Archive for the ‘California’ Category

Rental Property Outside of CA: LLC Options and Issues – Part II

Originally published in the Cedar Street Times

July 12, 2013

Two weeks ago, I discussed that LLCs are a popular choice for holding rental property, but that it certainly comes at a cost in California when you consider a minimum $800 annual franchise tax, the cost of filing another tax return each year, having to maintain better accounting records, as well as the initial costs to set it all up.  I also advised that if you do setup an LLC, you want to utilize an attorney to set things up instead of a do-it-yourself online approach.  I have seen plenty of problems from people using the latter method.  It is pretty easy to jeopardize the liability protections of the LLC if you do not have competent legal advice.  Since liability protection is one of the main reasons you go to all this continued expense and trouble, you might want to consider the old adage: penny-wise, pound-foolish.

Two weeks ago, I also raised the question and left readers pondering about whether you could save the minimum $800 a year tax by setting up your LLC in another state, which of course would be a natural inclination anyway, if the property is located in another state.

Many Californians are already in this boat, and I would say quite a number of them are unaware that even if they have a non-California LLC holding non-California rental property, they are generally required to register in California and pay California the minimum $800 franchise tax.  The franchise tax is levied on you if you are considered doing business in California.  So how is your rental property in Arizona, for example, that is held in an Arizona LLC (that maybe even loses money every year) considered doing business in California and subject to a minimum $800 California tax?

California’s position is that the mere fact that a managing member of the LLC lives in California, is enough to constitute that the LLC is doing business in California.  More specifically, they say that if you have more than one member, LLCs are taxed under partnership law unless you elect to be treated as a corporation.  Partnership law says that the activities of the partnership flow through and are attributed to the partners, and that the partners are therefore, by statute, doing business.  If they reside in California, then they are doing business while in California, thus requiring registration of the LLC in California and payment of the $800 minimum franchise tax (and filing of a tax return).  Limited partners also have statutory rights to participate so California is not letting them off the hook either.

Single member LLCs (a husband and wife are treated as one member in California) are disregarded entities for tax purposes and are not taxed as partnerships or corporations, but are reported directly on your personal tax returns.  For single member LLCs and corporations California will look to facts and circumstances.  If you could somehow build a case that your LLC had absolutely no connections with California (such as tax preparation, bank accounts, etc.) and that every time any decision needed to be made with regard to managing your property or LLC, you were out of the state of California (and not on your living room telephone), you might have a shot at not “doing business” in California! It is an extremely difficult threshold, and taxpayers have been losing case after case in court over this issue.

California has also put into place a steep new penalty for anyone failing to register.  In addition to the minimum $800 franchise tax, they are now assessing a $2,000 penalty plus interest for every year you have failed to register.  At about, $3,000 a year, that adds up quickly. Generally, California does not go back to assess past delinquencies if you start reporting before they discover you.  The internet and increased sharing of information between state taxing authorities is making this much easier to detect.  So make haste and get compliant if you are not already.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Rental Property Outside CA: LLC Options and Issues – Part I

Originally published in the Cedar Street Times

June 28, 2013

A lot of Californians find themselves with rental property outside the state at some point in their lives.  Sometimes it is from a past life in another state, or from an inheritance when a parent passes away.  Military folks often jog around the country collecting houses like refrigerator magnets from each state in which they have lived.  There are also a lot of people that invest in rental properties in Nevada, New Mexico, Arizona, and Texas because you actually have a shot at a positive cash flow situation right out of the gates, unlike California.  And then there is the Hawaiian contingency that buy investment properties that always need at least two to four weeks of maintenance work done by the owners each year – not sure if I want one of those with all that work – it’s funny, I never hear of clients having to go to Phoenix for a month in the summer to work on those properties.

