Ronald J. Cappuccio, J.D., LL.M.(Tax)

Ronald J. Cappuccio, J.D., LL.M.(Tax)
Tax Attorney and Business Lawyer

Thursday, April 28, 2016

Prince Estate  loses "Prncely" sum!

Prince may have known music, but he forgot to plan for his family.  Like 70% of America,  he died without an Estate  Plan or Will. As a result, the IRS and States will get about 50% of his estate. All of his hard work goes to the Government rather than his family  and the charity of his choice.  So sad!

I  wonder how many readers don't have a current Will and Estate Plan?

Friday, April 15, 2016

European governments attack business!

Thursday, European governments got together to attack people trying to own and control their businesses anonymously. The governments of France, Britain, Germany, Italy and Spain got together to create laws and try to enforce treaties to force banks and governments to reveal owners of businesses in other countries. For many years the high tax countries such as the US and Europe have been trying to find ways to attack developing countries from encouraging people to start businesses. Obviously if the business can be run in a lower tax jurisdiction it is prudent for the business owners to do that. Now, with the release of the "Panama papers" which were thousands of stolen documents from a Panamanian law firm listing the names and ownership of Panamanian registered companies, European governments are using this as an excuse to limit freedom of their citizens.

This follows the actions by the Obama administration in the US requiring extensive financial reporting under threat of jail time for Americans that own foreign businesses.

These actions are a great boon to residence some of the other countries that do not have to deal with these regulations and high taxes.

Maybe the problem really is not business secrecy but rather is high taxes and worse, higher regulation for many countries.

Friday, November 27, 2015

Establishing an online business in the US - Corporations

Corporations - the traditional business

Corporations are the prime type of entity used in publicly traded companies, larger entities, and when the owners want a separate taxable entity from the individuals. A corporation is set up by filing a certificate of incorporation or articles of incorporation in the state of choice. In addition to getting a separate tax identification number, the corporation should have bylaws detailing the officers, the operation of the business and the amount of shares and any particular rights in different classes of shares. Liberation files a separate tax return and pays income tax on the income earned to both the state and federal governments. After pays taxes if it wants to distribute some of the profit to the owners, these distributions are called dividends and are taxed in the income of the shareholders. This can lead to the famous "double taxation" where the corporation is taxed and then the same income is taxed again at the shareholder level.

In order to avoid double taxation problem, there is an option to elect "S" status for a corporation. One of the core requirements to be an S corporation is that all of the shareholders must be either US citizens or permanent US residents parens green card holders on friends. This limits the option for most foreign owned corporations to being a C corporation only. Nevertheless, if an S corporation can be elected then the corporation files a tax return is usually taxed at the shareholder level rather than the corporate level. This eliminates the double tax issue but also there are number of restrictions as to the amount of shareholders and also the classes of stock. Unlike a C corporation which can have many classes of stock with different types of interest, an S corporation can have only one class of stock. It has a 2nd class of stock must simply be a nonvoting version of the first class of stock but otherwise have the same economic rights. This leads to the problem of "a shareholder being a shareholder. Quote that means a person owns one share of stock it is the same as another one share of stock and not different sets of rights if it is an S corporation. If it were irregular, or C corporation, shares can be set up to be preferred shares that may have rights to income, nonvoting shares, voting shares and other kinds of restrictions and benefits.

An advantage to non-US residents and citizens of having a corporation, particularly a C Corporation, is that the corporation is taxed not the shareholders. This means it blocks taxation of the individual shareholders on the income earned until such time as it is distributed as a dividend. It therefore allows a buildup of capital in the US entity.

There are other limited liability entities such as a limited partnership, but these are much less frequently used and are more complex to establish and operate.

Tuesday, November 24, 2015

Establishing an online business in the US - LLCs

The LLC is the most popular form of business in the US

The limited liability company is taxed like a partnership in the US as the default rule. There can be other types of taxation elected, but that is generally not advisable. The limited liability company is established by filing a certificate of formation or articles of formation with the state. This is like the cover page of a book. It s just a bare outline of the business. It lets the public know that the entity is formed. The legal documents which control the limited liability company is the operating agreement and a buy and sell agreement. The operating agreement establishes all the terms of the LLC, the rights of the membership, the control of the LLC, and its tax attributes. The LLC is an extremely flexible type of entity. Similar to a partnership, it is as flexible as the attorney and the owners can be in drafting the documents.

