Change in scenario for next years IRS filing..

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Frankd1
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Joined: Tue Feb 14, 2012 9:58 am
Location: Canada

Change in scenario for next years IRS filing..

Post by Frankd1 »

Hi,

I have some questions about a change in my wife's scenario for next years IRS filing (for the 2014 tax year). She is a USC who lives and works in Canada as a Canadian PR. To date her scenario is pretty straight forward as far as her income, bank accounts and spousal RRSP. So far her returns have consisted of filing a 1040, schedule B, 1116, schedule 8812, 8891, FinCEN 114
No requirements at this point for 3520's or 8938

Here is the new scenario:

She has written a children's book series, she did all of the writing and her cousin did the illustrations. She linked up with a Canadian publisher and went the self publishing route. She signs a contract with them for editing and printing and access to different markets. However, she pretty much did everything in terms of writing, illustrating, directing the publisher as to the layout of the book, promoting, marketing etc.

She will earn income from this in 2 likely ways:
- if people want to purchase books they can order online from retailers or directly from the publisher's online store. She will receive a check quarterly from the publisher for her share of the profits from these online sales.

- she can purchase printed books from the publisher at wholesale cost and then sell them at various promotion tours, readings etc. She keeps all profits.
eg. she buys x number of books from publisher for $4 plus sales tax and then sells them for lets say $10…

She is setting her business up as sole proprietorship. She does have start up costs such as initial publishing contract, book purchases, supplies, travel etc…

Here are my questions:

1. Are all of the earnings from this, whether its from a quarterly check from the publisher, or, from her selling books on the road, considered self employment income?

2. If so, what new forms are we looking at as far as next years return?

3. is all of this income treated as earned income? She is setting up as sole proprietor and essentially doing all of the work. Her personal services are integral to this.

Sorry for the long post, I realize next years filing season is a ways off but I'm trying to get prepared ahead of time given this new change.

Thanks
nelsona
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Post by nelsona »

I'll only address the cross-border aspects of this, as all income will be reported in both countries as usual, with IRS giving credit for Cdn tax. Nothing special there. It is self-employement income, and earned income.

Since she resides in canada, she will be exempt from SE tax (Social security and medicare for self-employed). CRA can provide a letter of compliance indicating that she is paying both sides of CPP on this income, if required.
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nelsona
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Post by nelsona »

any software package will guide her on how to report this income both to CRA and IRS.
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Frankd1
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Location: Canada

Post by Frankd1 »

As always, thank you Nelsona!

Being exempt from the SE tax in the USA means no schedule SE AND no form 8959 as I understand it? I can get a letter from CRA if need be...

I'm glad you mentioned the tax credit, this brings up another question:

I'm guessing that TaxAct will show this income on line 12 of the 1040 and it will also populate a schedule C? At least it would make sense to go on line 12 for Business income. I will play around with the software and see what it generates.

As for the tax credit and form 1116,

Can I consider this as gen limit income and lump it in with the other gen limit income? Just so that I can use one f1116 for all of the gen limit instead of several different forms for the same type of income.

Currently we use one gen limit 1116 to cover the credit for wages, UCCB, EI from maternity leave (there wont be EI for next year). I could then add in whatever income is from the business and use the same form.

Thanks again.
nelsona
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Post by nelsona »

It is gen limit income
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Frankd1
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Post by Frankd1 »

Update and follow up question:

My CA who prepares our CRA returns, verified (as you said, nelsona) that any money made in Canada from her book - whether it is payment for an appearance or for the sale of books will be shown on her CRA return as self employment income. All appropriate taxes will be taken - income, CPP, etc…
He will also show any startup costs for her sole proprietorship business and any continuing cost for the business - expenses etc.

When I prep her IRS return (using TaxAct), I will show this SE income on the appropriate f1040 line and also use f1116 for the FTC along with her other gen limit income from wages from her regular job.

I think I'm clear on this part, here is where my other question lies:

She has been asked to make an appearance at several schools in her home State of Michigan. She will travel to MI, do the readings and then come back home to Canada. They will pay her for the appearance plus any books that she is able to sell…we are anticipating that it may be a couple of thousand dollars (earned in USA) between now and the end of 2014. No US taxes taken off, so self employed.

Because this is now money earned in the USA, I'm looking for some clarification on how this is reported.

1. I realize we show this to our CA, who then reports it on the CRA return as SE income..because no taxes are withheld or paid to the US, are taxes then taken in the same manner by CRA as the Canadian SE income?

2. If thats the case, it would then be reported on the IRS return in the same way that her Canadian SE income is reported? With proof from CRA to show compliance..

Or, because this is money earned in the USA, is it reported differently
nelsona
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Post by nelsona »

For this portion of income, which is indeed SE income, the following is the treatment:

For income tax, it is US sourced so the gen limit 1116 does NOT apply, the 1116 credit comes on the "re-sourced by treaty" portion, since she is a Cdn resident with no fixed based in US. All the tax will be paid in Canada, and you re-source a sufficient amount of it to reduce the US tax to 0 (assuming the Cdn tax is more than the US tax.)

For SE tax, her compliance letter for all her other SE tax covers her.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Frankd1
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Location: Canada

Post by Frankd1 »

Thanks nelson, appreciate the reply!

I am going to spend time researching "re-sourced by treaty" income and its 1116 credit, as this particular income scenario is all new to me…

My basic understanding if I am correct, is that under "resourced by treaty" agreements, whatever income she has from the U.S. counts as income from the treaty country when figuring out the taxes you owe it. The treaty country being Canada…I would imagine that the Cdn tax would be more than the US tax in this scenario as well..

