Help!

[Zee]

I'd like to prepare a presentation showing some real-life examples of:

1. Situations where a poor choice of entity resulted in substantial additional taxes.
2. Other poor choices, bad decisions that resulted in additional taxes.

I would assume of these real-life situations would be actual clients or prospective clients that didn't ask for advice before acting.

My goal is to use these examples in a powerpoint presentation for prospective small/medium sized business tax clients.

Any help would be greatly appreciated. If the reply would be too lengthy to post (or for whatever other reason), please send me a private message and I'll be happy to provide my email address.

Thanks in advance for any help you can offer! There's nothing better than real-life examples from those in the trenches.

[JohnH]

Avoid 50-50 Ownership Arrangements

I think this is the sort of thing you are after.

The most destructive forms of business ownership I've ever seen are 50-50 ownership arrangements (partnerships, S-Corps, LLC's, etc). When the business is struggling, everyone is pulling together and sacrificing equally, only spending money where necessary.

Then the business becomes profitable and ther are choices to be made. Evantually there are differences of opinion. Do we buy that new piece of equipment or pay bonuses? Do we hire another employee or put money into our retirement plans? And so on and so on. When the disagreements arise, there is no way to solve the problem because nobody can make & enforce a decision since both owners have equal ownership. Next comes conflict, stagnation, and possibly failure of the business.

I know of an extreme situation in which a business owned by two married couples went under because one party bought a lottery ticket with money from the petty cash box of the business. The ensuing agruments over who had the "right" to the money eventually caused the failure of the business and the breakup of one of the marriages.

I'd never enter into a 50-50 business arrangement with anyone, for any reason.

[veritas]

One of my favorites

is selling real estate or a business getting the cash and assuming they can do a tax free exchange. Or in their parlance "reinvesting".

[cpadan]

There's nothing better than real-life examples from those in the trenches.

I believe one of the best sources of "real-life examples" is the US Tax Court. The range of topics is endless: hobby losses, home office, vehicle/travel expenses, contractors vs employee, or from today's releases, setting up medical plan for spouse and sole proprietor.

Good luck
Dan

[joanmcq]

I'm not sure where you are located, but I got a client because someone had told her to become a Nevada corp. Now she is a masseuse, works out of home, and works solely in CA. Why a Nevada corp? Why a corp period? What she saved (little) in payroll taxes she paid to me to prepare all the payroll forms (in arrears) gross up the 'salary' she paid herself, and get her out of the mess. Who knows...you sure don't avoid CA taxes. I am getting the feeling from these boards that the same thing is being promoted in TX as a way to avoid TX franchise fees too.

[Zee]

My reply to joanmcq seems to have been deleted. Perhaps it's because I mentioned the name of the company offering the advice? So, I'll repeat it. I live in FL and also have a client that was advised to incorporate in NV by The Tax Club (Moderator...if mentioning this company isn't allowed...please let me know if deleting my reply, and why. Other companies are routinely identified). They were told NV has strong confidentiality laws which make it difficult to learn the identities of company owners and officers. That suggests that it might be harder and take longer to sue Corporations in NV INHO. My client also had a medical masseuse business in an LLC.

[joanmcq]

Yeah, where there is one person running the business, its really hard to find out who the officer(s) are. (Sarcasm intended) There's more than one promotor of these schemes out there.

[Zee]

Yeah, where there is one person running the business, its really hard to find out who the officer(s) are. (Sarcasm intended) There's more than one promotor of these schemes out there.

LOL. Yes, ain't it true?

[ChEAr$]

one more example

involves guys who consult a lawyer who advises them and they take the advice, to form an LLC. So it's done, business commences, and along about next May 15th they finally realize they need to "file taxes". Of course they took draws, and it's too late to be treated as
a Sub S, which is what I would have recommended.

[Golden Rocket]

LLC in Tennessee

Zee, I have the perfect answer for your scenario #1: poor choice of entity.

Lawyers everywhere are going ga-ga over LLCs. Unrecognized by IRS.
So in Tennessee, lawyer sets up one of my new clients as an LLC, and then does absolutely nothing about "checking the box."

So by default, my client is a proprietorship. But guess what? Since Tennessee has no general income tax, every OTHER associated tax is very heavy. The LLC is recognized as a corporation in TN, thus has to file a corporate tax. There goes 6.5% of the income, up in smoke. And no deduction against the federal corporate return, because there IS no federal corporate return.

It gets worse. Since there is no general personal income tax in TN, the state does not honor a subchapter S. That means all distributions are regarded as dividends. Even though no general income tax, there is a 6% tax on -- guess what? Yep, Dividends to individuals! The combination of these two, 12.5% is not deductible against anything. If there is sufficient 6% tax on the individual such that he has enough to itemize, he might get to deduct PART of it.

Organizing as a partnership would have avoided all the taxes above. He has no partners, but he has a wife. Even operating as an individual would avoid the taxes. You can buy a lot of liability insurance for 12.5% of your income.

[DaveinTexas]

To add to your post

I'm not sure where you are located, but I got a client because someone had told her to become a Nevada corp. Now she is a masseuse, works out of home, and works solely in CA. Why a Nevada corp? Why a corp period? What she saved (little) in payroll taxes she paid to me to prepare all the payroll forms (in arrears) gross up the 'salary' she paid herself, and get her out of the mess. Who knows...you sure don't avoid CA taxes. I am getting the feeling from these boards that the same thing is being promoted in TX as a way to avoid TX franchise fees too.

I recently had a client who incorporated as a Delaware corporation but operates and is located in Texas. He didn't seem to mind the $750 fee for registering a foreign corporation; not to mention that the corporation is still subject to the new margin tax, formerly franchise tax.

I really don't see any need to incorporate in a different state; this doesn't eliminate any filing requirements nor does it exclude the corporation from abiding by the resident state's laws for corporations. Silly; must be something they Googled.