Q:  I'm a British citizen working in the USA for the past year. I'm selling my UK residence for a profit of $110,000 U.S. My residence was rented out and depreciation was claimed. What are the tax consequences?

A:  You should qualify for the residency exemption under U.S. law, except for the amounts that have been depreciated. I'll need to know whether you've owned and lived in your foreign residence for at least 24 of the 50 months prior to sale and if the profits will be $250,000 U.S. or less (assuming you are not married - $500,000 if you are married and file a joint return). However, the exclusion does not apply to the depreciation amount. Depreciation is recaptured at the rate of 25% federal.

Q:  Several years ago I exercised non-statutory employee stock options and paid tax thereon. Now, the company is going bankrupt. May I recover the taxes paid on the stock?

A:  No. When you exercised your option, you received taxable compensation in the form of stock, rather than cash. You made an investment decision to hold the stock rather than sell it. Your investment subsequently lost value and you are treated the same as any other stock investor. You'll have a long-term capital loss based on the decreased value of your stock. You may use the loss to offset capital gains and up to $3,000 per year of ordinary income. You may carryforward your loss until it is fully depleted.

Q:  I am in the process of launching my online service. My plan is to initially minimize my tax obligations and paperwork, then eventually bring in investors and take the company public. Should I use an LLC or a corporation?

A:  The choice of entity and its location depends on a variety of factors. Because of California's LLC gross receipts tax, a start-up with high gross receipts relative to net income should not be a California LLC. A Delaware corporation is probably the best entity if one is seriously considering going public, but in the short run, there can be tax disadvantages (high corporate tax rates and a second tax on dividend distributions), especially if the company is subject to California taxes, because it is based in or derives substantial income from California sources.

A Delaware LLC is also a good choice initially, but you'll need to convert to a corporation if investor's insist on receiving corporate stock, rather than LLC membership interests, or if the company is going public.

The browsable version of this page: August, 2003 FAQ

All contents copyright © 1995-2003 Robert L. Sommers, attorney-at-law. All rights reserved. This internet site provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet® is a registered trademark of Robert L. Sommers.