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Finance: Taxes For Contractors 2011, By Luke Fairfield CPA

Dec 21

Posted by Matt in Finance, Industry Talk | 1 Comment

These newsletters come out about this time every year and they are a wealth of information. Probably the big one here is Luke’s suggestion of setting up a S Corp. Especially with the increased scrutiny by the IRS on those who have been claiming the foreign income exclusion.

Check it out below and definitely email him and his team if you have questions or are looking for a CPA. As you can see, he is a busy guy and Luke has partnered with another CPA to keep up. I also put his newsletter in the blue bar up top under Taxes For Contractors if you need to find it again. -Matt

 

Greetings!

For all you ex-teams, ex-pats, ex special forces, security contractors and operators out there I hope this letter finds you well.  In an attempt to keep you current with your tax filings I am sending out this letter as a year end reminder that 2011 is almost over.  There are some important new tax law changes this year such as the foreign tax being withheld in Afghanistan and increased IRS scrutiny of the foreign income exclusion and on Schedule C filers which I will address below.  Feel free to pass this email on to anyone in your situation who could use the help or anyone that I missed on this email. As always, I will do my best to minimize your tax bill and provide relevant advice for your situation.

Important Updates for 2011:
1) Audits on the foreign income exclusion have greatly increased. Those of you filing a Schedule C as an IC seem to be of particular interest.  This is due to the IRS opening a new office specifically dealing with this type of tax return.  In a typical audit, you are asked to provide some or all of the following:
a. A letter from your employer stating your work location and job duties for the year.
b. Letter of Authorization from the DOD stating your qualification to work overseas.
c. Copy of your passport to include any visa stamps.
d. A schedule of days outside the US for the period in question.
e. A copy of receipts for expenses claimed as deductions.
f. A copy of your work contract.
g. If claiming bona fide residency, they want to know where you lived, for how long and if it was your intention to remain overseas for a certain period.
2) Based on these audits, I strongly recommend starting an S Corporation for anyone who is an IC getting a 1099.  This appears to greatly reduce audit risk.  Additionally, if you do not think you could provide the above information or prove your qualification think twice about claiming it as you will most likely incur a 10 – 20% penalty on the additional tax due.

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Finance: Higher Business Taxes May Follow Treasuries Definition Of ‘Small’

Sep 9

Posted by Matt in Finance, Industry Talk | No Comments

Boy, this is one of those deals that could impact a bunch of folks out there who have set up S Corps or similar business structures as independent contractors. In this quote below I have included a point of contact to follow on this matter who originally brought this front and center. His name is Bob Perry and he specializes in this particular area of the industry. Here is a quote from his article and by all means follow the link if you want to read more and contact him.

TAX ALERT: For Owners of Private Security Companies
September 8th, 2011
By Bob Perry
Congressional lawmakers consider rewriting the U.S. tax code for closely held businesses, including those organized as partnerships, S corporations and limited liability companies.
This could have a dramatic negative effect on the owners of these corporations as they operate the company; and on the net proceeds from an eventual sale of the operating assets.

Hopefully some CPA types can come up and add their two cents on this deal. -Matt

 

 

Higher Business Taxes May Follow Treasury’s Definition of Small
By Andrew Zajac
Aug 18, 2011
A new definition of what constitutes a small business being considered by the Treasury Department is raising concerns among some closely held companies that it’s a step toward requiring them to pay corporate taxes.
The proposed definition, included in an Aug. 9 Treasury report, places the upper limit for a small business at $10 million in annual gross income or deductions. Currently, there is no size limit on what constitutes a small business for purposes of tax policy discussions.
The parameters could affect larger, closely held businesses, including those organized as partnerships, S corporations and limited liability companies. Such firms are called flow-through entities because profits flow directly to their owners, who pay personal income tax without first being subject to corporate tax. Large investment firms, including D.E. Shaw LP of New York and Renaissance Technologies Corp. of East Setauket, New York, and major law firms such as Los Angeles- based Latham & Watkins LLP are organized as flow-through companies.

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Military News: Military Retirement Is More Generous And Expensive Compared To Private Sector

Jul 29

Posted by Matt in Finance, Government Work, Industry Talk, Military News | No Comments

Hat tip to Thomas Ricks over at Foreign Policy for pointing this one out. Data like this seems to be missed when we discuss the costs of a standing government army, versus the private industry.  So stuff like this really points out the differences between public and private.

I have yet to work in a company that had any security contractor retirees. Hell, I would be lucky to have a retirement package offered, and most gigs these days seem to be all independent contractor stuff. That is the reality of today’s ‘disposable workforce’. So for me, I just assemble my own retirement plan and continue put into it from the various contracts I work.  Sometimes I was lucky enough to work a contract with a 401K plan, but those were few and far between.

The government seems to be the only industry left that actually has folks that work 20 years or 30 years, and has retirees under that system. It is actually a pretty good deal and many retirees collect pensions and go on to work other jobs.

In the security contracting industry, you see a lot of retired military folks who do exactly that.  They collect a nice pension after working 20 years in the military, and then go on to be a private contractor and make even more money.  So I could understand why the Pentagon and today’s cash strapped US government is taking a second look at this system. You could also guess the reaction of guys in the military that would construe this study as a threat to their good deal. The question to ask is will the government modify the current military retirement system to match that of the federal government, and get a few more years of service out of their soldiers? Or will they succumb to the politics of the matter, and realize that a ton of military retirees and current soldiers vote.

Who knows, but I do know that the US government is in the process of making some adjustments to the budget and spending. So they are looking at all and any options of cutting costs, and the military is no exception.

The other thing I wanted to mention is that I certainly hope these statistics are factored into future cost benefit analysis between government military forces and private military forces.  There are so many costs to consider when maintaining a standing army during times of peace and war.  Not to mention that all of these retirees in the military are also drawing healthcare benefits, and the legacy costs of that must be equally as high.  I mean if a guy retires at age 40 give or take, and the average life expectancy of a human these days is around 75, then that can add up to a lot of money that tax payers will be paying over the course of that individual’s life.

Here is the report that goes into more detail about military retirement and it’s costs. -Matt

slide6 ricksMilitary News: Military Retirement Is More Generous And Expensive Compared To Private Sector

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Legal News: Contractor That Worked In Iraq Cannot Exclude Compensation Under § 112

Feb 4

Posted by Matt in Finance, Industry Talk, Legal News | No Comments

     Ok gang, this is important and please feel free to pass this around.  This contractor lost in this case and the one thing that saved his bacon was this little memo that came from an IRS Acting Deputy Director in 2004.  If you filed your taxes with the impression that you fell under the same ‘combat zone compensation’ that the members of the Armed Forces received back then, then this memo could be your life saver. If anyone has a copy of this thing, I will make an edit and add it to this post so everyone knows where to find it. Robert L. Hunt was the IRS Acting Deputy Director at the time.

     The other point I wanted to bring up here is this. The powers that be are certainly trying all they can to put us under military/government control or under UCMJ, but god forbid if contractors actually enjoyed the same tax benefits as the Armed Services in combat zones? -Matt

Edit: 02/06/2011 – Thanks to Chris for sending me a copy of this memo.  I put it up in my Scribd account here if you want to check it out.

rule dividerLegal News: Contractor That Worked In Iraq Cannot Exclude Compensation Under § 112

Court: Blackwater Contractor in Iraq Cannot Exclude Compensation Under § 112

By The Tax Prof

February 1, 2011

The Tax Court yesterday held that a Florida man who earned $98,400 in 2005 working for Blackwater (since renamed Xe) providing security services to the U.S. Army in Iraq could not exclude the compensation from income under § 112 as “combat zone compensation of members of the Armed Forces.” Holmes v. Commissioner, T.C. Memo. 2011-26 (Jan. 31, 2011). The Tax Court concluded that the taxpayer did not serve in the Armed Forces of the United States but instead was a private citizen hired by and paid by a private company (Blackwater). The Tax Court refused to impose a penalty because the taxpayer relied on an IRS memorandum wrongly stating that civilian personnel in direct support of combat zone military operations qualified for the § 112 exclusion.

Link to TaxProf blog post here.

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From the Tax Court memo Holmes v. Commissioner, Page 9

     Petitioner admitted on brief that he did not file a return for calender year 2005.  Petitioner’s only explanation for failing to file is that in 2005 while in Iraq, he was given a memorandum that caused him to believe that the income he was receiving from Blackwater was not taxable.  This memorandum was an internal memorandum written to give the Commissioner’s employees field guidance for examination and collection activity involving taxpayers in Iraq.  The memorandum, titled “Memorandum for Acting Deputy Director, Compliance Field Operations”, was issued by the Internal Revenue Service Small Business/Self-Employment Division on June 28, 2004.  The memorandum states that civilian or military personnel who are in direct support of a combat zone military initiative and physically located in the combat area are entitled to the exclusion.  It also states that time spent in a combat zone by an individual serving in support of the Armed Forces will be disregarded with respect to “certain acts required under the Internal Revenue Code.”  It goes on to state that “This change in procedure will be reflected in the next revision of the IRM, which is in the process of being written.”

     Petitioner satisfies all the criteria found in the memorandum.  He was serving in Iraq alongside the military, provided security to Government officials, and aided in giving air support, medical aid, and emergency response assistance. Petitioner had no background in tax law and was given this memorandum written by an IRS employee while serving in Iraq.  We believe that receiving this memorandum while serving in Iraq could give someone reasonable cause to believe that his payments from Blackwater were excluded from gross income.  Therefore, petitioner is not liable for the addition to tax under section 6651(a)(1).

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From the Judicial Review

     While in Iraq, petitioner was given a memorandum issued by Robert L. Hunt, the Acting Deputy Director, Compliance Field Operations, Internal Revenue Service (IRS). This memorandum discussed the appropriate steps for civilian personnel to take when engaged in an IRS examination and collection activity involving a taxpayer deployed to a Qualified Combat Zone. Petitioner did not remember who gave the memorandum to him.

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Industry Talk: Foreclosure Freeze Could Put Security Clearances At Risk

Oct 24

Posted by Matt in Finance, Industry Talk | No Comments

     This popped up on my radar and I thought this was very interesting. I have not received any emails from contractors who are dealing with this problem, but I am sure it impacts a few out there. If anyone has experienced any issues related to this, feel free to comment below. -Matt

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Foreclosure freeze could put security clearances at risk

By Dina ElBoghdady and Dana Hedgpeth

October 20, 2010

The sudden moratorium on many foreclosures across the country has unexpectedly put some federal workers and contractors in jeopardy of losing their security clearances because of the heightened uncertainty clouding their finances, according to lawyers who handle these cases.

Employees with security clearances are monitored by the government for financial problems that would make them vulnerable to bribery or blackmail. And with many financial companies adopting some form of foreclosure freeze in recent weeks, it’s taking longer for some delinquent borrowers to resolve their mortgage cases and put their troubles behind them, the lawyers said.

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PMC 2.0: Paying Your Local Guard Force With ‘Mobile Cash’

Sep 5

Posted by Matt in Afghanistan, Africa, Finance, Industry Talk, Iraq, PMC 2.0, Strategy, Technology | 1 Comment

     This is an excellent article that discusses a very unique solution to a problem that we are dealing with in the war zones and other places throughout the world.  When companies subcontract with local guard companies for security, you often hear about how the managers screw over their guard force by skimming off the top of their pay.  They do all sorts crappy things to their people, and it can do a lot of damage to the morale of the guard force.

     The idea of mobile cash is about how the customer that pays for this guard service, can ensure that their contracted guard force is getting paid on time and in full via cell phone/text messaging.(read the article below for details) This is especially pertinent in war zones where telecom might be up and running, but not much else. Africa, Afghanistan and Iraq all have thriving telecom markets, and everyone has cell phones, and this is one more way to tap into this technology for the good of the company and mission.

     In order to maintain the edge in this market of force, and not lose folks to the enemy or a competitor, you need to make sure every last penny you are spending on these guard contracts is accounted for.  It also makes it very hard for your subcontracted field managers to take from the guards, which will also help in your market of force optimization. Anything you can do to minimize the potential for corruptive activities is a good thing.

     Now on to some ideas with this ‘mobile cash’ concept that the authors could have expanded on.  I have talked before about COIN and SMS, and this kind of cell phone payment system will make it easier to crowd source and spread messages. Some of the ideas I was thinking of is to offer bounties through the same system for any individuals that can locate wanted enemies or provide information. You could also provide bonuses to guards that participate in surveys.  How about an english learning program, which would make it a game for guards to learn english?  There are a ton of things you could ask the guards to do in order to get ‘feedback gold’ before they could collect their paycheck. I guess the point is, is just offering payment through this convenient service will be reward enough for anything you need them to do.

     The other thing that you could do with this concept for government related services, is to constantly ask police, military, and government folks to identify issues that need to be addressed within their organizations–before they collect their paycheck via phone. You don’t want to piss them off by making them go through too many hoops, but you could definitely tap into all of these ‘human sensors’ throughout the organizations, and get a feel for what is going on and collect data.

     I really like the commerce angle on this.  If this mobile cash concept makes transactions more transparent with better record keeping, then that will make banks more accountable. Especially when you have dorks like Karzai’s family in charge of the Kabul Bank, and because they keep playing games and writing checks to all their friends, that now you have a bank in trouble. (and I will pull my hair out if the US bails out this bank…pfffft) Hell, if there was a way to bypass corrupt local banks and maybe use international banks or even try a telecom bank type system?  Who knows, but either way the cell phone transaction will only add more record keeping to the whole thing.

     Now for the future.  I believe in several years, the smart phone market will catch up in these war zones.  People might joke, but locals in the cities will purchase these things because they are status symbols. The car, motorcycle, satellite dish, cellphone, and the soon to become a hit ‘smart phone’ are all status symbols that locals in these countries want to have. These devices will also be within their reach just because there will be such a large supply of them throughout the world.  The telecom industries in these countries will also do their best to keep up with this latest trend.  That is just my thoughts on the future of this stuff.

     Now imagine a local Afghan businessman with basically a computer in his pocket?  The apps, the online payment systems of international banks, the social networking, all of it, will be available to these folks in developing countries. It will be wise for us to take advantage of this new reality, and develop strategic communications plan that utilizes these devices as a means to reach out. Good article and a big hat tip to the guys at Small Wars Journal for putting it out there. -Matt

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One Cell Phone at a Time: Countering Corruption in Afghanistan

by Dan Rice and Guy Filippelli

September 2, 2010

Download the full article: One Cell Phone at a Time

American commanders are preparing for a major offensive in Afghanistan to attack one of the most formidable enemies we face in country: corruption. Despite sincere efforts to promote governance and accountability initiatives, Afghanistan has slipped from 112th to158th place on Transparency International’s global corruption index. One reason the international community has been unable to effectively tackle corruption in Afghanistan is that our own reconstruction efforts perpetuate the problem. As Secretary of State Hillary Rodham Clinton recently acknowledged, “Corruption, frankly… is not all an Afghan problem.” Money appropriated to secure and stabilize the country is too easily siphoned and redirected as it changes hands, inevitably making its way to local powerbrokers, insurgent networks, and offshore bank accounts, rather than the individuals who need it most. One solution to this problem lies in the palm of our hands: the mighty cell phone.

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Finance: Foreign Earned Income Exclusion Eligibility Online Tool

Jul 20

Posted by Matt in Cool Stuff, Finance, Industry Talk | No Comments

     This is an awesome little tool to use to see if you qualify for the foreign earned income exclusion. This is always an issue every year for contractors, and especially when you have worked multiple contracts and you are not quite sure if you qualify.

     Personally, I think the FEIE should be based on a pro-rated system*. Meaning for how many days you worked in country, is how many days you earned.  Guys who worked 330 days, earn the full exclusion–as they should.  Guys who could only get in half that many days overseas, should be able to get half the exclusion amount. The way it is set up now, you could spend 229 days overseas, and because you couldn’t get that one day, you do not qualify.

     That is a crappy set up in my view, and for many folks to get that 330 days overseas can be pretty difficult.  Especially if you have family obligations, you change contract or the company only gives a limited amount of days overseas, or some unexpected issue came up that would hinder your plans for staying overseas. Then your penalized for it, as if all those days worked didn’t mean anything.

     Either way, check it out and let me know what you think? -Matt

*it is only pro-rated if you start in one tax year, and promise to continue working overseas into the next tax year.

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Foreign Earned income exclusion eligibility online tool

While our online tool is designed based on years of experience and IRS source documentation, please remember that the most valuable advice we can give you for your foreign tax planning needs would be the result of proper analysis and live conversations. This online assessment can indeed give you a very good idea of your eligibility for the foreign earned income exclusion. Please click on the button below to begin the assessment (You are 5 minutes away from finding out if you qualify!):

startFinance: Foreign Earned Income Exclusion Eligibility Online Tool

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Cool Stuff: GPal, Inc.

Jul 18

Posted by Matt in Cool Stuff, Finance, Weapons, Weapons Stuff | 7 Comments

     I like it!  GPal or Gun Pal is an alternative online payment system that you can use to purchase anything ‘legal’.  So if you want to buy a firearm from someone using GPal, you can do that and your account will not be frozen.  With the other online payment groups, they are not at all gun or ammo friendly, so GPal is definitely a gun friendly alternative. (for US folks)

     The other important tidbit to mention here, is that you don’t have to use it for firearms or ammunition.  You can use it just like you use Paypal, to buy all types of things or services ‘that are legal’.  As you can see with the name change, they had to make it less specific of a title to symbolize it’s utility. Customers might get the impression that it is purely for gun or ammo purchases, and that is not the case.

     Good move and I hope it takes off. I would be curious if any of the readers have signed up for GPal and what their thoughts were about the service? -Matt

Facebook for GPal here.

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untitledCool Stuff: GPal, Inc.

HEALDSBURG, CA – May 13, 2010 (For Immediate Release)

GUNPAL, the leader in transaction-neutral online payment processing, is now operating as GPal, Inc. at the website https://www.gpal.net/

In order to appeal to a broader market and offer superior products and services, we are reorganizing under GPal, Inc. Our users will find familiar functionality and feel, secured by our Verisign EV SSL Certificate, the strongest in the world.

Only the name is evolving to better serve our user base and provide a growth path for expansion. All buttons, links and banners will continue to work but will be redirected to gpal.net. Thank you for your support thus far in providing a transaction-neutral payment service.

Sincerely, Ben Cannon

Chairman/CEO

GPal, Inc.

About GPal:

GPal is an online payments and money transfer service that allows you to send money to anyone with an email address in a transaction-neutral environment. GPal has revolutionized the transfer of money in heavily regulated industries and deals with fraud in a unique and very successful way. Accounts at GPal are FDIC insured. The company is expected to expand its offerings internationally in the near future. For more information please visit https://www.gpal.net/ or contact pr@gpal.net

*****

HEALDSBURG, CA – October 29, 2009 (For Immediate Release)

“GUNPAL, Inc. is a transaction-neutral online payments platform with a philanthropic spirit,” announces Founder/CEO Ben Cannon. “It is also the first serious competitor for PayPal Inc.”

A percentage of each transaction is donated to a selected charity at no additional cost to the user. The initial list of organizations includes the American Red Cross, American Cancer Society, and the Supercomputing Disease Research Center. Users can also suggest charities for consideration.

An avid supporter of constitutional rights, Cannon created a discrimination-free online payments application, starting with the recognition of the Second Amendment right to keep and bear arms.

Prohibited by PayPal’s “Acceptable Use Policy”, the $3 billion firearms and accessories industry has adopted GUNPAL as the payments platform of choice. “Firearms can only be sold by licensed dealers. GUNPAL is more convenient than other forms of payment as its comprehensive transaction tracking system is secure and reliable for our audits,” says Mitchel Chapman of WBtactical.com, a licensed firearms dealer.

An estimated one hundred million firearm owners nationwide now have a platform with which they can trade ammunition, scopes, and other accessories securely and hassle-free. As a socially responsible company, GUNPAL directs its firearm buyers to government documentation on current firearm laws and regulations and will provide licensed dealer listings by buyers’ zip codes in a future release. Having dominated the firearms niche, GUNPAL is already targeting other under-served markets with several new projects under way.

With every line of code written in-house, most of the engineering effort has been dedicated to fraud prevention. GUNPAL’s unique anti-fraud and anti-phishing systems take a finer-toothed comb through customer data for maximum privacy and security. Reduced fraud cuts operating costs resulting in lower fees for most common transactions as compared to PAYPAL. Cannon’s first company, GeoVario, LLC, was the natural choice for web-hosting services.

Founded in 2004, GUNPAL is a transaction-neutral online payment system that allows easy transfer of funds to anyone with an email address. Privately funded, GUNPAL has revolutionized the transfer of money with its pro-constitutional voice, unique anti-fraud approach, and philanthropic spirit. The company is expected to expand its services internationally in the near future.

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Military News: Admiral Mike Mullens– Debt Is Biggest Threat To U.S. National Security

Jun 25

Posted by Matt in Afghanistan, Finance, Letter Of Marque, Military News | No Comments

     “Of the total military spending in the world, the US spends half of that, and that’s an unsustainable number,” Erik Prince, founder and chairman of Xe, told CNBC Thursday.

    “You’re going to have to turn to private sector efficiency initiatives if the US is going to be able to project power and help its friends,” -Erik Prince, June 24, 2010

*****

     Thanks to Doug for sending me this. The numbers on this are staggering.  I also think that Prince is absolutely right.  If we plan on continuing the war effort, then efficiency initiatives in this war will be a necessity.  Those efficiency initiatives come from competition and the innovation born from that competition in private industry.  The money is running out and both government and private industry will be partnering on this to find a way.

     With that said, this is another great reason for introducing methods of warfare that might be more cost effective. I talk about the concepts of incentivizing warfare here all the time.(letter of marque, privateering, bounty hunting, etc)  I personally feel that if you want to combat an out of control industry of terror, drugs, or piracy, you need an organized and violent industry that profits from their demise.

     I would also like to see an effort to make supplying the troops more cost effective. Do we have to fly or convoy fuel into Afghanistan, or can we figure out a way to either grow fuel or utilize some other energy source to power our vehicles? Do we have to ship in food, or could we grow food locally on military farms, or through co-operatives with local farmers? Do we have to use expensive jets and bombers, to provide close air support against an enemy that has no air force? Do we have to helicopter troops in, or can we drop them in by parachute?  Little changes here and there, can do wonders for reducing that million dollar price tag per soldier, per year, in a country like Afghanistan.

     Most of all, are we doing all we can to invigorate investment in Afghanistan?  Could charter cities be set up in Afghanistan, as a way to invigorate progress in that country?  How about focusing on infrastructure that supports this trillion dollars of mineral wealth? Are we creating an environment that is attractive to all investors, and not just China?

     These are all just ideas to throw around, but I really think as the belt is tightened, you will see efficiency initiatives becoming more important to the military.  They will still have a mission to accomplish, but it will be about doing more with less.  And private industry will be right there with government and the military, coming up with the better/faster/smarter/cheaper solutions necessary to get us there. -Matt

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Joint Chiefs chairman reiterates security threat of high debt

By Roxana Tiron

06/24/10

Pentagon leaders, the military services and defense contractors must work together to cut bureaucratic bloat and unnecessary programs, the chairman of the Joint Chiefs of Staff said Thursday.

Adm. Mike Mullen also renewed his warning that the nation’s debt is the biggest threat to U.S. national security.

“I was shown the figures the other day by the comptroller of the Pentagon that said that the interest on our debt is $571 billion in 2012,” Mullen said at a breakfast hosted by The Hill. “That is, noticeably, about the size of the defense budget. It is not sustainable.”

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Industry Talk: Erik Prince On CNBC

Jun 24

Posted by Matt in Afghanistan, Finance | 5 Comments

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