Over the past 25 plus years, I have studied, analyzed and debunked literally hundreds of tax protestors and their ridiculous arguments for why nobody has to pay taxes in this country. For a long time, I felt as if I was doing the IRS's job because their strategy was to just ignore the idiots and hope they would just go away. As I constantly explained, the IRS's silence on these matters just lent perceived credibility to their insane arguments. As I've been chronicling, IRS has finally taken a more proactive approach to dealing with tax protestor scammers.

I am still waiting to hear back from Kenny Lizotte as to the IRS book that officially says that nobody has to pay taxes. He was so positive about that in his drunken messages on our answering machine. Of course, no such book exists; so we will never learn that secret from him. He has resorted to a long running tactic used by people in the tax protestor movement; trying to indict us professional tax practitioners as active participants in the massive taxation conspiracy in this country. The list of questions he sent was tiny compared to the ones I have seen in the past, which were often three pages long, single-spaced.

I have no intention of wasting time responding to idiots like Mr. Lizotte. However, I was copied on the following email that a reader sent to Mr. Lizotte. I haven't checked all of the code section citations; but they sound reasonable. However, the name of the sender does seem a bit strange.

From: "D Shyster" shyster1040@hotmail.com
To: kennylizotte@msn.com

Subject: Re: Tax Questions

Kenny:

In reference to your questions to Kerry Kerstetter (posted on http://www.taxguru.net)/ of November 28, 2004, try this on for size:

Section 1 imposes a tax on your "taxable income" which, under Section 63, is the "gross income" under Section 61 less the deductions allowed; thus there is a tax imposed based on your "taxable income"

Section 6012 requires you to file a tax return if you had gross income in an amount greater than the sum of the basic standard deduction and the exemption amount - probably about $10,000 right now, give or take; thus, if you earned more than $10,000 (or whatever the basic standard deduction and the exemption amount add up to), you have to file a tax return, and that return must show the tax calculated under Section 1.

Section 6151 requires you to pay the tax shown on a return if you were required to file that return.

Therefore, the following results: If you had gross income above $10,000 (or whatever the current basic standard deduction plus the exemption amount is) then you must file a tax return showing the tax calculated under section 1; because you have to file a tax return, you must pay the tax shown on that return.

I believe that the foregoing shows:

(1) what code section requires average Americans to pay the income tax - Section 6151 does;

(2) what code section shows the liability of the average American for the income tax - same as before, Section 6151 obligates you to pay the tax shown on your return;

(3) What code section requires Americans to keep books and records - Section 6001 permits the IRS to issue regulations requiring anyone liable for any tax to keep records - which they've done - see Treasury Regulations 1.6001-1 and following (and which will apply to you if you meet the test under Section 6151 because then you'll owe taxes, which means you'll be liable for them);

(4) What code section requires Americans to make a return - Section 6012 does; and

(5) What code section requires the average American to submit to withholding - short answer - Sections 3401 to 3406 do. Long answer - nothing directly; however, Section 6654 does require you to make estimated tax payments on a quarterly basis (i.e., every three months) prior to the date for filing your return - i.e., it's a pay-as-you-go system, and Section 3401 and following requires your employer to withhold from your wages amounts that approximate the taxes you'll ultimately owe on that income, and also gives your employer complete protection from you if you try to sue the employer to get them back. So, the effective answer really is - Sections 3401-3406 do.

Does that do it?

BTW, yes, every little red cent you got for doing work, e.g., wages, or for lending out your money, is included in the term "gross income" - section 861 does not "determine" anything, not your taxable income from sources within the US, nor even whether or not a given activity was a "source" of income - all that 861 does is assign a geographic location to your sources of income - it tells you whether or not a source was in the US or outside the US, it does not tell you whether or not the activity was a source at all. Further, the 16th Amendment was properly ratified and it is therefore part of the Constitution. Even further, Congress has almost unfettered power to tax things - the taxing power is included in the general list of Congress' powers and is therefore of equal dignity with all the rest. That means that it is an independent source of power, and is not limited by the other sources - meaning that Congress can tax purely intrastate income even though it cannot regulate purely intrastate activity that generates that income.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/30/2004 09:22:00 PM Send this post:

Tax writers Want GAO Review of OICs

Former Treasury Officials Slam National Retail Sales Tax, Praise VAT - Great idea.  Let's emulate the Europeans because we all know that they have all the answers for designing a perfect society.  How stupid an idea is that?  Let's add an entirely new taxation system to learn and keep track of, rather than just use one we are all already familiar with, such as sales tax.

IRS Officials Urge Care for Those Making a Car Donation; New Law Changes Rules at End of the Year

Hartford Goes to Court in Effort to Block EITC Test - There's just something satisfying about local governments having to battle with IRS just as we peons have to every day.

ABA Tax Section Asks Congress to Repeal or Modify AMT - This pretty much sums it up:

...alternative minimum tax no longer serves the purpose for which it was originally intended and asked that it be repealed or modified to be more in line with its original purpose of applying to high-income taxpayers.

Let's not forget to support ReformAMT

Time to save Social Security

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/30/2004 09:00:00 PM Send this post:

Tax activist faces charges - More on Joe Banister.

Pursue Happiness, Vote GOP. The real reason Republicans win. - Good summary of the DemonRat philosophy, including:

• That taxes must always be higher, never lower, because in the words of one traditional Democrat "I want the government to have the money."

• That you should not be allowed to invest some of your Social Security taxes in a personally owned account that will grow over your lifetime and give you some asset ownership upon your retirement, because it is a bad thing for you to have such assets.

On Social Security, Bush tested. Reform allies want him engaged.

New Social Security Plan Allows Workers To Put Portion Of Earnings On Favorite Team - From The Onion

The IRS Chain Gang - Similar to the "Tax Freedom Day" concept. We spend a large portion of our time working just in order to feed the government coffers.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/30/2004 05:19:00 PM Send this post:

Q:

Miss Kerstetter,

Let me start off by asking if you provide accounting services?  I am based in Hot Springs.

