Archive for the ‘Nevada’ Category

Should I Violate Federal Law or State Law?

Tuesday, August 28th, 2018

Suppose you have a federal license to perform your occupation in your state of residence. That license allowed you to do [whatever it is you do] anywhere in the United States. Now, further suppose your state legislature passed a law specifically overriding that license, and, in fact, making some of [whatever it is you do] illegal under state law. And further suppose that if you obey that new state law you would be violating federal law as you would not be performing [whatever it is you do] properly under federal law. No state legislature could be that stupid uninformed, right?

One should never take a bet against legislatures doing dumb things, and the actions over the past fifteen months of the Nevada legislature demonstrate that. In 2017 the Nevada Legislature passed AB 324 that amended NRS (Nevada Revised Statutes) Chapter 240A; that reclassified Enrolled Agents (what my federal license is) as people who performed “Document preparation services.” We would have to register with the Nevada Secretary of State, post a surety bond, and we would not be able to negotiate with anyone else or communicate to anyone else the position of a client; if we did so, we would be subject to penalties including possible imprisonment. Hmmm, might an Enrolled Agent need to negotiate on behalf of clients with tax agencies such as the IRS and collect confidential information?

The Nevada Society of Enrolled Agents (NVSEA) filed a lawsuit, and in November 2017 had a temporary injunction placed on enforcement of the law. Last month the court heard arguments, and the ruling came out on August 16th.

The Court finds, that as a result of the amendments made to Chapter 240A by AB 324, Nevada Enrolled Agents cannot comply with both federal and state law. Under federal regulations, Nevada Enrolled Agents must provide competent tax advice, must assist clients in preparing accurate tax returns and other forms, must collect documentation which supports a client’s position and must competently and diligently represent taxpayer clients in proceedings before the IRS. Under Chapter 240A as amended, Enrolled Agents in Nevada are prohibited from performing these duties and face civil and criminal liability for violations of the state law.

The Court went on to note why the law is unconstitutional:

This Court finds that Chapter 240A…hinders and obstructs the free use of the Enrolled Agents’ license to practice before the IRS…Pursuant to NRS 240A.240(5), Enrolled Agents are no longer able to “negotiate with another person concerning the rights or responsibilities of a client, communicate the position of a client to another person or convey the position of another person to a client.” This contradicts Section 10.2(4) of Circular 230, which allows agents to “correspond[] and communicat[e] wit hthe Internal Revenue Service” and engage in “matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities.” The amended law also prohibits an Enrolled Agent from “appear[ing] on behalf of a client in a court proceeding or other formal adjudicative proceeding….” NRS 240A.240(6). This provision conflicts with Section 10.2 of Circular 230, which allows agents to “represent[] a client at conferences, hearings, and meetings.” The amended law prohibits Enrolled Agents from providing “advice, explanation, opinion, or recommendation to a client about possible legal rights, remedies, defenses, options or the selection of documents or strategies….” NRS 240A.240(7) This contradicts Circular 230, which states that Enrolled Agents may give written advice regarding tax matters. 31 C.F.R. §§ 10.2, 10.33, 10.37. Finally, the amended statute contradicts Circular 230 because it requires an Enrolled Agent to provide a copy of a client’s file to government entities. NRS 240A.220(1). Yet, pursuant to IRC §§ 7525, 7216, 6713, Enrolled Agents must keep client information confidential and only share client files when ordered to do by a court…

Accordingly, the Court finds that Chapter 240A of the Nevada Revised Statutes, as amended by A.B. 324, conflicts with federal law to the extent it seeks to regulate Enrolled Agents who are authorized to practice before the Internal Revenue Service. The law is therefore unconstitutional pursuant to the Supremacy Clause of the United States Constitution, Article VI, Clause 2.

The permanent injunction was granted by the Court. While the Nevada Attorney General can appeal (the office has another 20 days or so to do so), it’s not likely; the law is clearly unconstitutional on its face.

There are two points I want to make. First, I didn’t write about this earlier because this law was so stupid it was clear to me that it was going to be found unconstitutional. Even before the temporary injunction was granted the Nevada Secretary of State’s office didn’t enforce the law as it pertained to Enrolled Agents.

The second point is how this law was enacted. The state legislature didn’t contact any tax professionals about the law. There apparently is a problem with some document preparer services, and the Assemblyman who wrote AB 324 made an assumption that Enrolled Agents were part of the problem. We’re actually part of the solution in that we help resolve taxpayer problems, but I digress. I’m a member of the National Association of Enrolled Agents and NVSEA to help with legislative policies vis-a-vis Enrolled Agents. While I don’t agree with all of what the NAEA would like to pass, I agree with most of it. And my dues and contributions to NVSEA helped fight an uninformed law.

