Orange County Accountant

I am completing a 3 month internship in Idaho, but will return to California upon completion. What is the best way to file taxes? Idaho’s state taxes are actually higher than Cali, so I would like to avoid them. Someone else mentioned they are just having their taxes withheld by their originating state, Is this possible? Of course, I would like to have the least taxes taken out, so if there is anyway I can pay only California taxes on the money I would love to know how?

I was a officer in a corporation. I never received any pay. When the corporation when bankrupt it owed sales tax and withholdong taxes. I had to pay these taxes out of my pocket. Are these taxes deductable from my federal taxes.

My fiance and I live in Nebraska, he works in Iowa. I have heard that he has to pay taxes in both states. Is this true? If so, will the credit issued for payment to one state equal the additional taxes paid to the other state? Will he wind up paying more combined taxes, than if we just lived in the same state he works in? We are not yet homeowners, but when we do buy, will the deduction for our mortgage interest in Nebraska be credited toward the taxes owed in Iowa?

The article written last month titled “Proper Delivery Outside of California Begins the “Use Tax” Exemption Process” explained the importance of, and how to, properly take delivery of an aircraft outside the state, which is the first step in the California sales and use tax exemption process.  If you didn’t get a chance to read that article you can contact Aero-tax Compliance Experts, LLC (ACE) for a copy or visit www.aero-tax.com.

Many aircraft owners and potential owners have contacted us for an explanation on California’s “first functional use” requirement.   We have learned that there is a lot of mis-information and confusion on this issue.  Our attempt is to clarify some of the confusion that exists and eliminate the mis-information with the “first functional use” requirement for the California use tax exemption process.

“First functional use” is a critical component of the California use tax exemption process.  California Sales and Use Tax Regulation 1620 defines first functional use as “use for which the property was designed.”  An aircraft is defined in Law section 6274 as “any contrivance designed for powered navigation in the air except a rocket or missile.”  Logically, one would conclude that first functional use of an aircraft is flight because aircraft are designed to fly; right?  Not necessarily.  In my experience with the sales and use tax law, one can not rely upon logic. 

The California State Board of Equalization (BOE) has effectively confused the term “for which the property was designed” with “how big it is,” or “how is it configured.”  I’ll explain; in May of 2002 a staff member of the BOE’s tax counsel (writer) drafted a memorandum to another staff member explaining to them the writer’s interpretation of first functional use.  Somehow, the writer deduced a formula, or justification, to distinguish between aircraft designed for personal purposes and aircraft designed for commercial purposes.  Simply put, the writer concluded in the memorandum that an aircraft with 6 or fewer seats was an aircraft designed for personal purposes, and an aircraft with 7 or more seats was designed for commercial purposes. 

To confuse the issue even further, the writer decided that all jet aircraft were designed for commercial purposes, and “personal” aircraft could be “configured” for commercial purposes.  Additionally, the writer added that it was possible for someone to justify a large jet as a personal use aircraft.

Now that the writer made a distinction between personal and commercial aircraft, the writer defined the “first functional use” for each.  Aircraft that are designed for personal purposes were first functionally used when flown, and aircraft designed for commercial purposes were first functionally used when flown with a passenger or cargo onboard.

We have researched and reviewed several thousand legal opinions and rulings from the BOE on this issue.  The BOE had interpreted first functional use as flight, up until this memorandum was drafted and distributed throughout the agency.  After the distribution its effect was immediate, and in some cases a retroactive application of the new formula.  During our research, we developed the industries most successful approach to complete the first functional use requirements pursuant to the current standards, and have projected other items that may be required in the future. 

As a standard practice, Aero-tax advises that the purchaser bring someone, to the out of state delivery location, to act as a true passenger (not a pilot, co-pilot, flight crew, CFI, etc.) onboard a flight (or two) outside of California before proceeding with their specific exemption.  In addition, this flight must begin in one state, country, territory, etc. (not California), and end in a separate state, country, territory, etc. (not California).  For example, this flight may depart from the out of state delivery location (Oregon), to another state (not within California or Oregon).  Depending on the “design/size” of the aircraft and for those who are claiming the commercial interstate or foreign commerce exemption, they must conduct business at the location they travel to.  In addition, documentation must be obtained to support the business purpose (i.e., meeting notes, invoices, proposals, etc.) of the flight.

