Taxes on Note Purchases & Income? - Posted by Don

Posted by Don on August 31, 2000 at 16:43:48:

Still waiting - would any of you note investors or brokers let me know how setup your company to best deal with taxes?

Taxes on Note Purchases & Income? - Posted by Don

Posted by Don on August 30, 2000 at 14:00:31:

  1. If I broker a note (buy and resell at the same time), does the state or Fed look at it as though I purchased it and then have to pay sales tax, or do they treat it like a commission where I simply pay income tax on my commission?

  2. If I setup a corporation in Nevada (where I hear they do not pay State Income tax), would I still have to pay state income tax on any profits from notes bought in other states (if I purchased for myself rather than brokering a note)?

I have read about setting up two corporations - one in Nevada that would loan money to the 2nd corporation in my state which would be a way of not paying state income tax as well as helping to make it “lawsuit proof” in that it would show a large debt to the Nevada corporation. It seems like this would be a good way to go once I have enough funds to invest in notes myself. But I still have the question of whether the Nevada Corporation would have to pay state income taxes on the income derived from loans it makes to my corporation in my home state?

Has anyone done this? Can anyone give me advice on which form of business is best for buying or brokering notes and where it should be setup?


Re: Taxes on Note Purchases & Income? - Posted by Eric C

Posted by Eric C on September 04, 2000 at 11:55:10:

Hi Don -

I think that you’re being a little too general with your questions.

Excellent tax advice, like other specialized information, is exactly that – specialized. It needs to be tailored for the circumstances and the individuals involved.

I am not a CPA, a tax preparer, or a tax attorney; all I can do is give you the benefit of my hard-won experience.

Over the years, I’ve lost more money by NOT doing deals than I ever actually paid in taxes (of any kind).

When I began, I was overly concerned about possible tax consequences; I don’t do this anymore. Repeat after me, all income is good. If you become successful, taxes are an inevitable consequence.

How much tax you will pay to get where you want to go is another story, but I think it’s a mistake to get hung up on tax issues when you haven’t done any (or few)deals yet.

Corporations are useful business tools; nothing more. They’re certainly not magical and most (if not all) of the benefits to using them whether for asset protection or tax shelter are well known (to ALL the players). As with most things in life, there are costs to go along with the associated benefits.

The two (entity) corporation strategy that you reference has been around for quite some time --centuries, if you consider more than just the US tax code. Notice, I’m not saying that it can’t be effective, but that doesn’t mean that it’s the anwer for everyone (or every situation).

Most States have regs that outline what consitutes doing business within their jurisdiction. These change from time to time and from State to State so it’s best to check your State’s current regulations on this issue.

Nevada is a very friendly State in which to do business. There is (at this time) no personal or corporate income tax.

Nevada also has some very favorable corporate law that allows some interesting benefits should those situations apply to you.

Here’s the bottom line.

  1. Make some money first. Learn this business THEN check out the tax and asset protection issues.

  2. Begin to learn something about these two subjects. There are good books on asset protection that can help bring you up to speed on terminology and the possibilities that this field can offer you. Please read them.

As for income tax issues, take an H&R Block tax course. It won’t make you an expert, but it WILL help you express yourself intelligently to your tax counsel.

Speaking for myself, I would rather have a client that can understand the issues (and the possible consequences)involved so that we can make intelligent choices together rather than work with someone who simply expects miracles on demand. Trust me, miracles are always in short supply.

  1. Everything has a cost. Believe it. If you wish to become better at anything, you must be willing to pay the price; not everyone is. It’s been said that experience comes from making poor decisions and that wisdom, hopefully will then emerge from that experience. I wish I could say the process (and the road) to wisdom wasn’t painful sometimes, but I cannot. I now try to learn as much as possible from the mistakes of others --it’s far less traumatic.

So, here’s the deal. If you just want to be an investor, do a deal or two. Nothing will teach you more than doing.

If you want to go into the business, begin a business plan. Write it down; tailor it just for you. If you can’t write it, then in most cases, you don’t know enough about either subject (the business or yourself) yet.

Asking questions is a great way to learn more; you should continue to do so. But remember that no one but you can (or should try to) take responsibility for your success – or your failure to succeed.

Expect mistakes. Learn to forgive yourself and others. Nobody is perfect. I’ve been in this business for over twenty years and I still make mistakes. Sometimes I’m still surprised, but I now realize that mistakes (and their consequences) are just part of the ride. I could tell you that I’ve learned to enjoy them, but that would be a lie. I can say that I no longer let them upset me (or my plans). Such is the path to wisdom.

Good luck. Keep us posted on your progress.


Eric C
(still learning)