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Tax FAQ

Discussion in 'Business & Tax Advice' started by burnett4congress, Jun 9, 2014.

  1. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    Over and over again, I see people asking the same kinds of questions related to taxes. So rather than throw my shoe at the monitor, I decided to make this thread instead.

    I'm going to start with a bunch of commonly asked question. Feel free to add your own and I will answer them throughout the thread.

    Q: Why should anyone listen to me?
    A: I'm a US tax preparer that does over 3000 tax returns a year, about a thousand of which are for corporations and LLCs. Whatever your situation is, I've probably seen it before. I help people all over the world minimize their tax burdens through proper structuring and planning.

    Q: Why should you care about taxes?
    A: For most people, taxes are the single biggest expense of their lives. Reducing your tax liability is a pretty big deal. Other people get into a dilemma in which they haven't filed taxes for prior years and then become afraid to do anything in the future. It's an understandable fear, but it can be dealt with pretty simply and easily.

    Q: If you're a US tax guy, how does that help people in other countries?
    A: 2 ways. First, if you are outside the US but want to do business in the US, you need to create a corporation or get a ITIN and file US tax returns. Second, taxes are actually pretty similar across the globe. The terminology and details may vary, but the basic ideas remain the same.

    Q: How do income taxes work?
    A: It's a complicated question, but the basic idea is that persons (natural and artificial) create a document that is submitted to the government that summarizes income and allowable expenses. The net income is then subject to a tax that varies depending on what kind of income you bring in and how much there is.

    Q: How do I report SEO income (including ebay, paypal, advertising income, affiliate income, etc)?
    A: It depends on how you have set up your business.

    If you haven't done any planning, you are what is called a sole-proprietor. This kind of income is reported on Schedule C of a 1040 tax return. On a schedule C, you report your income and related business expenses. The net amount is then your business income. This kind of income sucks because on top of regular income taxes, it is also subject to self-employment tax of 15.3% which is paying into social security and medicare.

    On the other hand, if you have done a little bit of planning, your SEO income will flow through an entity of some kind (S corp, or C corp). The advantage here is that this kind of income is not subject to that 15.3% tax.

    So let's do a little bit of math. Let's say it costs $1,000 a year to operate your business between state registrations and tax returns. That means that if you have income of more than $6,535 it will be cheaper to pay the $1,000 than it will be to pay the 15.3% self-employment tax. If you plan on making more than $500 a month, then incorporate.

    Q: What about LLCs?
    A: In the tax world, LLCs don't actually exist. An LLC will either be reported as a sole proprietorship, a partnership, an S corp, or a C corp. This flexibility is actually a pretty cool feature.

    Q: Can't I just send my money out of the country and avoid all this?
    A: If it were 10 years ago, maybe. Welcome to the global world of tax collection. There is a new reporting requirement called the FATCA. Basically, if the *combined* total of all your foreign bank accounts, investment accounts, and so on hits $10k during any day of the year, then you have to submit your account information to the Department of Justice. There's no taxes due other than regular income taxes, but they want to know where you are keeping your money.

    I've talked with one of the attorneys who was very involved in case that led to the creation of FATCA. Swiss bankers from UBS were coming into the US, lying to customs agents, and basically soliciting American businessmen to send their money to the Swiss bank in order to avoid being taxed. When the feds indicted a bunch of these bankers, the hallowed bank secrecy of the Swiss crumbled like a house of cards.

    As a result, the US has been very aggressive in getting foreign banks to start reporting the holdings of US citizens back to the US government. Most other countries have complied, and that's called 'tax harmonization.' This is also why a lot of banks refuse to deal with American citizens any more. It's just too much hassle for them.

    But this is a big deal, and the penalties for not complying are huge. Read all about it here: http://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA

    There is some confusion about whether it's $10k or $50k. This is because there are 2 different filings - one is on your tax return, and one is to FinCEN. Check this chart for the differences: http://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements

    Q: How come I have friends who pay no taxes and get $5,000 refunds every year?
    A: It's because they don't make very much and have children. There are several different deductions and credits for children. The biggest two are the Earned Income Credit (EIC) and the Additional Child Tax Credit. The EIC is primarily for people who make low incomes and have up to 3 kids. The amount of the credit varies based on your filing status, your income, and how many children you have. It tops out at around $6,000 this year if everything lines up right. The Additional Child Tax Credit can be worth up to $1,000 per child. And these are refundable credits, meaning the government will send you the money even if you didn't pay any taxes in the first place. It's tax welfare.

    Q: How do I know my tax guy is good?
    A: Sadly, most are terrible. It's like any other business really, good help is hard to find.

    During tax season, not a day goes without someone walking in and our having to fix prior years tax returns. The big chains like H & R Block are especially terrible since the people preparing the taxes have very little training. A good tax preparer will ask you lots of questions. We ask those questions to get a better understanding of how your life works and how that relates to your taxes.

    If you sat down in my office, and I found out you are in SEO, I'd start asking about what kind of equipment you have to run your business, how do you make your money, do you pay for advertising, do you pay for leads, do you rent any office of commercial space, do you subscribe to anything like BHW, how much does your internet cost, do you meet with clients, etc etc etc.

    And then there are the outright scams. There are tax preparers out there that do all kinds of crazy things and leave you holding the bag. Here's one example from not too long ago (names have been changed):
    Bill and Mary are new clients and come in to do their joint return. Bill is a mechanical engineer and Mary is a school teacher. I ask them if they brought their prior years' tax returns with them, and they say yes. They also tell me that they never got their refund from the last year and got this strange letter from the IRS.

    I look at their paperwork and the letter. The letter says the IRS has assessed the couple a $5,000 frivolous tax return penalty! I ask them what happened, and they have no idea. So I look at their tax return. As I'm looking through it, I see that there are 2 copies of form 1040, page 2. And they are different on a federal fuel tax credit and have different dates. So I ask Bill and Mary which one was sent to the IRS. They don't know. It turns out that they had gone to Bill's brother to do their taxes.

    Since at this point we don't know what has actually been sent to the IRS, I tell them to call the IRS and get a copy of their tax return transcript. It's the IRS' record of what has been filed.

    A month later they come back, transcript in hand. It turns out that when they went to Bill's brother, the brother did an OK job, they signed the return, and left. But Bill's brother never filed that return. Instead, he added several thousand dollars in federal fuel tax credits and then sent it in a couple weeks later. But here's the thing you need to understand about this credit - it's for the federal taxes paid when purchasing fuel used in certain commercial businesses like trucking, commercial fishing, and so on. It has nothing to do with being an engineer and a teacher.

    The IRS noticed that it has nothing to do with being an engineer and a teacher, so they assessed a $5,000 penalty for blatantly lying on their tax return.

    I could go on and on with stories of stupid things I've seen on tax returns. But the point is that it is worth the time and effort to find good people to put on your team.

    Q: So shouldn't I just use TurboTax and do it myself?
    A: It depends. If your choice is between going to a bad tax preparer and using TurboTax, then you might as well do it yourself. If your choice is between going to a good tax preparer and using TurboTax, then a good tax guy will save you thousands and thousands of dollars (with one exception). I can tell you that when people bring in the tax return they have done on their own, I have always gotten them a bigger refund. And the reason why is pretty simple, they just don't know the tax code. And despite TurboTax's best efforts at creating an automated interview, it never comes close to what a knowledgeable professional can do. The other major disadvantage of TurboTax is that there is no tax planning. Here's an example from this past season:

    Noah is a friend of a friend who mailed me his previous tax returns and said that he used to get great refunds that he did himself, but they went away for some reason in the past couple years. He's married with a daughter and makes pretty decent money. So I look through the last few years, and I spot the issue. He owns a condo that he rents out, but 2 years ago he moved to a new job and got a big raise. He and his wife's combined wages went from $120,000 a year to $170,000 a year.

    So what's the problem, you ask? Well, if you are married filing jointly, you lose your passive activity losses from real estate when your earned income exceeds $150,000. Did TurboTax tell him that 2 years ago? Of course not. His rental losses just didn't count any more. There's not much we could do for the past year, but going forward we were able to structure his business as a business, which isn't subject to the same kinds of limitations. That's at least $5,000 a year more in his pocket. So was it worth saving a couple hundred bucks and doing his taxes himself?

    Q: I haven't filed for 6 years - what do I do now?
    A: Step 1, relax. Step 2, gather all your information from those years (you can get copies from the IRS if you need to). Step 3, file your old tax returns. It's really that simple.

    Honestly, this happens a lot. I was in this situation many years ago when I didn't know anything about taxes and thought that since I lost money for the year (I was daytrading), I didn't need to file anything. A few years later, I started getting letters from the IRS saying I owed over $1 million in taxes. But it was because they were operating on incomplete information. The tax returns I later filed gave them the whole picture and showed that I didn't owe anything. And just like that, the problem was gone.

    But here's the issue: If you are due a refund, which most people are, you only have 3 years to claim it. So as of this writing, you can only claim refunds from the 2011, 2012, and 2013 tax years. Even if the IRS owed you $10,000 in 2008, you won't get it. But if you owe IRS from 2008, they are going to make sure they get paid. It's unfair, call your congressman, blah blah blah.

    Q: I filed an extension for my taxes, so I can do it later right?
    A: Extensions are widely misunderstood. If you owe taxes for let's say 2013, they must be paid by April 15, 2014. There is no extension for payment. The only thing that gets extended is your time to file the actual return. So if you owed $1000, filed an extension, and then filed a return and paid in August, you are going to get a letter from the IRS saying you owe penalties and interest.

    On the other hand, if the IRS owes you money, they are perfectly happy to wait for you to file. If you go more than 3 years before claiming the money, you lose.

    Well, my hands are getting tired, so that's it for now. If you have any questions about taxes or related topics, post them below.
     
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  2. Automated

    Automated Regular Member

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    Long read, but worth it. Thanks for sharing your knowledge.
     
  3. mangeshvthakur

    mangeshvthakur BANNED BANNED

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    its big long read, really need some time
     
  4. Trepanated

    Trepanated Supreme Member

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    Great post with some really interesting information.

    Although I'm neither American nor operating in the US currently, I still read it 3 times
     
  5. Reyone

    Reyone Elite Member

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    Cool to see some guide bringing info from a different angle.
    Nice content and well explained man, taxes are something we all got to go through and so it is nice to see someone with knowledge giving their input.

    (y)
     
  6. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    Glad you guys find it useful.
     
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  7. thisismymp3

    thisismymp3 Power Member

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    i know who I'm hiring next year.
     
  8. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    LOL, I'm expensive :). Of course, I'll save you more than I cost, so there's that.

    But this brings up a good point. Planning is critical! And it has to be done before the end of the year in order to have everything in order for your taxes next year.
     
  9. Meloman

    Meloman Jr. VIP Jr. VIP Premium Member

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    Hey man I would love to have you as my accountant. To those reading everything he said is 100% legit, I am studying to be an accountant.
     
  10. YouTubez

    YouTubez Regular Member

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    I'm bookmarking this and shoving it down my mother's stupid cunt mouth....

    She keeps telling me I shouldn't do my taxes... Stupid B***CH....

    Thank you again!
     
  11. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    What do you mean by shouldn't do your taxes? Not file them at all?

    There may be issues with your mother claiming you as a dependent.
     
  12. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    Wow, almost 1000 views.
     
  13. Sunday Lunch

    Sunday Lunch Junior Member

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    Burnett,

    I am a non US citizen banking offshore (non-FACTA signatory). I am presuming the answer to this is no, I am 99.99% sure but may as well take advantage of your expertise. If I get a US address for the sole purpose of having a US address and phone number I will not have any letters from your taxman will I?

    Thank you.
     
  14. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    You should be 100% sure. You won't be getting any letters for just having an address and phone number.
     
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  15. intercalation

    intercalation Newbie

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    What are the factors for going to LLC/Inc.? I'm thinking maybe income levels or hiring employees.
     
  16. emzed

    emzed Junior Member

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    Thanks for the great post.

    I'm from Europe and currently earning money thanks to affiliate marketing. I receive my payments from a US company on a Payoneer debit card (which is linked to a US bank account.
    This card is mine, with my European address and everything.

    The point is:
    - who pays me doesn't care: I'm not from the US, they do not care whether I pay taxes or not.
    - I know what I have to do in my country to pay taxes legitimately- it's all fine and will do it soon.

    Question is:
    -Would I be able to setup a business in another country, for instance in the US, and pay taxes there? Would I actually have to live in the place I'm paying taxes?
    -Would my government ever know that I have a debit card in the US, and that I'm generating income there?

    My business as most of the people here is not country related and takes place 100% online.

    Thanks again!
     
    Last edited: Jun 13, 2014
  17. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    Any time.

    1 - You can certainly set up a business in the US and pay taxes here (if applicable). As a foreigner, it would have be in the form of what we call a C-corp since you aren't a US taxpayer. The C-corp would have its own employer identification number and file its own tax returns each year. Depending on where you are from, the major advantage of doing this would be that you can do business a lot more easily with affiliate programs and payment processors.

    Recently, I set up a corporation for an Indian SEO company because they were having trouble with PayPal, which is what their clients wanted to use. So they got a US corporation that has its own bank account, mailing address, and so on.

    2 - I doubt very much that the government in your country would know or care if you have US-based earnings. The vast majority of countries in the world do not tax people on foreign earnings.
     
  18. burnett4congress

    burnett4congress Jr. VIP Jr. VIP Premium Member

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    In tax terms, it doesn't really matter.

    When you create a corporation, it can be treated as a C-corp (pays its own taxes) or an S-corp (profits/losses flow through to your personal tax return).

    An LLC can make an election to be treated either way. An LLC can also be taxed as a partnership or sole-proprietor, but that's lunacy :).

    For this next part, standard not a lawyer disclaimer (even though I work with one).

    The major difference between a corporation and an LLC is in legal terms. Should you ever get sued, LLCs require less formal activities like shareholder meetings. So it is a bit harder to pierce the corporate veil. Also, should you get sued and lose, the only thing the court can do is attach a charging order to the LLC - meaning any profits that are paid out go to the winner of the lawsuit. But guess who is in charge of deciding when payments go out? :cool:

    So for that reason, some people prefer to go the LLC route.
     
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  19. emzed

    emzed Junior Member

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    Thanks for your help. Would you give me some more inputs, so that I go check these things on my own and do some research?
    What would be the easiest, most affordable and overall most recommended way to start- consider my situation:
    -$20/30k every year in earnings
    -living in Europe
    -operating only online and generating income from affiliate marketing (with US companies)

    And what would be the costs to start it, maintain it and things that I have to pay?

    thanks for your help.
     
  20. intercalation

    intercalation Newbie

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    Sorry, I meant thinking about S/C-corps versus sole proprietorship. I know that structuring payments between the owner "salary" and capital distributions can decrease taxes but I also know it can be disallowed if you go too far. Do you know guidelines for this specifically for IM businesses?

    Also I'm unsure about different tax treatments when hiring employees. I think that it doesn't matter but I'm not certain. Thanks!