Archive for the ‘California’ Category

Bozo Tax Tip #8: Nevada Corporations (or LLCs)

Wednesday, April 6th, 2022

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation (or LLC) operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation (or LLC) is a California corporation/LLC, a Delaware corporation/LLC, or a Nevada corporation/LLC.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

Bozo Tax Tip #9: Move Without Moving!

Tuesday, April 5th, 2022

Over ten years ago, we moved from Irvine, California to Las Vegas. The home in Irvine was sold, a home was purchased in Las Vegas, and the belongings went from the Golden State to the Silver State. Cars were re-registered, doctors changed, and no one would say that we didn’t become Las Vegas residents.

But some people like to have it both ways. Nevada’s income tax rate is a very round number (0%), while California’s maximum income tax rate is a ridiculous (in my opinion) 13.3%. That certainly could drive individuals to move in name only. California’s Franchise Tax Board (FTB) realizes that, and they (along with New York State) lead the country in residency audits.

If you really do relocate, a residency audit is a minor annoyance. But let’s say you reside in Silicon Valley, and you buy a home in Reno but keep your home in Los Altos. Did you move? Or did you just move in name?

The Bozo strategy is the latter: moving in name only. I’ll just have that little home in Reno, spend the ski season in Nevada but really continue to live in Los Altos.

In a residency audit, the FTB will look at where you’re actually spending time, where you’re spending money (if eight months of the year you’re patronizing businesses in Silicon Valley, it doesn’t look like you really moved), and a variety of other factors. (The FTB has an excellent Residency and Sourcing Manual that explains California laws on the subject.)

Given the pandemic and a possible recession later this year, state revenues may be squeezed. The one government agency where increasing employees increases revenues is the tax agency (especially employees in audit). While I expect to see states cut employees, I’ll be surprised to see anything but minor cuts in tax agencies. We’re also likely to see an increase in audits looking at telecommuting issues. In any case, if you move in name only you’re painting a target on your back for a residency audit.

2022 State Business Tax Climate Index: Bring Me the Usual Suspects!

Friday, December 17th, 2021

Yesterday, the Tax Foundation released its list of the business tax climate in the 50 states.  Not much has changed, and for those in New York, New Jersey, and California wondering why businesses are moving to Florida and Nevada, you just need to look in the mirror.  The top 10 states are:

  1. Wyoming
  2. South Dakota
  3. Alaska
  4. Florida
  5. Montana
  6. New Hampshire
  7. Nevada
  8. Tennessee
  9. Indiana
  10. Utah

There’s also a bottom 10:

41. Hawaii
42. Louisiana
43. Vermont
44. Arkansas
45. Minnesota
46. Maryland
47. Connecticut
48. California
49. New York
50. New Jersey

The best states either lack a major tax or levy all the major tax types with low rates on broad bases.  Meanwhile, the worst states share, “complex, nonneutral taxes with comparatively high rates.”  My state, Nevada, ranks 7th with low individual and property taxes but high sales and unemployment insurance taxes (corporate tax is ranked in the middle, 25th).  My former state, California, ranks in the bottom four in corporate taxes, individual taxes, and sales tax, in the middle for unemployment insurance, and above average for property tax.  The worst state, New Jersey, ranks in the bottom ten in all taxes except unemployment insurance (where it ranks below average, 32nd).

Yes, taxes aren’t everything but they’re a huge reason why my business left the Golden State and moved to the Silver State.

Bozo Tax Tip #3: Move Without Moving!

Wednesday, May 12th, 2021
Nearly ten years ago, we moved from Irvine, California to Las Vegas. The home in Irvine was sold, a home was purchased in Las Vegas, and the belongings went from the Golden State to the Silver State. Cars were re-registered, doctors changed, and no one would say that we didn’t become Las Vegas residents. But some people like to have it both ways. Nevada’s income tax rate is a very round number (0%), while California’s maximum income tax rate is a ridiculous (in my opinion) 13.3%. That certainly could drive individuals to move in name only. California’s Franchise Tax Board (FTB) realizes that, and they (along with New York State) lead the country in residency audits. If you really do relocate, a residency audit is a minor annoyance. But let’s say you reside in Silicon Valley, and you buy a home in Reno but keep your home in Los Altos. Did you move? Or did you just move in name? The Bozo strategy is the latter: moving in name only. I’ll just have that little home in Reno, spend the ski season in Nevada but really continue to live in Los Altos. In a residency audit, the FTB will look at where you’re actually spending time, where you’re spending money (if eight months of the year you’re patronizing businesses in Silicon Valley, it doesn’t look like you really moved), and a variety of other factors. ( The FTB has an excellent Residency and Sourcing Manual that explains California laws on the subject.) Given the current pandemic, state revenues are being squeezed. The one government agency where increasing employees increases revenues is the tax agency (especially employees in audit). While I expect to see states cut employees, I’ll be surprised to see anything but minor cuts in tax agencies. We’re also likely to see an increase in audits looking at telecommuting issues. In any case, if you move in name only you’re painting a target on your back for a residency audit.

Bozo Tax Tip #9: Nevada Corporations

Tuesday, May 4th, 2021

As we continue with our Bozo Tax Tips–things you absolutely, positively shouldn’t do but somewhere someone will try anyway–it’s time for an old favorite. Given the business and regulatory climate in California, lots of businesses are trying to escape taxes by becoming a Nevada business entity. While I’m focusing on California and Nevada, the principle applies to any pair of states.

Nevada is doing everything it can to draw businesses from California. Frankly, California is doing a lot to draw businesses away from the Bronze Golden State. But just like last year you need to beware if you’re going to incorporate in Nevada.

If the corporation operates in California it will need to file a California tax return. Period. It doesn’t matter if the corporation is a California corporation, a Delaware corporation, or a Nevada corporation.

Now, if you’re planning on moving to Nevada forming a business entity in the Silver State can be a very good idea (as I know). But thinking you’re going to avoid California taxes just because you’re a Nevada entity is, well, bozo.

Are California $600 Stimulus Payments Taxable?

Thursday, February 25th, 2021

The state of California will soon be issuing $600 stimulus payments to an estimated 5.7 million residents.  These payments will go to:

  • Households receiving the California Earned Income Tax Credit for 2020 (typically making $30,000 or less)
  • Taxpayers with Individual Tax Identification Numbers (ITINs) who didn’t receive federal stimulus checks
  • Households with Individual Tax Identification Numbers and income below $75,000

ITIN taxpayers who also qualify for the California Earned Income Tax Credit will receive a total of $1,200.

The payments will be going out after taxpayers file their 2020 tax returns.  One client asked me, “Is that payment going to be taxable income on my federal tax return?”  The answer is clearly yes.

Any accession to wealth is taxable unless exempted by Congress.  State grants are taxable income.  That $600 payments will be taxable income on taxpayers’ 2021 federal tax returns, and impacted taxpayers should receive Form 1099-MISC forms from the state of California.  However, these payments will not be taxable income on taxpayers’ California tax returns–California has said these are nontaxable grants, and a state has the right to exclude that income from its taxation system.

2021 State Business Tax Climate Index: Bring Me the Usual Suspects!

Tuesday, November 3rd, 2020

Every year the Tax Foundation publishes its State Business Tax Climate Index. As they state, they look at how each state taxes, not on the how much. Per usual, the names at the top and the bottom haven’t changed much.

The top ten states are:

  1. Wyoming
  2. South Dakota
  3. Alaska
  4. Florida
  5. Montana
  6. New Hampshire
  7. Nevada
  8. Utah
  9. Indiana
  10. North Carolina

The bottom ten states:

41. Alabama
42. Louisiana
43. Vermont
44. Maryland
45. Arkansas
46. Minnesota
47. Connecticut
48. New York
49. California
50. New Jersey

This is what the Tax Foundation states about the bottom ten:

The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, has the second highest-rate corporate and individual income taxes in the country and a particularly aggressive treatment of international income, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.

I deliberately waited until election day to make this post. Why? Because some states have ballot measures today that will impact their rankings. For example, Californians will vote on whether to have a “split-roll” property tax, where business properties would be assessed annually based on current value rather than only when a property is sold. California today ranks 14th in property tax; if this measure passes, the ranking will fall dramatically. Illinois votes today on changing their personal income tax from a flat-rate tax to a progressive system.

Nevada, my state, ranks seventh. It’s not that every tax is great in Nevada (we have a poor sales tax system and unemployment insurance taxes); however, we lack income taxes. (We do have a gross receipts tax, called the Commerce Tax, that large businesses must pay.)

Some states, like Utah and Indiana, have most taxes but they administer them neutrally, simply, and with relatively low rates. Contrast that with California, which has an awful income tax system, high rates, and ridiculous regulations.

Below is a map (from the Tax Foundation) of the United States with the rankings of each state. If you’re considering locating a business, it makes sense to look at taxes (and other factors, too); the Tax Foundation’s annual guide is a tremendous resource.

