It may be a great time to start a business, but there are still many difficulties to overcome, not the least of which is finding financing. Many small business startups are going back to the tried-and-true method of finding money...using their own savings. A recent Wall Street Journal article cited some 
Federal Reserve data that substantiates this trend:
Tuesday, May 3, 2011
Raiding the Piggybank to Start a Business
Monday Map: State Cigarette Excise Tax Rates
Monday Map: State Cigarette Excise Tax Rates
Two Upcoming Events on State Tax Overreaching
Indiana Approves Tax Changes, Including Corporate Tax Rate Reduction
Today's Monday map shows state cigarette excise tax rates, expressed as dollars per 20-pack.
Click on the image to view full-size.
Two Upcoming Events on State Tax Overreaching
States are increasingly reaching beyond their borders for tax revenue. Two panels coming up will discuss the topic:
On Monday, May 9, tax law experts Paul Frankel, Ron Jacobs, Stephen Kranz, Todd Lard, Art Rosen, and yours truly will describe what's going on and what to do about it. The event is a morning half-day conference (with breakfast) at the Mayflower Hotel; read more or register to attend.
On Wednesday, May 11, I'll be appearing on a panel on state corporate income taxes, hosted by the American Enterprise Institute (AEI). Also on the panel are Joe Crosby of the Council on State Taxation and Michael Mazerov of the Center on Budget and Policy Priorities. Alan Viard of AEI is moderating. More information here.
Indiana Approves Tax Changes, Including Corporate Tax Rate Reduction
Indiana's legislature adjourned Friday after approving a budget that now goes to Gov. Mitch Daniels (R). The $28 billion two-year budget includes a $1 billion surplus. Included in the budget and in other bills enacted this session are several tax provisions:
- Automatic Taxpayer Refund. When the state's rainy day reserves exceed 10% of budgeted spending (about $1.4 billion), the money will be split 50-50 between the teachers' pension stabilization fund and refunds to taxpayers via an income tax credit. (The threshold is unlikely to be reached during the next budget biennium.)
- Corporate Income Tax Reduction. From the current 8.5% rate, the rate will drop in steps to 6.5%, by ending a tax credit for the purchase of out-of-state municipal bonds. Indiana was the only state to offer the credit to all state bonds, not just its own. The rate reduction schedule:
- July 1, 2012: 8.0%
- July 1, 2013: 7.5%
- July 1, 2014: 7.0%
- July 1, 2015: 6.5%
- Ends net operating loss carrybacks after 2011.
- Modifies the tax on smokeless tobacco to be at a lower rate than the tax on cigarettes, better reflecting the risk associated with the product relative to cigarettes.
- Reduces unemployment insurance benefits by 25 percent to forestall a tax increase and begin repaying $2 billion in loans from the federal government.
- Establishes a commission to study the effectiveness of economic development tax credits and programs.
A Democratic proposal to suspend the state's gasoline tax and sales tax on gasoline during the summer months was not included.
Sunday, April 3, 2011
Getting the Most from Your Home Mortgage Interest Deduction
Many tax advisors say that one of the most common errors on tax returns is claiming more home mortgage interest deduction than is actually available.� Many homeowners believe that all interest paid on a home mortgage is deductible, but there are limits based on which property secures the debt and how you used the money.� Go to the original author's site::
Washington State Offers Amnesty for Business Taxes
Washington is offering a tax amnesty for business taxpayers who are behind in filing or paying a variety of sales taxes, business and occupation taxes, and lodging taxes and other taxes imposed on businesses. The amnesty ends on April 30th, 2011.
Go to the original author's site:
Before U.S. astronauts blast off on April 19 to dock with the International Space Station, they better set up tax withholding first.
New York's tax authorities, infamous for aggressively reaching beyond their borders for revenue, are demanding that astronauts pay income tax for the period of time that they will be over New York in orbit.
"Those astronauts on the space station orbit into New York territory 15 times a day, spending as much as 40 seconds in the state each time," the New York tax commissioner told the media. "They need to pay their fair share for the cost of providing New York services to them."
The astronauts could make use of a wide variety of state services, he clarified, such as police protection, fire prevention, or even admiring publicly-financed landmarks visible from space.
There is no record of an astronaut making use of such New York services.
The Multigalactic Tax Commission (MTC) backed New York's arguments.
"This is about state sovereignty," said an MTC representative, Montana's revenue director. "We can't have the federal government or whoever telling states what they can and can't tax. We're in a fiscal crisis, after all."
Happy April Fools Day!
Thursday, March 3, 2011
IRS to Work with States to Reduce Erroneous EITC Payments
The IRS is one of the more maligned government agencies in the country, and while there isn't much sympathy for the IRS among taxpayers or lawmakers, the agency is really just carrying out the demands of Congress. And those demands are getting harder and harder to fulfill. As the National Taxpayer Advocate, Nina Olsen, pointed out in her latest report to Congress "the IRS no longer is just a revenue collection agency but is also a benefits administrator."
A perfect example of this is the Earned Income Tax Credit (EITC). The EITC is a tax credit available to low- and moderate-income working individuals and families. It is one of the federal government's largest anti-poverty programs, paying out $55 billion in 2009. The value of the credit depends on, among other things, a taxpayer's income level and number of children. This sounds simple enough, but improper EITC payments, defined as either over-payments or under-payments, are a big problem. Verifying income, family, age, and household eligibility requirements for the 25 million EITC recipients is a difficult and time consuming task even for an organization designed to handle the task, which the IRS is not. The improper payment rate for the EITC was estimated at somewhere between 23% and 28% in a recent report from the Treasury Inspector General for Tax Administration, costing the government around $12 billion annually.
But the President's Office of Management and Budget (OMB) has a proposal that it thinks will help bring down the error rate. They propose a pilot program to cross-check federal EITC information with databases linked to state benefits programs, such as Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and state tax credit programs. In this way they hope gather relevant information that will help reduce erroneous payments to those who are ineligible and also identify those who are eligible but currently not receiving the EITC. The pilot program, estimated to cost between $300,000 and $550,000 per state, will initially only include a few states in order to assess its potential. According to the proposal,
[O]n average a one percent reduction in the improper EITC payments to individuals in one State equates to $2.4 million annually. Therefore, the pilot has the potential to save significant amounts if it indicates that State data can improve the accuracy of EITC claims even marginally. [emphasis original]
IRS to Work with States to Reduce Erroneous EITC Payments
The IRS is one of the more maligned government agencies in the country, and while there isn't much sympathy for the IRS among taxpayers or lawmakers, the agency is really just carrying out the demands of Congress. And those demands are getting harder and harder to fulfill. As the National Taxpayer Advocate, Nina Olsen, pointed out in her latest report to Congress "the IRS no longer is just a revenue collection agency but is also a benefits administrator."
A perfect example of this is the Earned Income Tax Credit (EITC). The EITC is a tax credit available to low- and moderate-income working individuals and families. It is one of the federal government's largest anti-poverty programs, paying out $55 billion in 2009. The value of the credit depends on, among other things, a taxpayer's income level and number of children. This sounds simple enough, but improper EITC payments, defined as either over-payments or under-payments, are a big problem. Verifying income, family, age, and household eligibility requirements for the 25 million EITC recipients is a difficult and time consuming task even for an organization designed to handle the task, which the IRS is not. The improper payment rate for the EITC was estimated at somewhere between 23% and 28% in a recent report from the Treasury Inspector General for Tax Administration, costing the government around $12 billion annually.
But the President's Office of Management and Budget (OMB) has a proposal that it thinks will help bring down the error rate. They propose a pilot program to cross-check federal EITC information with databases linked to state benefits programs, such as Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and state tax credit programs. In this way they hope gather relevant information that will help reduce erroneous payments to those who are ineligible and also identify those who are eligible but currently not receiving the EITC. The pilot program, estimated to cost between $300,000 and $550,000 per state, will initially only include a few states in order to assess its potential. According to the proposal,
[O]n average a one percent reduction in the improper EITC payments to individuals in one State equates to $2.4 million annually. Therefore, the pilot has the potential to save significant amounts if it indicates that State data can improve the accuracy of EITC claims even marginally. [emphasis original]
Montana Governor Brian Schweitzer (D) delivered his State of the State Speech on January 26, in which he praised his state's efforts to keep taxes low in order to foster business development in his state. Beshear noted that "the Tax Foundation has rated us the sixth most business friendly tax state."
Beshear argued that low taxes, fiscal discipline, and a well-educated workforce led to a 65% increase in Montana's Gross Domestic Product during the past decade.
If you formed a corporation in a previous year and you have decided you want to elect S Corporation status for 2011, you must do so no later than two months and 15 days after the beginning of the tax year (that's March 15).
Vermont state legislators affiliated with the Progressive Party last week introduced a bill to raise the state's top two income tax rates, with the highest to be 10.45% on income over $373,650 (up from 8.95%). This would give Vermont the third highest top state income tax rate in the country. A Progressive Party release quotes one of the sponsors:
"People have received significant tax cuts on the federal level," Pollina said. "We’re not increasing taxes. We’re asking the wealthy to take slightly less of the Bush tax cuts."
The bill will be introduced just one day before the final cutoff for new legislation.
Pollina described the increase as "slight." Wealthy Vermonters will still be able to buy yachts, he said. "It’s not a broad-based tax," Pollina said.
The current perception already is that high-income Vermonters shoulder more than their fair share of the tax burden. (The recent Vermont Tax Reform Commission report sought to address this perception while maintaining progressivity; presentation version here (PDF).)
About half of high-income earners are in that category for just one year and another quarter for just two or three years, rather than the lifelong idle rich that Sen. Pollina seems to envision. Tax flight from tax increases is modest but exists, although the bigger problem is signalling that job-creating investors are to be punished, leading to them not to show up in the first place. There are also equity and sustainability concerns with funding broadly-available state services through a tax on a very small group of people.
Gov. Peter Shumlin (D) has already dismissed such a proposed increase (subscription req'd):
He said at a February 23 news conference that high-income Vermonters are taxed enough.[...]
"Anyone that tells me that we are not close to the precipice in terms of what we can ask Vermonters to pay in income tax isn't really looking at the facts," Shumlin said. "I can introduce you to many of my neighbors who no longer are Vermont residents. There is a point where we lose more than we gain, and I think we're there."
Thursday, February 3, 2011
Where to Find Tax Forms
Where to Find Tax Forms
IRS Launches Smartphone App
South Dakota Governor Praises Tax Foundation Ranking, Seeks More Control Over Tax Credits
Federal Judge Issues Injunction Against Colorado "Amazon Tax"
The IRS has stopped mailing out tax booklets and forms. You can download the forms, instructions and various publications directly from the IRS.gov Web site. The IRS also has recently re-designed their forms and publications page. In the redesign, the most common forms and instructions have been placed near the top of the page, making it easier for taxpayers to find and download the files they need. The IRS has also redesigned their archive page for tax forms from previous years. I've had trouble finding specific files using this page, and I much prefer utilizing this page that organizes forms by year.
...IRS Launches Smartphone App
People can now check the status of their federal tax refund, not just online, but also using their smartphone. The Internal Revenue Service launched the IRS2Go smartphone application, which is currently available for Android-based mobiles and Apple's iPhone.
...South Dakota Governor Praises Tax Foundation Ranking, Seeks More Control Over Tax Credits
South Dakota Governor Dennis Daugaard (R) delivered his State of the State address on January 11, in which he called for extension of a half-cent increase to the tourism tax, which would otherwise revert to 1% on June 30, 2011. The tourism tax, imposed on everything from campgrounds to carnival rides (click here for a complete list), brought in $8.4 million in revenue in fiscal year 2011, of which $1.8 million (2/3 of the ½% increase) went to the South Dakota Department of Tourism, to promote tourism.
Daugaard also spoke proudly about "South Dakota having the lowest per capita tax burden in the nation," as well as the state's top ranking in our State Business Tax Climate Index.
Governor Daugaard also called for increasing the size of the "Revolving Economic Development Initiative" (REDI) Fund, and limiting tax breaks from the Large Project Refund Program (LPRP) to projects that would not happen otherwise. Of course, that's hard to know in advance, and South Dakota has a pretty good business climate that makes it unlikely that it's attracting much additional business (or at least, desirable business) with some grants or credits.
Rather than reforming the program to give Governor Daugaard more power in selecting which companies are "worthy" of tax breaks, the legislature should consider scrapping the program altogether. The Governor is probably right that South Dakota is awarding tax credits for behavior that would have happened anyways, but that's a flaw central to the REDI and LPRP funds.
Federal Judge Issues Injunction Against Colorado "Amazon Tax"
Colorado legislators in 2010 recognized that New York-style "Amazon taxes"-claiming that Amazon.com and other out-of-state businesses are physically present in the state if they have relationships with in-state independent affiliates who refer customers-don't raise revenue, lead to lots of constitutional litigation, and signal business unfriendliness. Contrary to claims that they create a level playing field with brick-and-mortar businesses, the result sought would be brick-and-mortar businesses tracking and collecting one sales tax while online businesses track and collect 8,000+.
So rather than go that route, Colorado adopted a disclosure-focused requirement, a second generation of "Amazon tax." All online retailers are found to be present in Colorado, but are "only" obliged to disclose to customers that they need to pay tax on their purchases. This disclosure, however, requires analysis of the base and computation of the rate in each taxing district (8,000+ nationwide, many local ones in Colorado), can't be sent with the shipment, must be sent by U.S. mail, and all purchases must be disclosed to the Department of Revenue. It's a regulatory scheme so complicated and burdensome that its purpose is to force Amazon to just collect the tax itself.
On January 26, a federal judge in Colorado enjoined enforcement of the Colorado law, in a suit brought by the Direct Marketing Association. Judge Robert E. Blackburn wrote that "the plaintiff has shown a substantial likelihood that it will succeed in showing that the act and the regulations are discriminatory because, in practical effect, they impose a burden on interstate commerce that is not imposed on in-state commerce." Judge Blackburn's ruling follows a ruling against a similar North Carolina regulation.
So far this year, quite a few states are considering bills to adopt New York-style taxes (which also exist in North Carolina and Rhode Island). This has surprised me, since they haven't worked anywhere and indeed have done significant harm. Illinois Gov. Pat Quinn has one on his desk he is mulling, and bills have been introduced in Arizona (H.B. 2551), Hawaii (H.B. 1183), Mississippi (H.B. 363), and New Mexico (H.B. 95 and 102), with others rumored in California and Connecticut. In Rhode Island, H.B. 5115 would repeal that state's "Amazon tax."
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