Category Archives: Taxation

Federal Taxation of Real Estate Investment Trusts REITs and FINCen’s Beneficial Owner Reports

By:  Coleman Jackson, Attorney & Certified Public Accountant
January 17, 2023

Federal Taxation of Real Estate Investment Trusts REITs

General Definition of Real Estate Investment Trust:

For federal tax purposes, Internal Revenue Code Section 856 defines the term real estate investment trust as any corporation, trust, or association which is managed by one or more trustees or directors where the beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest which would otherwise be taxed under the Internal Revenue Code as a domestic corporation.  Financial institutions and insurance companies does not qualify as real estate investment trusts (REITs) under the Internal Revenue Code (26 U.S.C. Chapter 26).  REITs must have more than five beneficial owners.

Real Estate Investment Trust

Some of the other requirements to qualify for tax treatment as a REIT are as follows:

Pursuant to IRC Sec. 856(c), a corporation, trust, or association is not to be considered a REIT for federal tax purposes for any taxable year unless-

1) It files with its return for the taxable year an election to be a real estate investment trust or has made such election for previous taxable year, and such election has not been terminated or revoked under subsection (g);

2) At least 95 percent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions) is derived from-

  • Dividends;
  • Interest;
  • Rents from real property;
  • Gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(a)(1);
  • Abatements and refunds of taxes on real property;
  • Income and gain derived from foreclosure property (as defined in subsection (e);
  • Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property);
  • Gain from the sale or other disposition of a real estate asset which is not a prohibited transaction solely by reason of section 857(b)(6); and
  • Mineral royalty income earned in the first taxable year beginning after the date of the enactment of this subparagraph from real property owned by a timber real estate investment trust and held, or once held, in connection with the trade or business of producing timber by such real estate investment trust;

3) At least 75 percent of its gross income (excluding gross income from prohibited transactions) is derived from –

  • Rents from real property;
  • Interest on obligations secured by mortgages on real property or on interests in real property;
  • Gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(a)(1);
  • Dividends or other distributions on, and gain (other than gain from prohibited transactions) from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part;
  • Abatements and refunds of taxes on real property;
  • Income and gain derived from foreclosure property (as defined in subsection (e));
  • Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property);
  • Qualified temporary investment income; and

4) At the close of each quarter of the taxable year-

  • At least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and
    • (i) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A),
    • (ii) not more than 20 percent of the value of its total assets is represented by securities of one or more taxable REIT subsidiaries,
    • (iii) not more than 25 percent of the value of its total assets is represented by nonqualified publicly offered REIT debt instruments, and
    • (iv) except with respect to a taxable REIT subsidiary and securities includible under subparagraph (A)-
      • Not more than 5 percent of the value of its total assets is represented by securities of any one issuer,
      • The trust does not hold securities possessing more than 10 percent of the total voting power of the outstanding securities of any one issuer, and
      • The trust does not hold securities having a value of more than 10 percent of the total value of the outstanding securities of any one issuer.

Obviously Internal Revenue Code Section 856 is an extremely complicated tax accounting provision and requires an extensive understanding of accounting concepts and practices.  Organizations who might qualify under IRC Sec 856 will have to go through the various factors and accounting analysis that is depicted above.  In addition, there are additional nuisances about qualifying for REIT tax treatment that I cannot go into in this blog.  And before I turn to discussing the tax benefits from REIT tax treatment, take note that IRC Sec. 856 refer often to the term ‘beneficial owners’ of the organization.

Upcoming Beneficial Owners Information Reporting Requirements

Upcoming Beneficial Owners Information Reporting Requirements:

As we have seen so far during our discussion of United States taxation of Real Estate Investment Trusts pursuant to Internal Revenue Code Sec. 856, the term “beneficial owner” is extremely important for federal tax purposes since a Real Estate Investment Trust is a near pass-through entity.  What I mean is that normal corporate tax status applies to REITs income as computed by the rules set forth in the Tax Cuts and Jobs Act of 2017.  Typically, the bulk of a REITs income is passed through to the beneficial owners and are taxed at the beneficial owners’ personal tax rate.  The tax effect of this favorable treatment is the avoidance of double-taxation.  Remember, corporate earnings are taxed at the entity level and again when the earnings are distributed to the beneficial owners of the corporation.  REITs avoid this double taxation by electing to be taxed as Real Estate Investment Trust.  This in a nutshell is one of the main reasons why it’s extremely important to know the identity of the ‘beneficial owners’ for federal tax purposes.  Now let’s talk about a legal development that every REIT and those who structure them must be fully aware.

On September 30, 2022, the Financial Crimes Network, “FINCen” issued a final rule requiring certain entities to file with FINCen beneficial owner reports that identify two categories of individuals: (1) the beneficial owners of the entity, and (2) individuals who have filed an application with specified governmental authorities to create the entity or register it to do business.  These final FINCen regulations implement Section 6403 of the Corporate Transparency Act (CTA) enacted into law as a part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), describes who must file a report, what information must be provided to FINCen, and when the beneficial owner reports are due.  The effective date of the rules is January 1, 2024.  So beneficial owners and those who help them structure their entities, such as attorneys and other advisors must comply with these FINCen regulations effective January 1, 2024.

This upcoming change is important since many states’ business entity organizational codes do not require disclosure of beneficial owners when, say articles of organization are filed with, say the Secretary of State or some equivalent state agency in formation of, say a corporation, limited liability company or other legal entity structure.  The term beneficial owner is defined in the FINCen rules as “the individuals who actually own or control and entity – or individuals who take the steps to create an entity.  The Public Policy expressed in implementing the Corporate Transparency Act and these new FINCen regulations is stated to “help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity….”  FInCen is a department of the United States Treasury.  FInCen is the same organization where financial interest in certain foreign bank accounts are reported annually pursuant to the Bank Secrecy Act.  Those reports are known as FBARs and they are filed with FINCen on April 15th of each year.  In recent years there has been an automatic extension for FBAR (Form 114) to be filed.  Remember, FINCen and the Internal Revenue Service are not the same federal agency; although over the years, they work together on FBAR and foreign account matters.  As for the beneficial ownership reports, it is to be seen how closely the two agencies will work together with respect to these new ‘beneficial owner” reports.  But it is clear, FINCen reports do not enjoy the privacy protections afforded tax returns filed with the IRS. They can be shared throughout the government and perhaps be made public.   Therefore, the beneficial owners’ reports are likely to give the IRS very useful information when investigating tax fraud and tax evasion cases.  Corporate transparency is the goal; so lots of organizations, agencies and individuals could benefit from the exposure on beneficial owners of American businesses.  These recent legal and regulatory development are very important for anyone doing business in the United States subject to the new FINCen beneficial owner regulations and those who are starting new entities and their advisors, past, present and future.  The beneficial owner regulations even apply to the smallest of companies if they are structured under a state’s business entity structuring laws, such as, mom and pop limited liability companies.  For right now, let’s turn to discuss some specifics regarding how REITs are currently taxed under the Internal Revenue Code.

Federal Taxation of Real Estate Investment Trusts REITs

Federal Taxation of Real Estate Investment Trusts “REITs”:

The most significant thing about the taxation of REITs is that they are not taxed like regular corporations.  Unlike regular domestic corporations, REITs are not taxed on its regular taxable income.  Instead, REITs are tax on several categories of income at normal corporate tax rates applicable for the specific annual reporting period.  Since The Tax Cuts and Jobs Act of 2017, REITs taxable income is the organization’s taxable income with the following adjustments and considerations:

  1. Exclude net capital gains;
  2. Required to comply with Internal Revenue Code Sec. 443(b);
  3. Include dividends paid deduction for amounts paid to beneficial owners, but excluding net income contributed to foreclosure property transactions;
  4. Exclude net income contributed by sales or transactions related to foreclosure property;
  5. Exclude any income associated with REIT prohibited transactions;
  6. Exclude dividend received in computation of REIT taxable income; and
  7. Deduct taxes paid pursuant to Internal Revenue Code Sec. 857(b)(2).

Conclusion:

Real Estate Investment Trusts are just a business model used by real estate investors to pool their resources to invest in real property.  The legal structure typically used by these real estate investment businesses are corporation, or limited liability company or trusts.  Our federal tax laws treat REITs primarily as pass-through entities; similarly, to, but to a lesser extent, the way our federal tax laws treat partnerships, where the majority of the increments in wealth associated with REITs are passed-through to the beneficial owners and taxed presumably at the more favorable tax rates of the individual beneficial owners of the REIT.  There is an awful lot of tax policy and tax accounting involved in structing and operating a business using this business model.  And the new FINCen rules governing beneficial owners and those that aid in structuring them could likely make structuring an entity and operating in the REIT business model much more complex and cost intensive.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

EPISODE 3: Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published December 26, 2022

Overview:  

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, contract litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports.” You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

 

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, contract litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: Starting Your First Business in Texas. This is a series of podcasts, and today’s episode will focus on: “State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports”

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, contract litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports.”

Let’s jump right in,

Question 1: Attorney could you give us a quick picture of the type of taxes imposed in state of Texas?

 

Attorney Answer – Question 1:

Hello Alexis.

First and foremost, everyone needs to understand that the State of Texas imposes a series of taxes on individuals and businesses, but there are no income taxes in Texas.  Also, folks, individuals and businesses need to understand that property taxes are levied by local governments, such as, city, county, school districts and etc. throughout the State of Texas.  The law of local property taxes is fairly straight forward and our law firm does not practice this area of law.

  1. So, let me name several of the significant taxes imposed on individuals and businesses. Texas imposed the following taxes, among others:
  2. Limited Sales, Use and Excise Taxes are imposed on individuals and businesses;
  3. Texas Franchise Taxes are imposed on certain types of businesses;
  4. Estate and Generation-Skipping Taxes are imposed on estates;
  5. Unemployment Compensation Taxes are imposed on employers in Texas with employees;
  6. Alcoholic Beverages Taxes are imposed on establishments with such licenses to sell or distribute alcoholic products;
  7. Insurance taxes;
  8. Hotel taxes are imposed on guess of hotels, motels and similar establishments;
  9. Motor fuel taxes

This is just a list of eight types of taxes imposed by the State of Texas which generates the most revenue for the state.  There are a number of other types of taxes that Texas imposes on individuals and businesses operating within the State of Texas.  Anyone wishing to discuss these taxes can contact us with any specifics or follow our Blogs at www.cjacksonlaw.com; or follow our Legal Thoughts Podcasts; or follow our Law Watch videos on our You-Tube Channel where we frequently discuss various topics dealing with taxation, contracts, litigation and immigration matters those folks ought to know about.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

That leads me right into my next question, Attorney –

Question 2: What is the number one type of tax imposed by the State of Texas that everyone in Texas needs to know about?

 

Attorney Answer – Question 2:

Well Alexis, property taxes that are imposed by local governments is clearly a tax everyone in Texas should be aware of since Texas is one of the highest property tax states in the nation.  Property Taxes are taxes imposed by local governments throughout the State of Texas.  All people residing in Texas need to know about the property tax system because this is how public schools are financed as well as public hospitals and health services and a number of other major local and municipal services.

Alexis with that said, the number one type of tax imposed by the state that everyone needs to be aware of is the Texas Limited Sales, Use and Excise tax which is applies to most purchases of goods and some services.

Remember, as I previously stated; Texas does not have a state income tax.  So, our listeners should be asking themselves; so how does the State of Texas pay its bills?   The Limited Sales, Use & Excise Tax is; by far, the biggest tax revenue generator for the State of Texas.  The Limited Sales, Use, & Excise Tax generates about 58% of Texas’ tax revenues annually. This is the first major tax imposed by the State of Texas that everyone in Texas must be aware of.  Anyone operating a business or thinking about starting a business in Texas must do their due diligence with respect to whether their products, goods and services are subject to the Limited Sales, Use, & Excise Tax. If their products and services are subject to this tax; the business-owner is a trustee for the State of Texas and must obtain a sales tax permit, collect the appropriate sales taxes from each transaction and report and submit the monies to Texas Comptroller of Public Accounts, who is the chief tax collector for the State of Texas.  Business owners and other responsible parties can become personally liable for messing with Texas with respect to these sales, use and excise tax matters.

Texas imposes a 6.25% sales and use tax on sales, leases and rentals of touchable movable property (“tangible property”) and on certain specified services in Texas Tax Code Section 151.  Localities are also allowed to impose up to a maximum of 2% sales and use tax with respect to transactions within their jurisdictions.  The maximum limited sales, excise and use tax permitted in the Texas Tax Code is 8.25% of the gross taxable sales amount.

The sales and use tax are complimentary which means that Texas only gets to collect the tax as a sales tax paid by the purchaser at the time of the sale, or as a use tax paid by the merchant in the event the sales tax was not paid by the purchaser at the time of the sale.  Bottom line, the tax should only be paid once either as a sales tax or as a use tax.  Merchants in Texas are required under the Texas Tax Code to collect the tax as a trustee for the state of Texas.  Since the United States Supreme Court’s Wayfair decision, a couple of years ago, out of state merchants selling customers in the state of Texas could be subject to the same Texas Tax Code obligations as brick and mortal merchants operating with facilities and agents physically within the state.  The Texas Comptroller has issued guidance for out of state providers of taxable services and goods selling to customers inside Texas which can be found on the Comptroller’s website.

Any merchant inside the state or outside of the state who conducts a business subject to the Texas Limited Sales, Use and Excise Tax must obtain a sales tax permit from the Texas Comptroller of Public Accounts.  Again, the Texas Comptroller of Public Accounts is the chief tax collector for the State of Texas who administers the Texas Tax Code.  All kinds of useful and informative information can be found on the Comptroller’s website.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 3: Attorney, is there any other major tax imposed by the State of Texas that impacts business owners in Texas?

 

Attorney Answer – Question 3:

Alexis, another major tax imposed in Texas is the Texas Franchise tax; which is also known as the Margin’s Tax.  The Texas Franchise Tax is a tax imposed on some businesses for the privilege of doing business in Texas. Anyone interested in this topic can find this tax in the Texas Tax Code.

Several entities subject to the Texas Franchise Tax are:

  • Corporations;
  • Limited Liability Companies (LLC, including single member and/or husband and wife owned LLC);
  • Banks;
  • State limited banking associations;
  • Savings and loan associations;
  • S Corporations;
  • Professional Corporations;
  • Partnerships (general, limited and limited liability);
  • Trusts;
  • Professional Associations;
  • Joint Ventures; and
  • Other business entities not exempt by statute

Entities not subject to the Franchise tax are:

  • Sole Proprietorships;
  • General Partnerships (when ownership consist solely of natural persons or individuals. The partnership cannot have any legal entity owners);
  • Certain grantor trusts , estates of natural persons and escrows;
  • Exempt entities under Tax Code Section 171, Subchapter B;
  • Various other unincorporated passive entities, real estate investment trusts and entities classified under Insurance Code Chapter 2212;
  • Certain trust subject to Internal Revenue Code Section 401(a) or 501(c)(9).

Alexis, the actual computation of the Texas Franchise Tax can be an extremely complicated accounting computation; and any business subject to this tax should hire a very competent Certified Public Accountant who works with business owners who must regularly pay franchise taxes.  Many businesses; perhaps most Texas businesses, who are subject to the Texas Franchise Tax only have to file a no-tax due report each year.  Franchise tax reports are filed annually online with the Texas Comptroller of Public Accounts and there are penalties for failure to file and/or failure to timely pay any franchise taxes that are due for the period.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant
Attorney, so far, we’ve been discussing some of the taxes imposed by local governments, property tax in particular imposed locally, and some of the important taxes imposed by the State of Texas in this podcast – for example, the sales, use and excise tax and franchise tax.  There are some upcoming changes on the federal law horizon that you mentioned to me a few of days ago, and I thinking we should wrap up this podcast by explaining that.
Question 4: Attorney, can you briefly explain the Corporate Transparency Act and its key provisions?

 

Attorney Answer – Question 4:

This is a great question and it’s a very important one!

This past year, Congress passed the Corporate Transparency Act (CTA) as a part of the Anti-Money Laundering Act of 2020 (AMLA). The stated goal of the AMLA was to aid the federal government in detecting and preventing money laundering, tax fraud and other illicit activities.

The Corporate Transparency Act, as a result, imposes new mandatory reporting obligations with the stated intention of catching and stopping this illicit behavior. The FinCEN reports created under this mandatory rule are called, “Beneficial Ownership Information Reports” or BOI reports. The Corporate Transparency Act will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners—the persons who ultimately own or control the company, to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

The Corporate Transparency Act and its new reporting requirements is a huge change coming for all businesses structured under any state or tribal entity organization structuring laws and impose significant new disclosure obligations on business organizers and business owners of entities structured under state and tribal business organizational laws.  The Financial Crimes Network (FinCEN) is the U.S. Department of Treasury agency authorized to enforce the Corporate Transparency Act.

The final rules implementing the Corporate Transparency Act was published by the Financial Crimes Network (FinCEN) on September 30, 2022 in the Federal Register, and applies to domestic & foreign “reporting companies of all sizes, including the smallest of companies.”

A reporting company is a corporation, limited liability company, or any other entity created by filing entity structuring instruments with a secretary of state or any similar office under the law of a state.

  • For example, in Texas, the term “reporting companies” would include most business entities structured under the Business Organization Code, with the exception of sole proprietorships and general partnerships. If the business filed organizational documents with the Texas Secretary of State, the final FinCEN rules implementing the Corporate Transparency Act applies to them.

A “beneficial owner” under the FinCEN final rule includes any individual who, directly or indirectly:

  1. exercises substantial control over a reporting company, or
  2. owns or controls at least 25 percent of the ownership interests in a reporting company.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Attorney, these sound like huge changes for business owners!  Do you mean to say that the rules apply to even a mom-and-pop business that operates as an LLC!

Question 5: What kind of information will this mom-and-pop organization and other businesses structured under state law have to file and where will they have to file it?

 

Attorney Answer – Question 5:

Yes, Alexis, that is exactly what I am saying.  The final FinCEN rules do not exempt small business from the obligations imposed on affected business organizations.  The rules apply to the mom-and-pop limited liability company as well as other businesses structured under state and tribal laws.  They all meet the definition of ‘reporting company’ and must comply with the reporting rules.

When a reporting company files a “Beneficial Ownership Information Report,” or BOI report, with the Financial Crimes Network (FinCEN), they are required to identify themselves and report four types of information about each of its beneficial owners:

  1. Name
  2. Birthdate
  3. Address, and
  4. A unique identifying number issued by a jurisdiction in an acceptable document. A copy of this acceptable identifying document must be sent to FinCEN for inspection.  The document must be valid and current.

The FinCEN final rules implementing the Corporate Transparency Act and the related new reporting obligations are effective on January 1, 2024.

  • Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial BOI reports
  • Reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial BOI reports.

Alexis, our law firm will continue to monitor developments with respect to the Corporate Transparency Act and FinCEN announcements implementing the BOI rules.  Our office has been filing FBAR reports with the Financial Crimes Network on behalf of taxpayers for years now; and FinCEN is where the new BOI reports will be filed as well.  Any of our listeners should follow our blogs and Legal Thoughts Podcasts where we discuss these types of topics.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain the tax obligations of starting a new business in Texas. Today the key take aways from this podcast discussion are:

  1. Texas sales & use tax in Texas: This is a major tax imposed by the State of Texas impacting everyone who buys or sales goods and certain services,
  2. Texas Franchise tax: This too is a major tax imposed by the State of Texas on certain business structured under the Texas Business Organization Code and filed with the Texas Secretary of State, and potentially the big federal rule. Attorney even impacting
  3. Corporate Transparency Act: This is a new, big federal rule coming up in 2024. The new mandatory rule issued by the Financial Crimes Network (FinCEN) requires businesses structured under state or tribal entity organizational laws to file “Beneficial Ownership Information Reports” with the Financial Crimes Network. This rule is wide-reaching and will even impact the small mom-and-pop LLCs. Our office needs to watch the BOI report developments and perhaps produce future blogs, videocast and Legal Thoughts podcasts on this topic.

 

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

Taxpayer’s Responsibility to Substantiate the Numbers on Their Federal Tax Return

By Coleman Jackson, Attorney and Certified Public Accountant

October 11, 2022

As a general rule a taxpayer is allowed a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.  This basic tax rule is set forth in Internal Revenue Code Section 162.  The particular tax return that a taxpayer’s file depends upon how the business is structured under applicable state business organizational law and certain timely tax elections that the business owners make.  That sounds wonderful; but don’t move too fast because the Internal Revenue Service is not going to simply take the taxpayer’s word for it.  Generally, taxpayers are required to keep records in sufficient quality to establish the amounts, dates and business purpose of the items recorded on their tax return. Taxpayers generally bear the burden to show that they are entitled to deduct an expense on their tax return.  See Internal Revenue Regulation Section 1.6001.  Sometimes taxpayers can establish that an expense has occurred during a tax period, but cannot establish the exact amount.  When this occurs, the taxpayer must produce sufficient evidence to permit an estimation of the amount deductible on the tax return.  See Vanicek v Commissioner, 85 T.C. 731, 743 (1985).


Internal Revenue Code Section 274 sets forth detailed substantiation requirements to which taxpayers must adhere.  Treasury Regulation 1.274(d) sets out several categories of expenses that require enhanced substantiation.  Generally, the taxpayer substantiates their tax deductions by either adequate records or sufficient probative evidence that corroborates the taxpayer’s statements and opinions concerning the deductibility of the expense.  The substantiation burden only requires that the taxpayer maintain sufficient records and documentary evidence to establish the date, amount and business purpose or use of the expenditure.  The taxpayer’s words alone; however, are insufficient substantiation.  But the taxpayer’s written or oral words are sufficient to substantiate the deductibility of the expenditure if it is supported by credible corroborative evidence sufficiently establishing the deductibility of the expense.  As stated before, the burden to show that expenditures are deductible belongs to the taxpayer at all times. The United States Supreme Court has established this burden issue long ago in a case called New Colonial Ice Co. v Helvering, 292 U.S. 435, 440 (1934).  Yes, that means the taxpayer must prove that the expense is deductible in the first place.  In other words, the taxpayer must always prove deductibility of an expense upon challenge by the IRS.  Moreover, see also Internal Revenue Regulation 1.274. (d) regarding the enhanced substantiation requirements on certain categories of expenses.


For the non-tax lawyer and non-tax professional, this might all seem very esoterically complicated.  Like lifting weights—start with a weight that you can easily lift and graduate to more and more weight until you have achieved your goal.  Our goal here is to explain this in layman’s terms; so that, layman can understand the tax concepts of deductibility, substantiation and burden as these terms apply to their tax return.  Let’s try to explain substantiation in layman’s terms:  to be deductible on the taxpayer’s tax return all expenditures must meet three requirements, and possibly four as follows:

  1. Be incurred in pursuit of a trade or business (this means personal expenses don’t count);
  2. Be an ordinary and necessary expense (this means expenditures common to the taxpayer’s trade, group or industry);
  3. Be substantiated by sufficient records or documentation, which can include the taxpayer’s corroborated written and oral statements; and for some expense categories;
  4. Be subject to enhanced or stricter substantiation, such as, contemporaneous logs, charts, and diaries.

Looking at someone play sports is not the same as actually participating in sports.  Neither is reading about tax substantiation in a blog the same as actually running a trade or business in real time and sufficiently substantiating tax expenditures in preparation for the day when the Internal Revenue Service Auditor knocks on the door.  Like locks on our doors are preparatory; the expenditure substantiating taxpayer don’t expect the auditor’s knock, but is prepared if it comes.  It’s kind of like being prepared when a thief comes by having locks, alarms and even attack dogs.  What might these preparatory things look like?

“Ordinarily, documentary evidence will be considered adequate to support an expenditure if it includes sufficient information to establish the amount, date, place, and the essential character of the expenditure.  For example, a hotel receipt is sufficient to support expenditures for business travel if it contains the following: name, location, date, and separate amounts for charges such as for lodging, meals, and telephone.  Similarly, a restaurant receipt is sufficient to support an expenditure for a business meal if it contains the following:  name and location of the restaurant, the date and amount of the expenditure, the number of people served, and, if a charge is made for an item other than meals and beverages, and indication that such is the case.  A document may be indicative of only one (or part of one) element of an expenditure.  Thus, a cancelled check, together with a bill from the payee, ordinarily would establish the element of cost.  In contrast, a canceled check payable to a named payee would not by itself support a business expenditure without other evidence showing that a check was used for certain business purpose.”  See Internal Revenue Code 274.

If a taxpayer with a canceled check payable to a named payee is struggling to lift the substantiation weight, one can only imagine the plight of the taxpayer who conducts its business in cash.  Cash is a completely inappropriate way to conduct business.  But many foreign immigrants came from societies and cultures where business is routinely conducted in cash.    Cash cannot be substantiated and an IRS auditor is very likely to deny any and all expenditures paid in cash unless the taxpayer has serious corroborating evidence to back up their written or oral word.  When paying contract labor and other expenses by cash, the taxpayer voluntarily places onto themselves and their company’s enormous weight because Internal Revenue Code Section 6663(a) states that if any part of any underpayment of tax required to be shown on a tax return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.  See Tax Court case styled, Petzoldt v. Commissioner92 T.C. 661, 699 (1989).  Construction companies and other taxpayers must be sure to substantiate their contract labor or other labor costs by obtaining accurate and complete Form W-9 from all workers who are independent contractors and Form W-4 for workers who are employees, by filing all Form 1099 Miscellaneous with the Internal Revenue Service for all independent contractors or file Form W-2 for employees, withholding the proper tax amounts when required by law, by paying all workers by check and documenting the labor transactions in their books and records.  Numerous federal courts have stated that dealing in excessive amounts of cash is an indicia of tax fraud.  Courts have said that other indicia of tax fraud are (1) substantial understatement of income, (2) maintenance of inadequate records; and 3) implausible or inconsistent explanations of behavior.  See Bradford v Commissioner, 796 F.2d 303, 307 (9th Cir. 1986).  Taxpayer’s demonstrating two or more of these characteristics are all but certain to be charged with the tax fraud penalty and possibly referral to the IRS Criminal Investigations Unit.  See Otsuki v Commissioner, 53 T.C. 96, 106 (1969) and Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984).

And for expenses, such as, car and truck expenses, taxpayers must comply with the weightier substantiation requirements of Internal Revenue Code Section 274(d) which requires the taxpayer to substantiate vehicle, entertainment, travel and certain other listed expenses by sufficient evidence corroborating the taxpayer’s own statements.  Under the stricter substantiation rules taxpayers must maintain adequate records, such as, account books, diaries, logs, statements of expense, trip sheets, or similar records prepared contemporaneously with the use or incurrence of the expenditure and documentary evidence such as receipts or bills.  See Jijun Chen and Xiujing Gu v. Commissioner (T.C. Memo 2015-167) a recent Tax Court case dealing with disallowance of personal car and truck expenses.  The IRC 274(d) enhanced substantiation requirements are set forth in Internal Revenue Regulations Section 1.274-5T.  Remember that locks, alarms and attack dogs are to prepare for the thief or robber.  Taxpayers are responsible for substantiating the numbers on their tax returns, and knowing and properly implementing these taxpayer substantiation requirements are preparatory in the event the tax auditor comes knocking.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

EPISODE 1: 2022 Inflation Reduction Act – Three Federal Tax Implications You Ought to Know About

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published October 31, 2022

Overview:

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “The 2022 Inflation Reduction Act — Three Federal Tax Implications You Ought to Know About.” You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

 

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

 

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: “The 2022 Inflation Reduction Act — Three Federal Tax Implications You Ought to Know About.”

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “The 2022 Inflation Reduction Act — Three Federal Tax Implications You Ought to Know About.”

 

Let’s jump right in,

Question 1: What is The Inflation Reduction Act of 2022 and how did it come about?

 

Attorney Answer – Question 1:

Hello Alexis.

The Inflation Reduction Act of 2022 is a new landmark bill that was passed by Congress & signed into law by President Biden in August 2022.

The Inflation Reduction Act of 2022 (IRA) is the product of many back-and-forth negotiations between the Democrats and Republicans following the failure of President Biden’s Build Back Better bill that was introduced last year.

The law approves more than 700 billion dollars in federal investments aimed at reducing the national deficit, combating climate change, and lowering health care costs, among a number of other stated initiatives.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

That leads me right into my next question –

Question 2: Why is The Inflation Reduction Act of 2022 such a big deal right now?

 

Attorney Answer – Question 2:

That’s a great question.

 

Despite its name, “The Inflation Reduction Act of 2022” addresses more than just the rise in inflation. The Inflation Reduction Act is gaining attention right now because it is a massive bill that addresses many hot button issues.

For example, the Inflation Reduction Act has provisions related to healthcare coverage, capping prescription medication costs, pollution reduction, energy investments, tax code reform and much more.

Today’s podcast will focus on the top three relevant tax provisions predicted to raise revenue under the Inflation Reduction Act.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 3: Attorney, what is the first major tax change resulting from the passage of the Inflation Reduction Act?

 

Attorney Answer – Question 3:

The first major tax change under the Inflation Reduction Act is the imposition of a 15% Corporate Alternative Minimum Tax (AMT) on corporations with an annual profit of at least $1 billion.

The Alternative Minimum Tax was originally designed to prevent specific companies from being able to use enough tax breaks to face zero tax liability in a given year while reporting an accounting profit. To combat this problem, Congress decided to calculate the tax using book income rather than taxable income.

This measure is expected to raise over $300 billion in new revenue, providing more than 40% of the bill’s funding.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Wow, that’s a huge portion of expected revenue.

Question 4: What kind of companies are subject to this Alternative Minimum Tax and when will it take effect?

 

Attorney Answer – Question 4:

The 15% Corporate Alternative Minimum Tax only applies to corporations with an average annual adjusted financial statement income of more than $1 billion. Tax experts estimate that around 120-150 corporations will be affected by the Corporate Alternative Minimum Tax annually.

This means the average taxpayer doesn’t need to be concerned.  For the majority of American taxpayers, the number one thing you need to know with respect to the 15% Corporate Alternative Minimum Tax is that:  IT WILL HAVE NO DIRECT IMPACT ON YOU; although corporations impacted might find ways of passing any increased costs of doing business along to consumers of their products and services.

The Corporate Alternative Minimum Tax will be effective after December 31, 2022.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question no. 5: What is the next major tax provision in The Inflation Reduction Act?

 

Attorney Answer – Question 5:

In addition to the Corporate Alternative Minimum Tax, the Inflation Reduction Act also imposes a 1% Excise Tax on the fair market value of any stock that is repurchased by the corporation during the tax year.

  • The taxable amount is reduced by the fair market value of any stock issued by the repurchasing corporation during the taxable year, including stock issued or provided to employees of the corporation.

There is no minimum threshold, such as gross receipts, market cap, earnings and profits, etc., for the application of the 1% Excise Tax. And the Secretary of the Treasury is authorized to define “repurchase” to include “economically similar” transactions.

This tax will also be effective after December 31, 2022. Again, for the majority of taxpayers, unless they own stock, this Inflation Reduction Act provision will have little to know impact on their lives.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question no. 6: What is the final major tax change under the Inflation Reduction Act?

 

Attorney Answer – Question 6:

 The Inflation Reduction Act provides the IRS an additional $80 billion over the next 10 years.

The majority of these funds, about 60% of the increased IRS funding, is allocated to IRS enforcement activities, such as:

  • Determining and collecting unpaid taxes
  • Criminal investigations
  • Asset monitoring & compliance investigations

The stated purpose of this Inflation Reduction Act provision is to ensure high-income households & corporations pay their fair share of federal taxes.  This provision for increased IRS enforcement funding is not supposed to increase taxes on taxpayers with taxable incomes under $400,000.

This is what taxpayers should know:  Any additional funding to IRS is going to allow it to more efficiently and effectively collect taxes from whoever owes them regardless whether their taxable income is under $400,000 or over $400,000.

  • Word to the wise: timely file your tax returns when they become due and pay your taxes as you go. It’s likely that the IRS will be updating its processing systems, modernizing its monitoring and forms matching processes, hiring more auditors and examiners and knocking on more doors with this increased funding.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain the Inflation Reduction Act, specifically the 15% Corporate Alternative Minimum Tax, the 1% Excise Tax and the $80 billion dollars in increased funding allocated to IRS enforcement activities.

Today’s takeaway seems to be that although the Inflation Reduction Act’s 15% Corporate Alternative Minimum Tax and the 1% Excise Tax on stock buy backs might only impact a few taxpayers, it’s very likely that the additional $80 billion allocated to IRS enforcement is very likely to impact lots-and-lots of taxpayers.

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “The 2022 Inflation Reduction Act — Three Federal Tax Implications You Out to Know About.”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

EPISODE 2: Starting your first business in Texas – Assumed names use in Texas

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published October 17, 2022

Overview:

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Johana Powell, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Starting your first business in Texas: Assumed names use in Texas”.

You can listen to this podcast by clicking here:

 

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

 

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer and Johana Powell– Tax Legal Assistants, Leiliane Godeiro – Litigation Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: “Starting your first business in Texas: Assumed names use in Texas.”

This is a series of podcasts about how to start your first business in Texas, and this is the second episode.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Hi everyone, my name is Johana Powell and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this interesting topic: “Assumed names use in Texas.”

Let’s get started!

Question 1:

Attorney Jackson, in our first episode we talked about business structures and some operational concerns about starting a business in Texas. Now, one of the very first steps when starting a business in Texas is choosing an appropriate name for your business.

What does it mean to do business in an assumed name in Texas?

Attorney Answer – Question 1:

Good afternoon, Johana.

You are certainly right, I did mention in our first episode of this series, “Starting your first business in Texas” that new enterprises must consider certain operational concerns and legal concerns when structuring a Texas business.  I also stated during that first episode that we would leave any discussion of operating a business in Texas in an assumed name to another podcast.  Well, Johana here we are; this is that podcast.   We will discuss what it means to operate a business in Texas using an assumed name in this particular podcast today.

So, Johana, in answer to your first question- “what does it mean to do business in Texas in an assumed name”; let me first point out that an assumed name is not the legal name of the business.  An assumed name is the name used by the business to do business in the State of Texas. An assumed name is often referred to as a “DBA”, which means “doing business as”.  For example, let’s say a certain company’s legal name is “Water All Icy Cold, Limited Liability Company”; and the company do business in Texas as “Mobile Water Cooler Delivered to You”.

Texas Business & Commerce Code, Section 71.101 requires that a company, like our example, who do business under an assumed name in Texas file an assumed name certificate with the Secretary of State, commonly referred to as (“SOS”), if they regularly conduct business or render a professional service in the State of Texas under a name other than their legal name.  Section 71.101 requires filing of an assumed name certificate with the Secretary of State of domestic and foreign corporations, limited liability companies, limited partnerships, limited liability partnerships, and other types of business structures doing business in Texas under a name other than their legal name.

 

INTERVIEWER: Johana Powell, Tax Legal Assistant

Question 2: Attorney, when must the business owners file for an assumed name certificate and what is the effect of the filing?

Attorney Answer – Question 2:

Johana, to avoid harming other businesses and confusion, owners must file for an assumed name in Texas before they start conducting business in this state under the assumed name. The effect of filing for an assumed name certificate is to give notice to the public that the registrant is conducting business under that name. However, the filing of an assumed name does not constitute actual use of the name for determining priority, nor does filing the name with SOS give the registrant a right to use the name when is it contrary to common law, statutory rights of others, violate unfair competition, unfair trade practices, professional ethics rules governing practice of a profession, common law copyright, trademarks or similar laws pursuant to Texas Business & Commerce Code, Section 71.157.

Everyone should respect the rights of others.  Violation of others’ rights can land you into a lawsuit, professional ethics sanctions and huge financial losses.  Business owners should do their due diligence to determine name availability prior to any use of a name in Texas whether it be a legal name or assumed name.  To act otherwise is foolish and could be a violation of civil and criminal laws.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Interviewee’s Comment:  Attorney, that is exactly right everyone should respect other people when conducting their business affairs as well as at all other times.

QUESTION 3:

My third question is this one:  I am just curious on this point; then, if I file my assumed name with SOS, does it mean that no one is allowed to use it?

Attorney Answer – Question 3

Johana that is a very complex question because generally, every business must protect its own intellectual property and good will.

When you file a certificate for an assumed name it only prevents the Secretary of State from filing a subsequent certificate of formation for an entity with a name that the secretary of state determines is not distinguishable in the records. The filing with the Secretary of State is a notice filing, which means that the Secretary of State does not have any authority under Texas law to review the assumed name certificate to determine if the filing conflicts with another name in SOS’ file.

Johana, any dispute or violation involving an assumed name in Texas is probably left to litigation between the private parties sounding in trademark infringement, copyright infringement, deceptive trade practices, tortious interference with contractual relations or some cause of action like these between the private parties in State District Court.

INTERVIEWER: Johana Powell, Tax Legal Assistant

QUESTION 3:

Attorney, what are the steps to file a successful certificate of an assumed name?

Attorney Answer – Question 4:

First, you should determine whether the name you want to file for is available. The Texas Administrative Code, Title 1, Part 4, Chapter 79, Subchapter C sets out a series of rules to determine whether names are distinguishable, the same, or available with consent.

Business Organization Code, Section 5.053, states in part that “the name of a filing entity or a registered series of a Texas LLC or the name under which a foreign filing entity registers to transact business in this state must be distinguishable in the records of the Secretary of State from any existing filing entity, name reservations, or name registrations filed with them”.

Johan, to file for an assumed name certificate with SOS, your legal name must already be registered with the Secretary of State of Texas.

Then and only then, can you file SOS Form 503, a notarized assumed name certificate with Secretary of State.

INTERVIEWER: Johana Powell, Tax Legal Assistant. Wrap-Up

Attorney, thank you for siting with me today in this series of how to prepare on the journey of owning your first business in Texas.  Today’s discussion in our second episode of this series regarding doing business in Texas under an assumed name was very informative.

TAKEAWAY: It seems like there are three take aways here:

  1. You first file business structuring documents with the SOS for your legal name in Texas; and
  2. You may if you choose to, do business in an assumed name if you first file an assumed name certificate with SOS; and
  3. You must perform your due diligence with respect to name availability prior doing business in Texas under an assumed name to respect the rights of other business owners avoid legal issues and potential devastating and costly lawsuits.

This concludes our second episode in our Legal Thoughts podcast’s series called “Starting your first business in Texas”.  This second episode was about ASSUMED NAMES USE IN TEXAS.  We intend to do future podcast dealing with “starting your first business in Texas”; so, this series shall continue!

Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast.  Everybody takes care!  And come back in about two weeks, for more taxation, contracts, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

Attorney Closing Remarks

This is the end of Legal Thoughts for now!

Thank you for giving us the opportunity to inform you about: “ASSUMED NAMES USE IN TEXAS.”  Remember this is the second episode of series of podcast that we have entitled, “Starting Your First Business in Texas”. Future podcast in this series will likely be published over the next several months.

If you want to see or hear more taxation, contracts litigation and immigration LEGAL THOUGHTS from Coleman Jackson, Professional Corporation.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

 

FBAR Filing Requirements & Penalties

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published October 3, 2022

Overview:

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “FBAR Filing Requirements & Penalties.”

You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

 

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, Gladys Marcos – Immigration Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: FBAR filing requirements & penalties.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “FBAR filing requirements & penalties”.

Let’s jump right in,

Question 1: What does FBAR stand for and why was it created?

 

Attorney Answer – Question 1:

Good afternoon, Alexis.

Under the Bank Secrecy Act (BSA), the Department of Treasury was given authority to collect information from a US person who have financial interests in or signature authority over foreign bank and financial accounts. FBAR stands for Foreign Bank Account Report.

The FBAR, or FinCEN Form 114, is an annual report that US persons are required to file if they hold foreign accounts which have a balance exceeding $10,000 at any time during the reporting year in a single account or combination of accounts.

The Report of Foreign Bank and Financial Accounts (FBAR) is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions. The FBAR is also a tool used by the United States government to identify persons who may be using foreign financial accounts to circumvent United States law. Information contained in FBARs can be used to identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

In April 2003, the Financial Crimes and Enforcement Network (FinCEN) delegated enforcement authority regarding the FBAR to the Internal Revenue Service (IRS). The IRS is now responsible for:

  • Investigating possible civil violations;
  • Assessing and collecting civil penalties; and
  • Issuing administrative rulings.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 2: What is the FBAR filing requirement?

 

Attorney Answer – Question 2:

That’s a great question.

Under the Bank Secrecy Act, US persons with a financial interest in a financial account in a foreign country are required to keep record of and report such accounts to the U.S. Department of Treasury.

  • “US persons” includes: citizens, residents, corporations, partnerships, limited liability companies, trusts and estates.

A person is treated as having a “financial interest” in any foreign account that the person owns or that is owned by a corporation in which the person has an ownership interest greater than 51%.

FBAR filing is required for foreign financial accounts exceeding $10,000

  • This $10,000 threshold amount is an aggregate amount, meaning it is the value of all foreign accounts combined.
  • If at ANY TIME DURING THE YEAR the cumulative amount of a person’s foreign accounts is more than $10,000, they must file an FBAR.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 3: What constitutes an FBAR violation?

 

Attorney Answer – Question 3:

This has been a big question in the courts, but the IRS and the Fifth Circuit Court of Appeals (the federal court that governs Texas) are in agreement.

An FBAR violation is the failure to report a financial account on the FBAR form. It is not the failure to file an FBAR in general.

This means that you can have several FBAR violations in a single year for each financial account you fail to report or improperly report.

For example, if an U.S. person has 25 separate bank accounts exceeding the reporting threshold of $10,000 in 2022 and they fail to file a Form 114 for this period, the IRS and the 5th Circuit Court of Appeals think that this U.S. person has 25 FBAR violations, not one.  FBAR violations are on an account basis not forms basis.  Some of the other Circuit Courts have taken a forms view when imposing FBAR penalties.  The United States Supreme Court has not ruled on this issue although there is a spit in the circuits which means different FBAR violation penalties can be assessed by the IRS depending upon where the U.S. person resides.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Well Attorney, what are the actual penalties for FBAR violations?

 

Attorney Answer – Question 4:

Anyone who is required to file an FBAR and fail to file a complete and accurate FBAR could be subject to civil monetary penalties, criminal prosecution or both.  Civil penalties are inflation adjusted each year; so I am going to skip giving out exact penalty amounts since they would change from year to year.  Criminal penalties for knowingly and willfully filing false FBAR reports can be up to $10,000 fine or five years in prison on both.  Criminal penalties are based on the facts and circumstances and can even be higher.

FBAR Penalties are authorized in the Bank Secrecy Act; 31 U.S.C. 5321.  In addition to the criminal penalties authorized by the law, there are four types of civil monetary penalties for failing to file an FBAR or failing to maintain proper records for the five year required record keeping period as follows:

  • Negligent Violation Penalties up to the maximum amount in 31 Code of Federal Regulation 1010.821;
  • Pattern of Negligent Activity Penalties up to the maximum amount in 31 Code of Federal Regulation 1010.821;
  • Non-Willful Violation up to the maximum amount 31 Code of Federal Regulation 1010.821; and
  • Willful Violation Penalties up to the greater of the amount in 31 Code of Federal Regulation 1010.821, or 50% of the amount in the account at the time of the violation

FBAR filers can also be assessed these criminal and monetary penalties for failure to keep records of foreign accounts for five years from the due date of the FBAR, which is April 15 of the following calendar year.  The types of information that must be kept for 5 years from the due date of the FBAR are records that show–

  • Name in which each foreign account is maintained;
  • Foreign bank account number or identifying number;
  • Name and address of the foreign financial institution;
  • Type of foreign account, such as, savings or checking; and
  • Maximum value of each account during the reporting period.

These records must be presented to the IRS for inspection upon request.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Attorney, you’ve talked about different penalties depending on if the violation was willful or not.

Question no. 5: What does it mean to “willfully” violate FBAR?

 

Attorney Answer – Question 5:

The test for willfulness is an objective standard. What I mean is that the standard is not subjective or what the particular taxpayer knew or thought but what an objective taxpayer in similar circumstances would have known or thought.

Courts will consider whether a person knew or should have known about an “unjustifiably high risk of harm.”

In layman’s language, courts consider whether the taxpayer knew or should’ve known that there was a high risk that an accurate FBAR was not being filed and whether (s)he was in a position to find out for certain with little effort or not.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

You’ve discussed a lot, Attorney.

Question no. 6: In summary, what do listeners need to remember about FBAR filing requirements?

 

Attorney Answer – Question 6:

 Well Alexis our listeners need to remember a few key points:

  1. If you have any type of foreign bank account or multiple foreign bank accounts with balances which exceeds $10,000 or more at ANY POINT DURING THE CALENDAR YEAR, you MUST CHECK TO SEE WHETHER YOU are subject to FBAR and must report such accounts to the Treasury Department. Foreign Accounts are reported to the Financial Crimes Network on April 15th of the following tax period and currently there is an automatic extension to October 15th. Records used to file an FBAR with FINCen must be kept for five years and be made available for inspection if the IRS request them.
  2. If you fail to report any foreign account subject to the FBAR filing requirement, you will be subject to civil and possible criminal penalties depending upon whether the violation was willful or non-willful and upon all the facts and circumstances.
    1. Remember, courts use a very broad definition for willful, and include taxpayers who knew about the FBAR requirement, who should’ve known about the FBAR requirement, and taxpayers who could easily find out about the FBAR requirement.
  3. Lastly, remember FBAR violations are per-account violations for residents living in Texas, Mississippi and Louisiana (states within the 5th Circuit Court of Appeals jurisdiction). This means that taxpayers will be subject to FBAR penalties for each unreported or misreported account. Some other jurisdictions within the United States are per-form violations.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain FBAR, what the filing requirement is, and what the different penalties are for violations.

It seems like the take away here is that taxpayers need to be aware of their foreign accounts and the cumulative balances to avoid FBAR penalties.

 

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “FBAR filing requirements & penalties”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

Misclassifying Gig Workers

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published
September 5, 2022

Overview:  

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Misclassifying Gig Workers.” You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, Gladys Marcos – Immigration Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: “Misclassifying Gig Workers.”

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

A few weeks ago, we discussed the gig economy and the differing obligations for gig workers depending on if they were classified as an employee or independent contractor. Today, we’re going to continue that discussion from the employer perspective.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “Misclassifying Gig Workers.”

Let’s jump right in,

Question 1: What does it mean to misclassify a worker and how does it happen?

 

Attorney Answer – Question 1:

Hello Alexis.

Employee misclassification is the practice of treating workers as independent contractors, rather than employees.

If you recall from our podcast a few weeks ago where we discussed the tax implications for gig workers, I stated that employers classify workers based on their degree of control and independence in the relationship, using three main categories:

  • Behavioral control
  • Financial control
  • Relationship type

Worker misclassification can be unintentional, but sometimes employers are incentivized to misclassify workers in an attempt to cut costs. When workers are classified as independent contractors, employers avoid complying with payroll withholding and reporting laws; they avoid paying FICA taxes; and they avoid covering the workers under workers compensation and unemployment insurance programs.  All such avoidance is in violation of federal and state tax and labor laws.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

That leads me right into my next question –

Question 2: What are the consequences for employers if a worker is misclassified?

 

Attorney Answer – Question 2:

That’s a great question.

Ultimately, it is the employer who is responsible for correctly classifying workers, so misclassification can lead to a variety of penalties and liabilities for employers.

State Consequences

Within the state of Texas, employers are subject to the Texas Unemployment Compensation Act (TUCA) and are liable to pay unemployment taxes for employees. Misclassification can subject employers to fines and increased taxes and interest charges.

  • If the employer is operating under a government contract, a fine of $200 per worker is assessed for each misclassified worker.

Federal Consequences

Federally, employers are subject to the Fair Labor Standards Act (FLSA) which mandates minimum wage and overtime pay in the United States. Criminal penalties and liability for back wages may be levied against employers and executives who violate this law (whether willfully or not).

There are also federal tax consequences for misclassification. If it is determined that the employee was in fact misclassified, the IRS may require the employer to pay the employer’s share of the FICA tax for the period of misclassification.

On top of this, the employer may also be required to pay the employee’s share of the FICA tax, FUTA tax, and income tax.

  • This is significant because the employer is now having to pay 100% of the payroll tax associated with having an employee rather than splitting that cost with the employee.

If the IRS determines that an employer willfully misclassified their workers, penalties are even greater.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Wow, these are serious penalties.

Question 3: How can employers avoid misclassifying workers? Is there any relief for employers who do misclassify employees?

 

Attorney Answer – Question 3:

Form SS-8

Form SS-8 is the first step to avoid worker misclassification.

If an employer is having trouble determining worker status, or if an employee does not agree with how their employer has classified them, Form SS-8 can be filed with the Internal Revenue Service. Once filed, the IRS will make the ultimate determination on how to classify the worker in question.

  • If the IRS believes an employer has misclassified an employee, employers may be responsible for back-pay.

Section 530 Relief

The IRS has also provided another avenue of relief with Section 530 of the Revenue Act. Section 530 acts as a safe harbor provision, and terminates an employer’s employment tax liability for misclassified workers if three conditions are met:

  1. Reporting consistency;
    1. Employers must have timely filed all required returns consistent with their treatment of the worker as a non-employee. (For example, if the employer claims the worker is an independent contractor, Form 1099 must have been filed for all the taxable years at issue).
    2. If no information return requirement exists for a particular tax period, relief will not be denied on the basis that the return was not filed.
  2. Substantive consistency;
    1. If the employer or predecessor treated the worker, or any worker holding a substantially similar position as an employee at any time after December 31, 1977, the employer will not be eligible for relief from penalties associated with misclassification of workers.
    2. The IRS determines whether to grant relief for misclassification of workers based on all the facts and circumstances. The Service reviews the day-to-day services performed by the worker and compares the job functions performed to those performed by other workers properly classified as employees. The mere fact of similar job titles or categories alone are not sufficient to doom the employer’s request for penalty relief.
  3. Reasonable basis.
    1. The employer must have reasonably relied on one of the following three “safe harbors”: 1) prior audit; 2) judicial precedent; or 3) industry practice.
    2. Employer must have relied on the alleged authority at the time the employment decisions were being made for the periods at issue.

Despite Section 530 being available, few employers actually qualify for relief because they are unable to provide a reasonable basis for misclassifying the employee.

  • Employers who do not qualify for Section 530 relief will be assessed employment taxes (and even trust fund recovery penalties if necessary).

Classification Settlement Program (CSP)

For employers who are under examination but do not qualify for Section 530 relief, they may seek relief under the Classification Settlement Program (CSP). The CSP allows employers to work with IRS examiners and negotiate an agreement to lower their employment tax burden.

  • To qualify for CSP, employers must have reporting consistency. That means that the employer must have timely filed Form 1099 for workers classified as independent contractors.
  • In order for an employer to obtain relief under CSP, the employer must receive a CSP offer from the IRS and agree to prospectively reclassify workers as employees.

Voluntary Classification Settlement Program (VCSP)

The last option available for employers for relief from penalties associated with misclassifying its workers is the Voluntary Classification Settlement Program (VCSP). The VCSP allows employers to voluntarily reclassify workers for future tax periods with limited federal employment tax liability for past non-employee treatment.

  • To qualify for the VCSP, employers must have reporting consistency and cannot be under IRS audit examination.

 

Alexis, to summarize here:

There could be many reasons why employers misclassify workers; it is not always intentional.

However, misclassification of workers is not a victimless infraction or failure to comply with federal and state laws:

  • The misclassified workers are harmed because they are paying self-employment taxes when they should not be paying them. In the long-term, misclassified workers are harmed when they retire and beginning to receive social security benefits since their social security wages are likely understated.
  • The integrity of the overall U.S. tax system is harmed because often times when workers are misclassified the correct amount of tax is not paid; that is, neither the employer nor the worker pay the income taxes which are required to be withheld from employee’s paychecks.
  • The industry and the U.S. economy are harmed when workers are misclassified because unfair advantage can be achieved by those employers who are misclassifying their workers.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain what it means to misclassify workers, the penalties in place to prevent misclassification, and the available relief for employers who realize they have misclassified their workers. Misclassification of workers as independent contractors when they should be classified as employees is clearly not victimless!

It seems like the take away here is that employers need to be careful and mindful when classifying their workers to avoid all the possible consequences resulting from misclassifying their workforce as independent contractors when they should be classified as employees.

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “Misclassifying Gig Workers.”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

EPISODE 1: Starting your first business in Texas | Legal Thoughts

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published August 08, 2022

Starting your first business in Texas

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Johana Powell, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Starting your first business in Texas”. You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

TRANSCRIPT:
ATTORNEY: Coleman Jackson
LEGAL THOUGHTS
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, Gladys Marcos – Immigration Legal Assistant, and Johana Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: “Starting your first business in Texas.”

This is a series of podcasts about how to start your first business in Texas, and this is the first episode.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Hi everyone, my name is Johana Powell and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this interesting topic: “Starting your first business in Texas.”

Let’s jump right into this!

Question 1: Attorney would be business entrepreneurs have the resources to invest, want to invest and want to start their own businesses in Texas, but have lots and lots of questions about how to start a business in Texas.

What do you think about this Attorney?

Attorney Answer – Question 1:

Good afternoon, Johana.

Businesses in Texas can operate in several different entity structures, such as, Sole Proprietorship, General Partnership, Limited Partnership, Limited Liability Company, and Corporation.

The choice of entity selection involves a number of legal and operational concerns and should be made in consultation with a lawyer, accountant, and possibly an insurance agent and banker depending upon the type of activities that is intended to be conducted in the state of Texas.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Question 2: Attorney what types of legal and operational concerns are you talking about?

Attorney Answer – Question 2:

Johana, that is an excellent continuation question because it allows me to expand on my answer and explain why counsel and professional advice is so important when starting a business in Texas.

  1. Organizers intending to start businesses in Texas must consider the following legal and operational factors;
  2. The federal, state and local business tax structure in the State of Texas (Texas does not have income taxes, but does have sales taxes, property taxes and franchise taxes);
  3. The ease of formation and the startup cost of starting a business in the State;
  4. The accounting and operational requirements for operating a business in the State (The Texas Tax Code requires all businesses operating in the state to keep contemporaneous books and records, to maintain them for 4 years and make them available for inspection and audit examination at the request of the Texas Comptroller of Public Accounts);
  5. The rules and regulations governing the term of operations and rules governing winding down operations within the State (The Texas Business Organization Code governs business structuring matters within the State);
  6. The personal liability concerns for operating a business in the State;
  7. The special requirements, such as, licensing requirements for operating certain types of businesses within the State; and
  8. The unique requirements that might apply to government contractors if the business intends to sale goods and services to the federal, state or local government or to government agencies.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Attorney my next question is what happens if a business entrepreneur already has a business running but no paperwork filed with the State?

Attorney Answer – Question 3:

Johana that is a very complex question because it depends upon whether the business is structured outside of our state and is coming into Texas to do business or whether the business started in Texas but simply did not file any documents with the Secretary of State.  Let me first point out that out of state businesses doing business in Texas must register with the Secretary of State’s Office.  Let me also point out that the default form of business entity is a sole proprietorship when there is only one owner; and, when there are two or more owners; the default entity is a general partnership.  I will not address the various federal tax elections that might be available for businesses.  Let’s leave that discussion to another episode of “Starting Your First Business in Texas.”  Those starting or thinking about starting businesses in Texas should consult with legal counsel to avoid making legal mistakes when starting their first business enterprise in Texas.  Business structuring in Texas is a complicated legal issue which could expose those operating businesses within Texas without following the rules to serious civil and even criminal consequences.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Oh I see; it sounds like you are saying that a lot of complex business and tax laws are at play when starting a business in Texas.  My next question is this one:

Question 4: What is the difference and the advantages between all the business structures that you mentioned previously?

Attorney Answer – Question 4:

The main differences in the business structures that I mentioned earlier in our discussions in this ‘episode one’ on the topic “Starting Your First Business In Texas” are the liability and the tax concerns. Regarding the liability concerns; in a sole proprietorship and a partnership which are structures that are not incorporated, the owners of these two entity types do not enjoy liability protection for the acts of the business entity.  What I mean by that is that the owners’ personal assets are exposed to the liabilities incurred in the business.  As for the liability concerns for owners of corporations and limited liability companies, the owners of those type business structures are limited.  What I mean by that is that the owners are not personally liable for the debts of the business entity, unless they personally guarantee those business debts.  However, a general partner in a Limited Liability Partnership is personally liable for the debts of the limited partnership whether they guarantee the business debts or not.  In the Limited Partnership only limited partners enjoy liability protection.
Now with respect to the tax differences between these various business entities we are discussing here today, generally it is more favorable to structure a business as a Limited Liability Company or corporation.

Let me point out that non-profit businesses must register as such in the State and with the U.S. Treasury and meet state and federal tax requirements to be recognized as non-profit entities in this State and for federal tax purposes; otherwise, a business cannot operate as a non-profit entity in the State of Texas.

Johana this is an extremely complex question as to what constitutes advantages or disadvantages between the choice of entity selection.  Determining what type of business structure best fits any particular entrepreneur’s goals and objectives requires a conversation with a lawyer.  Many businesses law, contract law and tax law questions need to be discussed when determining what entity fits best to achieve the goals of the new business owner.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Question 5: When a business entrepreneur is ready to do the paperwork what is the first thing they have to do?

Attorney Answer – Question 5:

It depends upon what type of business they decide to form.  Remember a sole proprietorship and general partnership can for formed in Texas without filing any paperwork with the Secretary of State’s Office.  For now Johana, let’s just leave any discussion concerning operating a business in Texas under an assumed name for another episode in this series.

The organizer of any business entity in Texas must first check on name availability with the Secretary of State’s office (this is a must first step with all the business entity types that we have discussed today because you cannot infringe on the trade marks or rights of other businesses in Texas by using a name that creates confusion in the market place.)  For those types of business entities who must file organizational papers with the Secretary of State, for example, limited liability company, and corporation to name a couple; the organizer must file organizational documents compliant with the Texas Business Organization Code.  The business should request an Employer Identification Number from the U.S. Treasury if they intend to hire employees and register with the Texas Workforce Commission, and obtain a Texas Sales Tax Permit if the Texas Tax Code requires it. The Comptroller is notified whenever a business files organizational documents with the Secretary of State’s Office.  Franchise tax reports must be filed for all businesses who are required to file organizational documents.  Johana again we don’t want to make this podcast episode too long; we like to keep our podcast to about 20 minutes each; but we can discuss all of these individual topics in separate bite-size episodes so that our audience and understand these things.

Let me clarify that there are different requirements for each structure of business and our listener’s should subscribe to our Legal Thoughts Podcast if they are interested in this topic or anything dealing with international, federal and state taxation, contracts, litigation or immigration legal matters.  Legal  Thoughts Podcast is published bi-weekly on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcasts.

INTERVIEWER: Johana Powell, Tax Legal Assistant. Wrap-Up

Attorney, thank you for siting with me today to explain how to prepare in the journey of owning your first business.

TAKEAWAY: It seems like the overall idea here is that selecting the best entity structure to conduct a business in Texas is complex and has many tax, operational and legal issues that entrepreneurs starting a business in Texas should consider and discuss with their legal counsel prior to investing a dollar.  It is kind of like plan your trip before you start driving; otherwise, you might be delayed getting to your destination and possibly not arriving there at all.

I am glad this topic “Starting a Business in Texas” is going to be a series of podcast where we will discuss other aspects to starting a Texas businesses.  That is super Attorney!

  • Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Everybody take care!  And come back in about two weeks, for more taxation, contracts, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.
  • English callers: 214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “Starting your first business in Texas.”  Remember this is the first episode of Starting Your First Business in Texas.

If you want to see or hear more taxation, contract litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.