Money Blue Book

Business credit cards have grown to become a commonly accepted and practical way for small startup businesses to acquire access to needed venture credit. Not only do they offer benefits unique to business office and supply demands such as higher credit lines, better credit card rewards, and more versatile expense tracking, they offer also the opportunity for growing businesses to build up their business credit history. This is important because one day the business may need to draw upon that developed business credit history to acquire corporate loans.

Individuals Can Apply For Business Credit Cards With Their Social Security Numbers

What many consumers seemingly overlook is that business credit card benefits can be available to them as well and are not reserved for complex business entities alone. Card applicants don’t have to be part of a corporation or a limited liability company (LLC) to qualify. Ordinary individuals can go into business for themselves and establish their business operation as a sole proprietorship. If you are self employed, a freelance worker, or an independent contractor like myself, you may very well be operating as a sole proprietor already. In the eyes of the Internal Revenue Service (IRS), the government, and credit card companies, the individual and his or her sole proprietorship business are one and the same for legal and income tax purposes. The only significant difference is when it comes to record keeping and business tax deductions. As sole proprietorships are entitled to write off their business expenses against their income, most are encouraged to apply for and utilize an Employer Identification Number (EIN). This federal tax ID allows the sole proprietor to more easily keep their personal and business expenses separate so that business transactions can be more properly distinguished and categorized for tax deduction purposes. Having a separate Employer Identification Number apart from the individual’s personal Social Security Number (SSN) also allows the individual to apply and obtain credit lines separate and distinct from his own personal credit history.

For ordinary consumers interested in taking advantage of the many benefits of business credit cards but aren’t interested in actually writing off any business deductions, so long as they properly pay off the balance each month, they won’t have to put up with any extraneous IRS tax filing obligations. Other than the introduction of a separate business credit line for the sole proprietorship or company applicant, the differences in usage between consumer and business credit cards are fairly minimal.

Business and Personal Credit History Scores Are Reported and Recorded Separately

While they may be taxed as income generated from the same source, the sole proprietor and his or her business entity are treated separately for credit recordation purposes. Their credit histories and credit scores are not intermingled or consolidated when it comes to reporting credit transactions to the credit reporting agencies. In fact, the way they are reported differ as well.

Business credit scores range from a scale of 0 to 100 with 75 generally regarded as an excellent credit rating (example of a business credit report). Some agencies even report their own metrics such as Dun & Bradstreet (DnB), which reports its own Paydex score regarding the likelihood of credit delinquency. There are different types of scoring methods used for personal credit scores as well, but the most popular one is the FICO score, which ranges from 300 to 850 with 700 regarded as excellent. Both business and personal scores along with their accompanying credit history attempt to reflect the individual or business entity’s credit worthiness based on past and current credit lines, credit inquiries, and history of paying back outstanding debt.

Even With An EIN, Business Credit Card Applications Usually Require SSN’s As Guarantees

A true business or corporate credit card is a line of credit that is offered solely under the name of the business entity with all activity reflecting only on its own business credit history through business credit reporting agencies like DnB, Equifax, and Experian. However, the vast majority of online business credit cards still require that the business card applicant provide a personal guarantee for business credit liability. That is why card issuers almost always still ask for both a business tax ID as well as the Social Security Number of the person applying for the card. There are ways to obtain a business credit card through local banks and major card issuers using only a EIN without the need of a SSN, but those types of cards are strictly limited to established businesses that have developed and extensive credit histories. Thus, unless your sole proprietorship has a long standing and proven credit rating with a major business credit reporting agency like DnB, you will be required to associate your SSN as a guarantee for unpaid debts.

How a business card application will impact the respective business and personal credit reports depends on the card issuer’s policy, but in the vast majority of cases, an initial and one time hard credit check is applied against the applicant’s personal credit history like any consumer credit card would for approval purposes. While the inquiry itself will show up on the personal credit report, the business credit card balance and credit line will not. This hard credit inquiry is only for the initial approval. Subsequent business credit activity will be recorded on the business’ separate credit history report solely, unless there is something like a missed payment. Because most online business credit cards are backed by the cardholder’s personal credit and linked by his or her personal SSN, in the event the business entity enters default such as by filing for bankruptcy, the default may be reported on the personal credit report. But in general, business credit activity is kept separate from the associated personal credit file. This is the case for all major business credit card issuers like Citibank, Chase, and American Express.