I found your information on the recent changes to section 179 in relation to vehicle purchases very helpful.  I would like to ask if you could provide additional information about vehicle purchases under section 179.  I understand that the deduction is limited to $25,000 after October 22 2004 and that the vehicle should be used more than 50% for business.

I am considering purchasing a business truck for trips to UPS, the bank and post office.  More than 50% of the mileage will be for business usage however I expect to put 5K or less miles per year on the vehicle. 
With it being December already I may not put more than 500 miles on the vehicle.  In order to get the best price I may purchase the vehicle from a dealer several hundred miles away.

This raises two questions

1. Is there any minimum mileage required for section 179?

2  Can mileage between the dealership and home office when picking up the vehicle be counted as business mileage?

Thank you in advance for your advice!

A:

There are no minimum number of miles required by IRS to qualify for the Sec. 179 deduction.  There just have to be some miles driven, which need to be allocated on a percentage basis between business and personal.

If the vehicle will be used more than 50% for business in the future, I would consider the trip to pick it up and drive it home to be a business trip.

The $25,000 limit is only for SUVs and is not for trucks.  You can see a lot more info on my website at:
http://www.taxguru.org/incometax/Rates/Sec179.htm

I hope this helps.

Kerry Kerstetter

I am not currently accepting any new CPA clients; but everyone is welcome to check out my latest news & commentaries at: www.TaxGuru.net and the reference materials at www.TaxGuru.org 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/30/2004 10:08:00 AM Send this post:

Q:

I have found your website very helpful.  I had a quick question regarding the sale of QSBS.  I was wondering if it is possible to roll over the proceeds into a another small business shell that I have created?  Would that be legal?  I have not found any documentation stating that this is not possible.

Thank You,

A:

What you are referring to is an IRC Section 1045 rollover of gain, which requires that you reinvest the proceeds of the stock sale into new qualified small business stock within 60 days.

The key thing is that you need to actually purchase the stock from someone else.  You can't just use the money to set up a new company.  You can't buy the stock from yourself, unless you want to show that sale as a taxable event.

To follow the chain of events, somebody else will need to report the sale of his/her stock to you in order to make this a legitimate deal.  That person will then have the ability to do a Sec. 1045 rollover, and so on.

I'm sorry to burst your bubble here.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/30/2004 09:55:00 AM Send this post:

I actually received an email this morning from the retarded tax protestor who had been leaving obscene late night messages on our answering machine.  His name is Kenny Lizotte and his email address is kennylizotte@msn.com  I'm sure he would love to hear from anyone wanting to discuss his take on taxation.  I don't know what part of the country he is in because he had his phone number blocked from the caller ID.

He sent me this standard crap that tax protestors have long used to try to distort the issues of legitimacy in regard to taxation:

Subject: Incometax

What code section requires the average American to pay the income tax?

What code section shows the liability of the average American for the income tax?

What code section requires Americans to keep books and records?

What code section requires Americans to make a return?

What code section requires the average American to submit to withholding?

Please just direct answers?

Kenny:

That's not how things work in this country.  I am an independent CPA and don't work for the government; so I have no obligation to waste my time trying to educate you on the tax laws.

It is you who have the burden of proving your case that hundreds of millions of people in this country are wrong and you are one of the few geniuses who have the true answers about taxes. 

You left a number of late night drunken messages on our answering machine (your name showed on our caller ID) in which you called me obscene names and claimed that you obtained directly from IRS a book that states that nobody has to pay any taxes.  If that is true, tell me the name or publication number of that book, along with the page number where you found this statement, and I will check it out.  If what you are saying is true, I will write about it. 

However, if you are not able to back up your claims, please stop wasting my time.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/28/2004 02:28:00 PM Send this post:

Congress and the president are getting spending under control. - We'll have to see if this is possible.  It sounds much too good to be true.

The Politics of Presidential Spending

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/27/2004 05:08:00 PM Send this post:

Q:

Thank you for your helpful website.
Can you please clarify what qualifies as an "in service" date for Section 179 election and the Bonus Depreciation for 2004?
If software and hardware are delivered to a taxpayer but not installed prior to 1-1-2005, can the taxpayer still take the election for 2004?
Does the existence of a sales order qualify?
Thanks for your help

A:

Placed in service means actually being used before the end of the tax year.  Just having it on hand or on order is not good enough.

From a practical perspective, you do have to wonder how such things can be verified two or three years after the fact


For software, you should be careful to expense the normal recurring purchases, such as the annual QuickBooks or MS Office upgrades in a normal operating expense account.  These don't need to be capitalized and depreciated or counted against the Section 179 election.

Big customized software or programs expected to be in service for several years do need to be capitalized and depreciated or claimed under Sec. 179.

Your personal tax advisor should be assisting you with this.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/26/2004 09:27:00 PM Send this post:

Q:

If I buy a $25k SUV on december 30th, can I write it off completely?  Or is it prorated based on the calendar year?

A:

The Section 179 deduction has never been pro-rated for normal calendar year taxpayers on their 1040.  The only time I have encountered the need to pro-rate the maximum Sec. 179 deduction is for the first year of a corporation that is less than twelve months long.

In your situation, it is crucial not only to buy the SUV before midnight on 12/31/04; but also to use it for at least 50% for your business by then.  Depending on the cost of the SUV, and its business percentage usage, you could claim as much as $25,000 in Section 179 for it on your 2004 1040.

In addition, if it's a brand new vehicle, you could also claim the 50% bonus depreciation on the remaining business portion of the cost, after reducing it for the Sec. 179.

Good luck.  I hope this helps.   

Kerry Kerstetter

Q:

I am self employed, I am not incorporated.  Can I still use 179?
 
I do have a business name and am registered with the city.
 
Do I have to get commercial plates or register the truck in my name?

A:

You can claim it on your Schedule C.

The vehicle doesn't have to be in the business's name.  It can be in your personal name.  All IRS cares about is how it was used, business vs. personal.

You really do need to work with a tax pro to keep you on the right path.  Unfortunately, I am so far behind with work for existing clients that I can't accept any new ones at this time.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/26/2004 09:17:00 PM Send this post:

Q:

Any advice on the taxability of customer deposits/prepayments received by an S corp on the cash basis? Example: customer deposit received in 12/04 for a service to be performed in 1/05.  Does it make any difference whether the customer's check is placed in a drawer or deposited in a bank account?

A:

For any business operating under the cash basis of accounting, income is reported in the year in which the money is received or you in any other way have constructive receipt of it.  Whether it's actually deposited into your bank account or not isn't relevant. 

Keeping the check in your drawer isn't the only way undeposited funds could be taxable income.  Another example would be a customer down the street from you who tells you he has a check waiting for you to pick up in December.  Technically, that is income for December even if you don't actually pick it up until January because you could have taken the money, meeting the IRS's definition of "constructive receipt."

So, in your specific example, that money will be taxable on your 2004 1120S.  What you may want to do is spend it on deductible things by midnight on 12/31/04 in order to cancel out as much of that income as possible.

Good luck.  I hope this clears up this issue for you.  

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/26/2004 09:09:00 PM Send this post:

When Is That Holiday Turkey Taxable?

Fake Saudi princess-model countersues American Express - She's a real piece of work.  Suing AmEx for letting her run up charges when she was obviously insane.  Selling jewelry and then reporting it stolen for the insurance. Are credit card companies supposed to require a sanity clearance from a psychiatrist before issuing cards? 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/26/2004 09:06:00 PM Send this post:

Another tradition this time of year is setting up the Lacerte tax return organizer for the next year's filing season.  The 2004 organizer is now ready to roll.   

Any clients who have already received their 2003 individual income tax returns should notify us when they want their 2004 organizer sent out to them.  If you lose the copy we send you, we will have to charge you for the time to print and mail a replacement copy; so put it in a safe place that you can remember.

For those whose 2003 individual returns haven't been finished yet, there is no need to contact us.  We will be including the 2004 organizer in the left pocket of the folder in which your 2003 returns will be located.

Another reminder that organizers are only available for individual (1040) income tax returns.  All other kinds of tax returns - corporations, partnerships, LLCS, trusts - must have their data entered in QuickBooks and the data file sent to me when it's time to prepare the appropriate tax returns.  

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/25/2004 02:33:00 PM Send this post:

I received this in response to an earlier Q & A.

Kerry,
You used 25% as the recapture tax rate. Is this the case even if the owner's tax rate is actually lower. Would it not be taxed at the rate of the owner upon sale of the asset?
Thank you.

My response:

While 25% is the maximum Federal tax rate on most depreciation recapture, and what we use for quick and dirty calculations of possible tax effects, the actual effective rate could be lower depending on the other items of income and loss that the taxpayer has on that year's 1040.  It could even be zero if there are enough losses and deductions of other kinds to offset the recapture income.

This is why it is so important to work with your own professional tax advisor to crunch your real life numbers before undertaking a transaction that could have expensive tax ramifications.

Good luck. I hope this helps.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/25/2004 02:17:00 PM Send this post:

While I was on the phone the other day with the Intuit account rep registering my copies of the versions of QuickBooks 2005 that I was installing on my main computer, we were discussing the online version that they have been pushing me to recommend for the past few years.

I mentioned that one of my biggest reservations about this program was the inability to roll the data back from the online version to the desktop version if that need were to arise or if the client wanted to convert completely to a self contained desktop version of the program. I have considered this to be holding the client a kind of prisoner to their online service because converting to in-house would require a lot of re-entering of data. He told me that they have recently added the capability to export out some of the data, such as customer lists, back to the desktop programs.

On Thanksgiving, while Sherry was outside working on the logs on our main house, I spent a little time going over the features of the online QB program in more detail than I had previously. I was going to try converting one of my company files to online, enter some data and then try to convert it back to desktop and see how much of the new stuff was retained. However, as I was reading the FAQs and poking around the program, I saw enough other problems with the service that I didn't see a need to spend any more time on the data conversion issue.

Overall, I have to say that I'm not very impressed with what can be done with the online version of QB or the cost of using it. Unless the convenience of enabling multiple persons to have immediate access to the company data files without having to send them back and forth is critical, I would stick with the desktop version.

There are three big reasons for avoiding this that I don't recall addressing in previous discussions of the online QB service.

Multiple Companies - With the desktop version of the program, you can use it to work with as many company files as you want. Since most of my clients have at least one corporation in addition to their personal 1040 files, that's at least two company files they need to maintain on a regular basis. Some clients have a multitude of corporations, partnerships, LLCs, and trusts to keep track of. With the desktop version, the client only has to buy one copy of the program, which could be less than $100 for a Basic upgrade. With the online version, pricing starts at $19.95 per month for the first company file plus another $7.95 if you want to use Classes, which is another of my big complaints. You then need to set up a subscription for each other company file you want to maintain. They do offer a 20% discount on the additional company files; but this could still add up to quite a lot of money. For example, an individual with one corporation would have to pay over $50 per month for the online service with the Class feature in each company file. That's over $600 per year; much higher than just buying even the fancier versions (Pro or Premier) of the desktop program. It would cost a small fortune for those folks who have a dozen or more company files to work with.

Classes - I will be writing another article soon on the importance of using some of the features in QB to better maintain your records and make it easier for your tax preparer. One of the most useful features is the Classes, which I have discussed on several occasions and have always included in my Quicken and QuickBooks tips. Each Class corresponds with a tax return schedule and it makes my tax prep work go so much faster when it is used properly. Why this isn't part of the basic online service escapes me because it is a critical feature. It's simply ridiculous to charge extra for this. Not having the Classes feature was one of the reasons I gave a thumbs down to the new Simple Start version of QuickBooks in my review of it last month.

