Sole Member LLC - Tax Questions

D

Diamethyst

New Member
Jurisdiction
Iowa
Had to leave a great job to move when my husband took a new position. As a woman in her mid-50s, I'm experiencing a lot of age discrimination in trying to find a new job here, so I decided to start my own business and see if I could make a go of it. My sole-member LLC will be effective Jan. 1. I have an EIN and will be opening a bank account as soon as my LLC is active. I have made a room in the home we rent into my office and am in the process of obtaining business permits, getting business cards done, building a website, and learning how to advertise.

First question - I live in Iowa. My first client may be a company from California. Will I need to pay quarterly taxes to California as well as to Iowa, or should I pay only California for that work? I know I will have to file as a non-resident there *first* and then apply for the credit here in Iowa, but I'm not clear if I have to pay both states and then get the refund, or if I can pay just California and then submit the credit at tax time.

Second question - My home office is ready to go and there is nothing personal in it at all. It will be used only for conducting my business. That said, my husband is a remote employee for a company with headquarters in Illinois; he is a regional engineer and his territory is here, so our home is also his customary place of business and he travels to his assigned stations from here only when he needs to effect repairs. Can he use space in the home office for his business purposes as well, or would that complicate things? He already has a separate space in another part of the house that he uses, so if it will create a problem for me, he's okay with not coming in here.

Thanks in advance for your assistance!
 
Thanks, AdjusterJack. Are you the same who used to be on FindLaw?

I get what you're saying... the simplified might be *easier*, but comes nowhere near the deductions I'd be entitled to take doing the standard method. My office is 120.75 sf and 8.05% of my total home space. 120.75 x 5 is only $603.75. 8.05% of my annual rent is $1,159.20. That doesn't include allowable deductions that I might qualify for come the end of next year depending on how things actually go (I'm expecting it to be slow at first, especially given the current virus situation, but you never know!). Thus the question as to whether my husband sharing the office space with me would disqualify the home office. I know there will be a lot more recordkeeping and proof required but that's what I do anyway. It may be a moot point if the business doesn't make much to start, but every little bit helps, and if the hubby sharing space would be an issue, he can stay right where he is on the other end of the house. The rules are not as cut and dry for him since he's an employee and not a small business.
 
Diamethyst said:
First question - I live in Iowa. My first client may be a company from California. Will I need to pay quarterly taxes to California as well as to Iowa, or should I pay only California for that work? I know I will have to file as a non-resident there *first* and then apply for the credit here in Iowa, but I'm not clear if I have to pay both states and then get the refund, or if I can pay just California and then submit the credit at tax time.
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The details of what your LLC will do and to what extent you do business in CA will matter a great deal. First, for income tax purposes for federal income tax your sole member LLC is disregarded and treated as a sole proprietorship business owned by you unless you elected for the LLC to be classified for federal tax purposes as a corporation. Most states follow the same income tax classification as the federal government does. Thus, your income goes on your personal income tax return and is taxed as though it was directly your income. That matters because the rule for individuals state income tax is that your home state has the right to tax all your income but must either provide you a credit for income tax paid on that income to another state or exclude from taxable income out of state income. Iowa does the former; you get a credit for tax paid to another state. States other than your home state may only tax income arising in that state and only if you have sufficient activity there to have a nexus in that state.

So if you are subject to tax in CA you would follow the rules in CA for nonresidents, including making any estimated tax payments on your CA source income, and you would file a return in CA for that income. You'd only get a refund from CA if your estimated payments exceeded the tax you owed. You would then claim a credit on your Iowa return for the tax paid to CA.

But there is a hidden danger here for you. You operate as a LLC and while ignored for income tax purposes, it is not ignored for other purposes. If you have sufficient activity in CA such that you would be considered to be doing business there or have nexus there (the two concepts are similar but not the same) you (1) may need to register your LLC in CA as a nonresident LLC, which means paying the fees to the state for that registration, getting a registered agent in CA, and being subject to being sued in CA, (2) you may be subject to the CA franchise tax, which is a minimum of $800/year, and/or (3) you may have to collect CA sales tax if any goods or services you provide are subject to that tax.

So a great deal turns on the extent to which you do business and have connections in CA (and any other state outside Iowa). If you keep it so that you are not considered to be doing business in CA and have no tax nexus there things will be much more simple and less expensive for you. So I suggest you see a tax attorney who practices state and local tax (SALT) to review how you operate and advise you as to what obligations you'll have to other states. There is not enough information here for me to tell you whether you'd be subject to tax in CA and whether you'd need to register your LLC there.

Diamethyst said:
Second question - My home office is ready to go and there is nothing personal in it at all. It will be used only for conducting my business. That said, my husband is a remote employee for a company with headquarters in Illinois; he is a regional engineer and his territory is here, so our home is also his customary place of business and he travels to his assigned stations from here only when he needs to effect repairs. Can he use space in the home office for his business purposes as well, or would that complicate things? He already has a separate space in another part of the house that he uses, so if it will create a problem for me, he's okay with not coming in here.
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You must make sure that the space meets all the requirements for the deduction, including that it be used exclusively for business. Your husband can come in and say hi, but he should not conduct any activity there not connected with your business. The IRS says the following about exclusive use in Publication 587:

Exclusive Use
To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. The area used for business can be a room or other separately identifiable space. The space does not need to be marked off by a permanent partition.

You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes.

Example.

You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Your family also uses the den for recreation. The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den.

Exceptions to Exclusive Use
You do not have to meet the exclusive use test if either of the following applies.

  • You use the part of your home in question for the storage of inventory or product samples (discussed next).
  • You use the part of your home in question as a daycare facility (discussed later under Daycare Facility ).
Note.
With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test.​
 

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