Florida Tax Attorney Blog

Pursuant to I.R.C. § 861(a)(3), "[c]ompensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if the labor or services are performed by a nonresident alien individual in connection with the individual's temporary presence in the United States as a regular member of the crew of a foreign vessel engaged in transportation between the United States and a foreign country or a possession of the United States."

Consequently, nonresident crew members working onboard a foreign flagged yacht may not be subject to the withholding requirements found in I.R.C. §§ 3402 or 1441, so long as that yacht is engaged in transportation between the U.S. and a foreign country or U.S. possession. In this regard, it should be noted that U.S. territories (e.g., Puerto Rico, U.S. Virgin Islands) and their territorial waters are not considered to be part of the U.S. for purposes of I.R.C. § 861.

In Telebright Corp. v. Director, Division of Taxation, the New Jersey Division of Taxation effectively used a single employee's act of telecommuting as the jurisdictional hook to tax the income of a Delaware corporation. Significantly, the corporation maintained no offices in the State of New Jersey. Rather, the corporation's only contact with the State of New Jersey was in the form of an employee who telecommuted to work from her home in New Jersey.

This employee received her work assignments in New Jersey and completed such assignments from New Jersey using a company-provided laptop. Based on these indirect contacts through its employee, the corporation was held to be "doing business" in New Jersey. As a result, its income was subject to taxation in New Jersey under New Jersey law.

More significantly, the court held that such taxation was consistent with the Due Process and Commerce Clauses of the U.S. Constitution. First, the court held that the corporation's tax liability did not violate the Due Process Clause because the corporation had sufficient minimum contacts with New Jersey to justify taxation. In this respect, the court emphasized that the corporation had "fair warning" that its employment relationship with a New Jersey resident could subject it to New Jersey's jurisdiction. Second, the court held that the employee's presence in New Jersey in an employee capacity satisfied the substantial nexus requirement of the Commerce Clause because the corporation enjoyed the benefits of New Jersey's labor markets.

Key Takeaway: In this modern age of technology, corporations must be mindful of their telecommuting policies. Indeed, having a single employee telecommute from a state with otherwise insufficient minimum contacts to justify income taxation could subject that corporation to taxation in that state.

If you're going to walk away from your upside down mortgage, do it in 2012.

Under current law, homeowners may engage in a short sale or foreclosure transaction without tax consequences so long as the lender officially releases the debt. This is the result of the Mortgage Debt Relief Act of 2007 which allows taxpayers to exclude income from the discharge of debt on their principal residence.

But be aware of a planned change in the law. Effective January 1, 2013, debt forgiven in connection with a short sale or foreclosure of a primary residence will be taxable for federal purposes. This is a big deal.

For example, this means that a short sale of a home for $25,000 less than the outstanding mortgage amount would subject the seller to taxes on $25,000 of income. Homeowners in the 35 percent tax bracket would owe $8,750; homeowners in the 33 percent tax bracket would owe $8,250; homeowners in the 25 percent tax bracket would owe Homeowners in the 28 percent tax bracket would owe $7,000; homeowners in the 25 percent tax bracket would owe $6,250; homeowners in the 15 percent tax bracket would owe $3,750; and homeowners in the 10 percent tax bracket would owe $2,500.

Short sales can take a long time, so homeowners who want to short sell their homes during 2012 before the law change takes effect would be well-advised to begin the process now.

This week, the First Circuit convicted a couple who received erroneous tax advice from a dentist of tax evasion. United States v. Allen, 1st Cir., No. 10-2160 (Jan. 6, 2012).

Facts:

The taxpayers in this case worked in the health and wellness industry. Specifically, they worked in the field of nutrition and vitamin supplement sales. On the advice of their dentist (which they claim to have confirmed through their own tax research), the taxpayers concluded that the Internal Revenue Code did not require them to pay taxes. They attached an explanation to this effect to their federal tax returns filed during the 1990s.

Beginning in 1998, the taxpayers claimed exemptions from withholding for federal income taxes. As a result, their employer discontinued withholding income taxes from their paychecks. Subsequently, the taxpayers classified themselves as independent contractors (as opposed to employees) such that their employer also discontinued withholding for FICA (i.e. Social Security and Medicare).

In 2000, the taxpayers stopped filing tax returns altogether. This is true notwithstanding their income of at least $100,000 during those years. Moreover, the taxpayers closed out all bank accounts, had their checks made payable either to cash or directly to creditors, and transferred the title to their home to a trust. From this point on, the taxpayers paid all expenses with cash or money orders.

In 2009, the taxpayers were charged with one count of conspiracy to defraud the United States, one count of attempted tax evasion, and four counts of willful failure to file income taxes (i.e. tax evasion). In April 2010, the taxpayers were tried in a joint trial in which they defended against the charges by asserting good faith reliance on their dentist's prior tax advice and good faith misinterpretation of the tax law. Not surprisingly, their argument was to no avail.

To be clear, the established law is that a taxpayer lacks the willfulness necessary for tax evasion if it is honestly believed, based on a misreading of the tax laws, that no taxes are owed. Cheek v. United States, 498 U.S. 192 (1991).

Holding:
Unfortunately for the Allens, however, the jury did not buy their argument. To the contrary, the jury convicted on all counts, and the Court sentenced each of them to three years in prison.

Bottom Line:
Ignorance or misinterpretation of the tax law is not a defense. Nor is reliance on tax advice received from a non-tax professional. So here's the bottom line: Don't give tax advice if you're not a tax professional, and don't rely on a tax position that sounds too good to be true (because it probably is).

In a recent case, the United States Tax Court addressed an increasingly hot topic: the deductibility of business expenses. More specifically, the Tax Court addressed the substantiation requirement (i.e. the extent of support that a taxpayer must provide to support a business expense deduction).

Summary of Facts:

Taxpayer was employed as a mortgage banker by a company called Quick Loan Funding and Homefield Financial Inc. He was paid wages reported on Forms W-2, Wage and Tax Statement, of $ 127,319.47 and $ 79,052.24, respec-tively.

Taxpayer included three Schedules C with his individual tax return for three separate businesses in 2007. First, tax-payer reported gross receipts of $ 2,309 and claimed deductions for car and truck expenses of $ 10,242 in connection with his business as a mortgage banker. Respondent disallowed this expense. Second, taxpayer reported no gross re-ceipts or sales but claimed total expenses of $ 69,893 ($11,922 of which was for car and truck expenses) in connection with an advertising business. Respondent disallowed all of the ZE Advertising Co. claimed expenses. Finally, taxpayer reported gross receipts of $ 43,218, claimed costs of goods sold of $ 22,587, and claimed miscellaneous advertising expenses of $ 25,560 in connection with a search engine optimization business. The IRS disallowed all deductions.

Holding:

The Tax Court upheld the IRS' disallowance of taxpayer's claimed business expenses. Consequently, taxpayer was liable for taxes on the claimed deductions. Furthermore, taxpayer was liable for accuracy-related penalties for improperly claiming unsubstantiated business expense deductions.

Discussion:

Deductibility of Business Expenses

I.R.C. § 162(a) allows a deduction for "ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." In this respect, a business expense is "ordinary" if it is normal, usual, or customary within the taxpayer's particular trade, business, or industry. Commissioner v. Heininger, 320 U.S. 467, 471 (1943); Deputy v. du Pont, 308 U.S. 488, 495 (1940). Similarly, a business expense is "necessary" if it is appropriate and helpful for the development of the business. Id.

When is an Expense a "Business Expense"?

In Commissioner v. Groetzinger, 480 U.S. 23, 35 (1987), the United States Supreme Court held that to be considered to be carrying on a trade or business within the meaning of section 162, "the taxpayer must be involved in the activity with continuity and regularity and . . . the taxpayer's primary purpose for engaging in the activity must be for income or profit." In determining whether a taxpayer's involvement with the alleged business was sufficiently continuous and regular, it is not controlling that the taxpayer intended to operate a business, because a business may not exist or yet have commenced without a single customer. There is no business in active operation where there are no customers and no evidence of any sales efforts that could lead to customers. Goodwin v. Commissioner, 75 T.C. 424, 433 (1980), affd. 691 F.2d 490 (3d Cir. 1982); Wolfgram v. Commissioner, T.C. Memo. 2010-69.

In Baacel Roumi v. Commissioner, the taxpayer failed to establish that his claimed advertising business was in fact an ongoing business for profit as required by Section 162(a). Taxpayer presented no evidence that the business was in operation in 2007. Indeed, taxpayer testified at trial that his advertising business was "in development" in 2007. Moreover, the advertising company's taxpayer identification number was not established until January 2008. Furthermore, taxpayer did not present evidence that the business had ever generated revenue or that he had claimed expense deductions relating to it in prior tax years. On this basis, the Tax Court held that the taxpayer failed to persuasively explain why an active business generated no gross receipts or sales yet managed to generate $ 69,893 in expenses.

Continue reading "MAKE SURE YOU CAN SUBSTANTIATE BUSINESS EXPENSE DEDUCTIONS" »

The new year is upon us, and so is tax season. And as tax season quickly approaches, it is important for Florida business owners to be aware of their tax obligations. Here's the 411 on when and how to file and pay:

FEDERAL:

Income Tax

Corporations

Due: March 15 if the corporation operates on a calendar year. Otherwise due on the 15th day of 3rd month following the end of tax year.

• C-corporations - Form 1120

• LLC Taxed as a Corporation - Form 1120

• S-corporation - Form 1120S (Note: an S-corp itself is generally not liable for any tax

Partnerships

Due: April 15 if the partnership operates on a calendar year. Otherwise due on the 15th day of 4th month following the end of tax year.

• Partnership - Form 1065

• LLC Taxed as a Partnership - Form 1065

LLCs

• Most LLCs with more than one member file a partnership return (Form 1065).

Due: April 15 if the LLC operates on a calendar year. Otherwise due on the 15th day of the 4th month following the end of the LLC's tax year.

• To be taxed as a corporation, a Form 8832 must be filed. LLCs taxed as corporations file a corporate return (Form 1120).

Due:March 15 if the LLC operates on a calendar year. Otherwise due on the 15th day of the 3rd month following the end of the LLC's tax year..

Single-Member LLCs

• Sole Member = Individual - Form 1040.

If you would prefer to have the LLC file as a corporation, you must file Form 8832. LLCs taxed as corporations file a corporate return (Form 1120).

• Sole Member = Corporation - Form 1120 (for C-corps) or Form 1120S (for S-corps)

Employment Tax
Businesses with employees must withhold federal income, Medicare and Social Security taxes from wages. When and how these taxes are paid to the government depends on a business's aggregate annual employment tax liability.

• Small Businesses With Annual Employment Tax Liability of Less Than $1,000: Payments may be made annually on January 31 by filing Form 944, Employer's Annual Federal Tax Return.

• Businesses With Annual Employment Tax Liability in Excess of $1,000: Payments are generally made on a monthly or semi-weekly basis. For businesses with total annual deposits in excess of $200,000, the Electronic Federal Tax Payment System is required. Businesses with total annual deposits of less than $200,000 may use Form 8109-B to make these payments. The tax should be reported on Form 941, Employer's Quarterly Federal Tax Return

Unemployment Tax

Due: Jan. 31, April 30, July 31, Oct. 31

• Must be paid for employees who were paid $1,500 in wages within a calendar quarter or who were employed for any portion of a day in 20 different weeks during the year.

• Due at the end of the month that follows the last day of each quarter.

• Electronic Payment or Form 8109-B.

• Paid on a quarterly basis, but reported on an annual basis (Form 940).

FLORIDA:

Florida Corporate Income Tax

Due: April 1 if the corporation operates on a calendar year. Otherwise due on the 1st day of 4th month following the end of tax year.

• Corporations that do business in Florida are subject to a 5.5% state corporate income tax.

• C-corporations generally pay tax on Form F-1120. However corporations with a tax liability that is less than $2,500 may file a short form, F-1120A.

Estimated Tax Payments: Corporations that owe more than $2,500 in Florida corporate income tax for the year must make estimated tax payments on Form F-1120ES on or before the last day of the fourth, sixth and ninth months of the taxable year and on the last day of the tax year.

Limited Liability Companies:

• LLCs which are classified as corporations for federal tax purposes are required to file a Florida corporate income tax return.

• LLCs which are classified as partnerships for federal tax purposes are required to file a Florida Partnership Information Return (Form F-1065) if they are doing business in Florida and one or more of their owners are corporations.

• A corporate owner of an LLC that is classified as a partnership for Florida and federal income tax purposes must file a Florida corporate income tax return.

S-Corporations: An S-corporation is not required to file a Florida corporate income tax return (except in cases where the S-corp has federal taxable income).Florida Unemployment Tax

Due:Jan. 31, April 30, July 31, Oct. 31:

A Florida business is required to report wages and pay taxes to the Unemployment Compensation program if:

• It paid $1,500 in wages within a calendar quarter;

• Employed one person for any portion of a day in 20 different weeks during the calendar year; or

• is liable for federal unemployment tax.

Generally paid on a quarterly basis by submitting Form UCT-6 to the Florida Department of Revenue.

Florida Sales and Use Tax

Due: First day of the month

• Businesses with taxable transactions must register with the Florida Department of Revenue by filing Form DR-1 or e-filing via the Florida Department of Revenue's website.

• Businesses that collect more than $20,000 annually in sales and use tax must pay through electronically.

• Businesses that collect less than $20,000 annually may use Form DR-15.

• Returns and payments are generally due on the first day of the month following the month in which the tax was collected. However, businesses that do not collect substantial amounts of sales and use taxes may file and pay on a less frequent basis. Specifically, businesses that collect less than $1,000 per year may file on a quarterly basis; businesses that collect $500 or less per year may file on a semiannual basis; and businesses that collect $100 or less per year may file on an annual basis.

Florida Discretionary Surtax

Due: First day of the month

• Some counties impose an additional surtax on transactions that are subject to the state sales and use tax.

• In such counties, this surtax is reported on Form DR-15 with sales and use tax.

Use Tax on Out-of-State Purchases

Due:First day of the month following the quarter in which purchase was made

• When out-of-state sellers fail to collect Florida sales tax, buyers must make the payment on their own.

• Applies to merchandise purchased from the Internet, shopping networks, mail order catalogs, etc.

• Applies to merchandise purchased while traveling out of state and shipped to Florida.

• Paid on Form DR-15MO

Florida Tangible Personal Property Tax

Due: April 1

• Florida businesses that own tangible personal property (e.g., computers, furniture, equipment) must this tax annually.

• Inventory is not subject to tax.

• Paid to county property appraiser on Form DR-405.