As far as the 1116 for this US sourced SE income, this will be a separate form, which is fine. I hope that my TaxAct software is capable of doing this particular exercise!

Thanks again
Frankd1
Posts: 107
Joined: Tue Feb 14, 2012 9:58 am
Location: Canada

Post by Frankd1 »

nelsona,

Once I determine what amount (through apportionment) of the taxes paid to CRA directly relate to the US sourced SE income, I will be able to determine the FTC using a specific f1116 for "re-sourced by treaty"

In addition to this 1116, should I also include a form 8833 to explain the re-sourced by treaty income?

I have used an 8833 in the past for the spousal RRSP, but I was also filing an 8891 for the RRSP at the same time. Because this seemed redundant to include an 8833 when an 8891 was also included I did not submit an 8833 this past year. It seemed pointless to include another form to make a treaty based return position disclosure, when the 8891 already covered all of that…

However, not sure if its needed with this particular 1116..

including the 1116 for income re-sourced, there will also be a separate 1116 for gen limit wages and one for passive income (bank interest)..
nelsona
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Post by nelsona »

For re-sourced use the worksheet in the FTC Publication.
It would not hurt to atach an 8833.
I assume when you say a gen limit 1116 for "wages", you mean self-employment income.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Frankd1
Posts: 107
Joined: Tue Feb 14, 2012 9:58 am
Location: Canada

Post by Frankd1 »

I'll take a look at pub 514..

I have been using TaxAct software for the IRS returns, so I am assuming that it should be able to guide me through this re-sourced 1116, as it has done for the gen limit and passive limit 1116's that we have filed in the past...

As far as the 3 form 1116's that she will be filing, here's how they break down:

- one is for general limit income which includes all of her Cdn wages from her main job as a teacher. It will also include the Universal Child Care Benefit (UCCB) for our two children. As well, it will include any Cdn self-employment income from the sale of her books and reading appearances IN Canada.

- the next 1116 is for passive limit…this will be for a small amount of bank interest from one of our joint savings account.

- the third 1116 for re-sourced by treaty, is for the US sourced self-employment income that will be a result of any book sales and reading appearances that she makes in the USA.
Frankd1
Posts: 107
Joined: Tue Feb 14, 2012 9:58 am
Location: Canada

Post by Frankd1 »

Resurrecting this thread as I have a couple of questions....

Nelsona,

My wife did register her business name with the Province of Ontario as a small sole proprietorship business. This is for the children's book she wrote and had published, she is working on the next book.

She had startup up costs associated - publishing fee's, printer's fees for supplies, website creation, stock of her book to have on hand etc. If books are sold online or through the bookstores, she receives a check from her publisher. If she sells directly to people, she receives the funds from those people.

She does most of her work at home: writing, promoting, marketing, networking, setting up readings etc.
Her startup costs and expenses were much higher than what she made from book sales, she only made a few hundred dollars which was all expected.

She did earn general wages from her regular job as well....

Our CA will prepare her CRA return to show her general wages from her regular job. In addition, the business startup costs and expenses and whatever little bit of money she made from this business as SE income..

Question about the IRS side of things:

As was mentioned in an above post, the little bit of SE income gets shown on her 1040 - line 12 I believe as opposed to line 7 or 21..

Line 12 says to attach schedule C or C-EZ...however, does a small sole proprietorship business in Canada generate the requirement for schedule C?
Filling out expenses (part II), Cost of goods sold (part III), information on vehicle (part IV), etc etc?

My understanding with regards to schedule SE (1040 line 57) for the IRS is that she is exempt from it because she resides in Canada and will have paid SE tax to CRA for this income.

Just curious about schedule C though as line 12 1040 says to attach it...

Her IRS returns were straightforward up until now it seems!
nelsona
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Post by nelsona »

She is exempt from SE tax by the totalizization agreement. She needs to get a compliance letter from CRA.

As to net business income on schedule C, follow the rules for that schedule.

REalize however that if she wishes, and is eligible, she can exempt the income using form 2555, just like her wages.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Frankd1
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Joined: Tue Feb 14, 2012 9:58 am
Location: Canada

Post by Frankd1 »

Ok, understood on the compliance letter from CRA...

I have started to read through the instructions for schedule C..

Just spoke with our CA and because last year was her startup year for this business it looks like there is the potential that startup costs and expenses may wipe out (or nearly so) any little bit of SE income from the business as well as her general wages from her teaching job and other income from the universal child care benefit (uccb).

If her CRA return shows an overall loss and as a result no income, am I correct in assuming that an IRS return must still be filed to show this loss and no income as well? I am thinking so...sorry if thats a stupid question lol.

I would imagine that business operating costs and expenses in Canada may not translate the same way to the USA and IRS. So a business loss in Canada that results in zero income, may not result in zero income in the USA. I will continue reading up on schedule C..

As far as form 2555, we have always used form 1116 in order to benefit from the additional child care tax....

If there is a loss and therefore no income I would imagine that one could no longer benefit from the additional child tax credit....
nelsona
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Post by nelsona »

IRS doesn't care what you filed in Canada. She has business INCOME, so Schedule C MUST be filed, even if jus to prove that her expenses outweigh her proceeds.

You will have to determine if business losses can be used the same as in Canada, to wipe out other income.

The software will handle this easily.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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