Tag Archives: cloud computer

Saving Taxes in the E-commerce & the Cloud (Virtual) Computer World

cloud computer tax, tax planning, saving taxes, international tax planning,

E-commerce businesses are saving taxes with cloud computer tax planning.

E-commerce tax planning and Cloud tax planning uses unique tax laws.  As a result, saving taxes in this century’s cross-border business environment is easier than ever.  

Small businesses are saving taxes with eCommerce tax planning and cloud computer tax planning.  

The cloud has level the playing field between small business and big business.  Amazon is leading the way.

 Small businesses can benefit from cloud computer tax planning.  

Cloud tax planning allows big state and federal tax savings.  A popular term for this is “third wave” tax planning.  The second wave was most of last century and a little of the 1800s.  The first wave is from  10,000 BC to the late 1800s.  This explains the loophole.  Our tax laws were designed in the early 1900s.  While the laws are more complicated, the basis framework is unchanged.

We all have heard people say that things are not what they used to be.  This is particularly true in American business.  In 1910, electricity was not in the White House.  Cars were laughed at with jokes like “Get a horse!” 

Phones were rare, and there was no air travel.  U.S. E-commerce tax laws are written for last century’s business.  E-commerce tax planning provides significant tax savings.   Here is what has gone wrong for the Government and good for small business.

  Who is this man?    He is Robert Lee Doughton.   He was the powerful chairman of the U.S. Congressional committee that writes the tax laws.

This man designed and wrote our international tax laws. His education was only high school. His father fought with General Robert E. Lee (General of the Confederate States of America).  He was named after the General.  He was born in 1863. His view of international commerce was via steamship

In 1939, he wrote the international tax laws that govern today’s international taxation in America.[1]  Most of the congressional representatives who wrote the 1939 tax code were born before 1900.    Their view of the world was what you see in many silent movies … and so was their tax law.

Their idea of technology was steamships and the telegraph.  It is this world vision that governs how the U.S. taxes international business and investment today.

On this link, you can view my forty-minute of my presentation of the California Society of Certified Public Accountants on profiting from Congress’s failure to innovate.

Successful E-commerce international tax planning revolves around a major flaw in American tax law caused by the speed of change (more on this link).  

If you need to up the quality of your tax planning, then contact me, Brian Dooley, CPA, MBT, at [email protected]

[1] Congress renamed the tax code in 1986 to the “Internal Revenue Code of 1986.” As I wrote this, I realize that 1986 was just at the end the “second wave” of business. The tax consequences of leaving the economics of the second wave and moving into the economics of the third wave are discussed in this video.

 

Report on Google Industrial Age Offshore Tax Plan

SMOKE STACK INDUSTRIAL AGE

Google may be one of the best or even the best E-commerce business, its international tax planning was old fashioned and clunky. However, its tax advisers were industrial age (also known as the “second wave”) thinkers.

This blog will explain the efficiency of third wave (also known as the “cloud”) tax planning.

As Alvin Toffler states The illiterate of the future are not those that cannot read or write. They are those that cannot learn, unlearn, relearn.”

While Google is a third wave company, its tax advisers missed the more efficient third wave approach. We will explore this approach after we study the Google’s methods. Cloud tax planning requires one to forget last century’s tax strategies.

Google’s Irish company (Google Ireland Ltd.) is located in Dublin. The Company has a substantial presence employing 1000s. This Company earns most of the non-U.S. advertising revenue. This is not Subpart F income ( income currently taxed to a “U.S. Shareholder”), which means the income U.S. tax deferred.

To reduce the Irish taxable income, this company pays a royalty (on the intellectual property obtained from the Google U.S. of $5.4 billion to Google Netherlands Holding BV. Google Netherlands Holding BV has no employees. Google Netherlands Holding BV pays most of its income to the Bermuda Company.

The Dutch Government promotes this structure by allowing a Dutch income tax deduction for the management fee paid to the Bermuda company. The Dutch Government receives a small tax and employees it citizen maintaining these Dutch holding companies.

Bermuda has no income tax. To make this plan work, I assume that the IRS agreed (in the private letter ruling) that the income earned by the Bermuda company is not Subpart- F income.

The bad news is that Google has to use this profit to grow its non-American business. If this profit is used for a U.S. activity it is immediately taxed (under section 956)

Saving and Deferring Income Taxes in the 21st Century require your tax planners to unlearn last century’s methods and learn about cloud tax law. Spend 40 minutes with me and learn the future of tax planning with this video of my presentation from the CPA’s Society 2011 International Tax Conference.

Third Wave Cloud Tax Planning

For my example I am going to assume that Google is a private business owned by a husband and wife (which is my typical client).

They go to the IRS and get a private letter ruling allowing the transfers of the intangibles to a foreign corporation, Google Isle of Man, Ltd. This Company has an office in Douglas, Isle of Man and employees thousands. This company handles all of the non-American business.

