Tuesday, May 1, 2012

Amazon.com and the Use Tax Letter

Good afternoon everyone!

By now many of you may have received (or know someone who has) an email from Amazon.com regarding Tennessee Use Tax on your purchases.  The email looks something like this:

Hello from Amazon.com,

Thank you for being a loyal customer of Amazon.com LLC.  We appreciate your business and look forward to continuing to provide you vast selection, low prices, fast delivery and convenience.

As you may know, Amazon.com LLC is not required to collect sales or use taxes in Tennessee.  However, the state of Tennessee requires us to provide the following notice to you:

You may owe use tax on purchases you made from Amazon.com LLC during the previous calendar year. The amount of tax you may owe is based on the total sales price of the items you purchased during the calendar year unless an exemption exists under state law or you have already paid the tax. A sale is not exempt under state law because it is made through the Internet. The total sales price of purchases you had shipped to Tennessee in 2011 was $193.86. This is the amount that you may include on your Tennessee use tax return to calculate the appropriate use tax owed unless you have already paid the tax.

As purchases from Amazon.com LLC can be made through various sales channels, we have included directly below your breakdown of purchases from the various channels.

Total sales from
www.amazon.com $XXX.XX
(Other sites related to Amazon may be listed as well)

In addition, the state of Tennessee requires us to provide you with the following link that you can use to get more information and pay any taxes due:

Use Tax Page:
Please note the following:

• While Amazon.com LLC does not report this information directly to the state of Tennessee we are required to provide this information to you based on Tennessee Code T.C.A. § 67-6-5 (f)(3) signed into law March 23, 2012.
• This notification has been sent to all customers that had purchases delivered to Tennessee. If you are not a resident of Tennessee, the most common reason for receiving this notification is that you may have sent a gift to a recipient in the state.

For more information you may also view our Tennessee Use Tax Notification Page at:

So the first question you may have is, "is this a scam"?  Well, unfortunately it's not.  As part of their locating distribution facilities to Tennessee, Amazon will start reporting (and collecting) sales tax on purchases made through their site sometime in the near future.  However, under long-existing Tennessee law, any item you purchase online through sites such as Amazon, EBay, etc.  Of course compliance is voluntary (meaning you had to voluntarily go to the TN Revenue website, file the return and pay the money).  However, since it was voluntary compliance, most people ignored it.  Since the state realized that they're losing more and more sales tax revenue to Internet purchases, consider the Amazon move the first in a long line of changes in the way e-commerce is handled for sales tax.

They say there's no such thing as a free lunch, now Amazon just helped confirm that.

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Monday, December 5, 2011

Renting or Selling Property to a Closely Held Business

As a business owner, you're doubtlessly looking for ways to cut taxes on your earnings from the business' operations.  If you operate your business as a C corporation, there are two levels of tax to worry about.  This double taxation shows up in two ways: (1) the annual corporate income tax on the business' taxable income, followed by the personal income tax on any dividends you take out and (2) the double tax cost of getting property out of the business and back into your hands.

Since real estate rents and receipts for the use of royalty-type assets are exempt from FICA and self-employment tax, it often makes sense for a business owner to personally hold title to those assets.  This allows the business to make tax-deductible payments to the owner for the use of these assets without a FICA or SE tax cost while maintaining individual ownership of some business assets.  These techniques can also provide a source of retirement cash flow to you and facilitate the eventual transition of business ownership to the younger generation.  Deductible rental and royalty payments can be made in addition to reasonable compensation for services rendered.

If the business is a C corporation, rental and royalty agreements also solve the problem of having appreciated assets "trapped" in a C corporation due to the prohibitive double tax cost of distributing them to the owners.  Care must be taken when using rental and royalty arrangements to charge a market rate for the assets' use, since the IRS routinely scrutinizes those transactions.  Care must also be taken when personal property is leased, due to the less favorable self-employment tax rules for those assets.  I can help you determine what a fair rental or royalty rate is, and guide you through the applicable tax rules.

Alternatively, C corporation cash can be withdrawn without double taxation by selling shareholder assets to the corporation.  However, the sales price must be reasonable to avoid an IRS assertion that a constructive dividend has been paid.