Independence - As much as I love the various online services that are available and the ability to do more and more things all the time from the comfort of my desk, another very scary aspect of relying on an online QuickBooks program is the unreliability of our internet connection. Using the DirecWay satellite service, the only high speed service we can use here in the boonies, we are knocked off constantly when it's cloudy, rainy, foggy, and even when the sky is perfectly clear. The thought of not being able to access my QB for several hours, or even days, at a time is unthinkable. I have no separate checkbooks for our companies. QuickBooks is our checkbooks. So, unless you have 100% reliable internet service, I would be very cautious about converting to the online QB.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/25/2004 02:12:00 PM Send this post:

Congress' overstuffed turkey

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/25/2004 11:27:00 AM Send this post:

Bush, Republicans Sign Up for World's Largest Credit Card

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/24/2004 10:01:00 PM Send this post:

Sandra Bullock Sought Advice of Tax Scammer - One of the repercussions of the prosecution of promoters of illegal tax evasion schemes is the requirement to divulge their client list to the government, which then goes after them.  In some cases, those names are also made public.  

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/24/2004 06:20:00 PM Send this post:

Centrists and conservatives join forces for fiscal restraint

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/24/2004 06:17:00 PM Send this post:

IRS Chief Pleads for Bigger Budget

IRS Audits More of the Wealthy and Fewer Small Companies

Seven Ways to Save on Taxes (Just Don't Wait Until 2005)

Nonprofits Get Caught in the IRS's Sights

Another Omnibus Spending Bill Loaded with Pork - And the GOP is still considered the party of fiscal restraint and limited government?

Tax Fraud and the Medical Profession

IRS's Recap of the Newest Tax Laws

Conrad Seeks Answers on Return Disclosure Language - It's CYA time in the halls of power in DC. It must have been an immaculate conception because everyone is denying paternity.

The state and local tax deduction may not be around much longer.

Retirement isn't just a date. It's a new life.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/23/2004 11:04:00 PM Send this post:

Leading Foe of Income Tax Is Arrested After Car Chase - Another casualty of that idiot Joe Banister, who was also finally arrested for his part in this illegal tax evasion scam. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/23/2004 11:59:00 AM Send this post:

Investment Tax Cuts Pushed as Bush Eyes Tax Reform

GOP Constituencies Split on Tax Change - It's the same old divide and conquer strategy against tax reform that I've mentioned several times.

Privacy Concerns in Spending Bill - I'm glad to see that this issue has been receiving so much press.  Hopefully, it will prevent further attempts of this kind.

Istook Denies Inserting Taxpayer Privacy Measure in Omnibus Funding Bill - Lots of finger pointing over who was the culprit responsible for trying to slip the invasion of privacy power into the legislation. Maybe it was Santa's elves, so they can check and see who is naughty and nice.  

Borrowers Find System Open to Conflicts, Manipulation - Another illustration of how much the deck is stacked against the small investor in the big stock and bond markets.  People rely on the allegedly independent credit rating firms to assess the potential risk; yet they don't seem to be as accurate as is needed for a safe and well reasoned investment decision.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/22/2004 06:26:00 PM Send this post:

Be Happy, Put Retirement Fears to Rest

Congress Approves Omnibus Appropriations Bill Despite Disclosure Glitch - The most interesting part of this news story is this: 

The section would have allowed "agents" designated by the chair of either chamber's Appropriations Committee "access to Internal Revenue Service facilities and any tax returns or return information contained therein."

For anyone who remembers how Presidents Nixon and Clinton used the IRS to attack and persecute their political enemies, this kind of thing isn't a positive addition to the tax code and it should frighten anyone concerned about privacy that such language is being sneaked into legislation.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/21/2004 08:28:00 PM Send this post:

I am working on setting up and customizing the Lacerte organizer for 2004 income tax returns and wanted to discuss the resurrection of a deduction that we haven't seen since 1986, sales tax.  This was intended to be a fairness remedy for people who live in states without any income tax and are thus supposedly paying more in sales taxes than do people in states with income taxes.  That logic isn't really accurate, since there are some states with both very high income and sales taxes.  However, it's close enough for government work, so we do have a new opportunity for Federal income tax savings. 

While the stated intention of this deduction was to benefit those living in tax free states, I have seen nothing forbidding people in taxable states from choosing to deduct sales taxes if they are higher than the state income taxes they have paid for the year, which could very easily be the case for many people.

Before I add my suggestions and advice, here is how QuickFinders described this part of the new tax law:

Deduction of State and Local Sales Taxes

At the election of the taxpayer, an itemized deduction for state and local general sales taxes may be claimed in lieu of the itemized deduction provided under present law for state and local income taxes, effective for 2004 and 2005.

Taxpayers have two options for determining the sales tax deduction. They can deduct the total amount of general state and local sales taxes paid by accumulating receipts showing general sales taxes paid. Or, they can use tables created by the IRS that are "based on average consumption by taxpayers on a state-by-state basis taking into account filing status, number of dependents, adjusted gross income and rates of state and local general sales taxation." Taxpayers who use the tables can also deduct eligible general sales taxes paid upon the purchase of motor vehicles, boats and other items specified by the IRS.

 

Some additional things to keep in mind.

State tax laws differ as to whether they are consistent with Federal tax law.  Some states automatically just piggyback their tax rules on Federal law, while others require them to pass their own legislation making any changes in their tax laws.  At this late date in 2004, chances are that most of the latter states won't have time to enact a law authorizing the deduction for sales taxes on their individual income tax returns before the end of the year.  There is a chance that they could pass such legislation in early 2005 and make it retroactive to 2004, something I have seen happen on previous similar occasions. 

IRS tables of sales taxes paid by average consumers are intended to ease the burden of bookkeeping for most people.  They will most likely be used by more people for 2004 than in future years since it was only a month ago that this law was enacted and most people don't have the time to go back and pick up this info for the first part of the year. 

I have seen some comments on some tax related discussion boards that IRS won't have the tables out until March 2005.  Even considering IRS's legendary slowness in doing lots of things, I don't see them taking that long to issue their official tables.  That would hold up millions of taxpayers, plus the software companies that produce tax return programs, much too far into the normal filing season.  I would expect the tables to be out by the beginning of January, at the latest.

