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The IRS Targets Income Tricks

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Re: The IRS Targets Income Tricks

#61

Post by camz »

rubyrescue wrote: post #37
patio11 wrote: post #6

Small businesses are somewhat notorious for aggressively interpreting the tax code in one's favor, largely because they have a variety of options for doing so not available to the W-2 employee. The game theory sort of incentivizes it, too: heads you save 100% of the taxes at issue, tails you have to pay the taxes at issue and (if you had any sort of a good faith case) only interest at a below-market rate on them... a…

i just realized the both of us need to start an american-expat-tech-entrepreneur-tax forum. a few other people are in the same boat and email me based on my profile from time to time. I find i know much more about IRS tax code regarding form 2555 than most US accountants because they just don't deal with it much, OR, the ones that have charge way more than I can afford to help me with my questions - but i haven't fou…

I'd be willing to help with my experience with these tax issues. =)

I'm both licensed and experienced in the tax field.

Re: The IRS Targets Income Tricks

#62

Post by camz »

DenisM wrote: post #52
camz wrote: post #39

I'd like to clarify the issue. Personally, I think that the CPA in question in the article is an idiot for a number for reasons. (1) He's an accountant so he should've known that playing this game with the IRS as a CPA is begging the IRS to slam you. (2) Litigating a losing position like this so publicly is going to kill your reputation and put you on the IRS' top 10 favs list for life. This is a very clear issue act…

Does any of this apply if you're not distributing the cash at all ? Say, I am making money in my S-Corp, but I keep all of it in the bank (minus the expenses) and instead live off my savings. The plan is to save enough to expand the business, but for now the money is just sitting there, doing nothing.

No that is not going to work. Keeping money in the business is called "retained earnings." Only C corporations or regular corporations are allowed to retain earnings. Pass-through entities such as partnerships and S-corporations are required to pass any income to the owners regardless of whether cash or any other form of income is distributed.

If you want to reinvest into the company, then you'd have to pay taxes on the distributed income and then put the after tax money back into the business, which would increase your tax basis in the company. This would allow you to take net operating losses in the future as well as help you if you ever sell the company.

Hope that helps. Keeping money in the bank won't help you in this situation.

Re: The IRS Targets Income Tricks

#63

Post by camz »

ams6110 wrote: post #17

There is so much "waste motion" expended in trying to game the tax code in so many situations... what could creative people achieve in that time if they didn't spend it that way. We need a vastly simplified income tax code... I'm talking throw it all out and start from scratch. Or replace it with a national sales tax, rebating some amount to make it less regressive.

I'd like to clarify this argument. This is often a cited "alternative" A national sales tax won't be a simplified cure. Current sales tax laws issued by the states are considered fairly simple. Whatever you buy is taxed at X rate. But, from years of experience in sales tax, it is one of the most complicated areas of taxation that is constantly changing.

Ex: Have you ever wondered why supermarkets are designed the way they are? Tax is the reason why every major supermarket redesigned their layout years ago. There is a landmark case that argues whether a snickers bar is considered food or candy. Two categories with different tax rates. In the end the judge stated that candy is anything sold at the register counter and food is anything held within the isles.'

Simplification is an ideal that never pans out because we're always going to look for the loophole and its our own ingenuity that made the current IRC so complicated. Everything starts out simple until life gets a hold of it.

Re: The IRS Targets Income Tricks

#64

Post by JeffL »

jrockway wrote: post #36
JeffL wrote: post #32

Seems like if we just had a large sales tax, rather than income taxes, none of these things would be so complicated, and we'd save so much money on the cost of compliance.

A large sales tax is an unfair tax on the poor. Why should people making $20,000 a year pay the same tax on their groceries as someone making $1,000,000 a year?

"Unfair" by what standard? Why is it unfair to tax two different people the same amount on the same purchases?

Re: The IRS Targets Income Tricks

#65

Post by brc »

johnwatson11218 wrote: post #56
notauser wrote: post #35

Earlier quoted context omitted.

In the UK personal taxes are generally automatically handled by the employer. You just get the post-tax income transferred into your bank every month, and a payslip showing the deductions that were made. (Outsourced PAYE administration costs about £20 per month for a very small company.) It gets more complicated when you can't do taxes through PAYE for any reason - unearned income, dividends, directorships etc. My ow…

I read a book by Jim Rogers, I think it was "Investment Biker" and he said that the US is the laughing stock of the developed world because of the way our incomes taxes work. He said that in Australia you have one form the size of a postcard that everybody mails in once a year.

While I agree with you, it's not entirely true that you have one form that you post in once a year. While your 'group certificate' is postcard size, I think it's somewhat like a W2 (been a while since I received either), you still have to submit a personal tax return. For most people, it's just a case of reporting the information on the Group Certificate(s) (depending on how many jobs you had) and perhaps claiming on some deductions like uniforms or (new) secondary school expenses for dependent children.

That said, the government is talking about moving to a model whereby you don't have to submit a return unless you specifically want to claim some deductions. This is more like the UK model.

As for the US being the laughing stock - I don't know if I would choose those words, but I do think the IRS needs its wings clipped by foreign governments. The whole W8BEN form thing is ridiculous (so tempted to put F.YOU IRS as my contact details) as is the mind-boggling fact that the only way to not file a return in the USA is to renounce your citizenship (and good luck visiting your relatives after that!).

The myriad of local, state and federal taxes, forms, rulings and corporate structures - well, I do wonder how much GDP is lost in paper shuffling. It can't be insignificant.

Personally, I would have the tax laws in most countries scrapped and replaced with flat-banded taxes with zero exemptions. The tax rates would be lower to make up for the lost deductions, but in general, if you earnt X, you'd be up for taxes of Y. Corporations would be kept for their original purpose of limited liability rather than taxation structures. As noted above, it's all the special interests that get in, and, well, anyone who was tried to selectively reward children will know the impossobility of 'fair' once selective rewards and exemptions are introduced.

Re: The IRS Targets Income Tricks

#66

Post by DenisM »

camz wrote: post #62
DenisM wrote: post #52

Earlier quoted context omitted.

Does any of this apply if you're not distributing the cash at all ? Say, I am making money in my S-Corp, but I keep all of it in the bank (minus the expenses) and instead live off my savings. The plan is to save enough to expand the business, but for now the money is just sitting there, doing nothing.

No that is not going to work. Keeping money in the business is called "retained earnings." Only C corporations or regular corporations are allowed to retain earnings. Pass-through entities such as partnerships and S-corporations are required to pass any income to the owners regardless of whether cash or any other form of income is distributed. If you want to reinvest into the company, then you'd have to pay taxes on…

Thanks for your reply. Just to be sure I understand you correctly, which one (if any) is true:

If an S-Corp makes money, it is assumed that the earnings are distributed and thus both personal income tax (on the entire earnings amount) as well as payroll taxes (on the reasonable wage) have to be paid.

Or:

If an S-Corp makes money, it is assumed that the earnings are distributed and the personal income tax has to be paid (on the entire earnings amount), but payroll taxes don't need to be paid.

Re: The IRS Targets Income Tricks

#67

Post by camz »

DenisM wrote: post #66
camz wrote: post #62

Earlier quoted context omitted.

No that is not going to work. Keeping money in the business is called "retained earnings." Only C corporations or regular corporations are allowed to retain earnings. Pass-through entities such as partnerships and S-corporations are required to pass any income to the owners regardless of whether cash or any other form of income is distributed. If you want to reinvest into the company, then you'd have to pay taxes on…

Thanks for your reply. Just to be sure I understand you correctly, which one (if any) is true: If an S-Corp makes money, it is assumed that the earnings are distributed and thus both personal income tax (on the entire earnings amount) as well as payroll taxes (on the reasonable wage) have to be paid. Or: If an S-Corp makes money, it is assumed that the earnings are distributed and the personal income tax has to be pa…

Option 1 sounds about right. All distributions are going to be tax on your personal income tax and exempt from payroll taxes.

Reasonable wages are NOT corporate distributions, they're simply wages paid by the corporation and deducted as an expense. The payroll taxes would be paid on the amount that you deem wages through the corporation. Please note, payroll taxes are also deductible. hope this helps

Re: The IRS Targets Income Tricks

#68

Post by khafra »

rubyrescue wrote: post #37
patio11 wrote: post #6

Small businesses are somewhat notorious for aggressively interpreting the tax code in one's favor, largely because they have a variety of options for doing so not available to the W-2 employee. The game theory sort of incentivizes it, too: heads you save 100% of the taxes at issue, tails you have to pay the taxes at issue and (if you had any sort of a good faith case) only interest at a below-market rate on them... a…

i just realized the both of us need to start an american-expat-tech-entrepreneur-tax forum. a few other people are in the same boat and email me based on my profile from time to time. I find i know much more about IRS tax code regarding form 2555 than most US accountants because they just don't deal with it much, OR, the ones that have charge way more than I can afford to help me with my questions - but i haven't fou…

There doesn't seem to be a tax.stackexchange.com yet.
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