Another technique for withdrawing corporate wealth is a split-interest purchase, in which a shareholder and the corporation simultaneously acquire separate interests in the same asset.  To avoid trapping an asset in a corporation, and to provide a means of extracting corporate cash from current operations, the corporation would typically acquire a term interest in the asset and the shareholder would acquire a remainder interest.  Further, a corporate tax deduction may be available for a term interest in otherwise nondeductible assets such as land.

Because these transactions involve related parties, they must be carefully analyzed.  Among other things, the related-party rules may deny the benefit of capital gain treatment on asset sales, deny installment sale benefits, disallow losses from asset sales, deny the benefits of like-kind exchanges, or delay certain deductions from related-party transactions.  However, with planning, it is often possible to avoid these traps.

If any of these strategies sound like a way you might want to save taxes, please let me know.

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Tuesday, November 8, 2011

Disability Insurance, Because You're More Likely to Become Disabled Today Than Die

As you know, it is wise to have disability insurance coverage to protect you and your spouse from loss of earnings in the event you become unable to work.  Studies show that the possibility of permanent disability is far greater then death during a person's normal working lifetime.  Total and permanent disability is not only statistically more common than premature death, but can also have a much greater financial impact on the family.  Both death and disability can remove a source of family income, but with a disability, family expenditures might actually increase.  The disabled person must be fed, clothed, and sheltered, and the family is faced with the possibility of large, ongoing medical expenditures.

Disability insurance needs are usually based on the level of wages that would be lost if you were disabled, e.g., if you make $5,000 a month, you should carry $5,000 per month of disability insurance (although most policies will only replace 60-70 percent of pretax income, especially if the policy payout is tax free).  However, a more precise method may be needed to measure the gap between anticipated expenditures and continuing income.  This method considers other sources of income, such as investments, and special funding needs, such as unfunded education costs.

The benefits paid under a disability insurance policy can be totally tax-free to you, 100% taxable, or partially taxable depending on the type of policy, who pays the premiums and whether or not they are paid with pre-tax dollars.

I want you to be sure you understand how you would be taxed in the unfortunate event you become disabled.  Proper planning now can avoid unpleasant tax surprises later, when you can least afford them.

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Monday, November 7, 2011

What's This Tax Bracket Thing I Hear About?

Ever wonder what the term "tax bracket" means? It refers to the top marginal tax rate that individuals are being taxed, not the average. Knowing your marginal rate is important, because any increase or decrease in your taxable income will affect your tax at your top marginal rate. Thus, if you are in the 25% marginal bracket and plan on signing up for your employer's 401(k) plan, you will generally save $250 ($1,000 x .25) in federal taxes for each $1,000 contributed to the 401(k) plan. The reason we say "generally" is because sometimes a tax deduction can actually drop you into a lower marginal tax bracket.

The table below reflects the marginal tax bracket for various taxable incomes. Keep in mind that not all of your income is taxed. The amount equal to the sum of your deductions and exemptions is not taxed at all. If your income is below the sum of your deductions and exemptions, you would not have a taxable income, and your marginal rate would be zero.

However, once your income exceeds the sum of your deductions and exemptions, you will have taxable income and your marginal tax rate can be determined from the table. For example, let's assume that your income for the year is $50,000. You are married with two dependent children and will take the standard deduction. The standard deduction in 2010 for a married couple is $11,400 (same as in 2009). The exemptions for 2010 are $3,650 (same as in 2009). Thus, your taxable income would be $24,200 ($50,000 - $11,400 – ($3,600 x 4)). For a taxable income of $24,200, the marginal tax rate from the table (table values illustrated are the top of each bracket) is 15%.

(Values shown are the top of each
marginal tax bracket.)
Tax Rate
Head of
Married Filing
Over 379,150
Over 189,575
* Also used by taxpayers filing as Surviving Spouse

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Monday, August 8, 2011

Should I Hire My Family?

Today many small businesses are turning to family members to help them with small businesses.  I won't discuss the politics and soundness of that decision (sometimes this can work, many times it's a recipe for disaster), here are some business ideas you need to look at when hiring family members.

One way to reduce the overall family tax bill is by employing family members to work in your business by shifting income to them and providing them with employment benefits.
  • Employing your Spouse. Reasonable wages paid to your spouse entitles you to a business deduction. Although the wages are subject to both income and FICA taxes, your spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, your spouse may also be entitled to receive coverage under the qualified retirement and health plans of your business, allowing you to obtain business deductions for contributions to your spouse's retirement nest egg and health insurance premium payments made on behalf of your employed spouse. While maintaining the same family medical care coverage, you increase your business deductions by providing your spouse with family health insurance coverage as an employee.
  • Employing your child. By employing your child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child, thus reducing your self-employment income and tax by shifting income to the child. Since the salary paid to your child is considered earned income, it is not subject to the "Kiddie Tax" rules that apply to children under the age of 19, as well as some older children. The maximum standard deduction available to your child in 2011 is $5,800 if he or she has at least that amount of earned income. Therefore, the standard deduction eliminates all tax on this income if you pay your child $5,800 in compensation. If your business is unincorporated, wages paid to your child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing your child, but you may provide him or her with fringe benefits such as group-term life insurance and qualified pension plan contributions.
Your child may also make deductible contributions to an IRA of the lesser of earned income or the annual limitation. These contributions can offset earned and unearned income. As example, in 2011 your child could receive $10,800 gross income ($5,800 earned and $5,000 unearned) by combining the IRA deduction ($5,000) with the standard deduction ($5,800) and pay no tax. You should consider giving him or her part or all of the money needed to fund the IRA (as part of your $13,000/$26,000 annual exclusion for gifts) if your child does not want to use his or her earned income to fund an IRA contribution.

Please keep in mind that when you employ a family member in your business, the wages should be reasonable for the work performed and that the services performed are necessary to the business.  Also, it's often easy to overlook the disruption among your other staff that family can sometimes cause (have seen this with many clients over the years).  Finally, if you're a professional company or one that has to have licensed staff, while hiring Mom, Dad, or Junior to work for you, make sure they have the proper licensure as well to work for you.  It's easy to hire those you know without taking into consideration what they need (or have to have) in order to do the job.

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Thursday, August 4, 2011

Back to School...But Keep Your Wallet Out of Detention Hall

As the calendar has turned to August, it's time for the kids to head back to school (cue groan from students, cheers from parents now)...

With the back to school time, however, is also the time for buying school supplies, new clothes, etc.  Fortunately, many states offer a sales tax holiday to help save a little money to purchase what you need for the school year.  While this is a nice, small savings to stretch your dollars further, there are some things you need to look out for.

1.  Not everything qualifies as tax-free.  There is a misconception among some that sales tax holidays mean everything is tax free.  Unfortunately, this is not the case, so please don't start thinking about that new dining room set this weekend.  Usually, the only items that qualify are school-related items (clothes, supplies, and in some cases a new computer).  So make sure you if you're buying to save sales taxes that the items you're buying qualify.

2.  Make a plan and stick to it.  This is where problems happen for many people.  If you plan to buy the kids 6 pairs of pants each, for example, don't buy a 7th pair solely because you're saving the sales taxes.  The 7th pair (that you weren't planning to buy) will cost more than your sales tax savings, so now you're spending more than you planned.  (Of course if Junior is rough on pants, you might want to think about the extra pair...).

3.  Look for deals.  Many merchants offer sales on school-related items so take advantage of them.  Often when buying items on sale, we hear the dreaded "you can't combine two discount offers".  Well, the sales tax holiday is a state-imposed discount, so you shouldn't run into problems using a coupon, taking advantage of BOGOs, etc. in combination of the sales tax holiday.  If a merchant refuses to honor discounts in addition to the sales tax holiday, time to find a different merchant.

Now if you'll excuse me, I have to find some glue sticks...

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Wednesday, August 3, 2011

The Credit Card Shell Game

If you're typical, your mailbox is full of offers from credit card companies allowing you to transfer balances from your other cards at a very low interest rate for a period of usually six to twelve months. This can be a powerful tool to help you reduce your credit card debt in a dramatic fashion.

Normal credit card terms require a high interest rate payment making payoff a slow process -- if it happens at all! With a lower interest rate, most of your payment goes to principal, leaving a lower balance in a short period of time. After switching to the new card, make certain to pay at least 3% of your outstanding balance. In this manner, you will be reducing your balance quickly.

A word of caution -- the introductory period will end without any notice from the credit card company, except for a higher interest calculation on your bill. Mark your calendar and know when this date approaches. If you can, pay off the card by that date. If you can't pay it off, look for alternatives to restructure the debt again. Most importantly, don't use the credit card -- you won't get the same low rate on new purchases.

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