For those folks wise enough to keep their records on QuickBooks or similar accounting software, you should start splitting the posting of personal purchases up between the items bought and the amounts for sales tax.  Set up an Expense account called "Sales Tax" if your chart of accounts doesn't already have such an account.  If your detailed total for the year is higher than the IRS's average table, you can claim your higher amount. 

Big unusual purchases.  Those of us who were preparing and filing income tax returns before 1987 will probably remember that it was important to keep track of purchases made during the year of big dollar items, such as vehicles, furniture and jewelry, because those sales tax amounts could be added to the IRS table amounts, which are intended to reflect only the normal day to day purchases.  I noticed that the standard questionnaire included in the 2004 Lacerte organizer only asks about purchases of motor vehicles and boats during 2004.  While IRS hasn't officially announced what other kinds of big-ticket items can be considered for the additional sales tax deduction, I feel safe in assuming that it will be similar to what we had before 1987.  Back then, any purchases of several thousand dollars at a time qualified.  Besides boats and motor vehicles, those included purchases of furniture, appliances and expensive jewelry.  With some of today's home theater systems costing over $10,000, I would count those purchases as well.   

Since the way this new deduction has been set up, it gives us an either-or choice between deducting state income or sales tax on a person's 1040.  I can very easily see this switching back and forth for some people from year to year depending on their big purchases.

Business Purchases - I hope it came across that all of the above discussion was aimed at sales taxes paid on personal non-business related purchases.  Sales taxes paid on the purchases of items used for business purposes are treated differently.  This goes for both the purchases of consumable items which are expensed right away, as well as for capital assets which are depreciated over several years.

I review hundreds of QuickBooks files each year, including those prepared by accounting professionals, as well as by individuals for their own books.  One very common mistake I have often encountered from both kinds of users is the treatment of sales taxes paid.  Rather than include the sales tax as part of the cost of the item being purchased, which is the correct accounting treatment, they post sales taxes to separate expense accounts.  Many use a "Sales Tax" expense account to accumulate sales taxes on normal day to day purchases.  The most common mistake is posting sales tax paid on vehicle purchases to the "Vehicle Expense" account rather than adding it to the cost basis of the vehicle, which is depreciated over its useful life, or expensed under Section 179.

I am constantly having to remind people that deductions claimed on a business schedule (C, E or F) will often result in as much as twice the income tax savings as the same amounts being deducted on Schedule A due to the additional reductions in self employment tax, as well as the ripple effect of reducing adjusted gross income (AGI), since so many deductions, exemptions and credits are reduced based on the AGI.  I mention this once again for anyone who may feel deprived by the requirement to depreciate sales tax paid on a business vehicle over five years rather than being able to expense it all at once on Schedule A.

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/21/2004 02:35:00 PM Send this post:

New DMV Head Wants Tracking Devices In Cars for Taxing Motorists For Every Mile Driven - In case anyone wonders why I have long referred to my former home state as the People's Republic of California.

Is taxing mileage a good idea? - Another question to ask is if IRS will adjust its standard deductible mileage rates to include these new per-mile taxes.  With different states using various rates, that will require state specific mileage rates. 

Pennies pay off when Ohio collector cashes in - 1.4 million pennies may seem like a ridiculous way to save; but he has more to show than most stock market players.

Loopholes author is charged with theft, fraud, forgery - Another candidate for Ripley's Believe It Or Not; someone who openly teaches people how to scam the system is busted for scamming the system. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/20/2004 10:05:00 PM Send this post:

Congress blocks taxation of Internet connections - For three years at least. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/20/2004 03:33:00 PM Send this post:

Taxing Thoughts - Thanks to Ohio CPA Dana Stahl for the link to this.

 How to Fix Social Security

Senate Approves Four Year Extension To Ban On Internet Tax

FTB mails annual "mortgage interest" nonfiler notices - Interesting twist on tax enforcement by the PRC.  Using 1098s from lenders, they assume nonfilers earned four times the amount of mortgage interest paid in unreported taxable income and send out bills with taxes, interest & penalties on that amount.  As I always say, it's best to file tax returns even when no taxes are due in order to prevent tax agencies from concocting bogus amounts out of thin air.

Sale of California Real Estate - The rules for withholding taxes from sales of real estate in the PRC change as of 1/1/05. I tried to set up this pdf chart as an html web page, but it's protected to prevent that kind of conversion.

IRS Money Maker - Interesting summary of the IRS's activities for the past year, including their claim to have squeezed out $43.1 billion in enforcement revenue on a budget of $10 billion.  Individuals earning over $100,000 per year are in the IRS's cross-hairs.

Treasury and IRS Issue Indexed Amounts for 2005 Health Savings Accounts 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/19/2004 11:04:00 PM Send this post:

Tax-law rewrite has key GOP Senator skeptic

The Feds have busted another scam trust tax avoidance scheme; this time in Arizona.

 Bush Plans Tax Code Overhaul, with Changes Favoring Investment, Growth

 The case for one tax rate

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/18/2004 09:22:00 PM Send this post:

Senate Passes Internet Tax Moratorium Extension; House Could Approve Soon

Social Security Reform Could Come Next Year, Republicans Say

Government Suit Alleges Illinois Man Sells Bogus Defense to Refusal to File Tax Returns and Pay Taxes  - I wonder how many morons paid this guy $3,500 for his magic "get out of taxes" documents.  According to the anonymous retarded person who leaves late night obscene messages on our answering machine, IRS will provide that for free.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/17/2004 11:07:00 PM Send this post:

Although I had been seeing some people claim over the past few weeks that the standard business mileage rate was going to be 40 cents per mile for 2005, I couldn't find any official documentation of the 2005 rate, so I held off discussing it.

I'm glad I did wait because IRS has just announced that the business mileage rate will be 40.5 cents per mile for 2005.  That is up from the 37.5 cents we can claim for 2004. 