Anyway, the question always arises about whether or not to form an entity such as a corporation or Limited Liability Company (LLC) to hold the real property.  An LLC is generally the preferred vehicle to hold real property for many good reasons, including liability protection for your personal assets in the event you are sued, and the elimination of double taxation that can plague corporations.  They also have less formalities to follow compared to a corporation and avoid some nasty pitfalls of corporate tax rates and structure that could cause a lot of pain upon sale of the property.

As a result, a lot of people these days do hold property in LLCs.  Of course this comes at a price.  If you create an LLC in California (or a corporation for that matter) to hold your property, and are therefore granted the privilege of doing business in California, you are also granted the privilege of paying California a minimum $800 franchise tax each year.  You also have to pay someone like me to file another tax return every year, and you have to keep better books.  Don’t forget you have to hire an attorney to set it up initially for another $1,500 to $3,000.

I would not recommend an online filing company or do-it-yourself approach, as you are not getting any legal advice and have no one keeping you on track with formalities which could completely blow the liability protections and the whole reason you went to all the effort in the first place.  Correcting or trying to close ill-formed or mishandled entities can be a real pain as well.

So what if you form your LLC in another state such as Texas or Wyoming to hold your property?  Many states have much lower or no annual LLC fee and they have simpler annual filing requirements.  (You generally do not have to form the LLC in the state where the property is located.)  Could you save some dollars by setting up your LLC in another state?  In two weeks we will discuss California’s current position on non-California LLCs and some new rules that are just coming into play.  If you have a non-California LLC, you do not want to miss the next installment.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Military Taxation in CA Part II – Nonresidents

Military Taxation in CA Part II – Nonresidents

Originally published in the Cedar Street Times

February 22, 2013

Two weeks ago I laid the groundwork for important definitions related to taxing military servicemembers.  I also discussed how servicemembers are taxed just like California residents if their domicile is California, and they are stationed in California.  If a member whose domicile is California has a permanent change of station (PCS) outside of California, they are considered nonresidents.  Under California law, nonresidents are not taxed on their military income or intangible income such as interest and dividends.  They would also not be subject to taxation on military income in the other state either due to the federal Servicemembers Civil Relief Act which prohibits another state from taxing a servicemember’s military income while domiciled in another state.

Due to the Military Spouses Residency Relief Act of 2009 (MSRRA), spouses that go with the military servicemembers now receive similar treatment and their earnings from personal services and intangible income such as interest and dividends are exempt from tax. In the past they had to file as residents whenever they met the requirements of wherever they were physically living.  This act applies to all military servicemembers’ spouses regardless of domicile or station as long as both spouses have the same domicile.  This is a very important distinction.  And you cannot simply adopt your military spouse’s domicile.

If the military spouse was domiciled in Texas, for instance, and then gets married in another state, the new spouse cannot claim Texas unless he or she actually lives in Texas and takes proper steps to make it his or her domicile.  They could both claim the same domicile in the state they are living at the time, but that may be undesirable if that state has unfriendly military tax laws.  Regardless, until both spouses are able to claim the same domicile, the coveted provisions of MSRRA generally do not apply.

Another interesting twist to watch out for is if a California domiciled servicemember gets PCS orders to another state and the spouse stays in California.  In this case, all of the spouse’s income is now taxable to California as well as half of the military servicemember’s military pay and interest/dividends, etc. as community property of the spouse!

All the same rules apply to servicemembers whose domicile is in another state but are stationed in California, except they would look to their own state of domicile to see how that state may tax or exempt its servicemembers for its own state tax purposes.  California, however, would not be able to tax the servicemember or the spouse (assuming they have the same domicile).  The most common places I see for military domicile are Texas and Florida: neither has a state income tax.  This way, whether they are stationed in their own state of domicile or elsewhere, they have no threat of paying state income taxes.

It is also important to know that the military servicemember’s nonmilitary income would still generally be subject to taxation wherever it is being earned,and so would items like rental property income.  Many military people own homes in multiple states.  They should be aware they may have to file a tax return in those states.  Depending on the state, some people may need to file state returns even if the property produces losses every year which create carryovers to be utilized when the property is sold.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Military Taxation in CA Part I – Domicile, Residency, and CA Residents

Originally published in the Cedar Street Times

February 8, 2013

Here in this little part of California that some call heaven, we have a number of military related institutions drawing servicemembers from around the world. The next few articles will focus on military taxation in California.

The first thing we need to do is define a few important terms.

Home of record is a term that indicates the place you were living when you entered the military, and cannot be changed.  This generally does not affect taxation, but can affect benefits.

Your residence is the place you are physically living.

State of legal residence for military purposes is typically synonymous with domicile to be discussed next.  Do not confuse this with legal residence which you see on many non-military legal forms indicating a desire to know your residence address as opposed to your mailing address!

Domicile is the place that you consider your permanent home; if you are living away from your home, it is the place you would return to after being absent for temporary or transitory purposes  (or away on military orders).  It is usually the place you are registered to vote, have your bank accounts, have your driver’s license, register your vehicles, perhaps still own a home and store personal items, etc.  You have the option of changing your domicile by making convincing changes to items such as the above, but you generally have to be present in the state at the time, show that you have abandoned your prior domicile, and notify the military of this change.

Residency more closely determines how you are to be taxed, but is affected by domicile.  For a civilian, residency is a term given if someone is in California for other than a temporary or transitory purpose (generally nine months or more), or conversely someone whose domicile is in California but out of the state for temporary or transitory purposes.

For a military servicemember, residency is even more closely tied to domicile.  A military servicemember whose domicile is California is considered a resident if stationed in California, and a non-resident if stationed elsewhere due to Permanent Change of Station (PCS) orders (not temporary orders regardless of duration).  A military servicemember whose domicile is outside of California but that is stationed in California is considered a non-resident unless he or she works to change his or her domicile to California.  Most people are trying to get out of California taxation, so I rarely see military people changing their domicile to California!

Now let’s start to talk about what this means for tax purposes, including how it affects spouses.  Based on the above definitions we will start with those that are considered California residents (again, those that are domiciled and stationed in California).  It is pretty straight-forward:  these individuals are taxed on all their income including their military income.  The spouse will generally also be considered a resident and will be taxed the same, unless the spouse is also a military servicemember, and has a different domicile.  That spouse would then be a nonresident and taxed differently.

In my next column in two weeks, we will begin talking about nonresident military personnel, which accounts for the majority of servicemembers living in this area.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Retroactive Tax Increase on Highest Taxed State

Originally published in the Cedar Street Times

November 30, 2012

Depending on how you look at it, Californians could now consider themselves the highest taxed state in the U.S. after our recent passage of Proposition 30 on our November ballots.  Proposition 30 increased income tax rates by one to two percent on people earning over $250,000.  It also made these increase retroactive as of 1/1/2012.  If you are subject to these higher tax rates, be aware that your state withholdings are likely inadequate and you should talk to your tax professional about making an additional payment by April.  No penalties will be assessed for under withholding to the extent that it is attributable to the tax hike, and you pay it by April 15, 2013.

Our top rate on our highest earners is now 13.3%, commanding an impressive 2.3% margin over second place Hawaii (11%), and 3.4% over third place Oregon (8.9%).  Other states in the high eights include Iowa, New Jersey, Washington D.C., Vermont, and New York.

You do have to keep in mind that some places have city taxes also.  But even a penthouse occupant in New York City that has a state tax of 8.82% and a city tax of 3.876% (combined 12.696%) would not have to muster up the cash of a wealthy dessert dweller in California.

Of course, there are many ways that states bring in revenue, such as sales tax, property tax, inheritance tax, auto taxes, etc.  So you cannot really base overall tax burden on income taxes alone. If you are looking for overall low tax burden states you may wish to consider Wyoming, Alaska, Florida, the Dakotas, Montana, Texas, Tennessee, Mississippi, South Carolina, Louisiana, or Alabama.  Different states also have distinct advantages for people earning different types of income or have different types of deductions.  The more you have at stake, the more tax planning may become a factor in where you choose to reside.

If you want to know more specifically how California’s new increases may affect you, here are the details:  California taxable income over $250,000 for single filers, $500,000 for married filers, and $340,000 for Head of Household filers will be taxed at 10.3%. Taxable income over $300,000 single, $600,000 married, and $408,000 HOH will be taxed at 11.3%.  Taxable income over $500,000 single, $1,000,000 married, and $680,000 HOH will be taxed at 12.3%.  And anyone with over $1,000,000 taxable income will also be assessed an additional 1% mental health tax.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

Do You Buy Online or Via Catalogs? – Use Tax – Merry Christmas to CA!

Originally Published in the Pacific Grove Hometown Bulletin

December 21, 2011

If you made any purchases over the Internet or via mail-order catalogs for your holiday shopping (or any time during the year) for business or pleasure, California does not want to be left out of the gift-getting!  Due to the strain on California’s budget over the past few years they have been looking high and low for additional revenue – including the enforcement of existing laws that have historically been quite lax.

For decades, California, and many other states have had use tax laws.  California use tax is basically sales tax imposed on all those purchases you make online or via mail-order catalogs, or while in no sales tax states like Oregon (you know – all those purchases you made so you could avoid paying sales tax!).  If you bring the goods into California and use them here (or give them to somebody in California), you owe California use tax equivalent to the sales tax rate where you reside.  This applies to individuals as well as businesses. Certain goods like cold meats, cheeses, crackers and other grocery type foods that are not subject to sales tax are not subject to use tax either.

The California Board of Equalization (BOE) has been aggressively marketing its efforts to pursue this tax including sending letters to tax professionals several times a year, hiring auditors, registering businesses, working with the Franchise Tax Board (FTB) to add a form to your 540 income tax return, and now creating safe-harbor use tax tables based on your income.  The downside of not complying is that if audited, they can go back for years looking through your bank statements and credit card statements for purchases from the likes of Amazon.com – and who knows what else they might find…

The new safe-harbor use tax tables are available for use with your individual 540 California tax return (business entities including schedule C businesses cannot use these tables).  Instead of collecting all your receipts for non-taxed purchases, California will allow you to pay a predetermined amount based on your adjusted gross income (up to $20K – $7, up to $40K – $21, up to $60K – $35, up to $80K – $49, up to $100K – $63, up to $150K – $88, up to $200K – $123, over $200K – multiply by 0.07%).

If you elect to use the tables, you will be presumed to have met your requirement and they will not ask for more, even if the actual tax based on receipts would have been much higher.  Individual purchases over $1,000 are treated separately from the use tax tables.  This can be a strategic move.  Beware, if you owe money to the FTB for any other reason such as past due taxes, the FTB will not pass the use tax paid to the BOE, and you will get a bill from the BOE with a 10 percent late penalty.  Your other option is to file a separate Form BOE-401-DS Use Tax Return, but the safe harbor tables are not available for this return.

All businesses (including schedule C businesses) that have gross receipts over $100K, and do not already have a seller’s permit with the BOE, are required to register with the BOE and file a separate use tax return.  Even if they made no qualifying purchases they have to register and file a zero return each year.  If you fail to register and file, and the BOE discovers this, they will likely require use tax returns for the past eight years.  It is probably in your best interest to register and file simply to avoid the possibility of an eight-year look-back!

So as you open gifts this year and ponder how smart you will look in that new sweater, you may also think, “I wonder if the giver has a use tax issue?!”

For more information on use tax, registering, and filing returns you can go to http://www.boe.ca.gov/sutax/sutprograms.htm.

Prior articles are republished on my website at www.tlongcpa.com/blog.

IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.