2005 Tax Questions

[Silverbullet]

Please post all 2005 tax questions in this thread vice starting new threads for each different question.

Thanks, SB

[Massgrunt]

I've got a couple:

Can the 330 day tax exemption be pro-prated when your days didn't all fall into one calender year?

And is it true that if you're claiming the ex-pat tax exclusion, you can't deduct business expenses, i.e, gear?

[Silverbullet]

I can't answer the first question. I'm sure someone will be along to help with that one.

The gear question is one that has flaoted aorund for awhile in regards to the exemption.

Here's how to legally approach it. If you are an IC or what the company claims to be an IC (I don't want this thread to turn into a debate of the term IC vs employee) or are paid through your LLC or S-Corp then it is easy to deduct. While you use the gear in country, it is also required to maintain the skills you need to stay gainfully employed in your chosen profession. As long as it can't be termed duel use, such as for hunting or whatever, and you can prove you use it to maintain or improve the skills needed to be employed, you're OK.

Now if your out hunting with a 10 suppressed upper, that may be a problem:D

[terrible tim]

Can the 330 day tax exemption be pro-prated when your days didn't all fall into one calender year?

Yes. For instance: if you spend the last 8 months of 2005 and the first 4 months of 2006 overseas, the first $60,000 for 2005 will be exempt and $20,000 for '06. I have this info straight from my CPA. As always, I have to throw a disclaimer out there and recommend you consult a CPA for your own specific situation.

[yojinbukai]

+1 to Tim's post. That's what my attorney told me regarding the split calendar years.

Regarding the deductions. Depending on how you claimed them, previous years' deductions may be depreciated and deducted again as well.

[saudimedic]

It seems you are getting pretty accurate advice from the members the only thing I would add is get an accountant that understands the working expatriate, if you work in the sandbox you can afford it. Never get on the wrong side of the IRS if you tick them off they are the scariest of all the three letter federal agencies.

[Silverbullet]

The money you pay to a CPA is tax deductable.

There is nothing to fear from an IRS audit if you have your paperwork, reciepts, etc.. squared away. At the end of the day you have to be able to explain why a deduction was taken. You should not have to search for a reason when audited, anyway.

The IRS uses an algorithm to pick who gets audited, unless you are flagged for inconsisitent or outrageous deductions. Basically the luck of the draw.

I say duduct anything and everything that is legal to deduct. I see too many guys leave money on the table due to fear of the IRS. If you deduct something you beleive is right and they say no in an audit, you still have an appeal process to do before it's all over and you have to pay for the deduction.

[doitforjonny]

to any cpas out there

say i have a shit hot cpa who doesnt know expatriate tax law, that i am trying to bring on board. where do i direct him to educate hisself. ie pubs,docs, precedent, etc.

i dont care if the answer is incomprehensible to me because i am just going to feed it to him anyways.

thanks

[Massgrunt]

Great question, I'm in the same boat.

[Recon by Fire]

I would think a "shit hot" CPA would know himself where to go to get up to speed on expat issues.

Speaking of IC status; What are the benefits to forming a LLC or S-Corp? My CPA is good but as far as i'm aware, he has not made any such recommendations.

[landshark]

to any cpas out there

say i have a shit hot cpa who doesnt know expatriate tax law, that i am trying to bring on board. where do i direct him to educate hisself. ie pubs,docs, precedent, etc.

i dont care if the answer is incomprehensible to me because i am just going to feed it to him anyways.

thanks

Here is a good start:

Pub 54 is the guide for those filing for the Foreign Earned Income Exclusion. This will be a good start for him and no thread discussing expat taxes should be without this reference.

Html version: http://www.irs.gov/publications/p54/index.html
PDF Version: http://www.irs.gov/pub/irs-pdf/p54.pdf

Also info here: http://www.irs.gov/businesses/small/international/article/0,,id=97130,00.html

Here is info in regards to extensions : http://www.irs.gov/newsroom/article/0,,id=101265,00.html Q16 applies to those working in a combat zone it is as follows:

Q-16: Do the deadline extension provisions apply only to members of the U.S. Armed Forces serving in the combat zone?