They also raised the mileage deduction for medical and moving to 15 cents per mile, up from the 14 cents per mile rate for 2004. 

The deduction for charitable miles will stay at 14 cents for 2005.

I say this every year, but it never ceases to amaze me, as a numbers person, how the wizards at the IRS are able to calculate the fact that vehicles cost so much less to operate when they are used for medical, moving or charitable reasons instead of for business trips. 

Since we all recognize the fact that the IRS knows all and sees all, when will the car rental companies provide different rates depending on the purpose of the driving?  I'm not holding my breath waiting for that to happen.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/17/2004 10:19:00 PM Send this post:

Understanding Hedge Funds

Economists Urge Bush To Concentrate On Cutting Taxes

Scrap the tax code

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/17/2004 10:07:00 PM Send this post:

Toward a Single-Digit Tax Rate

New faces won't ease tax battle

Bush advisers urge deeper tax cuts in 2nd term

Toward an ownership nation

The Myth of the Working Poor

Tax Reform Report Will Take Two Years, Say Policy Observers

Lame-Duck Congress Begins Work; Tax Reform Remains Talk of Town

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/16/2004 11:08:00 PM Send this post:

On Eve of Lame-Duck Session, GOP Looking Ahead to Tax Reform

Budget Issues Hamstring Modernization, IRS Officials Say

A Flatly Simple Plan - While a flat rate tax system would be somewhat simpler than the current "progressive" structure, there would still be a lot of games to play in arriving at the taxable income figure; so that would definitely leave plenty of work for us tax pros.

Federal Court Halts Bogus Trust Tax Evasion Scheme In Texas

A new twist to your tax bill? - More on the idea of a national sales tax to replace the income tax.

Reship of Fools - People are falling for this new work at home scam.  It's not surprising, considering how many people actually voted for John Kerry.

Dead end for rebates - While at first glance, sending property tax rebates to dead people seems like a typical government screw-up, I don't see it that way.  A person's estate, and thus his heirs, is just as entitled to a refund of overpaid expenses as is a living person.  When a person passes away, some of the assets left behind often include receivables that will be collected after death. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/16/2004 10:08:00 AM Send this post:

Is it impossible for Bush to work on reforming both the income tax and Social Security systems during his second term?  Bruce Bartlett thinks it should be one or the other; because tackling both would be biting off too much.  I disagree; but everyone is entitled to their opinion.  If Bush and the GOP rulers in the Congress can focus and stop trying to kiss up to the DemonRats, I don't see why working on both issues isn't possible over the next four years.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/15/2004 10:27:00 PM Send this post:

None of which we advise, except perhaps for the mentally challenged anonymous person who has been leaving obscene late night messages on our answering machine about how he has an IRS book that states that nobody is required to pay taxes.  

Norwegian Mistakenly Burns Cash for Heat

Beavers Weave Stolen Cash Into Dam 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/15/2004 06:02:00 PM Send this post:

Tax to Encourage Savings Holds Promise - Now that the issue of tax reform is open for discussion, what we will be seeing are literally dozens of different proposals for revamping the current insane system we have.  What always happens at the end of these debates is that this creates too much of a divide among opponents of the current system, with not enough support for any single alternative.  This leaves us with people deciding that it's best to stick with the devil we know rather than take a chance on a new concept, such as a national sales tax to replace the income tax. 

As crazy as it sounds, there are huge constituencies that love the current tax system and are scared to death of any radical changes in it.  They know the fundamental rule of effective salesmanship is to only provide customers with a few options from which to choose.  Any more than that and their brains will fry and they will back away from making any decision. Opponents of changing the tax system have long used this technique - tossing out dozens of different options - in order to scare away support for leaving the perceived security of the status quo.   

I hope I'm wrong; but we've been down this road so many times - with the exact same result - that it's impossible not to be so skeptical of ever seeing any fundamental change in the tax code that has become so entrenched in our society. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/14/2004 12:26:00 PM Send this post:

Oops.  With all of the recent changes in the rules and amounts for depreciation and Section 179 deductions, it slipped by me when Kleinrock gave its analysis of the potential deductions for new business SUVs in 2005 that the special 50% bonus depreciation deduction was one thing that our rulers in DC didn't extend; so it will not be available in 2005. Kleinrock issued a correction in its most recent Federal Tax Bulletin. 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/13/2004 08:59:00 PM Send this post:

As I've pointed out for decades, one of the fundamental principles in Karl Marx's Communist Manifesto is a "progressive" tax rate structure that punishes the more successful people and redistributes their wealth to the less successful based on the ultimate goal of making everyone perfectly equal.  It is the underlying justification for our current tax rate structure.

In case anyone thinks this punitive taxation philosophy can't get any worse, thanks to TaxProf Paul Caron for finding this website from some of Marx's disciples, TaxWisdom.org that is in favor of even more confiscatory tax rates; even as high as 99%.

This is a gold mine for those of us who love to notice oxymorons in the language.  Calling tax rates that punish achievement "progressive" has always been a bone of contention with me.  Now, calling a 99% income tax rate "Tax Wisdom" may win the award for most ridiculous terminology.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/13/2004 11:50:00 AM Send this post:

Election May Doom the Estate Tax - We hope our GOP rulers can finally get it together and make the repeal of the Marxist estate tax permanent and not just for a single year, as it now stands.

Bush revives push to privatize Social Security

Donating cars may be better in 2004 than 2005

Bush Administration Tax Policy: Down Payment on Tax Reform?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/12/2004 10:14:00 PM Send this post:

Senators and Insider Trading - Our rulers would use secret inside info to increase their own stock profits?  Shocking!

Creating an Ownership Society: The Bush Challenge

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/11/2004 08:36:00 PM Send this post:

For some reason, I've been receiving several emails from people under the impression that the Section 179 deduction has been eliminated or will be as of January 1, 2005.  As you can plainly see on the Section 179 page on my website (which has been updated for the recently enacted new law), nothing could be further from the truth.  Whoever is spreading this myth, please stop it at once.