This Company has its computer farm in the Isle of Man. This location handles all of the American and non-American processing. Google employees around the world maintain the computer software, writing new programs and handling customer telephone calls.

Pay per click ads are displayed throughout the world but primarily in the United States.

The executive offices are located in the United States.

Based upon these facts, none of the income earned is United States source.[2] Further none of the income is Subpart F income. Income earned by Google Isle of Man, Ltd. is not taxed until the income is distributed or invested in United States property occurs.

We read about Nat King Cole[3]. His trusts may still exist and the income may still be deferred. Eventually his trusts will end and the deferral will stop. Under English law, a trust can last approximately 100 year. Under Nevada law, a trust can last 365 years.

So, assuming the same facts as above, except instead of using an Isle of Man company, we use a Nevada Limited Liability Company (LLC). Also, the husband and wife formed an inheritance trust in Nevada at the time they started the business.[4] The trust agreement has a flee clause, which causes the trust to be a foreign trust for tax law.

The trust was started with part gift and part loan. The money from the loan was used to start the Google LLC.[5] The money from the gift was placed into bank’s savings account.

As above, Google LLC has its operations in the Isle of Man. As in the above example, Google LLC has banking worldwide. Its executives live and work in the United States. Most of its banking functions are in the United States.

Subpart F income is not a concern because there is no foreign corporation. Google LLC is earning only foreign source income because the source of the income is the location of the computer.

A single member domestic limited liability company is disregarded for American tax law. Its taxable income is earned by the inheritance trust. As a foreign trust, the inheritance trust has no US taxable income. The inheritance trust pays no income tax.[6]

The portion of the inheritance trust funded by the gift is a grantor trust. The income from the bank savings account is reported on the tax return of the husband and wife.[7]

Prudent entrepreneurs legally protect their assets. One of the best methods is an Nevada trust owning a Nevada limited liability company (LLC). For those few concern with estate taxes, with cautious drafting and with an IRS ruling, the Nevada trust’s assets will not be subject to estate taxes for 365 year.

If you would like to brainstorm your tax planning ideas, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one hour consultation.


[1] Ireland has many income tax treaties that lower withholding taxes.

[2]Piedras Negras Broadcasting Co., and/or Cia Radio Difusora De Piedras Negras, S.A. vs. Commissioner of Internal Revenue (43 B.T.A)

[3] Estate of Nathaniel Cole vs. Comm’r of IRS (32 T.C.M. 313, 1973). This case is what is known as memorandum case. The court issues this type of case when the law is clearly understood but the facts need to be discovered.

[4] To avoid the throw back rule, the trust is a “simple trust” under the IRC

[5] For this example, we are assuming that the loan was a “qualified obligation” under section 679

[6] When the trust distributes money to its beneficiaries, they will pay tax. Since the trust is a simple trust the income tax throw back rules will not apply.

[7] The IRS may not accept the tracing method but will want to use a pro-rata allocation. As we discussed, the courts allow a debt to corpus ratio in excess of 100 to one. Our loan to gift ration can be 100 to one. As a result, the IRS would attempt to allocate 1% of Google LLC’s income to husband and wife. This point is negotiated with the IRS during the private letter ruling process.

Home Office Tax Savings – New IRS Tax Breaks

How to save taxes with a home office is more than just a few additional deductions. It shifts the tax profile of you car expense, medical expense and now the new solo 401K plan.

Open for business.

Open for business.

Home offices and home base businesses are the new legal tax shelter for business owners and real estate investors. With today’s powerful home internet services, you can run a major company out of your home.
If you watch reality TV, you know that Bethany of the NY Housewives created and sold a $100 million dollar liquor business out of her apartment.

Now, the Administration is pushing the IRS to recognize the power of a home office and home business. This new policy combined with President Reagan small business tax laws (from 1987) provides the blueprint to deducting personal interest and home interest as business interest or real estate business interest expense.

New tax law allows a portion of your credit card interest and home mortgage as a business expense. It is not merely the portion that relates to the home office. Oh yes, there is much more. In this episode,  you will learn about the 1987 tax breaks and how they work with the IRS new home office tax law. By the way, my favorite is the automobile expense.

Here is more.


And please remember, that a home office (of any size) allows you to deduct most of your auto expense. Further details on the new option can be found in Revenue Procedure 2013-13, .

Why Cloud Base Businesses Save Taxes with New Web Base Internet Tax Planning

internet tax planning, saving taxes, cloud tax planning ,

Saving taxes with the cloud based tax planning

The non-profit Tax Analyst reported that of nine states that have recently issued administrative guidance on the taxability of cloud computing services.  Two states determined that the services taxable.  The remaining seven determined that cloud computing is not taxable.

Shifting your businesses profits to a tax haven state is easy.  If you want to brainstorm your idea, then call me, Brian Dooley, CPA, MBT at 949-939-3414 for a free consultation. 

Here is why:   The cloud’s income tax nexus is where the server is located.  The tax law for service income is based upon last Century’s economy when humans, and only humans, provided services.  The tax situs of service income is the location of the human.  

Computers are now  doing work once done by employees.   For some small businesses, the computer has replaced staff for administration  or is increasing sales by using “big data”. E-commerce businesses’ computers help the customer find the product and recommend other products (the salesperson function),  collects payment (the cashier function) and sends the order to the warehouse or fillment center.  

By forming the correct type of a corporation to own the server, you can shift the income to a tax free state or even a tax free country.  You pay the corporation for the value of the services of the computer (located in the same state as the corporation). 

First blood was drawn on the IRS when they attempted to tax Xerox on its revolutionary photographic copier.  This was the first battle between the  exponential entrepreneur  and  the bureaucracies of government.   The IRS could not believe that the copier was was providing the service of a photographer and his darkroom.   

Here is what’s happened to the IRS: In the early 1970’s the first plain photo copier was available.  Of course, the U.S. Government wanted them.  At the same time Congress enacted a tax incentive for a business buy or lease equipment.  This tax incentive was not available if you leased to a government or a non-profit organization.

On Xerox’s tax returns, it claimed the tax incentive.

 Xerox claim that its copiers were providing the same services as photography studio developing a picture (back them pictures were taken on film).  The photocopier was to be viewed not as equipment but a tiny dark room with a robot developing the film.  The IRS went nuts.

Not only did the court agree with Xerox’s arguments. It set a legal precedent for another feature of economy of the future: machines can provide personal services.

According to the court, the evidence proved that Xerox’s customer, the US government, wanted more than just a machine. “In essence, therefore, the customer paid for an end result, i.e., the number of copies made, and not for use of a machine…” the court ruled.

The court provided a thorough historical review of machines providing a service, citing switchboards and vending machines as relevant examples. The court provided the key factors to consider when determining whether equipment creates service income or rental income.  If you want the court language, then please click on this link.

For example, in a lease, the customer (lessee) acquires a legal interest of some specified duration in the property itself. The customer has substantial control over the property including the right to deny access to others including the owner.

By contrast, a service contract allows the owner (Xerox) access to its property (the copier) and the right to freely substitute property in order to meet its contractual obligations.  Xerox supplied the paper, the ink and the maintenance and repairs. 

The lessee’s (the Government) right was to receive photographs (which is how we got the phrase “photo-copy) on plain paper.  The service was identical to that produced in a “dark room”).

The fact that technology can take over a role previously filled by a human does not lessen the value of the work from a tax perspective. Considering that the judges in the Xerox case came to this conclusion back in 1981, the ruling was extraordinary. No one would have foreseen that a few decades after the ruling, huge advances in technology would enable machines to provide more services than ever before.

How Tech Replaced Human Services in My Business

E-commerce business often own software that is replacing human services.  These businesses are a candidate for moving offshore and saving taxes.  I have included the story if my business to demonstrate how many software is replacing humans.

In my personal experience running my accounting firm International Tax Counselors, I’ve quickly transitioned from relying heavily on people to technology to perform the same services.  Here’s a quick snapshot of the firm’s back-office operations in 2006:

Besides my accounting staff, I had two full-time employees, an office manager and an assistant manager. Both were solely dedicated to providing administrative support.

As you can tell, running a small accounting firm demanded a tremendous amount of administrative support.  I spent $160,000 annually for the salary and health and retirement benefits, office space, telephone system, computer system, paper, postage for hard copy advertising, book printing and seminars.  .

They booked my travel arrangements, paid bills and performed many tedious, time-consuming tasks. In those days, we mailed out hard copies of tax returns. This required printing out two copies (one for the client and one for me), binding the packets and mailing them from the post office, which, of course, required them to stand in line and purchase certified mailing.  Each return and client activity was entered into an expensive database.

Today, technology replaces all of the administrative support I once hired people to provide. And the best part? It costs me a fraction of the cost of hiring people.

Here’s what changed in eight years: 

  • Now, the big data systems are inexpensive and in some cases free, I use it to keep track of every client activity, every client correspondence. 
  • The iPhone is a better telephone system than my hard line system of 2006.  I no longer look up phone numbers.  I merely ask Siri to call someone.  When I receive a call, the caller names show up on my phone.
  • PDF files and emails (which are a better because of hyperlinks and attachments have replaced paper.  Of course, postage is almost nothing.  My book, as you know, is Kindle or print on demand by Amazon and audio.  I no longer have a book production costs.
  • The cost of a server, fireproof backup and an IT contractor is than $100 a month because of the cloud.    
  • A seminar is now GoToMeeting.  Better than the hard facility rented rooms because, the whole world can attend.  A seminar cost  was a $1,000 or more.  GoToMeeting is $49 per months.
  • Travels is now online with a few taps on my IPad.  My staff is no longer booking my travel.
  • IPhone: Like many smartphone owners, my iPhone is not only a cell phone.  A mobile office fits in my pocket.  Everywhere I go, I can access documents stored in the cloud or look up a tax law.
  • Cloud software: I encrypt and store all my documents in a secure server that I can access and update anywhere in the world.
  • GoToMeeting: I use this to have “face-to-face” meetings with clients all over the world.
  • E-mail system: I e-mail documents rather than mailing them out.  I know longer have a staff typing an envelope and making a paper file copy of the cover letter.
  • Online calendar: I have Siri keep track of my appointments and book my own appointments with a calendar that’s automatically updated to my iPhone and e-mail system.
  • Bill paying?  Well my banks online bill pay automatically pays e-bills and sends out re-occurring checks. 
  • While a Xerox was important, now I rarely make paper copies.  I scan and save the image on my computer.

Machines at Your Service: Self-Checkout
Many machines are providing human services.  Advances in technology are changing the way business is conducted every day.  In the digital age, computers allow companies to glean massive amounts of information instantly, replace human staffers and cut costs dramatically.

Think about the last time you went shopping for household supplies. Did an actual person scan each item, tell you the total amount, collect your payment and bag your purchases? Or did you go through the self-checkout lane and use the machine?

National US chains like Safeway, Home Depot and Wal-Mart offer self-checkout lanes, and more are likely to follow. According to a 2013 article in Time magazine, retail industry experts foresee a future where shoppers will use their phones’ bar code reader to scan items as they shop. This would allow them to pay and walk out without having to wait in line.

It seems inevitable that technology will replace people in providing certain services primarily for the cost savings. In many situations, people actually prefer dealing with machines. According to a global study by Cisco on the retail shopping experience, 52 percent of consumers prefer to check out without the help of a human cashier.

If I were planning a tax strategy for the companies that manufacture self-checkout machines, I would definitely incorporate the lessons from the Xerox case. Self-checkout machines are clearly providing a service rather than a rental.

 The Xerox Case and Your Business

Consider the e-commerce industry alone and the thousands of websites conducting transactions for customers without any human interaction. Previous generations once depended on travel agents, for example, to book their vacations. Now, more people are accustomed to using sites like Travelocity, Priceline and Expedia to plan their trips.

 If you owned one of these web base ecommerce companies, you could avoid all state and U.S. taxation by having a foreign corporation own the computer server in a tax haven.

I encourage you to consider the Xerox case and how it applies to your business.  Can you place your big data operation in a foreign corporation with a server in foreign country?  If so, you can save taxes by hiring this foreign corporation.

Think about your expenses, your equipment and what value your cloud activities offers to your customers.   Can you segregate the invoicing and shift the income to a no tax state or a tax haven?

international tax, international tax planning,

International Tax Planning for the Entrepreneur is easy to read and understand.

Learn more with my easy to read book, International Taxation in America for the Entrepreneur.  Amazon has the Kindle edition on sale for $9.50 on this link. 

We recommend that you  work with the IRS and get their okay of your tax plan with a private letter ruling (get more information on this link)

Ancient American Tax Laws Create New Tax Planning for Ecommerce

STEAMSHIP

E-commerce’s innovation has left gaps in U.S. tax laws.  The tax savings for electronic commerce are enormous.  Congress’s ineptness in using ancient tax laws for today’s virtual world and E-commerce creates an environment where the tax laws do not fit.

Look at this change.  In 1910, electricity was not in the White House.  Cars were laughed at, with jokes like, “Get a horse!”    Phones were rare, and there was no air travel.    It is these concepts of the World that exist in the American international tax law.

Our ancient tax laws have created new tax planning for E-commerce cloud base businesses and artificial intelligent (AI) software.  And get ready for the tax haven boon with 3D printing software.

Saving taxes has never been easier for the E-commerce business.  By mere locating a cloud computer in a tax low tax or no tax country, an E-commerce business can save taxes.  Learn how cloud computer tax planning is using innovation to avoid taxes.

Below you can watch the CPAs International Tax Conference on E-Commerce and learn why these ancient tax laws are allowing significant tax savings for small businesses with their foreign corporations.

Don’t have time to watch and listen on the web (the play time is about 40 minutes)?  Then visit our iTunes page on the link.  
Get my book International Taxation in America for the Entrepreneur (at Amazon on this link) to learn more. The Kindle edition is on sale for $9.50.

Want to take your tax planning to the next level, then contact me, Brian Dooley, CPA, MBT  at [email protected]