IRS Extends Tax Deadlines for Victims of Iowa Derecho & California Wildfires

Tuesday, August 25th, 2020

The IRS announced yesterday that they have extended tax deadlines for victims of both the derecho that hit Iowa and the ongoing California wildfires. The specific counties impacted can be found on the Federal Emergency Management Agency (FEMA) website.

For both disasters, tax deadlines are extended that began on August 10th for the derecho and August 14th for the wildfires until December 15th. This impacts 2019 personal tax returns on extension, business returns on extension, payroll tax filings, and estimated tax payments. California’s Franchise Tax Board automatically extends deadlines for federal disasters, so those impacted have identical extensions for California taxes. I assume the Iowa Department of Revenue will similarly extend Iowa deadlines.

Unfortunately, it looks like we’ll also be looking at victims of Hurricane Laura in Texas and/or Louisiana later this week. The IRS recently posted information on safeguarding records for natural disasters; your insurance company likely has additional information available. The cliche is that an ounce of prevention beats a pound of cure–but it is good advice.

How High Is Too High?

Tuesday, August 4th, 2020

California, like many states, has financial difficulties because of the Covid pandemic. So is the legislature looking at cutting spending? A little. How about raising taxes? Definitely, especially on the rich.

California’s top marginal tax rate today is 13.3% (on those earning $1 million or more). Proposed legislation would increase the tax rate to 14.3% on those earning more than $1 million, to 16.3% on those earning more than $2 million, and to a whopping 16.8% on those earning more than $5 million.

Today, California gets 40% of its revenues from the top 0.5% of taxpayers. But something lost by the California legislature is what happened after the last tax increase (to 13.3%). As Josuha Rauh notes,

The problem is that high earners do not simply sit there and take it when the state goes after their income.

In a detailed study of the 2012 California ballot measure that raised the top state rate to 13.3 percent, Ryan Shyu and I found that just two years later, the state was only collecting 40 cents of every dollar that it had hoped to raise from the tax increase.

The reason?

High income taxpayers affected by the 2012 tax increase suddenly began to flee the state at higher rates, especially to zero tax states like Nevada, Texas, and Florida.

This is an obvious corollary to the Laffer Curve. Economist Arthur Laffer noted that at 0%, no taxes are collected and that at 100%, no taxes would be collected. So there must be a curve that describes tax collection by tax rate.

The unspoken issue for California is, “Will this increase drive the top 0.5% out of the Golden State?” Mr. Rauh, a Senior Fellow at the Hoover Institution and a Professor of Finance at Stanford, clearly believes the answer is yes. When this measure passes (and given the makeup of the legislature, it will pass), the question is not will top-earners leave, but how many will leave. Alan Greenspan famously said, “Whatever you tax, you get less of.” California is conducting an experiment, and we will find out the results in a year or two. I believe that if you’re a realtor specializing in high-end properties in Nevada, Texas, Florida, or Arizona, you’re about to get more business.

Bozo Tax Tip #1: Move Without Moving!

Monday, July 13th, 2020

Nearly nine years ago, we moved from Irvine, California to Las Vegas. The home in Irvine was sold, a home was purchased in Las Vegas, and the belongings went from the Golden State to the Silver State. Cars were re-registered, doctors changed, and no one would say that we didn’t become Las Vegas residents.

But some people like to have it both ways. Nevada’s income tax rate is a very round number (0%), while California’s maximum income tax rate is a ridiculous (in my opinion) 13.3%. That certainly could drive individuals to move in name only. California’s Franchise Tax Board (FTB) realizes that, and they (along with New York State) lead the country in residency audits.

If you really do relocate, a residency audit is a minor annoyance. But let’s say you reside in Silicon Valley, and you buy a home in Reno but keep your home in Los Altos. Did you move? Or did you just move in name?

The Bozo strategy is the latter: moving in name only. I’ll just have that little home in Reno, spend the ski season in Nevada but really continue to live in Los Altos.

In a residency audit, the FTB will look at where you’re actually spending time, where you’re spending money (if eight months of the year you’re patronizing businesses in Silicon Valley, it doesn’t look like you really moved), and a variety of other factors. ( The FTB has an excellent Residency and Sourcing Manual that explains California laws on the subject.)

Given the current pandemic, state revenues are being squeezed. The one government agency where increasing employees increases revenues is the tax agency (especially employees in audit). While I expect to see states cut employees, I’ll be surprised to see anything but minor cuts in tax agencies. We’re also likely to see an increase in audits looking at telecommuting issues. In any case, if you move in name only you’re painting a target on your back for a residency audit.