After the first functional use flight has been made, and prior to departing that location, fuel must be purchased, ideally using a credit card.  This will generate a fuel receipt that will contain documentary evidence that the aircraft was at this location on a specific date.  Additionally, a statement will be needed from the passenger onboard the aircraft during the “first functional use” flight.  Depending upon the type of exemption you are claiming the aircraft may or may not be allowed into California.   

If the foregoing process and documentation are properly completed and collected, the “first functional use” requirement should be adequately fulfilled.  The smallest variation could mean disaster for the tax exemption.

The “first functional use” is only one of the small, yet critical, parts of the California use tax exemption process.  There are many aspects which must be completed successfully and documented in order to secure the exemption.  ACE will guide the purchaser through the process and ensure the success by monitoring each aspect of the exemption requirements.

Unless otherwise expressly indicated, any advice contained herein was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any sales or use tax, interest or penalty that may be imposed.  To be certain the exemption requirements are accurate for your specific situation, call one of our tax experts to discuss.

Other articles will be coming out periodically to explain other aspects of the California sales and use tax laws, regulations, legal decisions, exemptions, or other related matters.  If you have a specific sales and use tax topic that you would like discussed or explained please send us an email to joe@aero-tax.com. 

IRS tax debtIf you happened to be one of the unfortunate individuals to owe tax debt from your past years, or you have paid your taxes for the current year, and still expect to owe further taxes to the IRS in the form of IRS debt, it?s possible for you to find a solution to redeem your taxes. The actual solution lies in not ignoring to pay your debt. Even though the IRS can collect the taxes up to ten years, it possesses many other powerful options to recover, and chances are it will. If you have outstanding IRS tax debt, the best possible solution is to utilize your savings, or alternatively borrow some funds to clear the debt. By paying your entire outstanding dues, it?s possible to save upon the penalties and fines, which are likely to be levied in case you decide to avail more time and clear your taxes over a period of time. If one borrows against some asset value such as your home, it?s quite possible the interest incurred might be tax deductible. It?s also possible to avail tax relief if you can represent your case properly to the IRS.Tax attorney servicesSince last few years, tax attorneys, and the services offered by them have been in high demand, especially since the tax season is approaching soon. Many taxpayers are likely to need tax help. While selecting your representative to deal with your IRS issues and concerns, it is quite important to retain somebody who can represent you to the best of his or her abilities, and not have conflicts while representing your case to the IRS. Even though the tax attorneys can be quite knowledgeable, properly trained, and have the ability to handle your issues, it is found that they can lack in aggressiveness when it comes to representing you to the IRS. The thing is most agencies like to maintain good terms with the tax authorities, since their entire business is dependent upon special tax clients, helping out tax debtors in availing IRS debt help, and good market reputation. It?s sad that IRS often takes advantage of some timid and docile tax attorneys because it knows that firm prefer to keep a positive image, and IRS can well damage the reputation through propaganda.It?s generally believed that it?s expensive to retain a good tax attorney to avail IRS debt relief. At a first glance, the client might feel that the tax laws are simple to understand and straight forward. So they often feel they can communicate directly with the IRS and avail an acceptable situation. This could turn out to be a mistake, since IRS rules can be interpreted in many different ways, and IRS is an expert in that. So it?s recommended not to take any chances, and have an effective arbitration by employing the services of an experienced tax attorney to get effective tax debt settlement.

I heard from other people that they itemized all the receipts from groceries and other items that has taxes on them and they include this when they file their tax. They don’t own businesses so I don’t get how they can do this. Is there a separate form that I can fill out to include all my expenses that has taxes on them?

I recently became a Texas resident and paid sales tax to Texas on a car I purchased. Is that state sales tax deductable from my federal income taxes (Texas has no state income tax)?

If you are feeling the stress of the upcoming April 15 income tax deadline, you have another option – you can file a tax extension and delay your income tax deadline to October 15.

The IRS is willing to grant you the six month income tax extension without you having to come up with an excuse to extend. In fact, the IRS doesn?t even ask why you need to extend. As long as you properly submit your extension request by providing accurate information, the IRS will grant you the six month extension automatically.

The fastest way to file an extension is to file it online through a website run by an approved IRS e-file provider like FileLater.com. FileLater.com makes the process easy. You?ll be asked for your contact information and then taken through a few simple questions to determine if you want to make a tax payment along with your extension. The whole process takes less than 10 minutes. A day later you?ll have an email back with the status of your extension. It?s that simple.

Another benefit to using FileLater.com is that they will help you ensure the information you submit is accurate, and they?ll help you submit multiple times (for no additional fee) if you for some reason get a rejection from the IRS.

FileLater.com will also provide you with an online calculator to help you determine if you should make a payment with your tax extension. If you decide to make a payment, you?ll be able to either mail a check directly to the IRS or pay via direct debit from your bank to the IRS as part of your tax extension e-file.

It is important to note that filing a tax extension does not grant you extra time to pay the IRS if you expect to owe the IRS additional tax dollars beyond any current W2 withholdings or estimated tax payments you?ve already made for the 2007 tax year. If you owe the IRS when you file your return and don?t pay when you file your extension, you may be subject to penalties and interest payments.

So, do yourself or your tax preparer a favor and file a tax extension. The deadline to file your income tax extension with the IRS is midnight on April 15. If you are for some reason rejected, you?ll have until April 20 to correct any errors and complete your extension.

1. Service tax authorities, of late, have been issuing notices to various borrowers of External Commercial Borrowings (ECB?s) from foreign branches of Indian banks and holding them liable to pay Service tax from September 10, 2004 under section 65(12)(a)(ix) of the Finance Act, 1994 which covers ECBs.

According to the borrower, the responsibility of paying service tax is of the service provider which is the foreign branch of the Indian bank and, hence, the Indian bank having a permanent establishment in India, is supposed to pay and not the borrower.

The contention of the service tax authorities is partially correct after coming into effect of section 66A of the Finance Act, 1994 from April 18, 2006.

Until the coming into effect of section 66A, the liability and obligation to pay service tax was that of Indian bank and not that of the borrower. Contrary to the contention of the service tax authorities, even under rule 2(1)(d)(iv) of the said Rules, effective from August 16, 2002 and June 16, 2005 respectively, the borrower cannot be made liable for the payment of service tax.

2. Rule 2(1)(d)(iv) reads as follows

?Person liable for paying the service tax? means,?

(iv) in relation to any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India.?

From the aforesaid provisions, it would be clear that until April 18, 2006, the requirement under rule 2(1)(d)(iv) was that only in case where the service provider did not have any office in India, the person receiving taxable service was liable for paying service tax involved. In the cited case, the Indian Bank having its registered and head office in India, and a branch in a foreign country cannot be said to be a service provider who did not have an office in India.

After coming into effect of section 66A, rule 2(1)(d)(iv), substituted with effect from April 18, 2006 by the Service Tax (Second Amendment) Rules, 2006, reads as follows

??Person liable for paying the service tax? means –

(iv) in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service;?

As such, until April 17, 2006, the borrower was not a ?person liable for paying service tax? within the meaning of the Act and the said Rules, including rule 2(1)(d)(iv) thereof.

It is relevant to note herein that the phrase ?does not have any office in India?, in rule 2(1)(d)(iv), stands omitted from the substituted rule. As such, with effect from April 18, 2006, in any case where the taxable service is provided or is to be provided by either a person who has established a business in a country other than India or has a fixed establishment from which the service is provided or is to be provided in a country other than India or has his permanent place or usual place of residence in a country other than India, the service recipient in India would be treated as if it has itself provided the service in India and, accordingly, it would be liable to pay the service tax and comply with all procedural and other requirements as specified in the Act and the said Rules. The respective clauses in section 66A (1) (a) are disjunctive and, hence, once any of the three alternatives contained therein are satisfied, the service recipient becomes liable to pay service tax on the taxable service involved.

Applying the aforesaid provision, since the service is being provided by foreign branch of an Indian Bank, the condition precedent laid down in section 66A(1)(a) is satisfied and, in the absence of the phrase ?does not have any office in India? in rule 2(1)(d)(iv), as recipient of the services, the borrowers would be liable to make payment of the service tax payable on the ?Banking and Other Financial Services?.

3. The fees paid or to be paid are liable to service tax under ?Banking and Other Financial Services? under the Act with effect from September 10, 2004. The liability to pay service tax for the period prior to April 18, 2006 would be that of Indian Bank and on and from April 18, 2006, would be that of the borrowers.

I am trying to compose a list of the important taxes/expenditures to think about when moving. I am going to use the list as a way to compare the different cities/states that my wife and I are interested in moving to.
1. Can you think of any more?
vehicle tax
property tax
school tax
local tax
vehicle inspections
income tax
sales tax
any environmental taxes/costs
estate tax
2. Can you name a place that is low in most of this categories?
Thanks