I can only surmise that the following exchange with an operator of a car dealer website was the product of his wishful thinking.

Q:

Whats the deal on the SUV tax loophole?
 
All the sites I read say it died as of 10/22 but my manufacturer contacts say they have had their attorneys and accountants review and they say its still good until till 12/31/04.
 
Do you know whos right?

A:

The Section 179 tax break for SUVs over 6,000 pounds does not die.

The only change is that for SUVs weighing between 6,000 and 14,000 pounds acquired after 10/22/04, the maximum Sec 179 that can be claimed is $25,000.

The actual total first year depreciation deduction can still be much more than $25,000 when combined with the amounts claimed as bonus and regular depreciation, as I covered earlier in my blog.

Q:

My manufactuer PR contacts dispute that and say their lawyers and accountants have reviewed and the full deduction (100k) is good till 12/31/04.
 
Have you heard that?

A:

Either you are misunderstanding what they are saying or they are not looking at the law properly.

The full maximum Section 179 deduction for 2004 is still $102,000.

The new law addressing how much of that $102,000 may be claimed for the cost of business SUVs was signed and enacted by President Bush on October 22.  The law clearly states that the new limit takes effect the day after enactment.  Thus, any SUV acquired after October 22, 2004 is subject to the new lower Section 179 limit of $25,000.

I have read literally hundreds of articles and discussions on this very topic over the past several months, and not a single one mentions an effective date of January 1, 2005.  Your recent email is the very first time I have seen anyone make such a claim.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/11/2004 03:46:00 PM Send this post:

Election Shows the Third Rail Is Dead - I wouldn't go that far.  The Left will never cease in their screams of bloody murder against any attempt to reduce the level of government control over our retirement funds.

Democrats Finding Little Common Ground with GOP on Tax Reform - As I've repeatedly warned, too many people use the word "reform" as a synonym for "repair" or "improve" when it really just means to form it again or into something different, such as my infamous analogy of the legislative/digestive process, where an apple pie is reformed into something very different. Those of us who believe in capitalism obviously have a very different concept of what would be an improvement in the current tax system than do those who worship Karl Marx, such as most members of the DemonRat (aka JackAss) Party.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/10/2004 06:55:00 PM Send this post:

Giving a Car? Get It in Gear - More on the new rules taking effect next year.

Big Tax Plans, Big Tax Risks

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/09/2004 09:39:00 PM Send this post:

National Audit Defense Network is no more.

Two scammers in Akron, Ohio are nailed, along with their foolish clients.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/09/2004 07:59:00 PM Send this post:

One of the most important financial issues to me since my very first accounting class has been the absolute insanity, instability and unfairness of the Social Security system; which is why helping people avoid flushing tens of thousand of dollars down this commode each year has been a big focus of tax planning for my clients the past almost 30 years. 

It's good to see that no time is being wasted after the election in addressing how this Ponzi Scheme needs to be fixed.  I'm not really that optimistic that the huge changes that are necessary will be forthcoming any time soon; but at least the debate is moving forward.

The normal hysterical reactions for the Left are right on schedule, such as with this comic that wants to paint the idea of allowing people to have their own privately controlled retirement accounts as a terrible idea because evil stockbrokers would be earning commissions on those transactions.  According to our betters on the Left, all good comrades should know that all money in this country belongs to the government and allowing any private market control is inherently evil.  What they are really afraid of is losing access to those trillions of dollars in Social Security funds that are currently being commingled with general operating revenues; something that is illegal in the world of privately controlled retirement accounts. 

Andrew Roth at the Club For Growth has been posting links to some very good articles on this topic, such as these today:

Social Security: House of Cards - By Ron Paul, previous Libertarian Presidential Candidate

Personal accounts, not benefit cuts - By Jack Kemp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/09/2004 11:18:00 AM Send this post:

The next 4 years: a shift to "ownership society"

IRS Office of Professional Responsibility Bearing Down on Practitioners - Cracking down on the bad apples in our profession, such as:

Court Halts Preparation Of Frivolous Tax Returns In East Cleveland. Return Preparer Omits His Customers' Wage Income

Regulators accuse H & R Block of fraud for sale of Enron bonds - Why it's risky to branch out from the tax return business.

Bush expected to press for overhaul of tax code. Replacing system politically difficult - Well, Duh

Finance: Lessons of the Past Five Years

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/08/2004 10:01:00 PM Send this post:

Budget deficits may force Bush to make hard choices

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/08/2004 11:02:00 AM Send this post:

Bush Hopes to Make Tax Cuts Permanent

Why taxpayers may steer in new direction

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/07/2004 06:05:00 PM Send this post:

Tax Reform High on Bush Agenda

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/07/2004 04:58:00 PM Send this post:

Libertarian Arrested for Tax Evasion - There is  a very clear difference between working within the system to minimize your taxes and flagrantly breaking the law, as this idiot did.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/07/2004 02:06:00 PM Send this post:

Beloit minister sentenced for false tax returns - This is just crazy.  Filing Federal income tax refund claims to offset music royalties that his wife's dead aunt was supposedly cheated out of is as convoluted a stretch of logic as I can recall seeing. I'm not sure prison is the proper place to send this nut-job.  A mental hospital seems more appropriate.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/06/2004 09:52:00 PM Send this post:

New surcharge and marriage penalty for high income taxpayers - Lefties in the PRC succeeded in their latest soak the evil rich campaign.

Bush Already Filling in the Blanks on Tax Reform 

The Limits of Payable On Death Accounts

Reform Is On the Way? Tax Policy and the 2004 Elections

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/05/2004 10:37:00 PM Send this post:

A topic with which he has a lot of very successful personal experience.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/05/2004 05:31:00 PM Send this post:

New Senate Is Good News for Taxpayers, Watchdog Group Says

Top 10 Mutual Fund Terms

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/05/2004 05:30:00 PM Send this post:

FreakingNews.com's current PhotoShop contest is with tax reform ideas.  Here are the entries so far:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/05/2004 03:58:00 PM Send this post:

Court Freezes $500 Million That Justice Dept. Alleges Was Paid To Firms Running Tax Avoidance Schemes.  More Than 3,500 Doctors and Dentists Allegedly Participated in Program Run by San Diego-based xelan Firm.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/04/2004 05:35:00 PM Send this post:

American Jobs Creation Act of 2004 - Nice summary of the newest tax law from QuickFinders.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/03/2004 07:15:00 PM Send this post:

IRS Disputes Watchdog's Audit Report

Tax Reform Warning - A message that I have always made, that the only way a national sales tax would be a good idea is if the 16th Amendment is repealed so that we don't end up with both income and sales taxes instead of just one or the other.

IRS Reveals Less Cheating by Businesses, Its Data Show - Of course, since they have always intentionally inflated the extent of the underground economy in order to justify their expansion of powers, it's hard to trust any statements they make in this regard.

This election is looking like a very positive step in the right direction for those of us who believe in lower taxes.  The NTU has already analyzed the net effect of the change in the US Senate with this Fiscal Analysis of the Incoming Senate.  Getting rid of high tax loving Senators Edwards (aka The Breck Girl), Hollings, and Puff Dashole are great developments.   The Club For Growth did an excellent job in helping South Dakota finally get rid of that snake Dashole.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/03/2004 06:22:00 PM Send this post:

Consumption Taxes Can Finance Public Education

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/03/2004 02:19:00 PM Send this post:

A Porsche, a Fla. home, a boat - all on $900 - What is it about Florida that makes so many people do such stupid things? 

Nothing growing out of Minnesota man's bequest to New York City

Study: New York City Metro Pays Disproportionate Share of Federal Taxes

2005 SDI rate announced - W-2 wage slaves in the PRC will have a tiny tax rate reduction, but a hefty bump up in the taxable base, resulting in a net tax increase for many.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/02/2004 11:02:00 PM Send this post:

Q:

Kerry,
Thank you for your answers. One more question.  Once equipment is purchased and the Section 179 full deduction is taken, is their ever a point in time where the owner could sell the equipment, not have to recapture the amount depreciated and pay taxes on the transaction?  I was told that if I took the deduction and held the equipment for five years, I could avoid the recapture tax, even though I sell the equipment five years later for the value I paid for it.

A:

You were either given incorrect information or are interpreting it improperly.

There is a potential recapture on Section 179 property if its business use percentage falls below 50% before the end of its normal MACRS recovery period (i.e. 5 or 7 years). 

However, if an asset's cost has been deducted on your tax return through Section 179 and/or regular depreciation, and fully depreciated, its cost basis on your books is zero.  If you ever sell that item before you die, anything you get for it will be taxable income.  Whatever you receive for it, up to its original cost, will be recapture of Sec. 179 and depreciation and subject to its 25% Federal income tax rate, plus any applicable State tax.

If you give a fully depreciated item to someone else, your cost basis carries over to that person.  If s/he sells it, anything received will be taxable income and taxed as depreciation recapture.

As I mentioned in my earlier response, the only way to not have taxable income on the item's sale is if you leave it to your heirs as part of your estate.  Even though it had been fully depreciated on your personal books, its cost basis is stepped up to its fair market value.  If your heirs sell it for that amount or less, it will be tax free to them.

I hope this clears this matter up for you.  As always, it is crucial that you work with a professional tax advisor when considering real life transactions such as these.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/02/2004 11:50:00 AM Send this post:

This topic seems to generate a lot of questions, in spite of being one of the least complicated tax matters.

Q:

Kerry,
Can a C Corp take the full section 179 deduction and the individual take the full deduction on his 1040 as well?
For Estate Tax Purposes, If I purchase an asset and use the 179 deduction, would the value of the asset be zero in my estate?
Thank you

A:

That is one of the big benefits of using a C corp instead of an S, as I have long described on my website.

The same assets obviously can't be claimed on both the 1120 and 1040; but if new business equipment purchases are split between the corp name and your personal name, it is possible to claim as much as $204,000 per year in Section 179 deductions.

When somebody passes away, the values used for estate tax purposes are the fair market values of those items as of the date of their passing.  The cost basis that the decedent had before passing away is irrelevant. 

An item, such as a vehicle could have a book value for the decedent of zero (fully depreciated), yet have an estate value of much more.   This stepped up basis rule is what many of us call the ultimate escape from taxes, especially in regard to assets like rental real estate.  I have seen several cases where heirs have been able to start claiming nice size depreciation deductions on property that had already been essentially fully depreciated by the previous owners.

Kerry Kerstetter

Q:

I read about the section 179 on your web posting.  I have a question and wonder if you can clarify this for me.

I own 100 percent of an S corp, california.

I purchased two new SUV's, each of which is over 6K lbs.  They were each approximately 50,000.  Since I purchased these in June of 2004 do I qualify for all of the $100K purchase for this tax year, or was the October revision to this bill allowing only 25K for each auto retroactive to the include autos purchased "pre-october 22, 2004"?

Thanks for your help.

A:

Any SUV purchased before 10/22/04 is not subject to the new $25,000 Sec. 179 limit; so it looks like you lucked out by buying yours before that date.  Of course, you have to have actually used them for business before October 22, not just purchased them, in order to be eligible for the Sec. 179 deduction.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/01/2004 07:11:00 PM Send this post:

Analysis: IRS Audits Businesses Less - You can see the actual study here.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/01/2004 05:24:00 PM Send this post:

No Rest for the Bleary: New Tax Turns to Ponder  - Another look at some of the highlights of the latest tax law.   

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/01/2004 03:24:00 PM Send this post:

Thanks to Janell Grenier of BenefitsBlog for catching this article in the online version of CPA Technology Advisor regarding blogs that focus on tax and accounting issues.  I wasn't interviewed for this article, but my blog is included in the list of recommended blogs at the end of the article along with some other very fine online resources that I check every day.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 11/01/2004 11:49:00 AM Send this post: