Our book, Smart Business Stupid Business is now shipping! And, in between all of the marketing that goes along with the publication of any new book, we’re also experiencing something new. How do we handle sales on our website, when states are creating so many conflicting nexus laws?

Colorado is the latest state to join the eTax club. Along with New York, North Carolina and Rhode Island, Colorado has now passed legislation trying to cash in on Internet sales. Companies who are caught in Colorado’s new law, may find that they have created a sales tax nexus in the state, even if they have no physical presence in the state.

Under Colorado’s new law, online retailers will be required to notify Colorado-based purchasers of their use tax obligation (use tax is equivalent to the sales tax you would pay if you bought an item locally instead of through the Internet). Companies will also be required to send a list of Colorado-based purchasers to the state’s Department of Revenue once a year.

Nexus - or the issue of what states you have to pay sales and income taxes in - is quickly becoming one of THE issues of 2010. We’ve got information on nexus in our forum, and devoted an entire chapter in Smart Business Stupid Business to the subject. There’s also a quick Nexus test in the book that you can use to help you sort out where your business’s tax obligations lie. As the rules are changing so fast, this is one area you will need to keep on top of, particularly if you do any Internet sales.

If you’ve been reading along all week, like what you’ve read, and are interested in what it takes to set up a Series LLC, today’s entry is for you.

Paperwork is the key here. All states that offer Series LLCs say the same thing: you only get the liability protection between subsidiary Cells if you run the cells separately, keep separate books and records and can demonstrate that you aren’t commingling everything into one big company. You’ve got to run your Series LLC and its subsidiary cells as though they were separately incorporated LLCs to comply with this requirement.

That said, the first step to creating a series LLC are the same as creating any other kind of LLC. You’ll prepare and file Articles of Organization with the state. The articles will typically be a little different from those of a regular LLC – there will be a statement that this is a Series LLC, or a box to check, or even a whole different form. You will appoint the resident agent, set out the LLC’s business office address, and name the main Series LLC’s Manager(s). If you’re creating an Illinois Series LLC, you’ll also be filing additional 1-page documents with the name of each subsidiary cell, and the Manager(s) of each cell.

After that, you get into the Operating Agreement, which defines how your Series LLC is structured and operates. This document sets out the following key points (in addition to other administrative functions):

• The name(s) of the initial Managers and Members of the Series LLC
• The names of each Cell being established at the time the Series LLC is formed (there’s usually at least one, but not always).
• The names of the initial Managers and Members for each Cell being established
• How new Cells are created or dissolved
• How the Cells relate to the Series LLC, as true subsidiaries or independent entities
• How the Series LLC Managers are appointed or removed
• How Cell Managers are appointed or removed
• The level of control the Series LLC has over the Cells
• The duties and responsibilities of the Series LLC Managers and the Cell Managers
• Restrictions on ownership and transfer of Series LLC ownership
• How and in what circumstances Members may be bought out by the Series LLC, or other Members
• How the profits and losses are to be distributed amongst the Members
• What happens in the event of bankruptcy in the Series LLC or any of the Cells
• How disputes between Series LLC Managers, Members or both are resolved
• The level of control Series LLC or Cell Managers have over day-to-day operations of the Series LLC or the Cells, and when management actions and decisions require pre-approval by the Members
• How the Operating Agreement may be changed
• When the Series LLC may ask Members for additional cash or property contributions, and what happens when Members cannot or refuse to pay

In any LLC, Series or regular, the Operating Agreement is crucial but that’s especially applicable here. You’ve not only got the main LLC to consider – you also have to think about all the subsidiary cells, now and into the future. This isn’t an agreement you want to prepare by finding on one the Internet. Let a professional draw this one up for you. That way, you know it’s covered all the bases.

In fact, because each Series Cell is going to operate independently, we recommend that you create a separate Operating Agreement for each subsidiary cell, in addition to the main Operating Agreement. Remember, the Series LLC’s Operating Agreement deals with the overall operation of the Series LLC. It tells you how you can create and dissolve Series Cells, but it also allows for each Cell to operate independently. That means each Cell needs its own guide for how the Managers operate, what rights the Members have, how profits are distributed, and so on.

Want to know more about the Series LLC? Sign up for coaching at USTaxAid Coaching and receive a bonus Series LLC course worth $99.

The offer expires today, at 5pm Pacific, so act now!

All this week, I’ve been writing about the virtues of Series LLCs. Now let’s talk about a couple of the downsides.

There are only 8 states that have fully accepted the Series LLC. Those are Delaware, Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah. We hope to see more states adding them soon. Meanwhile, though, if you’re in a state that doesn’t have the Series law, you have to hope that your state fully accepts them.

In most cases, that’s true. One notable exception is California. California is fine with you getting your call authorized in California, but it then insists on making you pay an $800 fee for each cell.

So let’s take an example and say you have one real estate property in California. You have other properties in Texas and Arizona. You may decide to use a Texas Series LLC and use individual cells for each of your investments in Texas and Arizona. So far so good. But don’t try to use a cell to hold that CA property. If you do, California is going to want to make you pay $800 for each of your Texas and Arizona cells.

If you’re in this spot, you may want to consider using a Series LLC for your properties and business outside of California. Then form a separate California entity to hold the CA investment.

The Series LLC is a great asset protection and tax savings strategy, but go into it as informed as possible!

It’s not that hard to push the envelope with a Series LLC. That’s because it’s still relatively new (13 years), has good case law behind it so far and it’s designed to be flexible.

Let’s look at some of the things that are all possible with a Series LLC:

You can set up a cell with a different tax structure. So, the main LLC might be taxed as a partnership but one cell is an S Corporation and another is a C Corporation.

You can set up cells with different ownerships. This could make the Series LLC a great estate planning tool as you gift ownership shares to heirs through different cells.

You can set up cells with different year ends (assuming the cells have elected C Corporation tax treatment or otherwise qualify for a different year end).

The Series LLC gives you a lot of possibilities and in today’s uncertain financial world, that can be the best thing to have.

Remember that the special on US TaxAid Coaching lasts through Friday 5 pm Pacific time. When you sign up today, you’ll have immediate access to the Series LLC Course.

The Series LLC works so well for real estate investors that you’d think it was drafted for that one purpose.

At the end of this blog, I’m going to go over two possible issues with the Series LLC. So, please make sure you read all the way through if you’re exploring the Series LLC for your real estate investments.

Asset protection concerns in a litigious society, skyrocketing state fees and aggressive IRS issues have brought us to this point. Let’s go through these issues, one by one, and see how a Series LLC might fit into to your overall business structure plan.

1. Asset protection. If you have 10 properties that you put all in one entity, you have protected yourself against something that might happen with the properties. And you have protected the properties from a personal judgment. But you haven’t protected the properties from each other. In other words, if one property has an issue that results in a judgment, then everything inside that entity will be fair game for the creditor.

   The solution is to separate out the properties. But that would mean 10 different structures and that’s cumbersome and expensive.

   With a Series LLC, you can set up each property inside a cell. The cells are set up without a separate registration fee and you don’t have to pay anyone to do that work. You can easily do it yourself. A warning here though: Do not do-it-yourself on the Series LLC formation. These are tricky and you need an expert for that. But once it’s done, you’re through FOREVER with paying for formation.

2. Skyrocketing state fees. One thing you can be sure of in today’s economy is that state fees are going up. They’ve already taken a jump in many states and as money runs out, the recession effects trickle down to the states and the economic stimulus money runs out, look for more fees. That’s one of the best parts of a Series LLC. You’ll save a lot of money. That’s because you don’t need to register the cells. No registration means no fees.
3. Tax Considerations. In the past, we’ve used Limited Partnerships to hold real estate. There is one possible issue that we’ve warned our clients about for years, now, though. The issue is that a Limited Partnership, by definition means that you have a general partner and a limited partner. The general partner has full control and risk. The limited partner has no control and no risk outside of his investment.

So the asset protection strategy is to hold as much value in real estate as a limited partner.

But there are two problems with this strategy. First, that means you need one more entity to hold the general partner ownership. And secondly, the IRS might not let you take a real estate loss because you must have active or material participation. And by definition, as a limited partner, you can not.

A recent Tax Court case may indicate otherwise, so it’s a little confusing exactly what you may end up with.

4. The Series LLC allows maximum asset protection with active participation.

Now the warning: California wants you to pay for each cell. So, if you live in CA or have investments there, talk to a professional. And in Illinois, a Series LLC must register the creation and dissolution of every cell, although the registration costs are minimal.

Intrigued by the Series LLC? We love it! Learn more about how you can save money and get better asset protection as part of our Coaching program.

We had a standing room only coaching session this past month on Series LLCs. If you haven’t yet become a coaching client, now is the time.

If you sign up for US Tax Aid Coaching for just $67 per month by 5 pm Pacific on Friday, you’ll be able to participate in both of March’s coaching session PLUS get a copy of the Series LLC course ($99 value) and Nexus Handbook ($99 handbook)

You must sign up by Friday at 5 pm to take advantage of this special offer, though.

A Series LLC is a business structure and that, of course, means that the right choice for you will depend on your circumstances. That all said, the Series LLC provides a much cheaper solution and a lot of flexibility. It might just be that the Series LLC will be the last business structure you ever need.

There are currently eight states that have Series LLC law (Delaware, Illinois, Iowa, Oklahoma, Nevada, Tennessee, Texas and Utah). If you’re in one of these states, it’s pretty clear what a Series can do for you, and what it can’t do. But if you don’t live in that state, it’s still possible that you might want to use this structure.

So, enough preamble. What really is a Series LLC? It’s a type of Limited Liability Company that takes advantage of some very specific state statutes that allow the LLC to set up an unlimited number of subsidiaries. The subsidiaries can be part of the original business of the original Series LLC, or could be something completely different. When they are set up and run properly, these subsidiaries are considered stand-alone companies that have legal liability protection from the other cells.

The LLC can elect how it wants to be taxed, which makes it the chameleon on the tax world. So, add that with the limitless possibility of a Series LLC, and you’ve got a lot of options.

Do you have a number of investments that you’d like to keep safe? Set each investment up in its own cell. You can roll up the cells into the main Series LLC come tax time and there’s only one return, but otherwise the cells act as their own individual asset protection vehicle.

Need an entity fast? You can set up a cell yourself and be completely operational in less than 2 hours.

Want a lot of privacy? With the exception of Illinois, you don’t have to register the cells of a Series LLC.

Want to cut your entity costs? No registration means no state fees.

Tomorrow I’ll talk about some specifics of the Series LLC for real state investors.

Many people start their businesses off in an S Corporation or an LLC electing S Corp tax treatment (LLC-S).

An S Corp is easier to manage and the losses will flow through to the owner, so it’s a good choice for many.

The trouble comes, though, when S Corporation shareholders get lulled into thinking an S Corporation tax calculation is uncomplicated and straightforward. It’s not. For example, the losses from an S Corporation are only deductible if you have sufficient basis.

Each S Corporation shareholder is required to keep stock basis and loan basis. If there is a loss, the basis is reduced as the shareholder takes the deduction for the loss on their tax return. The basis can’t be negative, in other words, if the loss is more than the basis, then the loss is suspended until the basis is restored.

The shareholder can restore basis by making a loan to the company or by the company having a profit in a subsequent year.

The bottomline that the IRS is counting on, as they plan more and more audits with their increasing audit force is this: Most shareholders don’t have the basis paperwork they need to prove the loss. And without that paperwork, the loss is lost. And that means tax, penalties and interest. Count on it.

The GAO is calling for S Corporation targets. If your S Corp has a loss, get ready. One of the first questions will be: “Where is your basis paperwork?”

Get ready for the coming S Corporation audits by making sure you have the paperwork you need. We’ll be covering this in detail as part of the March coaching session “Filing Your S Corporation Tax Return.”

Join now at USTaxAid Coaching.

One of the free services we offer to anyone considering becoming a client at USTaxAid Services is a review of past tax returns. It’s amazing some of the things I find.

In the case of a couple a few years, though, I found a plan that had actually created over $10,000 in taxes that they shouldn’t have had to pay. No, we’re not talking about missed deductions, we’re talking about going out of your way to create a way to pay more than you’d pay if you hadn’t done anything.

This couple operated their successful business as an S Corporation. And, like good S Corporation owner/employees they took officer salaries. The problem was that they took too much income in salaries.

The salaries were reported as income on their personal tax return. But because the salaries were so high they created a loss in the company. Normally you’d think that the worst that would have happened would be some extra payroll taxes. The salary was income, but the loss in the corporation flows through – right?

In this case, wrong. That’s because you need to have sufficient basis in order to take a loss deduction. Otherwise, the loss is suspended.

