Q:

Subject: RE: Interesting tax question

 

Thanks Kerry for the valuable information and points well taken.

 

To clarify, I didn't assume the sale of a personal ring to be a business transaction, I didn't miss it per se.  I do have a difference of opinion on this being a business transaction but totally understand how the IRS will see it differently.  Regarding the sales tax, if the IRS says it's a business sale, then can't I substantiate a lower sales price, less the sales tax?  Creating a legitimate business sale of $9,150 price, plus tax of $850, increasing taxable income (and SE tax) by $150 and a tax payable to the BOE of $850?

 

Another scenario would be as a capital gain of $1,000 at the collectible tax rate of 28%.

 

Also, good advice, I did actually incorporate at the end of 2004.  I keep my books totally separate.  I really like quicken for the portfolio tools, I don't think QuickBooks offers these tools.  I also have a CPA, but like to do some research so I understand my own taxes.  My CPA gave me the same scenario you did, that it would be a business transaction since I am in the jewelry business.

 

My other argument to this is that the ring I sold is considered "used" and I don't sell used jewelry, I sell made to order custom jewelry.  A pawn shop on the other hand sells "used" and "estate" jewelry.

 

Anyhow I am just assessing all the angles.  I find it interesting.

 

I appreciate your input and will let you know how it all turns out.

 

Sincerely,

A:

The only way you could possibly make a case that the ring sale was not part of your regular jewelry business might be if it was sold to someone who wasn't a normal "customer," such as a family member.  You didn't mention who you sold the ring to. If it was somebody who patronizes your business and is not related to you, there is no way you will be able to convince IRS not to added it to your Sch. C.  Being used won't make any difference.

As you know, sales taxes are assessed on the ultimate consumer, but collected by the retailer on behalf of the state.  If you didn't charge the buyer of this ring, and you end up having to pay the state out of your pocket for the un-collected sales tax, you will be entitled to a deduction for that in the year in which you make the payment if you are on the cash basis of accounting.  If you are using the accrual basis, you could make a case for accruing that expense for the year of the sale.  In that case, the auditor will need to see proof that you subsequently paid it.

If you didn't prepare a bill of sale or other receipt showing that the $10,000 was to include sales tax, you are going to have a hard time convincing the BOE that it was a sale for $9,150.  BOE auditors are notoriously harder to deal with than are IRS auditors in their relentless thirst for money.

You are correct that QuickBooks doesn't have the market price adjusting utilities that Quicken has for stocks; but that entire process in Quicken is not proper accounting and end up giving distorted cash basis financial statements.  That was one of the biggest complaints I had from clients who I wanted to switch, but they've adjusted just fine to QB, and we have much more accurate accounting reports.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 9/01/2006 08:14:00 PM Send this post: