Q:

Subject: Exchange Question

Yes, an exchange question...

I am debating 1031 vs cap gains, and wondering about the middle ground, a partial exchange.

I bought the property for 180 +20k improvements – 8300 in depreciation.

The selling price is 475k. Fees are 25k approx.

The state tax rate I believe is 9.3 in California as it is taxed at ordinary income.

The fed rate is 15% I think. At any rate I come up with a cap gains tax of 63k, ouch.

What if I purchased a 250k home with a 70k loan? What would my cap gains be reduced to?


Is that a good question?

A:

It's impossible for anyone but your personal tax advisor to give you a precise figure on your possible taxes from the proposed partial exchange because it is not a simple calculation.  There are other factors that could affect your tax, such as capital losses, suspended passive losses, and carry forward investment interest.

From your figures, you are looking at a possible taxable gain of $200,000, representing the amount you are missing the target replacement price by (450-250).  The tax on that will include a 25% Federal tax on the depreciation recapture, in addition to the 15% rate on the additional gain.

To see whether a 1031 exchange with such a huge trade-down in value makes sense, have your tax person plug your numbers into his/her tax program to run the figures for you.

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/30/2005 10:28:00 PM Send this post:

Q:

Subject: Question about your income shifting technique

Dear Mr. Kerstetter,

Thank you for your informative web site.  I don’t understand the income shifting technique described at taxguru.org/corps/scorp.htm, a portion of which is quoted:

“One of the most useful tools in the tax game arsenal is the ability to shift income between taxable years. … Toward the end of your personal fiscal year (12/31), you bleed off some of your taxable income to your C corp by paying it for something like rent or marketing services.  In January, your corporation can pay it back to you.  Near the end of the corp's fiscal year, bleed its net profits out by paying yourself.”

I assume this income shifting technique requires me to own two businesses: a sole proprietorship and a C corp.; otherwise, the IRS would disallow my 1040 schedule A itemized deduction for rent or marketing payments to the C corp. as personal expenses and not business expenses. 

I further assume that my sole proprietorship needs a source of (at least occasional) income separate from my salary, bonus, or dividends as an employee/stockholder in the C corp.; otherwise, the IRS would argue that my sole proprietorship is really a hobby.  For example, if all my 1040 income originates from my C corp. and every year I file a 1040 schedule C with deductions for rent or marketing payments to the C corp., eventually the IRS is going to audit and penalize me.

I already own a C corp., so I know how it generates revenue.  But, what business is my hypothetical sole proprietorship supposed to be in and where does it get its separate income that doesn’t originate from the C corp.?  Should I have some of my customers pay my C corp. and others pay my sole proprietorship?  Wouldn’t the IRS view that as a scam?

I also fear that the money my hypothetical sole proprietorship would be paying the C corp. would be so large that the IRS would view the deduction for rent or marketing services as unreasonable. 

How do I implement this income shifting technique without getting audited and penalized?

Regards,

A:

There are various ways in which income can be shifted back and forth between your 1040 and an 1120. You will need to work with a professional tax advisor who understands how to properly use C corps in order to set up the best strategy for your particular situation.

A lot does depend on where the original income is from.  If it's as W-2 wages, your options are more limited than if they are as a 1099 independent contractor.  Generally, if all income is from W-2, the income would need to be shifted via Misc. Schedule A deductions.  This is why it's a good idea to work with your employer to convert all or part of your compensation to 1099.  That would allow you to easily use Schedules C and E, which have much greater tax saving opportunity than does A.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/30/2005 10:22:00 PM Send this post:

Q:

Subject: Exchange Question

I have a piece of bare land (investment property) that I want to exchange for a floating home. I am being cautioned that this floating home, even if we use it for investment purposes, does not qualify for 1031 exchange because it is considered personal property and therefore not a like-to-like exchange. (This may be similar in principle to exchanging for a mobile home that is in a long-term (30 year) lease.)

The best argument we've heard thus far is that in California, there is a law on the books where for tax assessment purposes, floating homes are considered real property. I'm told 1031 respects state law over federal.  Further, I understand it is unlawful for a person to have to pay real property tax on personal property, therefore (sort of a "if a=b and b=c then a=c" thing) we feel we would have a good argument should we be audited.

Our title company, 1031 exchange agent and real estate agent all are comfortable with the transaction. Are we taking too much of a risk?

 

Thanks for your help!

A:

At first, I thought you were going to say that your exchange facilitator was refusing to accept the houseboat as a suitable like kind replacement property.  I agree that a permanently docked houseboat, such as you often see in places like Sausalito, which is taxed by the county as real property, would be appropriate like kind property as long as it will not be used be you personally and will be held for rental, business or investment purposes.

This is a similar situation to mobile homes.  RVs and other large living quarters that move around a lot would definitely be considered as personal property; while permanently mounted mobile homes that are taxed by the county as real property would meet that test for 1031 purposes.  

A boat that is not permanently moored, even with living facilities, would be considered personal property and not suitable replacement property for the disposal of land.

It sound like you are on the right track. 

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/30/2005 10:15:00 PM Send this post:

Transferees Debate Whether to Sell or Rent – Good look at some of the factors involved in deciding whether to hold onto a former residence or sell it off.  She includes the key factors that I often discuss:

tax free residence sales

1031 exchanges

tenants from hell, as illustrated in the movie, Pacific Heights

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/27/2005 09:16:00 PM Send this post:

IRS probing possible data security breaches – If private credit card companies, with the best computer techs money can buy, can’t protect the privacy of their data, it shouldn’t be any surprise that IRS, with their disastrous track record with computers, as well as very low pay scale, can’t do any better.  Thanks to Matt Drudge for this link

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/25/2005 11:57:00 AM Send this post:

It's a sad and sickening day in the USA for those of us who believe in capitalism. To say that today's ruling by the US Supreme Court that tax revenue is more important than private property rights is an absolute abomination would be a huge understatement. Impeachment of those five justices who voted to torch the Fifth Amendment would be in order if our Constitution were in any way respected nowadays. Unfortunately, as proven daily by the treasonous actions of the DemonRats in regard to the war on terror, and the unwillingness of the GOP to do anything about it, defense of the Constitution has been abandoned by our rulers in DC, in spite of the fact that they all took oaths to defend and uphold it. The wholesale adoption of the Communist Manifesto marches on in this country.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/23/2005 10:11:00 PM Send this post:

IRS, Congress Aim To Curb Abuse of Popular But Unregulated Donor-Advised Charity Funds

One Investor's Impossible Dream

Check Your Beneficiaries!

How Safe Is Your Pension?

Bias Questions Arise With Financial Planners

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/23/2005 10:08:00 PM Send this post:

Q:

Subject: Want to Gift to each of our Daughters

 

Hi, Kerry,

We want to gift real property to one daughter (so they can build a home and be close to us) and we want to do the same for the other daughter (equity in the home they occupy) our rent house next door - total value to each approx $14,000. 

 

We have read about IRS "gift sharing", but don't really understand it.  Publication 950 & Form 709 and its instructions. 

 

Could split it into two different tax years if necessary - 2005 & 2006.    We would prefer not to complicate our taxes.  Can you please advise? 

 

Thanks,

A:

The current law allows each person to gift up to $11,000 to another individual per calendar year without the need for filing a gift tax return (709) or dipping into your lifetime gift and estate tax exclusion.  This means that you can give $11,000 to each daughter, and so can your husband, for a total of $22,000 to each daughter.  You could also gift up to $11,000 each to their spouses, effectively doubling that figure.

For jointly owned property, the gifting process is fairly straight forward.  The concept of gift splitting comes into play where there is property that is owned entirely by one spouse.  In those cases, you have the option of dividing the gift as if it had been made by both spouses, and thus doubling the tax free portion.  For example, if one of the properties that you want to gift to your daughter is worth $20,000 and is just in your name, you can choose to report it on Form 709 as if you gave $10,000 worth and your husband gave $10,000 worth.

Gifts can be split into multiple years through a variety of methods, such as gifting certain percentages each year or by selling the property to the kids and then forgiving the carryback loan in $11,000 increments.  If the properties are only worth $14,000 each, neither of those approaches seems necessary.  Your and your husband's $22,000 annual exclusion is more than enough to cover the gifts in one calendar year.


I'm not sure how familiar you are with gifting; so I will mention a few common misconceptions I hear all the time.

First, there is no deduction on your income tax returns for gifts made.  This balances out with the fact that the recipients do not have to pay any income tax on gifts that they receive.

While the gift amounts are based on the fair market values of the property at the time of the gift, the basis that the recipients will have to use to determine any capital gain or loss if they ever sell the property is the same basis as you and your husband had in the property.  For appreciated property, this means that you are also literally transferring your capital gain to the recipients.  This isn't necessarily a bad thing.  If they are going to live in the property for at least two years, they will be able to utilize the tax free exclusion of up to $250,000 per person of gain from primary residence sales.  Even if they don't live there, they will still be able to utilize a 1031 exchange to defer the taxation on the gain if they so choose.

Documenting the carryover basis that your daughters receive in the property can be done in a number of ways.  If Form 709 is filed with IRS to report the gift, the property's basis has to be shown.  If the gift is under the $11,000 threshold and you choose not to file the 709, you should provide your daughters with a statement of the property's basis so they can have it for their records.  It will come in very handy down the road when they sell the property.

I hope this clarifies the  gifting process for you.  Let us now if you want to set up a phone appointment to discuss any of this in more detail.

Kerry

Follow-Up:

Appreciate your response, Kerry. Thank you.  We will deed one acre, value of $14,000, to our daughter & son-in-law this week.

 

Have a great week!  

Reply:

I'm glad to see that the info was useful to you.

In addition to the deed, be sure to give your daughter & son-in-law the cost basis of the property so they will have that available if they ever sell it.

Kerry

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/21/2005 09:39:00 PM Send this post:

Q:

Subject: larger Corps??

I've read your article with interest especially the double taxation paragraph.
I'm nearing the company formation filing time and, with help from many sources, am looking mostly at the LLC. I started to draw away from the C early on because of the large taxes....I must state that the company with be in the 10's of millions in a year....
   I (we) are certainly not interested in giving a dollar more to Sam than we are forced to but do wish to keep ownership and operations private and simple....where is the trade off?
   What happens in a C to the larger amounts of profits? And, I mean large...
All the best,

A:

There are far too many variables involved for me to be able to advise the best entity and jurisdiction to use for your particular situation via this medium.

To work out the best solution for your particular circumstances, you really need to work with a tax pro who can help you set up a strategy that will work for you.  If you are truly looking at millions of dollars of income, you would be nuts not to pay the bucks for a good professional tax advisor.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/18/2005 02:31:00 PM Send this post:

Q 1:

Subject: S corporation Shareholders

Kerry,  My question regards whether a S Corporation can have Inactive (authorized but not issued) shares.  A S corporation had 3 originals Shareholders but 2 of the Shareholders were bought out by the Corporation thereby leaving the remaining Shareholder with 100% Ownership and Control.  However, that shareholder has taken the Position that she is only a 45% owner (her original share percentage) and the remaining 55% are owned by the "Corporation".  I believe this position is in conflict with IRS rules regarding individuals reporting all income/losses thru their Personal Tax Returns.  Can you recommend any references that might clear this up.  I live in Louisiana but do not believe the Community Property Laws impact the question.  Any help will be GREATLY appreciated. 

A 1:

It is quite natural to have more authorized shares than are actually issued to owners.  In fact, I have long recommended that, when setting up a corporation, a much larger number of shares be requested so that there will always be some in reserve without the need to file additional papers with the Secretary of State's office.

For S corp purposes, only the outstanding shares count.  The unissued and treasury (bought-back) shares are completely irrelevant.  Thus, you are correct that the remaining shareholder now has a 100% share.  It is impossible for an S corporation to be its own shareholder.  In fact, corporations of any kind are legally barred from being owners of an S corp, or else the S corp election is automatically terminated.

This is such a basic matter that it points out the true underlying malady here - trying to run a business without the assistance of a professional tax advisor.  Your friend needs to hire the services of a competent tax advisor ASAP before she puts herself in serious tax and legal jeopardy.

Kerry Kerstetter

Q 2:

Thanks Kerry , Do you know of any Court Cases that deal with this issue?

A 2:

I don't know of any such cases.  In fact, I doubt if any exist because your friend's interpretation of ownership allocation is so wacky that I seriously doubt if anyone would take it all the way to court. 

The concept of basing S corp allocations on shares issued and outstanding is so cut and dried that no tax professional would be crazy enough to pursue your friend's theory and be laughed out of the court. 

The purpose of S corps is to pass through 100% of their net income or loss to the shareholders.  It makes no sense by any stretch of logic to think that 55% of the corp's income would stay with the corp itself and not be passed through just because that stock has been retired or repurchased by the corp.  The remaining shareholder now has an effective ownership of 100% of the corp and is required to report 100% of the corp's income on her 1040.  If the ownership change took place mid-year, there are a variety of methods by which to allocate the corp's net income between the old shareholders and the remaining one.

As I said earlier, this is why matters of tax law are not suitable for amateurs.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/18/2005 02:28:00 PM Send this post:

Q:

I was viewing your website and got your email address.  You seem to know what your talking about, so I have a question for you that I have not been able to get a clear answer on.  My husband and I sold our first home, which we used as a rental for a while, in September of 2003.  We did not pay any gains because we had lived in it two of the previous five years.  Well, we are now planning on moving.  We have lived in our current house for over five years, but, if we sell before September of 2005 will we have to pay a gain because the sale of our rental was less than two years ago?  Does it make a difference if we are rolling any income from the sale into the new home we are having built?  Please let me know if you know anything about this sort of thing.

A:

As I've explained on my website, buying or building a new home has been entirely irrelevant to the calculation of taxable gain since May of 1997. 


You failed to mention why you are going to be moving before September 2005.  If it's just your own choice, a sale before the two year anniversary of your previous home's sale will be fully taxable.

However, if the sale is happening so soon due to health, employment or other unforeseen circumstances, you would be able to get around the once in two year limit.

You should discuss your circumstances with a professional tax advisor who has experience applying this rule.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/18/2005 02:23:00 PM Send this post:

Q:

Quick question for you..I want to buy two rv’s and start an rv rental business..can I immediately expense the full cost of both rv’s on my 2005 taxes and reduce my taxable income. I had read where there was a limit in the deduction that says if the business makes 25K that’s all you can write off..not the 105K.. Thank you kindly…

A:

It's impossible for me or anyone to know how much, if any, you will be able to claim for Section 179 without looking at various factors, including the level and type of other taxable income, as well as th total cost of new Section 179 assets you have purchased during the tax year.

While I have covered these points in a very general sense on my website, that is not in any way intended to replace the use of a qualified tax professional.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/18/2005 02:20:00 PM Send this post:

Q:

Subject: s vs c corps

 

hi kerry, thanks for publishing this info. i just read your page on s vs c corps and have a couple of questions. if the company does not have any initial shareholders how is the taxation of income to the principal officers of the company? what if the company never has any shareholders? what kind of entity would you recommend for a real

estate broker in the state of CA?

thanks,

A:

It is not possible to have a corporation with no shareholders.  A corporation is legally required to have at least one share of stock issued out of the total that were authorized when it was chartered.

There are far too many variables involved for me to be able to advise the best entity and jurisdiction to use for your particular situation via this medium.

To work out the best solution for your particular circumstances, you really need to work with a tax pro who can help you set up a strategy that will work for you.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/18/2005 02:17:00 PM Send this post:

Q:

Subject: Please help with some tax questions...

Hi Kerry,
I just read your articles on tax exemption for the sales of a primary residence.  I purchased my current home (only property that I own or have owned) about a year ago in California.  I’m looking to move shortly since I’m getting married and will have a 3-year old living with me (actually they both currently live with me).   Our current neighborhood, though sufficient for my own purposes, is not exactly what I’d call child friendly.  We do not feel safe, as a family should.  We also work excessively far from our home, over 50 miles each way.

I would like to move from this location approximately 20 miles westward (towards the coast).  Is there a way that I can get an exception on the gain from the sale of this house?  I expect to see a gain of approximately $70,000-$100,000 (did quite a few upgrades in the past year).  Reading through your summarized pages, I don’t seem to qualify for any of the posted exclusions.  As it is, I can’t afford to move without extracting maximum gain from my current house and with trends in the market, I will be shut out from any possibility by next summer.

If you find some free time, I would truly appreciate any and all advice that you can give.  My realtor knows little (very sweet woman, but not the sharpest tool in the shed), and even those at H&R Block seem to be caught in a time warp.  Some professional information would be greatly appreciated.

Thanks in advance,

A:

I don't see a problem here.  Either getting married or having a child move in are the kind of life changing unforeseen circumstances that would make you eligible to use the prorated exclusion of gain.  After being there a year, this means that you could exclude at least $125,000 or profit; more than enough to cover your situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Hi Kerry,

This is great news.  How do I petition or write a letter to in order to get my exemption?  Obviously, in California, I will have to petition both the IRC and the California Franchise tax board, but I don't want to start sending out blanket letters to either of those two agencies.  The progress and resolution of the exemption will take years.  Do you happen to have an address and contact department who I should send my information and claim to?

Thanks in advance.  Your site as well as your personal assistance has been a HUGE relief.  Being in a state that promotes family values and wellness, you would think they would make it easy to better your situation, but that is not the case.  Real estate agents are virtually worthless and getting help directly from the IRS is nothing more than a game of cat and mouse.

Thanks again.  I'll send you pictures of my new house once this is all said and done.

Regards,

A:

That is not how this works.  You don't need to get anyone's permission ahead of time when claiming the tax free exclusion for residence sales.

If you feel that you qualify for an exclusion, you just report the sale and the amount of gain excluded under Section 121 on Schedule D with your 1040.  If you are claiming the pro-rated exclusion for special circumstances, it is a wise move to attach an explanation of what those circumstances were. 

As with anything on your 1040, IRS will have three years to decide if they will accept your exclusion or ask you for more details.  My philosophy has always been to attach more than enough documentation of your case so IRS will have no need to request anything more from you.  This has never failed to head off IRS challenges of the several tax returns I have prepared with similar circumstances.  It is also one of the main reasons I advise against using IRS's electronic filing system because that does not allow any additional explanations of unusual items.

This is a very basic part of the tax law, which makes me nervous for your ability to do things properly.  You should work with a tax pro or you are very likely to screw things up.  Obtaining tax advice from IRS or Realtors is absolutely nuts.  Stick with CPAs and Enrolled Agents who believe in the philosophy of helping their clients save money as I discuss on my website.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/18/2005 02:11:00 PM Send this post:

Q:

Subject: Basics of Corporations

Hello Kerry,

 

First of all, thanks so much for taking the time to put together and to post the Corporations Internet page. Your explanations are excellent, and so helpful!

 

I have a question, and I can only hope that you have a minute. Am I to understand that an LLC can protect personal assets much like a corporation can? My brother and I are starting a landscaping business (in NC), and of course it will be quite small (for starters)---just us two.

 

From what I'm reading, a simple LLC is the way to go, until we get a little bigger, and then we may want to consider an S-Corp. Will we still be protected as an LLC (assuming we have basic liability insurance for our business)? Just in general, for a small startup, would you advise an LLC?

 

Thanks so much for taking the time to read my questions. I hope you have a moment to respond. But in any case, thanks again for the great information you've posted!

 

Best Regards,

A:

As I always say, there is no such thing as a one size fits all for businesses.  Neither is it wise to base important decisions such as this on anything other than a direct consultation with a tax pro who understands how to set things up in the best way for your and your brother's unique circumstances.

That said, there are a few issues that need consideration in your email.  

First, it this true that the LLC entity, if used properly, can shield its members from personal liability in the same way as a corporation.

However, if you already see a need for an actual corporation down the road, I don't see the benefit of starting off with an LLC as a "bunny slope" towards your ultimate goal.  LLCs can't be converted into corporations.  They are technically different kinds of legal entities.  You would need to file brand new paperwork, and pay new fees, to charter your corporation.  I am not familiar with North Carolina's LLC and corp paperwork; but in many states, the LLC paperwork is actually more complicated and the fees are more expensive than they are for corporations.  It is also occasionally the case that the taxes on LLCs are higher than they are for corporations. That is definitely the case in California, which assesses a tax on LLCs based on their gross receipts in additional to the $800 per year minimum tax it hits corporations and LLCs with.  This may not be the case yet for NC; but states that are desperate for revenue do look to the PRC for ideas.

If you do choose to just skip the middle step and set up a corporation, be darn sure you have studied the issues I have raised regarding the pros and cons of C versus S corps.   If your business is going to show profits, S corps can end up costing you a lot more in taxes than will a C.  Your only mentioning LLCs and S corps leads me to believe that you haven't adequately analyzed this matter.

I have found that LLCs are very useful entities for joint ventures between people.  However, they make most sense as something that will last out the life of the project, and not as a stepping stone to a corporation.  Take a look at the credits of movies.  They are almost always set up as LLCs that are there to account for the expenses and income of that one project, which is a joint venture between various companies and individuals.  When the film and its revenues run out, the LLC is dissolved.  It is not converted into a new corporation.

That is just my opinion.  I'm sure there are some folks, especially professionals who earn fees by setting up LLCs and  corporations, who would love for you to try the LLC and then a corporation.  You'll be paying them to set up the LLC, to properly terminate the LLC, set up the corp, and possibly terminate the corp.  However, corporations do have potentially eternal life; and can last forever, unlike LLCs and partnerships, which are tied to the life span of their owners.

Those are just some issues to consider when you discuss this with a tax pro.

Good luck.

Kerry Kerstetter

Follow-Up:

Wow Kerry!

 

Thanks so much for the detailed response. It's so nice of you to take the time to do that, especially since I'm a stranger.

 

After I sent my e-mail to you, I re-read the pages on your site, and I did see how you had pointed out that the C-corp may be a better choice than the S in many cases, and I think that will be the way to go. Also, your response to me highlighted the fact that moving from an LLC to a Corporation is not a simple, or even natural, transition. You're pointing this out will save us a lot of headache. Thanks!

 

I will definitely take your advice, and talk to a tax pro in NC before making any moves. Thanks again for your kind responsiveness!

 

Best Wishes to you, and know that you're doing good work!

 

Thanks!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/14/2005 10:31:00 PM Send this post:

Q:

Subject: starting corporation

Dear Kerry,

 

I love your site, I wish you wrote books too. So to my question. I have a roofing / construction business and from your site a C corporation looks best for me. Do you know of any books, other information sites anything where I can learn more about setting up my business to reduce taxes.  I have not been satisfied at all with my accountant or lawyer. I've talked to other accounts and lawyers but I can't find a smart aggressive person to help, so I'm working to learn for myself all I can. If I was a little younger I'd consider this line of work, because there is definitely a need and demand out there. Any way if you know how I can learn more I'd appreciate it and if not thanks anyway for your site and opening my eyes to what's out there.

 

Sincerely,

A:

I'm glad you found the information I have on my websites useful.  However, it is in no way intended to replace the services of a good tax advisor who understands how to utilize corporations and other techniques to minimize tax and liability problems.  While there are a lot of good books and articles available from Nolo Press on many of the mechanics of operating a small business in the most tax efficient manner, I really don't know of any books anywhere that can take the place of an up to date person. 

The tax rules are simply too fluid for any book to have a very long shelf life.  In fact, this is the very reason that, in spite of my writing my newsletters over the past 25+ years, I have never felt comfortable with the concept of publishing a book on tax savings tips.  I have always worried about the information in my newsletters becoming obsolete soon after it is written.  With the length of time it takes to produce an actual book, I've felt that much of its content would be out-dated by the time it was available to readers.

It is hard enough for professional tax advisors to stay current on the latest laws and regulations.  Unless you intend to give up your construction business and become a full time tax pro, there is no way that you could possibly be successful at both. 

I understand your frustration at being unable to find a tax pro you feel is compatible with your tax savings goals.  I constantly rail against tax pros who seem to be more concerned with maximizing the government's take than in helping their clients save money.  However, there are plenty of other tax pros out there who share my philosophy that it is our duty to do everything that is legally possible to help clients minimize their taxes.  I am positive that you will spend less time continuing your efforts to locate such an individual than you would trying to become a tax expert yourself.  If you haven't already done so, please check out my tips for selecting a tax pro.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for the reply, I'm not wanting to do my own taxes I was just wanting to get as much information as

possible so I'll know enough to pick a good accountant.

I'm not thinking of switching professions either, I was just noting the possibilities a good tax accountant like yourself would have and how many people he could help. I majored in accounting in college many years ago but I didn't realize how important it was then and not until after I had my own business. I think what I will do when I'm looking for a new accountant is have him go to your site and see if he's on the same page as you.

Thanks again.

Reply:

Using the info on my site as a sort of barometer to measure the attitudes of other tax pros is a very good idea.  You would be amazed by how many people, including many tax pros, consider me to be evil and unpatriotic for teaching people how to legally pay in less taxes.  You would obviously want to stay as far away as possible from those folks and hold out for someone who understands that there is no sin in using the laws to help their clients reduce their tax burden.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/11/2005 08:00:00 PM Send this post:

Q:

Subject: conversion-s corp to c corp

 

can you provide the statement required to be filed with the irs to do the conversion, or the publication where more info can be found?

Thanks

A #1:

You can find the requirements for terminating the S election on pages 2-3 of the 1120S instructions, which you can download from the IRS at: www.irs.gov/pub/irs-pdf/i1120s.pdf

Good luck.

Kerry Kerstetter

A #2:

I was browsing through my Tax Tools programs and saw that the Corresponder program has the following template for revoking the S election.  It's short enough that I copied and pasted it here.

I hope this helps.

Kerry Kerstetter



Page 1:


Statement to Revoke Sub chapter S Election (IRC Section 1362(d))


To:  Internal Revenue Service
        <insert service center address>


Re:  [Client: Taxpayer & Spouse name(s)/Company Name]
[Client: Street address, Apt/Ste/PMB #, plus line 2 (if any)]
        [Client: City, State  Zip]
        ID: [Client: Taxpayer's SSN/Company FEIN]


The above mentioned company hereby revokes its election under IRC Section 1362(a) in accordance with IRC Code Section 1362(d).  As of  < insert date >, there are < insert number > shares of issued and outstanding shares of stock in [Client: Taxpayer & Spouse name(s)/Company Name].  Attached are signed consents by all shareholders holding more than one-half of the issued and outstanding stock in [Client: Taxpayer & Spouse name(s)/Company Name].


[Client: Taxpayer & Spouse name(s)/Company Name]


By: ____________________________
             (Title)

Date: _____________________



Page 2:

Attachment of Shareholders to Statement of Consent to Subchapter S Revocation


The undersigned shareholders in accordance with IRC Section 1362(d) hereby consent to the revocation by the [Client: Taxpayer & Spouse name(s)/Company Name], ID# [Client: Taxpayer's SSN/Company FEIN] of its election under IRC Section 1362(a).  Such revocation is effective < insert date >.



By:  _____________________________________    ___________________
        <insert name of shareholder>    Date
        <insert address>
        <insert city, state, zip>
        ID: <insert ID#>


By:  _____________________________________    ___________________
        <insert name of shareholder>    Date
        <insert address>
        <insert city, state, zip>
        ID: <insert ID#>


By:  _____________________________________    ___________________
        <insert name of shareholder>    Date
        <insert address>
        <insert city, state, zip>
        ID: <insert ID#>


At the time of this revocation, the issued and outstanding shares of the  [Client: Taxpayer & Spouse name(s)/Company Name] are held as follows:

        <insert shareholder>    <insert number of shares>
        <insert shareholder>    <insert number of shares>
        <insert shareholder>    <insert number of shares>

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/11/2005 07:53:00 PM Send this post:

Q:

Subject: Primary Residence Sales: Partial Exclusion

Can I move without paying capital gains taxes?

It's been 12 long months of putting up with my house and I’m sick and tired of living in my current home. Moving would relieve my stress and improve my health, but I couldn't afford to move if I had to pay capital gains taxes.

You state in your website that a pro-rated exclusion is available "if the move was made due to health, work, or other unforeseen circumstances. Health reasons can cover a multitude of situations, including just being sick of living there."

However, the IRS issued a precautionary note: A sale "that is merely beneficial to the general health or well-being of an individual is not a sale ... by reason of health." Further, the IRS regulations stipulate that a preference for a different residence or an improvement in financial condition would not qualify.

What can I do?  Thank you for helping.

A:

You are correct that the health reason needs to be more specific than just feeling better to qualify for the pro-rated tax free exclusion.

However, if you think hard and creatively enough, it shouldn't be very difficult to come up with an actual health reason.  Factors such as allergies (to things on your property or from the neighbors) and access  (inability to handle stairs) occur very often. 

Safety issues, such as new dangers in the neighborhood with speeding cars or homicidal neighbors, would be examples of justifiable health matters. 

You just need to be able to prove, in the unlikely case that IRS even asks about it, that the situation either changed after you moved in, or you were unaware of it before starting to reside there.  As with all tax matters, the burden of proving the case lies with you and not with IRS. 

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/11/2005 07:46:00 PM Send this post:

Q:

Subject: Sec. 179

 

Hello Kerry Kerstetter,

Have a question for you. Forgive my lack of knowledge, but for a small family owned C corp, what exactly falls under Section 179?

Can I classify new office computers purchased/financed? Company car (under 6K lbs) financed? Office renovations such as new carpet, paint, etc.?

A:

I have posted extensive info on what qualifies for Section 179 on my website.

You really need to be working with a tax pro for this kind of thing.  Operating a business without a competent professional tax advisor is just asking for trouble.

Good luck.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/11/2005 07:41:00 PM Send this post:

Q:

Hello,

        I was looking up information on taxes of real estate and came across your website.
I have yet to find an answer to my question and I was hoping that you may be able to assist me.

I recently bought my place of residence and for $290K
I have decided to sell it for $325K and purchase another place for $100K

I have owned my current place for 6 months and it is my primary residence and I am selling it to buy another primary residence.

Am I subject to pay any tax since I am moving from a primary residence to a primary residence and my gain us under $250K? (I am single so I am only allowed the $250K and not the $500K).

If I am subject to the tax since I have not lived their for at least two years can I prorate the time I have been there (the 6 months, meaning 25%)

therefore allowing me $62.5K of tax relief (which would still allow me to not pay the taxes)?
Or am I subject to all the taxes?

Any information you can provide would be greatly appreciated.

Regards,

A:

You neglected to include a very crucial bit of information; why you are moving.

If it is due to a health, employment or other major unexpected development, you may be able to qualify for the pro-rated exclusion.

You can see more details at www.taxguru.org/re/primary.htm

Follow-up Q:

Hello Kerry,

        I am moving for personal reasons, nothing to do with the information listed below.  I feel that this new property is a better investment for the future.

Given this information does that allow for any tax relief?

Regards,

A:

Then you will have a short term capital gain that will be subject to ordinary income tax rates.

What you need to do is work with a tax pro to make sure you are reporting the proper amount as profit, which will entail a good accounting for your total cost basis of the home.  Make sure to include the cost of all improvements you have done to it, as well as any other items, such as furniture and appliances, that you will be leaving behind.  You also want to keep good tabs on the selling costs, including any that you spend on your own, such as trying to sell it yourself.

Good luck.

Kerry Kerstetter

Reply:

Hello,

        Thank you for your assistance, though not the answer I was hoping for I appreciate all your help.

Regards,

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/11/2005 07:35:00 PM Send this post:

Q:

Subject: Your article on S corporations

Hello:

I wanted to thank you for your article on S versus C corporations.

I am currently taking an on-line class on Federal Taxation and Management. One of our issues is S versus C corps.

Your article helped me in many ways.

Thank you again,

A:

I'm glad that it was useful for you.

Good luck in your class.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/09/2005 10:45:00 PM Send this post:

Q:

Subject: QuickBooks Pro 2005 vs. 2004

Kerry, Sounds like you’re very knowledgeable about QuickBooks and Quicken.  I’m in the process or purchasing a system for my new small business.  I am looking at Quicken 2005 Premier Home & Business vs. QuickBooks Premier Editions 2005.  In reading an article you wrote (December 28, 2003 – QuickBooks vs. Quicken) it sounds like QuickBooks has become a better product for small businesses.  But, I’ve seen some very low rating and horror stories about QuickBooks Pro 2005 version.  In your opinion would it be better to purchase the QuickBooks Pro 2004 instead?  Thanks,

A:

Normally, I would be quick to advise always buying the most current version of QuickBooks in order to take advantage of the newest features, as well as to give you the most time before the program is abandoned by Intuit, which happens every three years.

That isn't the case with the 2005 program.  I have heard and seen a lot of non-specific buzz around the internet about QB 2005 being buggy and problematic.  I have been having problems with it, as well.

Because our clients use a wide variety of versions of QuickBooks, I have long had to keep several versions installed on my main computer in order to keep their data files intact and compatible with their programs.  I had never had any problems working with any of the versions of QB until the 2005 program was released and I started working with it back in October 2004. 

I have been having the following problems with both the regular QB 2005 and Enterprise Solutions versions.  What happens is that out of the blue, I can't even open the program.  After spending several hours on the phone with QB tech support the first time this happened, the only solution we could come up with has been to uninstall the programs and reinstall them.  This has allowed me to run the 2005 programs for a few weeks until they conk out again.  Tech support has been useless in regard to any better solution.  To say that this is a pain in the butt is a huge understatement. 

I chalked the problem up to my running so many different versions of QB on my main computer.  The other two computers on which we have the 2005 Enterprise Solutions QB program installed haven't had this problem, which has been handy by allowing me access to our personal and corp data files.   
 
I have been running the QB 2004 programs since they were released in October 2003, and have yet to have a single problem with them.  I use the 2004 program at least a few times each week, as I work with client files. 

Unfortunately, I can't roll our data backwards to the 2004 program; so I am stuck using the 2005 until October of this year, when the hopefully more reliable 2006 programs are released. 

For your situation, I would advise obtaining a copy of the 2004 program.  It should be much less expensive than the 2005, and possibly free if you can get a copy from someone who has moved on to the 2005.  Down the road, you will always be able to roll your data over into the 2006 or 2007 program, after you have been assured that it is safe to do so.

I hope this helps.  You were wise to check on this before just buying the newest program.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks Kerry,

You comments are greatly appreciated and I am going forward with QuickBooks 2004.  I would be interested in reading any comments you may have on the web when the 2006 version comes out.  Until then thank you

very much for your advice.

Reply:

I'm glad to be of assistance. 

You should check in every so often with the QuickBooks section of my main website to keep up on new info and resources for QB users. 

As soon as we get DSL hooked up here, I will also be posting some short instructional videos.

Good luck with QB 2004.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/09/2005 10:40:00 PM Send this post:

Q:

Subject: Quick question on buying a SUV for business in 2005.

Kerry,

First of all, finding your website is probably the best thing I've done online this year. Thanks for all the great information and I wish every CPA could have the same attitude and knowledge.

May I ask a quick question about Sec 179? I started a retail business this year and it is doing good so far. I am planning to buy a SUV, which will be used at least 60% for business. I understand that the 100K deduction expired. Does that mean the tax impact will now be the same no matter whether the SUV is above 6K lbs (e.g. A VW toureg) or below? How much deduction should I expect for it? (vehicle will be priced between 30K~40K)

Thanks for your help in advance.

Have a wonderful day.

A:

As I always say, you really need to be working with a tax pro to see how the tax laws and rules will affect your particular situation.

If you check my page on Section 179,  you will see that the maximum for 2005 is $105,000.  Of that, only $25,000 can be for SUVs that are over 6,000 pounds GVW. 

The maximum for vehicles under 6,000 pounds is much lower than that.  For  example, SUVs, trucks and vans weighing less than 6,000 pounds that are placed in service in 2005 have a maximum Sec. 179 deduction of $3,260 if they are used 100% for business.  Thus, the 6,000 pound threshold is still very important.

In your example, using an SUV weighing more than 6,000 that costs $35,000 and is used 60% for business, you would have a possible Section 179 deduction of $21,000 ($35,000 X 60%).  This could be limited based on the other restrictions related to Section 179.

Again, any competent tax pro should be able to help you with this in more detail than the generalities we are using here.  

Good luck.

Kerry

Follow-Up:

Thank you so much for your reply. You are just awesome.

I will definitely hire a CPA for the actual tax/accounting stuff,

But your answer helped me to save time on researching target vehicles, which is just as valuable.

Thanks again and you have a good evening.

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/09/2005 10:31:00 PM Send this post:

IRS announced that the interest rate that is charged on late tax payments will remain at six percent for at least through September 30, 2005.  I have updated this on my Quick Reference page.   

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/06/2005 10:06:00 AM Send this post:

Q:

Subject: May I ask you a quick tax question about section 179?

 

Please advise me on your thoughts regarding the purchase of a new business telephone system and being able to utilize section 179 for a tax break on this purchase.  We are debating at our company on whether you can write off some of the purchase expenses or not…I thought I would ask an expert.

Thanks,

A:

While buying a new phone system would possibly be eligible for Section 179 expensing, whether you can or cannot actually claim it depends on various other factors. 

These include:

The total cost of new equipment placed into service during the tax year; i.e. $420,000 for 2005

Whether there is a net profit for the year, because Section 179 can't create or add to a net loss. 


You really need to be working with a tax pro who can analyze your figures and give you advice based on your actual numbers.

Good luck. 

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/05/2005 08:57:00 PM Send this post:

Q:

Subject: Exchange Question

 

Dear Sir,

 

Can I exchange my business in England for a similar business in California? As I am taxed on my worldwide income I should also have all the benefits which are available to all US residents.I am a US citizen

A:

Using 1031 like kind exchange rules for business sales is extremely complicated and is something that you will need to consult with a tax pro on.

This is due to the fact that when a business is sold, the price needs to be allocated between the different components involved, such as equipment, real estate, inventory, goodwill and covenant not to compete.  With each of those items, you will need to determine whether it is even eligible for a 1031 exchange, and if so, what constitutes eligible like kind replacement property. 

One thing that is in the tax code that may mess up your plans has to do with real estate.  United States real estate must be replaced with United States real estate.  Likewise, British real estate would need to be replaced with British real estate.  California real estate is not like kind for British real estate.

You didn't specify exactly how the sale will be structured.  The above refers to the sale of business assets.  Another complication could cause problems for you if you are selling a corporation by selling off its stock.  This would automatically make it ineligible for a 1031 exchange.

There are plenty of ways to minimize your tax bite.  However, the only way to do so effectively is by working with a tax pro.

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/05/2005 08:49:00 PM Send this post:

Q:

Kerry Kerstetter,

 

Your Estate & Gift Tax page is well laid out and quite informative. However, I have one question for clarification. In your example of one dying in 2005 with an estate valued at $1,700,000.00, you mention that, because of the current exclusion, only the "overage" of $200K would actually be taxed. You also mention that it would be taxed at 45%, per the table following further down that page. Would that $200K actually be taxed at only 32%, that being  the  actual taxable amount, per the chart heading. Or is the actual taxed amount taxed at the rate for the entire estate value?

 

I would see owing 32% of $200K, or a total estate tax burden of $64,000.00. Am I mis-interpreting your table and verbiage?

 

It is a critical question and I thank you for your attention to this query.

A:

The verbiage on my website is accurate.

The way the estate tax exclusion works is that it effectively wipes out the lower rate brackets.  On the estate tax form (706) itself, it shows up as a credit against the total tax on the full taxable estate.

The net effect of the way this is set up is to subject the excess taxable estate to the next marginal tax rate.  A net estate  of $1,700,000 falls in the 45% bracket. Since the current exclusion wipes out the first $1,500,000, this leave the additional $200,000 still in the 45% bracket, for a tax of $90,000.

I know this is confusing; but that is how our rulers in DC like it to be.  As always, anyone with an estate large enough to be subject to tax should be working with a tax pro.  Estate tax returns are definitely not a do-it-yourself area; especially since a very large percentage of them are audited by IRS.

Kerry Kerstetter

Follow-Up:

Superbly logical and communicated response, sir.

Thanks!

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/03/2005 06:34:00 PM Send this post:

Q:

Subject: Section 179 expensing

I find your blog to be very informative.

 

Would you please explain to me how a C corp is able to deduct its own 179 expenses in addition to what is claimed on the 1040s of the owners?

 

Your response would be most appreciated.

A:

This is covered in my article on the differences between C and S corps:
http://taxguru.org/corps/scorp.htm

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/02/2005 08:49:00 PM Send this post: