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IRS Announces 2010 Standard Mileage Rates

sherayzenlaw — Sun, 17 Jan 2010 16:09:17 +0000

The Internal Revenue Service today issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car will be:

50 cents per mile for business miles driven
16.5 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

Remember, you may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, you cannot use the business standard mileage rate for any vehicle used for hire or for more than four vehicles used simultaneously.

Also note that you always have the option of calculating the actual costs of using your vehicle rather than using the standard mileage rates.

This article was written by Sherayzen Law Office, a Minneapolis law firm. If you are looking for a business lawyers, contract lawyer, and tax lawyer in Minneapolis, visit our website www.sherayzenlaw.com

Report on Foreign Bank and Financial Accounts (FBAR): General Requirements

sherayzenlaw — Sun, 17 Jan 2010 16:02:54 +0000

Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (the “FBAR”) with the U.S. Department of Treasury if two conditions apply.

The first condition is that the U.S. person must have either a financial interest in or signature authority (or other comparable authority)over one or more financial accounts in a foreign country. Several clarifications are necessary in order to understand the applicability of this first condition. First, for the purposes of the FBAR, the definition of a “U.S. person” includes U.S. citizens, U.S. residents, and persons in, and doing business in, the United States. “Person” is defined to include not only individuals, but also all forms of business entities, trusts, and estates.

Second, the term “financial account” itself is defined fairly broadly and includes: bank accounts (saving and checking), mutual funds, brokerage accounts, securities derivatives accounts, accounts where the assets are held in a commingled fund and the account owner holds an equity interest in the fund, and other similar types of financial accounts. A financial account is considered to be foreign if it is located outside of the United States and its territories (Northern Mariana Islands, American Samoa, Guam, Puerto Rico, U.S. Virgin Islands, and Trust Territories of the Pacific Islands).

Third, the term “financial interest” is defined as account for which the U.S. person is the owner of record or has legal title, whether the account is maintained for his own benefit or for the benefit of others, including non U.S. persons. Even where the owner of record or holder of legal title is a person acting as an agent, nominee, or in some other capacity on behalf of a U.S. person, the financial interest in the account exists and the agent may need to file the FBAR as well. Note, however, that the agent may need not file the FBAR if he is not a U.S. person. Furthermore, the definition of a financial interest in an account encompasses a corporation in which a U.S. person directly or indirectly owns more than 50 percent of the total value of the shares of stock.

It is important to understand that a U.S. person who has no financial interest in a foreign account, but retains a signature authority (or other comparable authority) may still be required to file the FBAR. A U.S. person has account signature authority if that person can control the disposition of money or other property in the account by delivery of a document containing his signature to the bank or other person with whom the account is maintained.

The second condition for filing the FBAR is that the aggregate value of all of these foreign financial accounts exceeds $10,000 at any time during the calendar year. Notice the word “aggregate” – this means that if, for example, a person has one foreign bank account of $6,000 and another of $5,000, then he still needs to file the FBAR with the U.S. Department of Treasury, because the aggregate amount of both accounts exceeds the required minimum of $10,000.

If a person is required to file the FBAR and fails to do so, it is still generally recommended that he files a delinquent FBAR, because, if the Internal Revenue Service (IRS) discovers this failure earlier, severe civil and criminal penalties may be imposed. Sherayzen Law Office can help you deal with this difficult situation and make sure that you fully comply with the U.S. tax laws.

Significance of Income Source Rules in International Tax Law

sherayzenlaw — Sun, 17 Jan 2010 15:47:51 +0000

When dealing with the international transactions, the United States tax law usually divides income into two broad categories: foreign source income and the U.S. source income. The determination of whether the income is foreign or U.S. in origin depends on a set of rules – the source-of-income rules – created by Congress, elaborated by the U.S. Treasury regulations, refined in courts, and further modified by the international treaties. While jurisdictional in nature, the income source rules are fundamentally and critically important to the understanding and operation of international transactions, primarily because these rules generate real operational consequences that affect a variety of substantive U.S. tax provisions. For the purposes of this essay, these consequences may be classified according to the grouping of the affected taxpayers.

The first set of such taxpayers are U.S. citizens, residents and domestic corporations subject to foreign tax on their income. The income source rules are crucial for these taxpayers because the U.S. foreign tax credit is available only if the foreign taxes are paid on the foreign source income. Hence, foreign taxes paid on the U.S. source income are not available to offset U.S. income tax liability. For example, suppose that a U.S. corporation earns income in the United Kingdom, which under the U.S. tax rules and relevant treaties is considered to be U.S. source income. If the U.K. authorities tax this income, the U.S. corporation will not be able to credit these taxes against the U.S. tax liability. Thus, the unfortunate result in this situation is double-taxation of the same income (note, however, that a deduction may be available to the U.S. corporation).

The other set of affected taxpayers is comprised of the nonresident aliens and foreign corporations. For this group, the impact of income source rules is two-fold. First, with respect to the business income, only U.S. source income may be regarded as effectively connected income and subject to the U.S. taxation. Hence, if the income is not a U.S. source income, then it cannot be considered as effectively connected income, thereby avoiding taxation by the U.S. government, unless the exception under I.R.C. §871(c)(4) applies. Under this exception, where certain types of income (such as dividends, interest, rents, royalties, sale of personal property, et cetera) are attributed to the nonresident alien’s (or foreign corporation’s) U.S. office or other fixed place of business, the income is regarded as effectively connected income and may be subject to the U.S. taxation.

Second, in case of non-business (usually, investment) income, the 30 percent withholding tax may be imposed only on U.S. source income. If, however, the income is considered by the U.S. tax authorities to be foreign source income, then no such tax may be imposed. For example, if a French investor receives interest that is deemed not to be U.S. source income, then the withholding tax will not be imposed.

Thus, based on the analysis above, the enormous importance of the income source rules in structuring international transactions becomes apparent. Obviously, for the purposes of illustrating their significance, I simplified this discussion into a simple domestic versus foreign dichotomy. The reality may quickly become much more complex when one takes into account various variations with respect to U.S. territories, certain types of income and/or transactions, politically-motivated exceptions regarding some foreign countries, and modification of the rules by bilateral tax treaties.

It should be remembered, however, that while they contain many traps and dangers for the unwary, the income source rules may provide excellent opportunities for beneficial and responsible tax planning.

Minnesota Unemployment Insurance: Independent Contractors in the Trucking Industry ~ By: Eugene Sherayzen, Sherayzen Law Office

sherayzenlaw — Sun, 17 Jan 2010 15:43:50 +0000

Standing at the crossroads of tax and employment law, the perennial problem of whether a worker is an employee or an independent contractor has been among the most important and common unemployment insurance tax issues. This problem is particularly complex in the trucking industry, due to the special conditions present in that industry’s working environment. In fact, it became so complicated that Minnesota legislators found it necessary to deal with it specifically in Minnesota Statute 268.035. In this article, I will rely on my own experience to explain the requirements of this legislation as it pertains to independent contractors in the trucking industry, and offer practical guidelines in certain common situations in that industry.

I will start by providing some background on the Minnesota Unemployment Insurance Program (hereinafter “UI”). Under Minnesota law, an individual or an organization that pays “covered wages” in the state of Minnesota is required to register with the UI, submit quarterly wage reports, and pay the appropriate unemployment insurance taxes as computed by the UI. Generally, “covered wages” are the compensation that a Minnesota employer pays to his employees for the work done mostly in Minnesota (there are some important exceptions regarding covered wages, especially with regard to the officers of business entities, religious services, and work performed out-of-state). Because covered wages are those paid to employees, we can deduce that if the compensation is paid to an independent contractor, then the business owner does not need to pay any UI taxes. This clarifies the reason why one of the most frequent battles fought between employers and the UI is the issue of proper classification of a worker as an employee or independent contractor.

To provide context for this classification, this article will examine who is considered an independent contractor in the trucking industry by the UI. Traditionally, under common law, five factors (still closely followed by the UI for the classification of many other categories of workers outside of the trucking industry) were used to determine whether a worker is an independent contractor: (1) the right to control the means and manner of performance; (2) the mode of payment; (3) furnishing of materials and tools; (4) control of premises where work is performed; and (5) the right of employer to hire and discharge. Wise v. Denesen Insulation Co., 387 N.W.2d 477, 479 (Minn. Ct. App. 1986). The presence of one factor is insufficient to find an employment relationship if such factor is countered by other factors. Stenvik v. Constant, 502 N.W.2d 416, 420-421 (Minn. Ct. App. 1993). While the common-law test is no longer the current law for trucking industry purposes, it is useful to mention these factors because they still form the basis for the current statutory requirements as spelled out in Minn. Stat. § 268.035.
Minn. Stat. § 268.035 subd. 25b regulates the issue of whether a worker in the trucking industry qualifies as an independent contractor. Minn. Stat. § 268.035 subd. 25b states:
“In the trucking industry, an owner operator of a vehicle that is licensed and registered as a truck, tractor, or truck tractor by a governmental motor vehicle regulatory agency is an independent contractor, and is not considered an employee, while performing services in the operation of the truck only if each of the following factors is present:

(1) the individual owns the equipment or holds it under a bona fide lease arrangement;
(2) the individual is responsible for the maintenance of the equipment;
(3) the individual bears the principal burdens of the operating costs, including fuel, repairs, supplies, vehicle insurance, and personal expenses while on the road;
(4) the individual is responsible for supplying the necessary personal services to operate the equipment;
(5) the individual’s compensation is based on factors related to the work performed, such as a percentage of any schedule of rates, and not on the basis of the hours or time expended; and
(6) the individual enters into a written contract that specifies the relationship to be that of an independent contractor and not that of an employee.”
Each of these six requirements must be met in order for a worker to be considered as an independent contractor. An analysis of the specific requirements follows below.
1) The individual owns the equipment or holds it under a bona fide lease arrangement.
This first requirement means that the employer has to show one of the following: a) the worker supplies his own equipment, or b) the worker entered into a bona fide lease with the employer or a third party. Usually, it is the second option that causes problems for the employer (especially if the employer is also a lessor), because the issue of whether a lease is bona fide depends mainly on the facts. There are two common scenarios, though, that I wish to share with the reader.

Scenario one: A worker rents all of his equipment from the employer, and pays the employer a nominal rental price of one dollar per month. When this case comes to a UI auditor, he will raise two issues immediately. First, the fact that the employer is also the lessor immediately invites greater scrutiny on whether this is a bona fide lease. The second, and much more significant, problem is the one-dollar rent. The UI is usually unwilling to consider a lease as bona fide if the rent is nominal.
Scenario two: A worker rents all of his equipment from the employer, and the corresponding rental payment results in a worker’s pay reduction (i.e. the employer deducts the rent payment from the worker’s paycheck). In general, the pay reduction as a rent payment is sufficient to satisfy the bona fide lease requirement, but the outcome again depends on the details. The employer must be prepared to show (i.e. his assertion must be supported by business records) that the deduction is real, consistent, and equivalent to the actual rent payment. When such a scenario arises, the business owner’s attorney should insist that the independent contractor sign the necessary documents to support his client’s assertion.

2) The individual is responsible for the maintenance of the equipment.
This requirement is fairly straightforward. Whether he owns or rents the equipment, the worker must be responsible for the maintenance of all trucking equipment (trucks, trailers, cargo chains, etc.). This requirement should be included in the “independent contractor” agreement between the worker and the employer. I have also found that often the best evidence of the worker’s responsibility for the maintenance of the equipment is a lawsuit initiated by the employer against any current or previous workers for damaging the equipment.

3) The individual bears the principal burdens of the operating costs, including fuel, repairs, supplies, vehicle insurance, and personal expenses while on the road.
This “principal burden” requirement can become very complicated on account of even the most minute of details. This is mainly because the real issue here (as in requirement two) is the first factor of the common law test – control over the means and manner of performance. To satisfy this standard, the worker should be required pay for the operating costs of the business such as fuel, repairs, and supplies.
The less obvious issues are exemplified by the following scenario: a worker bears the burden of the operating costs through a pay reduction. In general, this scenario could satisfy the “principal burden” requirement, but once again it is highly fact-dependent. Unlike the rent, the operating costs are not so easily calculated especially given the wild fluctuations in the price of oil and diesel that the reader has had an opportunity (or misfortune) to observe recently. It is tremendously difficult to properly reflect this calculation in the records. Yet, such failure to correlate the operating costs with the pay reduction is likely to result in the UI finding that the pay reduction is not related to the operating costs, and, therefore, the employer bears the principal burden of the operating costs. Another important factor is whether the worker is given a choice to pay the operating costs directly or through a pay reduction. Where such choice exists, the UI is more likely to consider the worker as an independent contractor since the worker seems to have more control over the manner of his performance.

4) The individual is responsible for supplying the necessary personal services to operate the equipment.
The usual problems associated with this requirement are the ones that are related to the control of the actual performance. The most common issues involve route and schedule control. The employer’s control over the manner of performance can be strong evidence in favor of finding an employment relationship. Note, however, that the employer’s control might be mitigated and even entirely disregarded if it corresponds to governmental regulations or common industry practices. I will deal with this issue again in more detail in connection with the next statutory requirement.

5) The individual’s compensation is based on factors related to the work performed, such as a percentage of any schedule of rates, and not on the basis of the hours or time expended.
Usually, this requirement is satisfied if the workers are paid per job, and not on an hourly basis. A business owner’s attorney should try to make sure that the workers are paid on a percentage basis if possible. The other common alternative, which is payment on a “per mile” basis, is fraught with danger. The most significant concern with this alternative is the “control over manner of performance” issue discussed in connection with requirement four. This is because the UI auditors might consider per mile payment as a disguised hourly payment.

The best remedy to this problem is to explain per mile payment basis as compliance with government regulations and common industry practices. For example, per mile payment might be based on the federal government’s calculation of mileage for interstate highways. This way, the payment is related to the job performed, but there is no control by the employer because the number of miles traveled is based on an objective (i.e. divorced from the actual number of miles traveled) government calculation which is a common practice in the trucking industry.

6) The individual enters into a written contract that specifies the relationship to be that of an independent contractor and not that of an employee.

This requirement must be strictly complied with. If there is no written contract between the worker and the business owner, the UI will consider the worker to be an employee. The contract should include at least the following two clauses: a) this is a relationship between an independent contractor and the business owner, and b) this is not an employee-employer relationship. If possible, an owner-operator addendum should be considered by the attorney, because it provides additional evidence of the existence of an independent contractor relationship.

An ambiguous or reckless choice of words in the contract can jeopardize the outcome of the case. The business owner’s attorney should be very careful about what he includes in the contract. Statements that are interpretative of control or of an employment relationship should be avoided. Clauses that include careless inaccuracies, such as “the contractor must obey” or “follow instructions”, need to be redrafted. If some control by the employer is required by state or federal regulations, the contract should so indicate.
Finally, the business owner’s attorney should advise his client that the contract is only as good as the parties’ compliance with it. The UI does not automatically accept that the contract accurately describes the parties’ performance, and, if necessary, it may choose to investigate whether the parties actually conform to the terms of their agreement. Even the best contract will not protect the employer where the parties’ conduct does not correspond to it.

These are, in essence, the current statutory requirements which may result in a finding an independent contractor relationship in the trucking industry. While I provided a number of practical comments on this issue, there are many more issues to consider with respect to Minn. Stat. § 268.035 subd. 25b. I hope that this article provides sufficient background for practicing attorneys to understand the basics of this area of law and to avoid the most common traps.

Reduction of Estimated Tax Payments under the American Recovery and Reinvestment Act of 2009 (ARRA)

sherayzenlaw — Sun, 17 Jan 2010 15:34:47 +0000

Prior to the ARRA, small businesses usually had to pay 110 percent of their previous year’s taxes in estimated taxes. The ARRA permits small businesses to reduce their estimated payments to 90 percent of the previous year’s taxes.

This article was written and published by Sherayzen Law Office, a Minneapolis law firm. If you are looking for a business lawyers, contract lawyer, estate planning lawyer and tax lawyer in Minneapolis, visit our website www.sherayzenlaw.com

Definition of Foreign Earned Income for the purposes of Foreign Income Exclusion under I.R.C. §911

sherayzenlaw — Sat, 19 Sep 2009 16:32:25 +0000

Under I.R.C. §911, if certain conditions are met, a qualified individual can exclude as much $91,400 (for tax year 2009) of foreign earned income from taxable gross income. Two questions arise: what is earned income, and when is such income considered to be foreign earned income?

Earned Income

Earned income usually means wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered.

The issue of earned income becomes complicated in a situation where a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors. Capital is a material income-producing factor if the operation of the business requires substantial inventories or substantial investments in plant, machinery, or other equipment. In this case, a reasonable allowance as compensation for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or business, shall be considered as earned income (I.R.C. §911(d)(2)(B)). This rule, however, would not apply where the capital is merely incidental to the production of income (see Rousku v. Commissioner (Tax. Ct.1971)).

In a situation where the services rendered abroad culminate in a product that is either sold or licensed, it is difficult to determine whether the proceeds are earned income. Usually, such issues are resolved on a case-by-case basis.

Foreign Earned Income

Earned income is usually considered as “foreign earned income” if it is attributable to services actually rendered by the taxpayer while oversees. The place at which the taxpayer receives the income is not relevant. For example, an employee working abroad for a U.S. employer does not lose the exclusions by having her compensation paid into a bank account in the United States. Note, however, that services rendered in anticipation of, or after the conclusion of an oversees assignment are not covered by the exclusion. I.R.C. §911(b)(1)(A) and §911(d)(2)

Foreign Income Exclusion article written and published by Sherayzen Law Office, a Minneapolis law firm. If you are looking for a business lawyers, contract lawyer, estate planning lawyer and tax lawyer in Minneapolis, visit our website www.sherayzenlaw.com

Understanding Foreign Income Exclusion under I.R.C. §911: General Information 0

sherayzenlaw — Sat, 12 Sep 2009 22:01:23 +0000

Under I.R.C. §911, a U.S. citizen or resident can elect to exclude as much as $91,400 (for tax year 2009) of foreign earned income and some or all foreign housing costs from taxable gross income if two conditions are met. First, the individual must satisfy either a foreign presence or bona fide residence test. Second, the individual’s tax home must be in a foreign country. The first requirement (foreign presence/bona fide residence test) is satisfied when: (i) the individual is a U.S. citizen or resident who is physically present in a foreign country for at least 330 full days during any 12 consecutive months, or (ii) the individual is a U.S. citizen who is a bona fide resident of a foreign country for an uninterrupted period that includes an entire tax year. The second requirement is satisfied if the individual’s tax home – i.e. main place of business, employment, or post of duty – is in a foreign country. Tax home generally means the place where the individual is permanently or indefinitely engaged to work as an employee or self-employed individual.