If the owners of an LLC simply adopt a form that they grab off the Internet or some service, they will be missing the main advantages of formation of the business. One example could be that you can have several different classes of membership interest. Control can be vested in one group and the investment return could be put in another membership interest. It is also good for expanding the ownership to new members without losing control.

Because of the extreme flexibility and the favorable tax treatment, most new closely held businesses in the US are limited liability companies. When a business is established, tax and business attorneys normally presume that the LLC would be the best choice of entity unless there are certain reasons to choose another form of entity.

It should be clarified that LLC's do not have to be taxed as either a sole proprietorship, which is known as a "disregarded entity" for tax purposes, or a partnership for tax purposes. The LLC can elect to be taxed as a regular corporation or as an S corporation. Even though those choices are available, there are only very limited circumstances where a person would set up an LLC and then lashed the other tax treatment.

Monday, November 23, 2015

Establishing an online business in the US - Partnerships

Basic Entities in the United States - Partnerships

Partnerships are similar to a sole proprietorship in that the individuals have personal liability. This means that each partner is liable for their own actions and the actions of the other partners. That is a big negative of the partnership versus a limited liability entity.

For tax purposes, partnerships are generally disregarded and the attributes of income and deductions are passed through to the individuals. That is why they are referred to as "pass-through" entities The partnership will file a federal partnership tax return as well state all partnership tax returns, but it usually does not have any taxable income at the partnership level. Rather, the taxable income is solely pass-through to the partners. Partnerships can also have some interesting tax issues. For example if people simply contribute cash to the partnership for their interest, it is easy. But if one person contributes cash and another person contributes assets, such as machinery and equipment or real estate, the basis of the asset in the partnership is dependent upon the basis in the individual member. This can present some interesting issues and differences between members and can result in different tax treatments for similar distributions.

Unfortunately, the personal liability of the individual partners for their own actions and the action of the other partners makes this undesirable for the operation of most businesses.In order to limit the liability of the owner of the business, it would be necessary to set up a limited liability entity. The two most popular entities in the United States are corporations and limited liability companies. Limited liability companies are a US creation and do not exist in most other countries. Corporations or other limited liability entities similar to that are available in many countries.

Thursday, November 19, 2015

Establishing an Online Business in the US

Basic Entities in the United States.

Anyone, even a non-US citizen and non-US resident can establish a sole proprietorship. This is simply operating the business under your own name. You have personal liability for the actions of any employees or any actions taken in the name of the business. The business can also have a trade name also known as a " doing business as" name which is typically filed with the state. The advantage of a sole proprietorship is simplicity. There is not much you need to do to set up the business other than obtaining a tax identification number and possibly a trade name certificate from the state. Depending on how the services are rendered are rendered, there may be some licenses that are required but for most online businesses that it is not necessary.

Another advantage of the sole proprietorship is that it is taxed on the individual tax return. There is no double taxation. The sole proprietorship is simply taxed at the individual level for both federal and state purposes. Nevertheless, a significant disadvantage of a sole proprietorship is that if you want to add an additional owner to the business, it gets converted into a partnership. This requires a change in entity, a change in taxation and other issues.

Wednesday, November 18, 2015

Establishing an online business in the US

Unlike many countries, you do not have to be a citizen of the United States, or a resident, in order to establish a business in the US. A non-US citizen and resident establish a business without having any kind of immigration visa or any special. That person will be treated the same as a resident and citizen of the US.

Also unlike many countries, the United States, is exactly what its name indicates: "states". Each of the 50 states, and the District of Columbia have different laws and requirements for establishing a corporation, limited liability company, limited partnership or any of the various business entities. Also just because a business is established in one state does not mean that it is authorized to set up an office, warehouse or manufacturing plant in another state. For example if an online business were established in Delaware, and decided to have a warehouse employees in New York, you need to have that Delaware corporation or LLC authorized to do business in New York. This would require state corporate filings as well as tax returns and payments. Therefore, setting up the business in the US can be a little bit tricky because of different state laws.

Forming a business in the US does not require any additional service. Most smart business owners retain a good tax and business attorney to form the business in the appropriate jurisdiction. This assures that the business is set up for tax purposes as well as for state and federal law purposes. Although an individual is allowed to establish a business on their own, and some people attempt this by using either the state's individual online websites or an on line service that promises cheap business establishment, in reality, it is a waste of money for most people.

At this point it is important for you to understand that setting up a business is not a commodity. You are not seeking documents, rather you are seeking advice. Determining the correct state where the business should be formed, the type of business entity, the tax treatment of the business entity, and the contracts and agreements with employees and independent contractors requires planning and thinking. It is not a matter of pressing a button on a word processor and printing out a document.

The only people that are trained and authorized to provide services for the tax and business law planning are tax and business lawyers. Even though other people such as accountants, financial planners and companies promising all kinds of benefits attempt to do this, they are not providing the real service that you need. The service is the thinking, the planning and designing the actual organization

Tuesday, April 21, 2015

Hillary Clinton Proposes Tax Increases

Here we go again! It is campaign season and some candidates just cannot wait to say how they are going to penalize business. Hillary Clinton is proposing a new scheme where businesses that manufactured things will be tax differently than businesses that are "trading" items. I am not exactly sure what this means but it sounds to me like a tax increase on service businesses and for people who invest in business.

Let us face it, manufacturing has been on a continual decline in this country for the past 60 years. The US is known for producing intellectual property and services that are the envy of the world. Hillary Clinton, as well as some of her tax and spenders just do not get it! If you increase taxes on something you will get less of it. Increase tax on business and you will have less business in the US.

I have clients all over the world. Many times a client chooses to locate its business outside of the US because of the very high cost of taxation particularly on worldwide income. Most countries simply tax income when earned in that country. If you are a US business or US citizen (including a permanent resident or green card holder) you are taxed on your worldwide income not just the money earned in the US. This has made us uncompetitive!

Instead of attacking businesses and calling for tax increases, I am waiting for politicians to talk about true tax simplification and tax reduction. That will mean reducing government spending but it will enable the economy to grow.

Monday, April 20, 2015

IRS Announces New Interest Rates

Rev Rul 2015-8, 2015-18 IRB

The Applicable Federal Rates for May 2015 are reproduced below.
Table 1
                Applicable Federal Rates (AFR) for May 2015
                          Period for Compounding
                Annual         Semiannual       Quarterly        Month
     AFR         .43%           .43%             .43%             .43%
110% AFR         .47%           .47%             .47%             .47%
120% AFR         .52%           .52%             .52%             .52%
130% AFR         .56%           .56%             .56%             .56%
     AFR        1.53%          1.52%            1.52%            1.52%
110% AFR        1.68%          1.67%            1.67%            1.66%
120% AFR        1.83%          1.82%            1.82%            1.81%
130% AFR        1.99%          1.98%            1.98%            1.97%
150% AFR        2.29%          2.28%            2.27%            2.27%
175% AFR        2.68%          2.66%            2.65%            2.65%
     AFR        2.30%          2.29%            2.28%            2.28%
110% AFR        2.54%          2.52%            2.51%            2.51%
120% AFR        2.77%          2.75%            2.74%            2.73%
130% AFR        3.00%          2.98%            2.97%            2.96%
Table 2
                         Adjusted AFR for May 2015
                          Period for Compounding
                   Annual         Semiannual        Quarterly        Monthly
adjusted AFR        .43%            .43%              .43%            .43%
adjusted AFR       1.43%           1.42%             1.42%           1.42%
adjusted AFR       2.30%           2.29%             2.28%           2.28%
Table 3
                    Rates Under Section 382 for May 2015
Adjusted federal long-term rate for the current month                  2.30%
Long-term tax-exempt rate for ownership changes during the current
month (the highest of the adjusted federal long-term rates for the
current month and the prior two months)                                2.47%
Table 4
                Appropriate Percentages Under Section 42(b)(1)
                                for May 2015**
Appropriate percentage for the 70% present value low-income
housing credit                                                         7.44%
Appropriate percentage for the 30% present value low-income
housing credit                                                         3.19%

Table 5
                    Rate Under Section 7520 for May 2015
Applicable federal rate for determining the present value of an
annuity, an interest for life or a term of years, or a remainder or
reversionary interest                                                  1.8%


Friday, October 31, 2014

Durable Power of Attorney-the Smart Choice!

Durable Power of Attorney-the Smart Choice!

Today I received a frantic telephone call from the adult daughter of a senior citizen client for whom I prepared an estate plan 10 years ago.  Unfortunately, the man, who is a widower, had a serious stroke.  He is alive but is not communicative.  The daughter called and asked if I had prepared a Durable Power Of Attorney.  Even though I had prepared a Will and a Living Will, the client had insisted that he did not want a Power Of Attorney.

Specifically, this client is a very private person and wanted to be in complete control of all of his assets.  I had suggested that we establish a Trust, with him being the Trustee and having one of his children as a Co-Trustee who could take over if he came incapacitated.  That was rejected.

I suggested a Durable Power Of Attorney.  That was also rejected because he did not want anyone to have authority over his affairs.  I suggest that the Durable Power Of Attorney could be held until actually needed.

Now, unfortunately without a Trust and without a Durable Power Of Attorney, his children are left scrambling to figure out how they can pay his bills even though there is money in the account and what will happen if he does not recover sufficiently to make the necessary financial decisions.  These problems could of been easily avoided.

As I was dictating this blog post, it brought to my attention that I have not revise my own Durable Power Of Attorney in at least 10 years!  Once I am done make this post, that is my next project.  Maybe it should be yours!

Thursday, October 30, 2014

More Taxes – Time after Time

More Taxes – Time after Time

Wake up and smell the coffee!  Its political season again and unfortunately it appears most candidates for State Governors and Congress are advocating a “tax the other guy” approach.

“We need more money for the schools!”-Tax the Rich.

“We need more money for the poor!” – Tax the oil companies.

“We need more money for the seniors!”-Increase sales tax.

“We need to fight Ebola!”-Tax the pharmaceutical companies.

We need money for good clauses so therefore we need to increase taxes?  Does that really makes sense?  When a politician advocates increasing taxes they always try to make it sound like they are not going increase your taxes but somehow your taxes will be increased.  Has any country ever taxed themselves and prosperity?  The fact is if you tax something you get less of it.  That truth is immutable and is not difficult to understand.  Politicians just simply ignore that and try to get voters to forget about it.

Taxes are drain on the economy.  It is not just simply the taxes that need to be paid at all levels, it is compliance with tax laws and regulations.  The requirement to keep more and more records, file more tax returns that are more complex and dealing with long and expensive State and Federal audits cost the economy a tremendous amount of money.  For example, I had one client that was being audited by the State of New Jersey for Sales and Use Tax as well as Gross Income Tax.  (Yes, I said gross income tax, not net income tax which is type of tax and most states and the IRS!)  After more than 100 hours of my time, countless hours of my client’s employee’s time, as well as work by the business owners and CPAs, the State of New Jersey came up with a whopping $1900 of tax due.  The cost of compliance was so expensive, they would have been better off if New Jersey has simply sent a thug and said “pay us $10,000 more and will go away.”

So in review, if anyone says increases in tax and regulations will improve the economy you know the either do not understand much about economics or are just simply pandering for votes.

By the way, living in Cherry Hill, New Jersey, the home of Melita Coffee, some mornings like today, when you step outside literally you “wake up and smell the coffee.”

Friday, October 24, 2014

IRS Increase Contribution Amounts for Retirement Plans

The IRS announced in  IR 2014-99 increases to retirement plan contributions.

Highlights include the following:
  • The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,500 to $18,000.
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $5,500 to $6,000.
  • The limit on annual contributions to an Individual Retirement Arrangement (IRA) remains unchanged at $5,500. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Please see the full announcement.