Archive for the ‘Nevada’ Category

Yes, Online Poker Players Must Pay Taxes

Thursday, April 3rd, 2014

The Las Vegas Review Journal has a short article on the fact that online poker players must pay taxes. The article notes that winning players must pay taxes; of course, both winners and losers are supposed to include their winning sessions on their tax returns. There is one minor error in the article: Freeroll winnings of $600 or more should be reported on a Form 1099-MISC rather than a Form W-2G.

Both Brad Polizzano and I are quoted in the article. One point that I made with David Ferrara (the writer of the article) is that proposed legislation legalizing and regulating online poker in other states (than Nevada) explicitly requires reporting wins and losses to state tax agencies.

Bozo Tax Tip #7: Ignoring California

Thursday, April 3rd, 2014

Yesterday I looked at the idea of forming a Nevada Corporation while in California and being able to avoid California taxes. It doesn’t work. Today’s focus is on something that comes up now and then and applies to trusts.

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 #8: Nevada Corporations

Wednesday, April 2nd, 2014

A repeat follows, but it’s one again getting a lot of play due to business conditions in California. 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 incorporating 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 corporation is, well, bozo.

No Margin for Error

Wednesday, February 26th, 2014

Nevada is known for low taxes. It’s also known for subpar schools and relatively low teacher salaries. The Nevada State Education Association (aka the teachers union) decided that a solution to the problem of subpar schools was a tax on businesses. The NSEA calls it the Education Initiative; opponents call it a fiscal disaster for the state. The initiative will appear on the November ballot and is more commonly known as the Margin Tax.

Interestingly, Jon Ralston, who is probably the leading political commentator here in the Silver State, noted on his blog that both sides (pro and con) paid for a study of its impact. I have a feeling that proponents of the tax aren’t thrilled with what they’re reading. Here are two of the conclusions from the study:

With an effective tax rate approaching 15 percent, Nevada’s effective business tax rate would be materially higher than any other Western state, including, without limitation, California…

The proposed margin tax would take Nevada from below the national average in terms of businesses taxes paid per employee, per $1,000 of personal income and per $1 million of gross state product to among the top five states in the country in each of those categories.

This tax goes into effect at exactly $1 million of gross receipts. It doesn’t take a genius to figure out that this initiative would cause companies to stop growing when their sales neared $1 million.

To date, the only large union in favor of the initiative is the NSEA. I expect that as news of this study spreads that the large casino interests and the unions will either refuse to support the measure or come out against it. While the November election is just over eight months away, this doesn’t look like a good year for Democrats and supporters of new taxes. Given the devastating impact of this proposed new tax, that’s a good thing.

Bring Me the Usual Suspects: Small Business Policy Index 2013

Sunday, December 29th, 2013

The 18th annual Small Business Policy Index was released almost three weeks ago by the Small Business & Entrepreneurship Council. Congratulations are in order for my home state of Nevada; the Silver State ranked second (behind only South Dakota). Bringing up the rear are the usual suspects.

Here are the top ten states:

1. South Dakota
2. Nevada
3. Texas
4. Wyoming
5. Florida
6. Washington
7. Alabama
8. Indiana
9. Ohio
10. Utah

And the bottom ten:

41. Connecticut
42. Oregon
43. Iowa
44. Maine
45. Minnesota
46. Hawaii
47. New York
48. Vermont
49. New Jersey
50. California

The rankings include a variety of factors, and the Bronze Golden state ranked last in quite a few: personal income tax rates, individual capital gains tax rates, individual dividends and interest tax rates, and state gas taxes. California also has an added S-Corporation tax rate, and both an individual and corporate Alternative Minimum Tax (AMT). California ended up with a relative ranking of 113.637; the top state, South Dakota, has a ranking of 34.627. Yes, you’d have to deal with the South Dakota winters, but climate isn’t everything.

As noted in the introduction,

Of the 47 measures included in the 2013 edition of the Index, 22 are taxes or tax related, 14 relate to regulations, five deal with government spending and debt issues, with the rest gauging the effectiveness of various important government undertakings.

It is a comprehensive review. The states that did the best are those with low tax rates, low regulations, and lower spending and government debt.

The conclusion of the report is really presented in the introduction:

Political fantasies involving higher taxes, increased regulation, and much higher levels of government spending and debt, as we have learned at the federal level over the past nearly seven years, do not serve our economy well. The same goes, of course, at the state and local levels.

Tax and Insurance Administration Are Different

Wednesday, December 18th, 2013

Jason Dinesen tweeted tonight about the insurance regulation report card issued by RStreet.org. On Monday, the Tax Foundation posted about the Council on State Taxation (COST) grading states on taxpayer administration. I thought it would be interesting to compare the top states and bottom states in each.

First, the top ten:

Rank Tax Administration Insurance Administration
1. Maine Virginia
2. Ohio Vermont
3. Alaska Illinois
4. Arizona South Carolina
5. Kansas Tennessee
6. Montana Minnesota
7. Pennsylvania Missouri
8. Indiana Nebraska
9. Iowa Wisconsin
10. MA/NC/OK/UT/VA Nevada

Now, the bottom ten:

Rank Tax Administration Insurance Administration
50. California New York
49. Louisiana Hawaii
48. Alabama West Virginia
47. Colorado Florida
46. Arkansas California
45. Nevada Texas
44. Florida Washington
43. Kentucky North Dakota
42. North Dakota Montana
41. NC/VT/WA/DC Massachusetts

One conclusion that I draw is that a state appearing on both bottom ten lists is a state with a bad regulatory environment. California, Florida, North Dakota, and Washington share that dubious distinction. Indeed, California ranks the worst for tax administration and is 46th for insurance administration. It’s no wonder that business executives believe that California’s regulatory climate has miles to go before it becomes average (in ranking).

Only one state makes the top ten in both lists: Virginia. A state with a favorable regulatory climate will attract business, and that’s something that Virginia is doing.

Finally, I do need to point out that states that rate poorly in tax administration but do not have a personal income tax lead to some interesting scores on the COST list. The states without a corporate tax return (such as Nevada) should have a negative score in the Corporate Return Filing Burden column imho–these are states where life is easy for tax administrators.

My thanks to the Tax Foundation, RStreet.org for publishing these charts and to Jason Dinesen for pointing out the insurance information.

When They Can’t Get You for the Real Crime, There’s Always Tax Evasion

Thursday, October 17th, 2013

One of my clients a few days ago asked me jokingly–she’s been a client for years, so I know when she’s joking, “If I had a stream of illegal cash income, do I have to declare it on my tax return?” Of course you do–illegal income is just as taxable as legal income. From as far back as Al Capone to others more recently, such as Johnny Ray Taylor, the government has found that crooks who make illegal income tend to also not report that income; sometimes its easier to get the crook for tax evasion than the underlying offense.

Everyone’s heard of Al Capone, but who is Johnny Ray Taylor? Well, Mr. Taylor is a resident of nearby Henderson whose main source of income appears to have been pimping. Indeed, he’s apparently going to soon plead guilty state felony charges of pandering and living off of prostitution. Back in May, Mr. Taylor pled guilty to one count of tax evasion. On Wednesday he was sentenced to 25 months at ClubFed, must make restitution of $117,559 to the IRS (what he earned as a pimp), and will then have three years of supervised release. It is likely that Mr. Taylor will be able to serve his state charges concurrently with his time at ClubFed.

The 2014 State Business Tax Climate Index: Bring Me the Usual Suspects

Wednesday, October 9th, 2013

The Tax Foundation released its 2014 State Business Tax Climate Index. In what will shock few readers of this blog, the usual suspects remain at both the top and bottom of the list.

First, let’s look at the top states–the best for business:

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

What do these states share? Generally, low taxes (and in the case of some of these states, no income tax). But as the Tax Foundation noted, “But this does not mean that a state cannot rank in the top ten while still levying all the major taxes. Indiana, which ousted Texas from the top ten this year, and Utah have all the major tax types, but levy them with low rates on broad bases.”

