): "If you find yourself in a hole, quit digging".
This sounds obvious and it is, but the strip mall accountants seem to miss this point. They actually encourage people to create losses as a form of deductions; this is foolhardy. But you need to know their motivation in making that recommendation.
First, deductions are not good. deductions make bad things less bad. The bad thing is that you gave up 100% of that money, the less bad part is that you didn't have to pay taxes on it too.
That's it.
Accountants will go into great detailed explanations why you should buy property so you can become a night time plumber and weekend landscaper, just so that you can shave a few bucks off your tax return.
I can go two ways with this: my first recommendation is to buy real estate only if you are confident that it is a good and positively cashflowing investment. That is true for any investment. If you are going to make money don't do it.
Second best recommendation, if after this explanation you still are scrounging for deductions, but now realize you are looking for low maintenance deductions, ones that won't require constant effort. I can offer the lowest effort deduction available. It can be any size, if you feel you need a $100,000 deduction. . . this is it. If you want to deduct $2 million dollars (That's right 2 million) this will work. It is such a little bit of effort it is incredible. In fact it is just a couple of hand written lines and your signature.
That's it a few words on a piece of paper, sign it and you can have as large of a deduction as you please.
While I am looking for deductions and am very curious what you were alluding to--pls let me know more. I was asking about the investment business more in the context of stocks and options, not real estate. In other words, the $3000 loss limit for individuals trading make it scary to take a bigger risk if you lose as it can take so long to get the full write off. So still interested if you know the answer to that.
thanks,
Marshall
Answer: Deductions for deductions sake are bad. If you are making a "business decision" then you always need to keep "PROFIT" as a primary determinant.
Let's say you throw $10,000 in the stock market, Have not invested the time to do the real due diligence, do not have an insiders knowledge of the companies plan. Do they want to depress the stock so they can buy it up before the big money making announcement, or are the inflating the stock value so they can leverage higher to pay the salaries of the key personnel before they tank?
You finally sell your invest and lost all, most, or some of your $10,000. Congratulations, you can now tell the IRS you lost $XXXX and they will credit you back on your tax return, 15% of that amount (maybe even 25, 28% of that amount if you are in the higher income brackets) get any higher than that and you'll lose the deduction to phase out or the AMT.
If you lose $3000 a year, every year, you get credited back $450. What about the other $2500. That reduction in your bank account is your to keep and enjoy.
If on the other hand you realize that there is a risk of occasional loss, but intend to make more gains than loss; then the personal $3000 limit against ordinary income is not an issue.
The reason you are looking for deductions on your personal tax return is that you have TOO MUCH ordinary income on your personal tax return.
I don't know where your personal revenue is sourced so I can't tell you yet with authority how best to handle it. But, I can, all you have to do is call me.
First of all, I want to say how thorough your answers are. I've spent some time today perusing your past answers and your site. You clearly know the ins and outs of corporations.
I've included some background and lots of details to hopefully illuminate the best path in my circumstances:
I reside in Illinois. I am currently employed full-time, earning about $50,000/yr and my employer pays 85% of the medical insurance cost for my family (self, husband and two daughters).
I have also concurrently been operating several businesses as a DBA (shame on me, I know):
I have an independent Speech-Language Pathology (licensed in my state) business for which I receive 1099s from insurance companies & the state of Illinois. I've been doing so for 3 years & am profitable every year. I only see patients an extra 4 hours/week and gross about $20,000-25,000 per year - I have also have very few expenses to deduct for this income, mainly a home office, supplies, and mileage.
Next, I have 3 websites (2 are brand new, the other is 2.5 years old). Last year, the established site earned about $9,000, this year, it will bring in over $25,000 this year - it also requires only about 4 hours/week (and sells no physical products) and has a very low overhead. Of the other two sites, one will be an info site earning passive income (no products) and the other is a website design business that was just launched in June but should be showing a profit as well by the end of the year. Basically, two will generate passive income and the other is a service site.
In addition, my husband also has a DBA business, he's a DJ, and working part-time earned about $15,000 last year. He does typically have higher expenses for equipment, music, home office and mileage etc to deduct. He's also in heart failure, so our medical bills are quite high despite being insured and sometimes we are able to deduct a small portion of those.
So, of course, our increased income last year placed us into a higher tax bracket and we ended up paying over $1,000 in taxes - but it was the first year we had to pay in.
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My long-term plan is to phase out the Speech Therapy business as the income from the websites surpasses it (which it is already beginning to do with just the one site). I would like to focus on creating more passive income with the sites, and possibly building more of them.
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Obviously, we need to 1. limit liability and 2. reduce taxes, which makes a C corporation the obvious choice.
Now here's my question: do we need a separate C corporation for every DBA? Initially, I was looking into forming a series LLC (which is new in Illinois & relatively expensive to set up), wherein each DBA would be its own entity. But as this would offer no tax advantages, I don't think it's the way to go.