No matter your profession, stay informed. Talk to your local legislators. Generally, state legislators are approachable and most want to be informed. I’m making a point of meeting mine later this year, and explaining what Nevada Enrolled Agents do, what we had to do, and why we did what we did. Unfortunately, we remain the Lichtenstein of the tax world.

Bozo Tax Tip #9: Nevada Corporations

Tuesday, April 3rd, 2018

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.

Bozo Tax Tip #7: Nevada Corporations

Wednesday, April 5th, 2017

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.

Kiplinger’s Tax Friendly and Tax Unfriendly States: No Surprises

Saturday, August 27th, 2016

Kiplinger released its list of the tax friendly and least tax-friendly states in the US. There really aren’t any surprises:

Here are the bottom ten:

1. California
2. Hawaii
3. Connecticut
4. New York
5. New Jersey
6. Minnesota
7. Maine
8. Vermont
9. Illinois
10. Rhode Island

And the top ten:

1. Wyoming
2. Alaska
3. Florida
4. Nevada
5. Arizona
6. Louisiana
7. South Carolina
8. South Dakota
9. Mississippi
10. Delaware

Let’s look at my former state (California) and my current state (Nevada) as to the differences. “The Golden State is home to movie stars, beautiful beaches and the highest income tax rates in the U.S., putting it at the top of our list of Kiplinger’s top ten least tax-friendly states. Californians pay lower property taxes than residents of other high-tax states, but, in a state with some of the highest real estate prices in the U.S., they’re no bargain.” There’s not much to add: California is a very high-tax, high-regulation state.

Now let’s look at Nevada. “Another no-income-tax haven, Nevada is one of Kiplinger’s top ten most tax-friendly states. Where does it get its money? Sales tax: the average combined state and local tax rate is 7.98%.” Kiplinger missed another huge source of funding for Nevada: casinos. No matter, Nevada is a low-tax, low-regulation, business friendly environment. I’m happy I’m here.

Nevada Commerce Tax Filing Deadline Is Monday

Thursday, August 11th, 2016

The deadline for filing Nevada Commerce Tax returns is Monday, August 15th. The tax is a modified gross receipts tax on businesses with more than $4 million of Nevada gross receipts. However, all Nevada businesses must file the returns. Impacted businesses should have received a welcome letter from the Nevada Department of Taxation; however, non-receipt of the letter doesn’t exempt you from filing.

Filing an “exempt” return (less than $4 million in revenues) took me about one minute after I registered with the Nevada Department of Taxation. The online form was simple and straightforward; the hardest part was inputting the NAICS Code for my business (though there’s direct searching within the online form).

Yes, Two States Rank Lower than California

Tuesday, November 17th, 2015

It’s not all bad news in the Tax Foundation’s 2016 State Business Tax Climate Index for California. You could always be in New York or New Jersey. Still, it’s better to be elsewhere.

Two excerpts from the article note why states rank at the top of the list or at the bottom:

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, South Dakota, and Texas have no corporate or individual income tax (though Nevada and Texas both impose gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax…

The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.

So who are the winners and the losers? Here are the top ten states:

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

Here are the bottom ten states:

41. Maryland
42. Ohio
43. Wisconsin
44. Connecticut
45. Rhode Island
46. Vermont
47. Minnesota
48. California
49. New York
50. New Jersey

My home state, Nevada, does very well (ranking fifth overall). It ranks first in individual income tax (there isn’t one), fourth in corporate tax (there is no a gross receipts tax on businesses, but only large businesses and the tax rate is low), seventh in property tax, but 39th in sales tax and 42nd in unemployment insurance tax.

Note that it is possible to have every major tax and still rank highly (Indiana and Utah manage that) if the taxes are broad with low rates. Of course, you can be like New Jersey, New York, and California: have broad taxes at high rates. If you do that, you end up on the bottom.

I should point out that it is possible that New York will rise in the rankings. As the Tax Foundation noted, New York enacted corporate tax reform which should improve its standing. Meanwhile, California is apparently considering more and higher taxes for the future. That, combined with the regulatory environment in the Bronze Golden State, should give legislators pause…but probably won’t.

Are Turf Rebates Taxable?