A-16: No. Unlike the combat zone military pay exclusion, the deadline extensions also apply to individuals serving in the combat zone in support of the U.S. Armed Forces, such as merchant marines serving aboard vessels under the operational control of the Department of Defense, Red Cross personnel, accredited correspondents, and civilian personnel acting under the direction of the U.S. Armed Forces in support of those forces.

And for future reference there is the proposed bill (for those working DOD contracts at least) being discussed in this thread here on SOCNET: http://socnetcentral.com/vb/showthread.php?t=56995 I'd urge everyone to contact their Reps even if yours is useless and with the last name of Kennedy like mine, friggin oxygenthief. Anyway...

That should be good enough to get him rolling.

[landshark]

I would think a "shit hot" CPA would know himself where to go to get up to speed on expat issues.

Speaking of IC status; What are the benefits to forming a LLC or S-Corp? My CPA is good but as far as i'm aware, he has not made any such recommendations.

Mostly administrative differences good article here: http://www.entrepreneur.com/article/0,4621,288849,00.html

I started LLC's for my two businesses. The advantage I will have here are those business expenses pass through to my personal tax liability. Although my amount is going to be prorated since I started over here in Feb, lets say for the sake of argument the tax burden falls on the amount remaining after the 80k tax exclusion. say that is 50k, well I want to get that liability down as much as possible. That is where my deductions for gear etc come in as well as all of my LLC expenses such as computers, office supplies. And on top of that I am operating at a loss so it works out even better.

Here is some speculation on the whole IC deal. In your case I am assuming you have been hired as an IC, If you are an LLC, the company you worked/work for in theory hired your company (LLC or S Corp) and they pay the company for services rendered. You can then chose to pay yourself from the company although it doesn't really matter because in both cases the tax liability is passed on to you personally. I am not sure how the whole contract thing would work, i don't know if the company you are working for has to make the contract with the LLC or if it will work with you as an individual. At least this is the way i remember it when i was reading up on the whole thing.

Here is a pretty good book i read: http://www.nolo.com/product.cfm/ObjectID/47715F77-6A7A-4499-BDD17170C80AA328/111/182/ it was an easy read and had a bunch of good information.

in respect to SB's request i won't get into the whole IC vs. Employee thing, although I really want to... :)

Of course the disclaimer: I am not a CPA and I am only refering to memory.

[iraqgunz]

Question 1. I am in Iraq now myself and have been doing research. It is my understanding that the pay will be prorated. I believe that the procedure is explained in the IRS Form 2555. If I am wrong let me know. Hope this helps.

[landshark]

Question 1. I am in Iraq now myself and have been doing research. It is my understanding that the pay will be prorated. I believe that the procedure is explained in the IRS Form 2555. If I am wrong let me know. Hope this helps.

It is covered in Pub 54, haven't checked Form 255 but here is how it is calculated:

Physical presence test. Under the physical presence test, a 12-month period can be any period of 12 consecutive months that includes 330 full days. If you qualify under the physical presence test for part of a year, it is important to carefully choose the 12-month period that will allow the maximum exclusion for that year.

Example.

You are physically present and have your tax home in a foreign country for a 16-month period from June 1, 2004, through September 29, 2005, except for 15 days in December 2004 when you were on vacation in the United States. You figure the maximum exclusion for 2004 as follows.

Beginning with June 1, 2004, count forward 330 full days. Do not count the 15 days you spent in the United States. The 330th day, May 11, 2005, is the last day of a 12-month period.

Count backward 12 months from May 10, 2005, to find the first day of this 12-month period, May 11, 2004. This 12-month period runs from May 11, 2004, through May 10, 2005.

Count the total days during 2004 that fall within this 12-month period. This is 234 days (May 11, 2004 - December 31, 2004).

Multiply $80,000 by the fraction 235/366 to find your maximum exclusion for 2004 ($51,148).


You figure the maximum exclusion for 2005 in the opposite manner.

Beginning with your last full day, September 29, 2005, count backward 330 full days. Do not count the 15 days you spent in the United States. That day, October 20, 2004, is the first day of a 12-month period.

Count forward 12 months from October 20, 2004, to find the last day of this 12-month period, October 19, 2005. This 12-month period runs from October 20, 2004, through October 19, 2005.

Count the total days during 2005 that fall within this 12-month period. This is 292 days (January 1, 2005 - October 19, 2005).

Multiply $80,000, the maximum limit, by the fraction 292/365 to find your maximum exclusion for 2005 ($64,000).

Again not a CPA, just read and do my research.

[Recon by Fire]

I guess I will just leave my status as an individual IC for now, seems to be working out. The "big bear paw" company i'm working for refers to the ICas "company" usually in contracts and just lets you list your name or your LLC, etc...as the "company". Yeah, I don't feel to independant LOL.

[yojinbukai]

FWIW, and I imagine this has been visited previously....

The memo that came out in 2004 only applies to filing extensions and associated penalties. A lot of guys I've run into think that it qualifies them as combat zone taxpayers for the purpose of tax exemption. It doesn't. The clue that I took was when the memo said that it applied to the incomes of the spouse as well.

My attorney looked at it and interpreted it the same as me. Take your chances if you like, but I wanted to toss that out there. A $40,000 tax bill earns a lot of interest if you get audited three years from now.

[landshark]

FWIW, and I imagine this has been visited previously....

The memo that came out in 2004 only applies to filing extensions and associated penalties. A lot of guys I've run into think that it qualifies them as combat zone taxpayers for the purpose of tax exemption. It doesn't. The clue that I took was when the memo said that it applied to the incomes of the spouse as well.

My attorney looked at it and interpreted it the same as me. Take your chances if you like, but I wanted to toss that out there. A $40,000 tax bill earns a lot of interest if you get audited three years from now.

If you're refering to the document dated June 28, 2004, this memo is fake.

The simplest way to check for yourself is to use the control number. It appears in no IRS or US Treasury databases and is not the same format as other SB/SE control numbers. You can also call you loval IRS office and have them verify this.

Believe none of what you hear and only half of what you see, and on the internet i'd drop that half down even lower.

I am sure this document is going to get someone in trouble.

And to beat my drum again, IRS Pub 54 is where you need to look for the exclusion and Pub 3 for the extension.

I'm not trying to come off as a "know it all" or shithouse lawyer but I'd hate to see anyone fall into the hoax. If it is coming across that way it's not my intent.

[TowGunner]

Is there a work sheet for the deductible stuff... i.e gear, computers, clothing and so on? Also... since meals were "provide" (but rarely consumed) Does anyone know if meals away from camp are deductible? I have a sheet for my old Police Department... but there are some things I think would be deductible that are not on the list I have.

[Type-82]

I have spent a huge volume of time reading and re-reading pub 54. The attached letter was drafted and sent thru to 5 different CPAs from 5 of the guys on my team. All 5 said YES good to go! Remember its an either or situation. I have done 2 330s but I am going to declare Iraq my tax home so this year I can go home when I want for as long as I want. The 80K will be pro rated based on how many days I spend in country, however I will still get some of it as opposed to only doing 329 out of the states and getting nothing. If you can qualify for the Tax Home, I would highly suggest you do so. Down side, if you decide to recind your tax home status, you can't again claim a forign tax home for 5 years without IRS approval. Note in the letter, everything in ""s is quoted from tax pam 54.

What ever you do PLEASE don't be stupid and actually let someone talk you into filing tax exempt as a contractor and file as an enlisted soldier because your working for the DoD. I can't believe how many people I know who have done this. If they can last 7 years and never have it pop up on the IRS radar, good on them, however there is no time limit on fraud in taxes they can go back forever. Pay your fair share and not a penny more, but pay what you owe!

[mrperfect25]

To all the hard hittin IC's makin some cash like me.... Reguardless of your CPA or your GOD .... ur gonna pay something and without getting fined for not paying qtrly taxes.....I have found this to be the easy way.... all the guys up here in Mosul are on line..."well maybe not all" ... :cool:

After creating a profile if will take 14 business days for your paper work to arrive at your home of Record. with the pin and all.... take a look....

https://www.eftpssouth.com/Eftps/

paying someting every qtr keeps your peepee out of the door slammin

semper fi