What happens when you have high taxes, complex taxes, and non-neutral taxes? You end up in the bottom ten:

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

Let’s take my home state, Nevada, and compare it with California (my old state) to see why each ranks where they do. The Tax Foundation looked at five taxes: Corporate Tax, Individual Income Tax, Sales Tax, Unemployment Insurance Tax, and Property Tax.

Nevada doesn’t have a corporate tax or an individual income tax, so the state is tied at number one for both. California ranks dead last on the individual income tax. Not only does the Bronze Golden State have the highest state tax rate, there are numerous conformity issues (with federal taxes), and a tax bureaucracy that is hard to work with. California is below average for the corporate tax. This isn’t because California is that good; rather, there are states that are far worse.

Nevada and California rank 40th and 41st respectively on sales tax. Both states have complex systems with rates that vary in different districts. Additionally, both states have fairly high sales tax rates. California significantly outranks Nevada on Unemployment Insurance Tax. Nevada’s tax rate is one of the highest; California’s is relatively low with conformity on the maximum income base for this tax ($7,000). Nevada slightly outranks California on property tax (9th versus 14th). California’s low ranking is because of limits from Proposition 13. It’s something that gives certainty and is probably the third rail of California politics.

What most observers forget is the importance of the individual income tax. Most businesses pay tax through individual income taxes, not corporate taxes. S Corporations, LLCs, LLPs, general and limited partnerships, and sole proprietorships are flow-through entities that are taxed on the individual level. States that provide low rates on individual income taxes generally do better for businesses. While California is known for its entrepreneurs (think Silicon Valley), its tax climate discourages such ventures.

And for those who think that taxes don’t matter, I’m in Nevada as a result of taxes and California’s miserable business climate. Nissan moved its headquarters from California to Tennessee, and taxes were a big factor. For both small and large businesses (and everyone in between), these issues count. The Tax Foundation’s full study is well worth your perusal.

California Is #1…For Highest Marginal Tax Rates for S-Corps

Sunday, September 15th, 2013

The S-Corporation is a business structure that’s well liked by entrepreneurs. It allows for a flow-through entity, corporate protection, and (generally) favorable taxation. Of course, there are exceptions–in tax, there are always exceptions.

The Tax Foundation has this wonderful map showing marginal tax rates by states for S-Corporations:

California is also #1 for sole proprietors. Nevada, where I reside, is #42 for both…and that’s a good thing.

The Flow of AGI from One State to Another

Saturday, July 20th, 2013

From watchdog.org comes an interesting interactive map showing how money has flowed from state to state. Back when I moved to Nevada from California, I noted this issue. Here’s yet more verification that this is real.

The five biggest losers were:
1. New York ($68.10 billion in annual Adjusted Gross Income (AGI))
2. California ($45.27 billion in annual AGI)
3. Illinois ($29.27 billion in annual AGI)
4. New Jersey ($20.62 billion in annual AGI)
5. Ohio ($18.39 billion in annual AGI)

The five biggest winners were:
1. Florida ($95.61 billion in annual AGI)
2. Arizona ($28.30 billion in annual AGI)
3. North Carolina ($25.12 billion in annual AGI)
4. Texas ($24.94 billion in annual AGI)
5. Nevada ($18.17 billion in annual AGI)

Sure, some of this is retirees moving from the snow belt to the sun belt. But California is anything but part of the snow belt; it’s clear that successful individuals are fleeing high tax states for low tax states. We here in Nevada are appreciative of the $9.59 billion in annual AGI that has moved from the Bronze Golden State to the Silver State.

Interestingly, the interactive map allows you to look county-by-county. The areas that one would think would show AGI growth are losing AGI. The area around Silicon Valley has lost AGI; so have Los Angeles and Orange County. Sure, some of this is retirees moving to the desert (Riverside County, which includes Palm Springs, showed an increase in AGI). However, there is no chance that this is just caused by retirees.

Taxes matter, and individuals absolutely do relocate because of taxes.

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