Wednesday, September 23rd, 2015

The Los Angeles Times has an article asking this question. Because of the drought in California, the Metropolitan Water District had a $340 million incentive program so that homeowners would replace grass (which takes a lot of water) with bark, rocks, and other drought tolerant (xeriscape) landscapes. (The Southern Nevada Water Authority has a similar program.) The MWD has no idea if they have to issue 1099s to rebate recipients under federal law. (It is exempt from California taxation, though.) The article notes that the MWD suggests talking to a tax professional, so I’ll helpfully give an answer.

Any accession to wealth is taxable unless Congress has exempted that from taxation. One such exception are rebates on purchases. If you buy, say, a new car for $25,000 and receive a $1,000 rebate, you really bought the car for $24,000. A car rebate isn’t taxable income. Is the MWD (or SNWA) program a rebate?

No, it’s not. There’s nothing being purchased from the water agency. Instead, you’re tearing out grass, and replacing it with something else. The agency paying the “rebate” isn’t the same agency that’s doing the work. You might do it yourself, or you might higher a landscaping firm to do the work. The landscaping firm isn’t giving you a rebate.

If this isn’t a rebate (for tax purposes), then what is it? Well, the IRS could rule it’s not taxable since it is a lowering of the cost of doing the grass replacement and this is good for the environment. However, that’s not likely. There’s nothing in the Tax Code that says if something is done that’s good for the environment it’s not taxable. Instead, this looks like income–“Other Income” that would be reported on line 21 of Form 1040. You’re receiving a reward (income) for doing something. It’s not a rebate of a purchase. It’s not exempt from taxation under any other of the exemptions under the Tax Code. Thus, it’s taxable income.

Kiplinger’s Tax-Friendly and Least Tax-Friendly States: Bring Me (Mostly) the Usual Suspects

Monday, September 21st, 2015

Kiplinger has come out with their list of most tax-friendly and least tax-friendly states. There aren’t many surprises on the list, and readers of this blog definitely won’t be shocked with the least friendly state. The most friendly state was a little different. Do note that Kiplinger looked at all the taxes in a state, not just income tax.

Most Tax-Friendly States:
1. Delaware
2. Wyoming
3. Alaska
4. Louisiana
5. Alabama
6. Mississippi
7. Arizona
8. New Mexico
9. Nevada
10. South Carolina

Why Delaware? It has a relatively low income tax, no sales tax, low property taxes, and low a excise tax on alcohol. My state, Nevada, is noted for its non-existent income tax.

Here is Kiplinger’s least tax-friendly states:

1. California
2. Connecticut
3. New Jersey
4. Hawaii
5. New York
6. Rhode Island
7. Vermont
8. Maine
9. Minnesota
10. Illinois

Why California?

If you’re moving to the Golden State, plan to take short showers (to conserve water) and to pay the highest state income tax rates in the U.S. Worse, capital gains are taxed as regular income.

California also has the highest statewide sales tax, at 7.5% (it’s scheduled to drop to 7.3% at the end of 2016). The average state and local combined rate is 8.4%; in some cities, the combined rate is as high as 10%.

There’s actually more bad news about California’s taxes noted in the short article.

Kiplinger also has a tax map so you can find your state and whether it is tax-friendly or not.

Bozo Tax Tip #5: Ignoring California

Monday, April 6th, 2015

Perhaps I should call this Bozo Tax Tip “Forming a California Trust.” Why? Let me explain.

Let’s assume John and Jane, two California residents, form a trust to benefit their children, Ann and Bob. Ann lives in Florida; Bob resides in California. The trust is an irrevocable trust, so it files its own tax return (a Form 1041). The income to the beneficiaries is reported on Schedule K-1s. Ann is surprised and calls her accountant when she receives both a federal K-1 and a California K-1.

The issue is simple: The trust is a California trust, so the income is California-source. California requires that a Schedule K-1 for Form 541 (California’s trust tax return) be included. Yes, Ann must pay California tax on the income. Ann’s CPA called me and asked me why I included the K-1 from California. My response was succinct: I have to and Ann has to pay the tax.

California’s desire to have anyone and everyone pay California tax has led to many trusts relocating to Nevada (which has no state income tax) and other trust-friendly states. California isn’t one of those states. Ann’s parents, John and Jane, could have formed the trust in Nevada but because they didn’t Ann is stuck in the Hotel California. You can check out any time but you can never leave.

Ignoring the California K-1 is a Bozo idea. Instead of just paying tax, you will get the joy of paying tax, penalties, and interest. If your parents are in California and thinking of forming a trust to benefit you, it may be worth your time to talk about Nevada to them. Otherwise, welcome to the Hotel California.

Bozo Tax Tip #6: Nevada Corporations

Sunday, April 5th, 2015

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.