The couple had created phantom income in salaries and the losses through the S Corporation weren’t deductible.

Tomorrow we’re going to go through what goes into calculating basis in an S Corporation. This is one of the three items that the IRS will be looking for in the coming S Corporation audit sweep.

Go to USTaxAid Coaching http://www.usataxaid.com/coaching to learn more about S Corporations in March when we featuring Corporation filings.

It’s not that hard to figure out what the IRS is going to do next. For one thing, they tell us tax pros every year where they are going to focus their attention. But, if you’re paying attention you can figure it out a year or more in advance and that gives you time to prepare.

One of the areas that we’ll see a lot more audits in is S Corporations. And one of the problems areas is going to be medical insurance deductibility.

It’s confusing, and doesn’t make a lot of sense, but here’s how medical insurance deductions work for an S Corporation according to IRS issued Notice 2008-1. (http://www.irs.gov/pub/irs-drop/n-08-01.pdf)

In short, medical insurance paid under individual medical insurance plans may be deductible “above the line” if the following conditions are met:

1. The corporation must establish a “plan” for the payment of medical insurance premiums on behalf of the shareholder-employee.
2. The corporation must either pay the premiums for the plan, or reimburse the employee-shareholder for the premiums paid after being provided proof of premium payment to the S corp.
3. Premiums so paid or reimbursed on behalf of the shareholder-employee MUST BE ADDED TO W-2 BOX 1 WAGES. These premiums should be EXCLUDED from Box 3 Social Security Wages and Box 5 Medicare Wages (thus they are exempt from FICA taxes completely).
4. On the 1120S for the S corporation, the corporate tax return will include a deduction for wages/compensation paid which includes the medical insurance paid on behalf of the shareholder employee.
5. On the shareholder-employee’s 1040 an above the line deduction will be taken for the medical insurance paid by the corporation which were added to the W-2. In Notice 2008-1 the IRS states that if this treatment is not followed, the medical insurance deduction “above the line” will be disallowed and the deduction will be moved to Schedule A. If this happens, the value of the deduction is generally severely limited due to the 7.5% threshold that must be exceeded before medical expenses are allowed.

ACTION ITEMS TO TAKE ADVANTAGE OF THIS DEDUCTION:

1. Document the existence of your corporation’s “plan” by making note of it in your annual minutes.
2. If you have paid the medical insurance individually, gather up all of your medical insurance payments for 2009 and submit a reimbursement to your corporation to reimburse yourself for those amounts. Post the reimbursement check to “Officer Wages” or similar gross pay expense account.
3. Contact your payroll company to provide them with the information necessary to include the medical insurance expense (directly paid by the corporation or reimbursed to the shareholder) in your final paycheck and your W-2 for 2009.

If you’ve already issued the W-2s (which you should have) you can create amended ones to correct the medical insurance issue.

If you’ve got an S Corporation, the IRS has its eye on you. And that means an audit. If the audits are anything like the brutal audit teams that have targeted Real Estate Professionals then we can expect some bad times ahead for S Corporations.

Be prepared! Our March 23rd USTaxAid coaching session http://www.usataxaid.com/coaching is focusing on Filing Your S Corporation tax return – safely and with the most legal tax deductions you can take.

At the end of January, the General Accounting Office (GAO) issued a startling report regarding S Corporations. They found that 68% of them were filed wrong.

When you consider that there are more S Corp tax returns filed then any other business return out there, I think it’s not hard to figure out where the IRS is going to be concentrating their attention soon.

Over the next few days, I’m going to be covering a few of the most common errors and how you can avoid them. I’d suggest you read all of this before you file your S Corporation tax return for this year. Plus, you may want to just put it on extension and join us for the March coaching sessions when we cover both C Corporation filing issues and S Corporation filing issues.

First up on the IRS hit list for S Corporations: reasonable compensation. The GAO report is calling for the IRS to create more objective strategies for determining what is reasonable, both as a way to help auditors and to help taxpayers determine the right amount.

One thing all can agree on, though, if you have an S Corporation you need to show a salary for officers. If you don’t, you’re just asking for an audit and count on all income being re-characterized as salary with the resulting tax, penalties and interest.

S Corp Filing Tip: Make sure you have a salary amount being paid to officers and properly reported on the correct line item of Form 1120S. The one exception is if your S Corporation did not have income for the year.