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Thread: taxes: how to handle living expenses while commuting

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    Veteran Member francesca's Avatar
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    Default taxes: how to handle living expenses while commuting

    I have always done my own taxes, but this will be the first year I have been travelling to work. I've read a bit here about which expenses can be deducted while travelling, but how about if I work EVERY DAY that I am out of town...including the day I travel?

    Also I maintain two homes...the one I live in one week per month (my primary residence for the past 3 years) and the one I stay in when I am out of state working the other three weeks. I have two leases and everything. Is my out-of-town rent deductible like a hotel? I started out staying in weekly hotels but I save half by renting. I stay less than one mile from my club. I signed my lease within a month of being hired. I go there ONLY to work...I never take a night off unless I am sick...I fly in and work the same night, and work every night for three weeks straight, then fly home for a week or so. I essentially work at this out-of-town club full-time and I commute. I will be doing this all year.

    Any thoughts as to how I should handle my travel and living expenses for my taxes next year?
    * FIND YOUR POWER ANIMAL

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    Banned Melonie's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    yes, incorporate, and fast ! I wish that you had asked this question before leasing the out-of-town apartment !

    Basically, your primary residence cannot be deducted as a business expense unless you actually work and earn money directly out of your residence (like a webcam or phone sex line or other genuine home business), which you do not. Even then the allowed home business expense deduction is partial. But that is only the tip of the proverbial iceberg. Just because you call the location you spend one week a month at your primary residence, and just because you think of the other location near the club you spend 3 weeks a month at as being an out-of-town business location, this does not mean that the IRS will see things from the your perspective !

    If you file your taxes as an independent contractor sole proprietor business, i.e. you're an "individual person" in the eyes of the IRS, then it becomes arguable which location is actually your primary residence now. If you spend more than half of your time at one location, the IRS can argue that it therefore has become your primary residence on that basis and is thus not deductible as a business expense. Since you don't work at the other location while you're there for one week a month, the IRS can also argue that it doesn't qualify as a business expense deduction either (i.e. they'll try to call it your "vacation home").

    Same principle would apply to trying to deduct your air travel. If the IRS successfully makes the case that your primary residence is now near the club based on greater than 50% occupancy, then your air travel to and from the other "vacation home" location is without a legitimate business purpose and therefore would not be deductible as a business expense (i.e. in the eyes of the IRS you would be taking 12 vacations per year, and vacation expenses are not deductible).

    By incorporating, and by placing the lease for the location near the club you work at in the name of the corporation while leaving the other location in your own name, you can make a clear distinction as to which location is used for business versus which location is your personal residence regardless of the relative amounts of time you spend at either location, and your corporation can take the business expense deductions for the business related location as well as for all related expenses i.e. electric, phone, insurance.

    As it is, if you were still paying extended stay hotel bills, the question of the legitimacy of the hotel bills and air travel as business expenses would not come up. However, by leasing an apartment instead of paying hotel bills, and by de-facto changing your primary residence as a result, you are actually risking paying out more money in income taxes due to lost business expense tax deductions than you are saving by leasing the apartment vs. staying in hotels !

    Incorporation for dancers usually involves more complexity and accounting/administrative costs than it's worth. However, in your particular case, incorporating would have major tax benefits due to the two residences and air travel between them, as well as offering a bunch of other benefits as well i.e. leasing a vehicle, providing health insurance for you which is 100% deductible etc. However, I'd really recommend first talking to an attorney or CPA who is well versed in the subject of setting up single owner corporations.

    I'd do this quickly though, because you may not be able to deduct any money you have spent so far this year on the location near the club, i.e. rent, electric, phone, insurance, or on your monthly airline tickets, and you may not be able to deduct future payments, until the name on the accounts can be changed so they can be paid for in the name of your corporation rather than by you personally. Also, if you spend 183 days or more in any one location this year before incorporating and getting the account names changed, you may have screwed yourself for the rest of the year as well.

    Since you're probably talking about a total of $15,000-$20,000 worth of business expense deductions in question, and potentially talking about an $8,000-$10,000 difference in the amount of income taxes and SE taxes you'll wind up paying vs. not paying this year as a result of those business expense deductions being considered legitimate, the IRS will definitely take a personal interest in your tax return ! Therefore make sure that the attorney or CPA that sets this corporation up does it right !

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    Banned Melonie's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    You WANT your primary residence to remain in Nevada, so that your apartment in Houston is the corporation's "work" location thus the expenses of maintaining that apartment and travel expenses to and from Houston are deductible business expenses. You really don't want to incorporate in the state where you are now working if you plan on trying to deduct the expenses of working and staying there or travelling from there to another location where you won't be working !

    If you already have a Nevada corporation, you don't need or want to form a new corporation in Texas. Simply use your existing Nevada corporation to pay for the Houston apartment and utilities and for your air fare. I trust that you already have a corporation credit card and a corporation checking account to make these payments with ? Maintain your legal residence in Nevada at all costs - be sure to register and vote in Nevada this coming November to reinforce your claim to Nevada residency even though you will be spending more than 183 days this year in Houston. Maintain your personal bank accounts in Nevada and do not open new personal accounts in Texas. If need be, your Nevada corporation can open a new corporate bank account with a Houston bank, but you don't want to open a personal account there as it would contradict the claim that you are a Nevada resident receiving Nevada income from your Nevada corporation.

    Then at the end of the year file a Nevada personal state tax return reporting payments you received from your Nevada corporation as "Nevada Income". Your corporate tax return will have to be filed with both Texas and Nevada and any other states where you work and will show the Texas income as well as payments made to you in Nevada. The whole idea here is that you are still a resident of Nevada, you work for your corporation which is based in Nevada, and your corporation sends you to out-of-state locations to work on "assignments". Thus your corporation can pay for and deduct the costs of setting you up with the necessities of working in out-of-state locations, as well of the travel expenses of sending you there on a monthly basis !

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    Default Re:taxes: how to handle living expenses while commuting

    A good primer that will give you a heads-up on incorporating....

    Own Your Own Company
    by Garrett Sutton, Ann Blackman



    enter: E3167322D9 for your 10% discount

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    Veteran Member francesca's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    Ok I misunderstood. And I'm still a little confused.

    If I'm claiming to be an "employee" of my corporation, being sent on out-of-town assignments, I obviously would be paid for my work. I will have to give myself a 1099. So will my corporation be paying income taxes on my income in Texas or will it be my own personal tax as reflected on my 1099? The corporation has to have income to write off the expenses...and I know that corporate tax rates are higher than personal.

    _____________

    As far as maintaining my Nevada residence, I am on the right track already, as I have been a Nevada resident nearly my whole life, I am registered to vote and haven't changed any of my bank accounts or anything else. I have a corporate bank account in Nevada and the only thing I have done is rented an apartment in Houston and worked there. My legal residence will not change.

    I will need to change my lease in Houston to be in my corporation's name, and pay the rent with the corporate checkbook. All the utilities are included so that's the only account I have to change.

    Should I also use my Visa debit card for my corporate account to pay for my plane tickets so it comes directly out of that account?
    * FIND YOUR POWER ANIMAL

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    Banned Melonie's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    The confusion comes from too much logical thinking and not enough convoluted IRS thinking.

    Everything that you say about your Nevada residence may be perfectly logical, however if you live in an apartment in Houston for more than 183 days in the same year as far as the IRS is concerned you have now moved to Houston. Therefore if you claim individual income from a Houston club and the IRS officially considers that you now live in Houston, there is no way that the IRS will buy a business expense deduction for a Houston apartment or for plane tickets FROM Houston to Nevada. The only way that these business expense deductions for a Houston apartment and air fare will be allowed is as business expense deductions to a Nevada corporation.

    You're correct that in order for the deductions to have value, the corporation needs to have income. The money earned in Houston clubs therefore needs to be corporate income. The corporation then pays business expenses out of that income, retains a small additional amount as corporate profit, and pays the rest to you.

    The trick here is that tax rates are progressive, meaning that double the income results in say 4 times the taxes. By being able to take the business expense deductions, and by retaining only a small extra amount as corporate profit, the corporation winds up reporting peanuts in income and paying peanuts in taxes. As far as your individual tax liability, the amount that the corporation pays you and therefore the amount that you must report as income already has all of the business expenses deducted off the top at the corporation level, and is much less than the amount which you earned in the clubs. Therefore your individual tax payment is much lower as well even though as an individual you don't have many deductions.

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    Veteran Member NVJosh's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    Francesca - Melonie's hit it squarely on the head with this one, including keeping Nevada residency. Even though you'll be a Nevada corporation, your income will be taxable in whatever state its earned, however all your travel from Nevada to those locations will be deductible.

    BTW, you will get a W-2 as an employee of your corporation, not a 1099. And corporation rates are not higher. The first $50,000 of corporate income is taxed at only 15%. However, for a lot of reasons you may want to be an S-Corporation where you will be taxed at your normal individual rates (although you will avoid self-employment tax on part of your income).

    Drop me an IM if you want. I'm a Nevada CPA and work in this arena a lot and can show you how to get this set up and a lot of other ways to make your corporation work for you.

    Oh...Melonie missed one thing...there is no Nevada personal income tax return. The Nevada Constitution does not permit a Nevada individual income tax. There is currently no Nevada corporate tax either, however from the various Nevada payroll tax forms, unemployment insurance and business license forms you will be able to show that you are being paid as a Nevada resident.

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    Veteran Member francesca's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    Ok, so the coorporation needs to earn just enough to deduct the business expenses. I kind of figured as much. So me, as an individual, will pay my regular tax rate on the difference between what the coorporation earned and the rest of what income I declare.

    My corporation is an S-Corporation. I've had it for many years and I've had a couple of business operate under it (I've never done the taxes for it though, obviously).

    Do I have to provide unemployment insurance for myself? What I was thinking was that I would be an independent contractor working for my coorporation, which is why I would get a 1099. Would that work? Can't a coorporation can hire a contractor and still write off travel expenses associated with sending that person on assignment?

    And does it make a difference if I pay for my plane fare out of my own personal account or the coorporation's account? In reality, if I was an employee (or contractor) and I paid my own plane fare, I would expect the corporation to reimburse me anyway.

    Thanks guys for all the info. Josh, are you in Vegas?
    * FIND YOUR POWER ANIMAL

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    Banned Melonie's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    And does it make a difference if I pay for my plane fare out of my own personal account or the coorporation's account? In reality, if I was an employee (or contractor) and I paid my own plane fare, I would expect the corporation to reimburse me anyway.
    This one gets dicey, since the corporation would then have to clearly differentiate money being paid to you as a salary/fee, and other money being paid to you to reimburse expenses. Also, depending on the mood of the IRS, they may try to tax you personally on the money you received from the corporation to reimburse expenses as if it were income unless you as an independent contractor or employee file expense reports or separate invoices to the corporation for those expenses and the corporation cuts you separate checks (major paperwork on both ends). Gray areas crop up because you have created a situation where the corporation is in fact paying a salary/fee/dividend to its sole owner. However, if the corporation pays for these expenses directly then that sort of potential argument never comes up and the corporation can avoid paying taxes on any of the money used to cover expenses.

    There are obviously a lot of little details involved, and I certainly don't know many particulars about Nevada corporate law. But I DO know that the "small" choices that you make at the beginning in regard to such things as who actually pays the Houston landlord and the airline, and whether your corporation pays you an employee salary vs contractor fee vs. a corporate dividend, make a huge difference later on. With tens of thousands at stake, it's worth consulting a pro.

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    Veteran Member NVJosh's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83222#msg83222 date=1078988921
    Ok I misunderstood. And I'm still a little confused.

    If I'm claiming to be an "employee" of my corporation, being sent on out-of-town assignments, I obviously would be paid for my work. I will have to give myself a 1099. So will my corporation be paying income taxes on my income in Texas or will it be my own personal tax as reflected on my 1099?
    As an officer or director of the corporation, you are a defacto employee under federal law. Therefore, you're not eligible to get a 1099 from the corporation, you need to get a W-2. You'll pay taxes in the various states where you, as an employee, earn wages, and the corporation will do the same (more on this in a sec).

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83222#msg83222 date=1078988921
    The corporation has to have income to write off the expenses...and I know that corporate tax rates are higher than personal.
    Essentially, everything you earn will become corporate income. So if you go to a club and earn $500 on a night, that's really $500 of corporate income which is then paid out to you via salary. Its more or less that you, as an employee, are making cash collections of corporate income when you work.

    As stated earlier, corporate rates are often lower than individual rates. The first $50,000 of corporate net income is taxed at 15%. If a single individual has $50,000 of taxable income (I'm using the 2003 rates here), the first $7,000 is taxed at 10%, from $7,001 - $28,400 is taxed at 15% and from $28,401 is taxed at 25%. So, a corporation with $50,000 of net income pays $7,500 of tax, while an individual with $50,000 of taxable income pays $9,310 of tax.

    Corporate rates do get higher as income rises (to a point), however in lower brackets they are advantageous.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83222#msg83222 date=1078988921
    As far as maintaining my Nevada residence, I am on the right track already, as I have been a Nevada resident nearly my whole life, I am registered to vote and haven't changed any of my bank accounts or anything else. I have a corporate bank account in Nevada and the only thing I have done is rented an apartment in Houston and worked there. My legal residence will not change.
    That's all good and will help you in the long run.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83222#msg83222 date=1078988921
    I will need to change my lease in Houston to be in my corporation's name, and pay the rent with the corporate checkbook. All the utilities are included so that's the only account I have to change.
    If you have a W-9 on file with your Houston club, you may want to file a new one from the corporation. Technically, the club doesn't have to give the corporation a 1099, however what you don't want is a 1099 coming to you personally.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83222#msg83222 date=1078988921
    Should I also use my Visa debit card for my corporate account to pay for my plane tickets so it comes directly out of that account?
    That's fine, as long as you only use the debit card for corporate transactions. Ideally, you should have a card keyed to your corporate checking account. You will want your corporation to set up an expense reimbursement policy (There's a technical term which is escaping me at the moment) so that if its a personal Visa account, reimbursements to you will not be considered taxable income and so you will not have to file a 2106.

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    Veteran Member NVJosh's Avatar
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    Default Re:taxes: how to handle living expenses while commuting

    Sorry if I re-iterated some things in the previous post, I actually quoted the wrong one this morning (oops). I decided to leave it because there are some good general tips there.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83532#msg83532 date=1079081183
    Ok, so the coorporation needs to earn just enough to deduct the business expenses. I kind of figured as much. So me, as an individual, will pay my regular tax rate on the difference between what the coorporation earned and the rest of what income I declare.
    If you're an S-Corporation, it won't matter, because you'll be taxed on the income at your individual rate anyway. Actually, you'd want to minimize what you paid yourself as salary in this case because S-Corporation net income isn't subject to FICA. If you're a C-Corporation (which would mean revoking your S-election), as pointed out in the previous post there may be some advantages to paying corporate rates on some of the income. However, there's a lot of considerations that go into that decision, so I couldn't recommend one way or the other at that point.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83532#msg83532 date=1079081183
    My corporation is an S-Corporation. I've had it for many years and I've had a couple of business operate under it (I've never done the taxes for it though, obviously).
    Do you know if you're current with the Secretary of State? If you send me the corporate name, I can check to see its status.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83532#msg83532 date=1079081183
    Do I have to provide unemployment insurance for myself? What I was thinking was that I would be an independent contractor working for my coorporation, which is why I would get a 1099. Would that work? Can't a coorporation can hire a contractor and still write off travel expenses associated with sending that person on assignment?
    As discussed above, you're not allowed to be an indepdent contractor of a company for which you are an officer or director. You would have to pay state unemployment, and state payroll taxes. Both are fairly minor amounts if all is structured correctly. You'd also pay Federal unemployment.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83532#msg83532 date=1079081183
    And does it make a difference if I pay for my plane fare out of my own personal account or the coorporation's account? In reality, if I was an employee (or contractor) and I paid my own plane fare, I would expect the corporation to reimburse me anyway.
    Again, as mentioned above, you will need the business to set up an "accountable reimbursement plan" (that's the technical term I couldn't remember before) where you must report the expenses with backup (i.e., receipts and business purpose) to the corporation to be reimbursed. At that point its a business expense and not income to you.

    This also addresses the thong/makeup/hair issue. You'll want the business to make you have to meet certain requirements as a condition of employment. Amoung these requirements can be that you get your nails done weekly, get your hair cut monthly, etc. It will also say that the business will reimburse you out-of-pocket costs for these under the plan. As mentioned in another thread, the corporation will provide you your "uniform" which will include your thongs, bras, shoes, dresses, etc. which will serve to make them deductible, too.

    The whole goal of a corporation here is to make what would otherwise be non-deductible personal expenses into deductible business expenses. And, in your case, to solve the "two places or residence" issue. Heck, we can even work on making some of your groceries deductible.

    Quote Originally Posted by francesca link=board=6;threadid=7270;start=msg83532#msg83532 date=1079081183
    Thanks guys for all the info. Josh, are you in Vegas?
    Francesca - Yuppers. My office is in Green Valley. I also have an office up in Pahrump. You can IM me for details.

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