The Accounting Educator Online

October 23, 2011October 24, 2011

Incorporate Your LLC in Nevada and Avoid Paying Taxes

Nevada has no franchise tax, no corporate income tax, and no personal income tax. It’s near the large markets of California. It sounds like a perfect state to incorporate your business in.

Unfortunately, incorporating in Nevada isn’t going to make your business immune from paying California taxes. In fact, a steady trickle of people have come into our office this year who have been sent notices of delinquent taxes by the State of California. These business owners have been in similar situations: they have California addresses, the business is conducted in California, and their only connection to Nevada is that is where an online service — maybe even a lawyer — told them to incorporate.

There may be legitimate reasons for you to choose to incorporate in Nevada, but if you conduct business in the Golden State, completely escaping California’s taxes isn’t one of them.

California require out-of-state corporations who do business within the state to register with the state. Registration requires the payment of a fee which is similar to the annual incorporation fee for a California corporation.

California require you to file corporate income taxes declaring the income earned from activities performed within the state. In addition, if your business has a retail presence in California, the state will expect you to collect state sales taxes for items sold in the state, regardless of where the business is incorporated or from where the items are shipped.

An Example

Bob lives in San Francisco and has a brilliant idea to create combined iPhone4S cases and coffee mugs which he will sell online. He’s going to make the “Cases4mugS” in his basement which will also serve as his shipping and fulfillment center. Bob searched the Internet for incorporation services. He found a web site that let him incorporate in tax-free Nevada, and he established an LLC there.

Bob will be required to register his Nevada LLC with California. He’ll will have to file LLC returns for all income earned for his work in California. In Bob’s case, that’s all of the corporation’s income. In addition, he will have to collect and forward to the state the sales tax for every Cases4mugS shipped to an address in California. Bob will also have to obtain a San Francisco City business license and may have to pay city payroll taxes, too.

If Bob doesn’t register his foreign corporation and pay the income and sales tax, he will be violating California law. If his business is successful it’s very likely that California will notice its existence and it will take steps to get its money plus penalties and interest.

In addition, we would urge Bob to check with a lawyer about the legal problems an unregistered corporation has. I am not an attorney and cannot give legal advice. But, run an Internet search on the topic of unregistered corporations and you’ll see many articles on the topic of how unregistered corporations cannot sue or defend themselves against lawsuits in California courts. In effect, it seems that unregistered corporations are sitting ducks in California courts.

Sure, the lure of “tax-free Nevada” or “corporate-friendly Delaware” is appealing. Your attorney may tell you legal reasons why those states — or others — are better places to incorporate than in California. Just make sure that you also check with a CPA to understand the financial implications and tax effects of your out-of-state incorporation.

October 9, 2011October 12, 2011

3 Things to Do By October 17th if You Haven’t Filed Your 2010 Taxes

Time’s up if you asked for an extension to file your taxes back in April. If you weren’t ready to file April 18th (April 15th was a holiday in some areas, so the deadline shifted to Monday), then this coming Monday is your new deadline.

This time, though, there are no extensions. You MUST file your 2010 taxes by Monday or your return will be delinquent.

(You don’t want the IRS to consider you delinquent. When your tax filing status goes delinquent, the Feds will charge you penalties and interest, and payment deals you’ve made with them in the past may be thrown out. The IRS does not have a sense of humor about tax payers going delinquent. They will suspect the worst of you, and they’ll act on their suspicions!)

Our firm is getting a flurry of last-minute calls from people panicked because they waited until now to file their return. Some of the callers are still waiting for information from partnerships or other sources of income, but most of the folks just put filing taxes out of their mind.

If you haven’t filed your 2010 taxes yet, here are our suggestions on what to do to make the deadline:

If you have a simple situation file online, maybe for free. If your return is simple, there are commerical and government sites that will do your taxes for free. See the Consumer Reports article from earlier this year… the links in it that I checked today are still working.

Most people who have waited until now to file, have more income and some complex things going on so that free filing is not available to them. The commerical services that offer free services to low-income filers, also have paid programs for people with complex returns.

Check out the commerical sites, and let them walk you through the return.
If you have a more complex situation and need automated resources, find a DVD of commerical 2010 tax software, and prepare the taxes on your computer.We haven’t formally tested any of the major programs, but from what we’ve seen, they do an excellent job in getting the math right, and they also have interview-like Q&A’s that will suggest deductions and other tax-saving measure.

The 2010 programs issued in the spring, still should be good. Make sure that you check for update to download any fixes they’ve discovered over the months!
If you want to meet with someone face-to-face to go over issues, call a Certified Public Accountant local to you. At this time, most CPA’s are offering most callers appointments after October 17th. Fortunately, you can book an appointment with a CPA for later in the month and still avoid being delinquent.

To avoid going delinquent, submit the best Form 1040 that you can by Monday. If you are missing hard data for a line, make your best estimate. You may find places to comment that what you’ve written down is your best estimate.

File your best tax estimate with the Federal and state authorities by October 17th. Then when you meet with the CPA, you will have them refile your completed taxes as an amended return. Even if you were significantly mistaken in your initial tax filing, you’ll be much better off than if you didn’t file at all.

Whatever you do between now an Monday night, don’t panic!

The IRS isn’t going to come for your retirement fund Tuesday morning because you failed to submit your return on Monday. You won’t need to run to a defense attorney or to Canada.

But, still… don’t go delinquent. You don’t have to!

October 3, 2011October 4, 2011

What to do About the Bank of America’s New Debit Card Charge

The Bank of America says that in 2012 it is going to start charging $60 a year if people want to use their debit cards for purchases. What should you do?

The answer is easy: don’t use a debit card from the Bank of America. In fact, don’t even get one.

Regardless of how much the BofA — or any bank — decides to charge for debit card use, I suggest that you don’t use ANY debit cards. Debit cards are not consumer-friendly cards. Sterck Kulik O’Neill wrote about the problem one of our team members had with a fraudulent charge on a debit card in a May newsletter (and see the gory details in his blog). We also linked to news stories outlining how risky debit cards are.

Basically, debit cards don’t have the legal protection that credit cards do. If you qualify for a credit card, then use the credit card instead of using a debit card, and pay the balance off every month.

Compounding the weakness of debit cards, the Bank of America wants to charge you for using this inferior payment tool. Paying makes ZERO sense, especially since banks make a lot of money from merchant fees when their cards are used. (A new Federal law limits how much banks can charge merchants for debit card use, but the charge is still way more that the bank’s cost per transaction.)

Just say NO. No to using a debit card from Bank of America or from anyone else.

Fall back position: if you are going to ignore the suggestion to abstain from debit card use and you don’t like BoA’s proposed charges, it’s probably time for you to sit down and figure out how much you’re willing to pay for convenient banking. Don’t stop at ATM fees. Get all the information out on the table.

All of the major banks are on a fee binge. Wells Fargo announced a $15/month fee on some previously free checking accounts, and Chase is piling on fees, too.

These institutions have ATMs on every city block and branches in your grocery store. All of that infrastructure comes at a cost… to you! If you don’t like the fee options and decide you can live with less convenience, investigate using a smaller regional bank or else sign up with a credit union. A smaller bank or a credit union may not charge for your accounts or debit cards, but they don’t have the ATM network or so many branches.

Only you can decide if $5/month or $15/month is a reasonable charge for the large bank’s convenience. Before you leap because of an ATM fee or other single charge, look at the whole picture of what your bank wants from you each month. If you decide to switch, Consumers’ Report has online tips, including a PDF checklist of steps to follow when you move your account.

September 30, 2011September 30, 2011

Embracing the Practice of Referring

As the designated contact for the first call from people looking for accounting services, I talk to a lot of folks who have never engaged a CPA before but think they need one now.

It’s fun! Usually I get to hear about people doing new and exciting things. They’re starting a business or buying an empire, and they are looking for professional support.

While we talk, I try to find out what accounting services would help the person calling and how Sterck Kulik O’Neill is a good fit for them. Sure, we’re looking for new clients. But, we want people to engage us when it makes sense for them.

I’ve discovered new business owners — especially those who have never run a business before — often really have no accounting tasks for an accountant to do! They say that someone told them they needed a CPA and they want to talk about financial issues. So, we talk some more about what information they want.

When the business owner is looking for help setting up accounting systems, support in managing their finances, help doing due diligence for a purchase, or taking other action that has a spot for a professional accountant, I set up a meeting for them with a partner to talk about an engagement.

But, I also know that money is tight for new businesses. If the owners just want to talk with an experienced person about what they’re planning, I offer them two options.

They can meet with a partner for an hour or more for a development consultation. We work a lot with established businesses to grow their profits, and we can provide hourly support that helps someone just starting out.
They can contact their local office of SCORE. SCORE is a non-profit organization with offices across the country. They provide a free one-hour consultation for new entrepreneurs and they offer many free or low-cost seminars on business basics.

I usually suggest that they go to SCORE first, even if it means we’ll miss a hour of consultation.

We want people to get good value for their money when we work for them, and SCORE’s price of FREE is a good one for a new business. The advisors at SCORE can talk about their personal experiences, how they set up their QuickBooks, how they paid estimated taxes, and how they handled rent, utilities, payroll, and other nuts and bolts issues.

We are not in competition with SCORE, and I am happy to refer people to them when it’s appropriate. In fact, SCORE is just one of several organizations and businesses I suggest to people when they’ve call us to talk about accounting.

I like that Sterck Kulik O’Neill doesn’t try to get everyone to sign up for their services. When it’s a good fit, I’ll encourage a prospective client to meet with a partner. And, I am happy to have the freedom to suggest more appropriate solutions when someone doesn’t need our services TODAY.

September 28, 2011September 28, 2011

The Worst and Best Things to Do When the IRS Writes

A lot of people are coming into our office this year because they’ve been contacted by the IRS and they want help.

Many new clients have assumed that they’re being audited by the IRS as soon as they saw the envelope in their mail box. The “Official Business” look intimated them.

Several business owners and individuals I’m working with simply didn’t open the mail from the IRS. It’s like they thought the IRS would go away if they didn’t read the letter.

That’s the worse thing you can do: Leave the IRS notice unread!

Many IRS letters are minor administrative corrections to your math. Some of these corrections actually result in you getting money back!
Even dreaded IRS audit notices or other correspondence questioning what you’ve done are better read and dealt with.
In most cases the IRS letter asks you to respond by a certain date. If you miss deadlines, the IRS will simply decide that their worst-case assumptions are correct, and they’ll take steps to get the money they think you owe them. You or your representative need to talk to the IRS before the deadline — even if all you say to them is that you need to extend the deadline!

Some clients first called us when the response date in the letter is a week or less away! That gave them and us no time to prepare to meet with the IRS. Fortunately, the IRS has been flexible in rescheduling meetings and examinations. We’ve even had some success postponing or reversing asset seizures for tax payers who blew past all deadlines and completely ignored the IRS mailings. Of course, begging the IRS at the last minute is nerve-wracking, not always successful, and more time consuming than responding in a more relaxed way.

Dealing with the IRS is usually straight forward.

The best thing to do is open the notice right away and discover what you’re dealing with.

Why open the envelope ASAP? Well, if the IRS is correcting your addition and sending you $100, you want to find that out right away. If there is a small correction the other way, you’ll sleep easier knowing that the matter is minor.

Even a full-blown IRS audit is survivable. Most IRS agents are focused on doing their job correctly, and they respond well to a clear, logical presentation of facts.

But, open the IRS envelope! If you have to respond to the IRS, give yourself and the professional you engage time to present your information in the best possible light.

We have some more IRS audit tips and FAQ answers online. If you have more questions post them here, or phone us at 415.433.4500 if you want a more private conversation.

September 19, 2011October 19, 2011

We’ll Help You Achieve Financial Success!

Sterck Kulik O’Neill is jumping into the blogosphere to give our clients and community an additional way to receive support in their efforts to achieve financial success. And, we also want to have some fun!

Our San Francisco CPA website will remain more formal, structured, and encyclopedic in describing the professional accounting services available to businesses and individuals.

This blog will be a forum for our thoughts on the business development, accounting, tax, and financial worlds that we work in. We’ll be less formal, and what we write will reflect the opinions of the individual authors and won’t be the official opinion of the firm.

Please comment in public or send email with your idea on what you like, don’t like, and what you think we should write about!