However, despite the association of the applicant’s SSN with the business card as a guarantor, so long as the card payments are made properly, there is no business credit balance or credit usage impact on the individual credit history report other than the initial application inquiry hit.

Applying For A Credit Card With Just A Business Tax ID, Without A Social Security Number

For various reasons, including wanting to keep a pristine personal credit history report, or fear and paranoia about identity theft, some card applicants may seek to apply for a consumer or business credit card with just a business tax ID, without having to provide a personal SSN as a liability guarantor. Unfortunately that is not possible with the majority of online credit card offers. With regular consumer credit cards, attempting to replace the SSN with an EIN on the card application will likely result in a rejection letter as well.

I used to sell products on eBay as a money making hobby and even once attempted to make a side business out of it. It wasn’t easy trying to make profit while at the same time avoiding all the internet fraud and scams out there. While I eventually decided to pursue other ventures, I had a friend who continued to dabble in eBay auctions. Soon enough, he had successfully turned what started out as a one room operation to an impressive one man eBay business machine that engulfed his entire basement. Everytime I stopped by his house I was always startled at the sheer number of brand new Dell laptop and ThinkPad boxes stacked in piles throughout his basement that overflowed into his unoccupied garage.

Through his closely guarded network of online connections (he never disclosed them to me), he was able to secure excellent wholesale deals on hot electronics like laptops, desktop computers, and handheld PDA’s for sale on eBay. His racket continued for several years to my continued amazement as I wondered how he managed to stay so consistently profitable despite rising eBay fees and heavy online competition. One day I finally turned to him and asked him if he was reporting his eBay earnings as taxable income on his federal income tax. He simply smiled and changed the subject. Obviously, the answer was no, thus exposing the secret to his profitable eBay success – tax evasion!

Frankly I don’t really blame him for withholding his eBay profits from the Internal Revenue Service (IRS), although I wouldn’t have done that myself. The subject of eBay tax enforcement has been murky for years, mostly due to the lack of proper paper trails and the undeveloped legal area of online auction income. However, the IRS has been recently making moves to crack down on eBay powersellers and auction proprietors to compel the reporting of all business profits. The IRS has also set its taxation efforts on other popular online auction sites like Amazon and UBid, as well as other online hobby market networks like Etsy. I suppose it was about time the almighty IRS dealt with the issue of online auctions.

The IRS Struggles To Compel eBay Sellers To Divulge Their Taxable Earnings

When it comes to reporting their sales income to the IRS, eBay sellers currently operate on the honor system. However, this honor system has resulted in a significant shortfall of under-reported and untaxed auction earnings. Currently, eBay does not report seller stats or submit sales records to the IRS unless it is honoring a subpoena request for information. Many amateur and aspiring eBay entrepreneurs have been able to work the eBay tax loophole for some time and avoid having to pay tax on their profits. It’s a risky game of tax evasion roulette, but the lax enforcement has allowed it to persist for some time.

Recently, the federal government and the IRS has begun to put pressure on major online auction retailers like eBay to cough up user information and sales records, and has even introduced legislation to require market hubs to report personalized sales activity. Of particular taxation concern are the millions of auction sellers who consider eBay as their primary or secondary source of income but fail to accurately report their earnings. Obviously this effort is going to encounter much resistance from sellers and even the auction sites themselves since new tracking policies will undoubtedly result in higher tracking and record keeping costs. The prospect of requiring sites like eBay to track user information based on individual Social Security Number will obviously have the usual online privacy advocates up in arms.

While this taxation crackdown may bug a few eBay sellers, the requirement to report auction income and taxable business earnings is nothing new and has always been around. It’s just only until recently that the IRS finally decided to work harder at plugging up the tax gap to stem tax evasion activities. Mandating the implementation of tools to enforce tax compliance already exists in most employment sectors and the IRS believes the new frontier of online auctions should be no exception.

When Do Proceeds From An eBay Auction Sale Have To Be Reported As Taxable Income?

From the amateur seller who considers eBay to be nothing more than a hobby, to the heavy traffic Powerseller who runs his or her operation as a profit generating business, no one really wants to spent the time to report earnings as income if he or she can help it. However, the IRS instructions make it clear that all sources of income can be taxed, which includes everything from online auction profits, and income from gambling activity, to even illegal “business operations” such as drug dealing and prostitution.

Even if the eBay seller makes a few sales here and there as a hobby, the IRS requires all income to be reported – this includes wages, salaries, tips, gambling winnings, money found on the floor, sweepstakes earnings, business income, and yes, eBay earnings (both hobby and business). The hobby or business nature of your eBay income only becomes an important factor when determining whether your eBay losses and operation costs may be used to offset your eBay income as a business deduction.

The correct question to ask regarding taxability is not necessarily the frequency or dollar amount of the transactions – but rather – did the eBay auction activity result in a net profit? For those who use eBay or other internet auction sites to sell old stuff that’s been piling up in your garage, you probably don’t have to worry about paying income taxes on the proceeds since the cost (the basis) usually exceeds the selling price. Under current tax law, an individual who sells an item online and collects more money than its original purchased value is expected to report that money as income on his or her tax return. Items whose original purchase basis value cannot be determined is typically valued at $0 under current tax law. Thus, it’s advisable for all eBay sellers to get in the proper habit now of retaining their purchase and sales records. You never know when the IRS will flip the switch and go nuts with the eBay seller tax audits. It’s only a matter of time.

Why Does It Matter If Your eBay Selling Is A Hobby Or A Business?

All eBay online auction sellers have a duty to report their earnings and to comply with tax law obligations to avoid an IRS audit. For most casual eBay hobby sellers who occasionally run the online equivalent of the garage or yard sale, they usually are not obligated to report their sales. That’s because for most online garage or yard type sales, the items sold are usually personal household items purchased over the years and used. As such, the resulting selling prices are almost always lower than the original purchase basis price. The exception occurs when the item for sale has appreciated in value. Even if the transaction was intended to be a simple online yard sale, if the item being sold was something like a set of rare baseball cards that had appreciated in value in excess of the original purchase price, the resulting earnings must be reported as taxable income.

The hobby vs. business debate matters when it comes to self employment tax obligations and tax deduction benefits. If the eBay operation is properly regarded as a business, the taxpayer may be entitled to business deductions to write off operating costs. Whether the eBay seller will be treated as running a business will depend on his or her intent to generate profit. Activities such as visiting pawn shops for resale bargains like my friend used to do will likely be seen as demonstrating business intent. Furthermore, when the individual is running a business operation that results in regular profit sales, he or she may also be obligated to pay self assessed quarterly estimated tax payments through Form 1040-ES.

If you lose money pursuing a hobby, you cannot deduct your hobby loss from other income, but you can deduct your expenses up to the amount of your hobby income on your tax return. A hobby loss is a miscellaneous itemized tax deduction, and as such, only the total that exceeds 2% of the adjusted gross income may be deducted.

For more information regarding the differing IRS treatment of hobby and business related activity, check out the IRS explanation. The IRS also provides a good tax information resource for online auction sellers.

When I went downstairs to the mailboxes to check my mail today, I discovered a letter in my slot with the ominous letters “IRS” and the trademark federal eagle logo stamped on it. My heart immediately skipped a beat. Was I being audited? But then I thought again – that wouldn’t make any sense – I hadn’t even filed my 2007 federal tax return yet.

I looked at the envelope more closely – the red lettering advertised the contents of the envelope as an important message from the IRS on the economics stimulus act of 2008 and implored me not to throw it away. Looks like I finally received one of those notorious notice letters that the IRS spent $42 million to issue. For $42 million you’d think the federal government would have been able to design a more conspicuously colored envelope rather than sticking with the traditional white junk mail design. If I hadn’t examined the lettering closer I may have chucked it into the trash can like I instinctively do with most spammy mail pieces I receive.

If you want to know what the letter said, I’ve transcribed the entire content message below. It was a typical boiler plate form message. They didn’t even bother to address the letter recipient by name. I’m simply referred to using the standard moniker – “Taxpayer”.

Why the federal government and the IRS chose to spend so much money to send us this information is beyond me. Is this part of the economic stimulus plan – injecting precious taxpayer money to jump start the U.S. postal service? Why else would they waste $42 million worth of stamps and envelopes to send every single taxpayer this pointless notice? None of the information provided was new and most of the facts could easily be gleaned from a simple Google search about the stimulus tax rebate or a visit to the official IRS tax rebate website.

What the federal government and the IRS needs to do is join the modern age and start issuing nation wide email and text messages rather than relying on ancient snail mail postal delivery means. The IRS already accepts free e-filing and most people already submit their tax returns electronically. It’s quick and easy. Official governmental notices being sent nationwide should accordingly adopt this electronic medium as well. Better yet, they should have used the money to help fund the Democratic Primary Re-elections in Michigan and Florida to stop the electorate disenfranchisement. That would have been a better use of governmental funds than to spend it on taxpayer junk mail.

If you didn’t receive your part of the $42 million colossal paper waste, here is what the message said. It’s applicable to everyone:

Economic Stimulus Payment Notice

Dear Taxpayer:

We are pleased to inform you that the Unites States Congress passed and President George W. Bush signed into law the Economic Stimulus Act of 2008, which provides for economic stimulus payments to be made to over 130 million American households. Under this new law, you may be entitled to a payment of up to $600 ($1,200 if filing a joint return), plus additional amounts for each qualifying child.

We are sending this notice to let you know that based on this new law the IRS will begin sending the one-time payments starting in May. To receive a payment in 2008, individuals who qualify will not have to do anything more than file a 2007 tax return. The IRS will determine eligibility, figure the amount, and send the payment. This payment should not be confused with any 2007 income tax refund that is owed to you by the federal government. Income tax refunds for 2007 will be made separately from this one-time payment.

For individuals who normally do not have to file a tax return, the new law provides for payments to individuals who have a total of $3,000 or more in earned income, Social Security benefits, and/or certain veterans’ payments. Those individuals should file a tax return for 2007 to receive a payment in 2008.

Individuals who qualify may receive as much as $600 ($1,200 if married filing jointly). Even if you pay no income tax but have a total of $3,000 or more in earned income, Social Security benefits, and/or certain veterans’ payments, you may receive a payment of $300 ($600 if married filing jointly).

In addition, individuals eligible for payments may also receive an additional amount of $300 for each child qualifying for the child tax credit.

For taxpayers with adjusted gross income (AGI) of more than $75,000 (or more than $150,000 if married filing jointly), the payment will be reduced or phased out completely.

To qualify for the payment, an individual, spouse, and any qualifying child must have a valid Social Security number. In addition, individuals cannot receive a payment if they can be claimed as a dependent of another taxpayer or they filed a 2007 Form 1040NR, 1040NR-EZ, 1040-PR, or 1040-SS.

All individuals receiving payments will receive a notice and additional information shortly before the payment is made. In the meantime, for additional information, please visit the IRS website at

www.irs.gov

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.“

- Honorable Learned Hand, U.S. Appeals Court Judge, Helvering v. Gregory, 69 F.2d 809 (1934).

The above quote is one of my favorite tax quotes from law school and one that I concur with wholeheartedly. It was a historical statement from a well known and respected former United States Appeals Court Judge regarding the minimalist extent of our obligation as citizens to pay taxes. The opinion reflects the view that we have no ethical or even patriotic duty to pay taxes beyond what has been legally assessed upon us. Thus, as the message advocates, it is within our compete given right to do everything within legal boundaries to minimize our personal tax liability exposure. If society deems the income and tax bracket disparity to be unfair or unjust, it is our duty as voters to ensure the government legislates fairly, rather than evade individual tax obligations out of protest.

Difference and Distinction Between Tax Avoidance and Tax Evasion

The practice of tax avoidance is essentially the credo of most tax attorneys and tax preparers. It is completely legal and there should be no moral or patriotic implications as it is in complete compliance with the law. Tax avoidance is simply the practice of working within the legal confines of tax law and regulations to maximize tax deductions while minimizing tax liability. In contrast, tax evasion works outside the rules by trying to duck legal obligations by hiding income through nondisclosure, or improperly taking deductions that one is not qualified for. There is a clear distinction between the two.

However, many people seem to inaccurately equate legal tax avoidance with the same type of immorality implications of those who practice tax evasion. For example, there are some who point out that wealthier people, through clever tax manipulation and deductions are able to drastically keep their tax liability very low. Even the Oracle of Omaha himself, Billionaire Warren Buffet noted that he only paid a 17.7% tax rate on his $46 million of taxable income in 2006, while his own employees paid an average 32.9% tax rate. His own receptionist reportedly paid a 30% tax rate.

This might not seem fair in my eyes or yours, but none of these moral questions obligate Warren Buffet or anyone else from having to pay more taxes than they are required to do so, as long as they fully comply with all existing tax regulations. If there was truly an injustice or immoral component or dichotomy to the current tax structure, it is the obligation of the federal government to implement a fair taxation policy, and ours as voters to ensure that the government do so.

We Should Not Confuse the Government’s Duty To Create A Fair Universal Tax System As Our Own

It’s been said that there are certain things in life that are simply inevitable, including death and taxes. Society needs taxes to function and requires an empowered government to execute the uniform exaction. Making the tax system voluntary would obviously never work because individuals would not be able to effectively enforce the collection without resorting to vigilante tactics. Thus it’s a necessity to have a strong government that can legislate and enforce tax codes, and mandate obligatory payments based on whatever sliding scale system it deems in the best interest of society. We have expressly given the government this power to legislate fair marginal tax brackets and to create an equitable system of tax deductions and tax credits to promote certain values and interests for the betterment of society.

It is not our own individual duty to draft our own federal tax returns to what we personally think will benefit the government. That duty has already been delegated away. Our responsibility as citizens is to operate in good faith within that tax framework to ensure we legally abide by the rules. If the day comes when we deem change is necessary, then our role is to change the individuals to whom we have delegated this legislative power to. However, our framed roles as taxpayers never expands beyond mere compliance.

So Long As We Abide By All Legal Tax Codes, We Are Free To Maximize Opportunities

Because our tax system is universally applied with every single income producing resident subject to it, we should not feel any moral, ethical, or patriotic duty to pay extra beyond what is demanded of us. So the next time you sit at your desk to prepare your tax return, you should not feel guilty about being able to cleverly duck certain tax obligations through legal manipulation. So long as you are fully abiding by the tax code, you are fully in the right. Our duty is to put the right people in power to make these difficult social and moral choices for the betterment of society. Once the universal tax codes have been laid in place, we are perfectly within our right to use every legal trick, tax loophole and strategy to minimize our own tax assessment to the betterment of ourselves.

As the taxpayer, we are under no obligation to provide any more to the government than we are required to. The tax code and our tax obligation is not in the nature of church tithing that we voluntarily offer out of altruistic feelings or charitable obligation. It’s a regulated and systematic way for the government to mandate fairness and to ensure equality of its citizenry. There is no tip that needs to be paid to the government. This is not a restaurant and the servers are not being paid minimum wage and dependent on our generosity. So long as we abide by legal regulations and aren’t resorting to the illegal practice of tax evasion, we are within our legal and moral right to try to reduce our own tax liability down to zero (if possible).

Thus the next time you feel guilty about being able to successfully and properly claim a whole slew of deductions, don’t be. There is nothing inherently wrong with the legal practice of tax avoidance. Thus, pay what you owe and nothing more. That’s the most responsible thing we can all do.