Is it possible to separate each website as a series/division of the main C corporation, or must they operate as their own C corps? Could the speech therapy & DJ business be added in this way as well?
The situation is also complicated by the Speech Therapy services, as it seems I'd have to form a PSC at a 35% tax rate, so I'm not certain what to do about that yet either.
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I have several other contingent questions, such as can minors be shareholders in a corp, must I pay myself a salary based on part-time work or instead pay myself an hourly wage, but these can wait for another question once the corporation structure questions have been resolved.
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Any guidance would be most appreciated - if you need additional details, I'll do my best to provide them.
Answer: I humbly thank you for your kind words.
Your concerns run the gamut, and there are some concerns that you haven't yet mentioned, but have declared. You might not know they exist.
As to the multiple corporation question:
Yes, if it makes sense to separate them.
There are a number of factors; each needs to be considered in its own time. for example, you have 3 sites, only one is profitable. Then a single corporation can handle all 3 until such time as there is a reason to separate them, then each can simply be "spun off" into a new corporation.
What "factors" would apply?
Profitability, Liability, ease of management, unique group of people involved, etc.
Profitability: Once the net taxable revenue exceeds $50,000 the tax rate increases. So, if it is a possibility it makes sense to separate successful business models into distinct entities.
Liability, some ventures are inherently more risky than others. Putting risky ventures into an entity that has a safe revenue stream would be foolhardy. They others are self explanatory or secondary concerns.
Divisions in a Corporation do NOT really separate businesses. that is also true for the Series LLC. the Series LLC is at this time Sciencefiction. Although it is a display of great imagination and seems almost possible. It has yet to be proven.
You are correct on the speech therapy profession that you would be required to file as a professional corporation. you are also right that a profession corporation is taxed at a flat 35%. I cannot directly solve that problem. The indirect solution is: Don't be profitable. Then it doesn't matter what the tax rate is.
Profit is net after expenses, if you have an increase in your expenses, you would have a decrease in your profit. More on that later.
You should be concerned about the 35% flat tax of the Professional corporation. However, you provided all the details in your explanation. . . you also need to be concerned about the "Personal Service Corporation" tax rate and the Personal Holding Company" tax rate.
These start at 30% and go up to 49%. This we can solve directly. But the explanation is not a simple one. Google these terms and we'll discuss them.
No age limit on being a stockholder (no advantage to being a stockholder in a properly structured real corporation).
the required salary concern would exist if you were attempting to operate as a S-corp. Is not a concern in a C-Corp.
Can I sell my paid-off car to the Corp so I can deduct the fuel costs, maintenance, etc? If so, what kind of price would I have to sell it to the Corp for, i.e. blue-book value or whatever price I decide?
Thank you,
Eugenia
Answer: You can. Is that the best option? It depends. There are some pitfalls.
What price? that also has variables, but probably doesn't really matter.
Unless there is a specific reason to do it differently, you could exchange the car for stock (capitalize) that takes some of the transactional hassle out of the equation, and gets you to the same net result.
Question: When forming a C Corp, can you be penalized by the IRS for setting your director's salaries too low?
Can/should you specify the number of hours per week that constitute the salary if it's less than full-time?
Also, if you are the sole owner/shareholder in a C Corp and are filling all the Director positions (President, VP, Secretary, Treasurer), do you have to set a salary for each position or can/should you denote a single salary encompassing all the positions? If it's the latter, how would you phrase it?
Answer: This line of concern stems from requirements that are laid out for S-Corps. This does not apply to C-Corps.
There is no minimum salary to be paid to "owners" who are acting as officers. For non-owners there are of course minimum wage laws, and negotiated pay rates, for some reason we can't force people into indentured servitude.
As a general rule, Directors do not normally get paid a salary.
To understand the reasonableness of this let's first realize that until the business is cash flowing there is no money to pay anyone, and the owners are always last in the payline.
There is no legal, logical, or logistical reason that necessitates the separation of income to particular responsibilities. Ego, might apply, but. . .
In 1983 my husband borrowed money from one of his friends. Last year my husband died without having paid his debt back to this friend. There was never a promissory note issued to this friend and my husband never informed me about the fact that he borrowed money from this friend.
Now this friend approached me and asked me to pay him the money that my husband borrowed from him.
Do I have to pay him? This was 26 years ago and I knew nothing about it. Does the statute of limitation apply to this?
We all live in New York.
Awaiting your kind answer and TIA.
Answer: In this case the statute of limitation does not apply.
In order for it to be a valid loan there has to be 3 things:
a "NOTE". The note has to be written.
an interest rate. It must be reasonable, not too high and not too low.
an intent to repay.
Failing any of these things it is not a loan it is a gift.
That is the legal part in a capsule.
You'll have to wrestle the social, moral, ethical, and personal parts.
