Eleventh-Hour Ideas for Paying for College – From Gail Buckner

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/29/2006 10:14:00 PM Send this post:

IRS affidavit says deals on property sales fraud – When I was teaching seminars to Realtors around Arkansas, I used to include a section on the requirement to file Form 8300 with IRS for transactions where more than $10,000 in cash or cash equivalents was involved.  There was a lot of skepticism as to this happening with real estate purchases.  However, this case shows that it is a very common method of money laundering. 

While the article doesn’t say anything about the parties receiving the money, IRS has a good case to prosecute them for failure to file Form 8300.  Anyone receiving 30 cashiers checks totaling $120,000 should report it on one or more 8300s, even though no one check was for more than $10,000.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/29/2006 09:55:00 PM Send this post:

Q:

Subject: SE Tax Avoidance Strategy

Hello, Tax Guru. I'd like to become one myself. Forgive me for the length of this email, but I wanted to present what I think are all the relevant facts so that you could give me your expert opinion. I've really enjoyed reading all the articles you have on your website and I, too, feel that we give too much of our money away to Uncle Sam because of fear. But I must confess, I have a little fear because it's just me and my own little mind. Here goes.My wife and her unrelated partner have two businesses. A lawyer suggested they set one up as an LLC and the other as an S-Corp. Both of these are split 50-50.

The LLC bought a commercial building (28K sqft) and pay a mortgage. The LLC leases this building to the S-Corp. Through an informal "triple-net-lease?", the LLC requires S-Corp to pay the RE taxes and insurance on the building.

The S-Corp is in the Art Business. They rent out space to artists, usually with 6-mos to 1-yr leases. The rent out wall space a month-at-a-time. They rent out floor space for weddings/receptions, corp meetings, karate instructors - you name it. They try to rent the air above the building. The S-Corp also sells art for the artists when they are not there, taking anywhere from a 10-30% commission, plus credit card fees for these sales. Both owners put in at least three days a week into the biz.

In the beginning, Oct 2003, both partners put money in the biz to get rolling. An accountant told me to put $100 each into Quickbooks (QB) equity accounts called Owners Capital. The rest of the money he had me put into accounts called Loans From Owner. I set these up as Equity accounts, but maybe they should be liabilities, short-term or long? I guess you know by now I do the books and taxes for the babes (they don't like to be called ladies because that implies old).

Up until now, the owners have been taking 2K each out of the businesses. I book these by reducing the Loan From Owner accounts. Now, one of the partners has gotten her original investment out, so we're talking about salaries, etc.

The S-Corp, in my mind, is never going to generate enough money to pay wages and dividends. I know from reading your website and others that wages are subject to FICA and dividends not.

Then I had a thought that the S-Corp may be in the rental business and thus the income would not be subject to SE/FICA tax. But I now think that because substantial services are rendered to the artist tenants and the hours the owners put in are relatively substantial, the S-Corp is really an active activity and not a passive rental activity. More like Property Management, I guess, which I read is also an active activity.

Next thought was that LLC is truly a rental, passive activity and that money earned in the LLC is not subject to SE tax. If this is true, then why not reduce S-Corp's income down toward zero by increasing the rent paid to the LLC?

The only potential flaw in this strategy, in my mind, is that the IRS could say this structure is only for the purpose of evading SE taxes because the rent amount is "unreasonable" and exorbitant. To that end, we're going to see what the going commercial lease rate is in this city per square foot.

There you have it. If you haven't yet gone to sleep or deleted the email - what do you think about this?

Just as an aside, I've always done my own taxes and have been aggressive (like hiring my wife in my IT consulting business and deducting all health expenses), borrowing money from my IRA late in the year and having 99% of it withheld to avoid penalties for not paying estimated income tax during the year (is this a cool trick or what?!) and have done lots of reading. I'm a math major and always interested in numbers (and saving taxes). Since I got outsourced to India (I hope those six guys are happy) about the same time as this Art business, I decided to professionally prepare taxes for people last year (actually made a few hundred dollars) and I'm doing it again this year.

Thank you very much for listening and I would appreciate any advice you could give me on anything herein.

Sincerely,


P.S. When the Babes take non-wage money out of the biz and the Loans From Owner account have already been paid back, what is this disbursement called and where do I book the Debit in QB? (Obviously I'm a self-taught bookkeeper, too!).

A:

I don't want to rain on your parade here, but working with LLCs and S corps is not something you can learn as you go on your own without making a lot of costly mistakes. You really need to be working with a competent professional tax advisor who has experience with coordinating these kinds of things. As you pick up on what s/he is advising, you can gradually take on more of the tasks yourself.

If you are serious about becoming a professional tax preparer, you should consider doing some tax season work for an established CPA or other tax prep service, where you can learn how to handle various kinds of tax issues. There is no substitute for real life experience in the tax profession, and most tax services are desperate for busy season help. I used to have several CPAs work for me during tax season back in my offices in the PRC. I taught them how to work with corporations and partnerships, skills they were able to take out on their own.

Good luck.

Kerry Kerstetter

Follow-Up:

I guess I really didn't expect an answer for free. I'm already professionally preparing taxes anyway and have always learned everything I know from doing it myself, whether it's computer programming technology or taxes. You're right that I should be hanging around seasoned pros, which is why I sent the email to you and am constantly seeking other opinions – face-to-face, emails and by researching on the internet.

Anyway, I'm pretty confident in my assessment re: avoiding SE tax in the partnership. I found some more ammunition at the following website.

Thought you might be interested in it.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/29/2006 02:23:00 PM Send this post:

Q:

Subject: Exchange Question

My father-in-law owns highly appreciated raw land in Florida which he bought many years ago for $8,000.  He is receiving sale solicitations in the neighborhood of $400,000.  He wants out because he is tired of paying the increasing real estate taxes.

 The Q is: Can he use the 1031 rules to buy fraction shares in both my home and my brother in laws home (reduction in our mortgages) - with the understanding that we would pay him on the note (a monthly dollar amount equal to the non-deductible equivalent of principal and interest amounts - using a 25 year amortization). 

He would conceivably be placed on the deed and would leave us the share of the home in his will if he were to die before the 25 years was up.  He is 80 years old today (in good health)???

Basically we would be paying him 5.00% instead of paying the bank.

Thanks in advance for any help.

A:

There are several complicated twists to the scenario you are proposing, which all parties concerned need to discuss in detail with qualified professional tax advisors.

Your father in law could reinvest into your homes as long he will be acquiring equity ownership interests in them and he will be treating them on his books as investment, business or rental property.  He cannot treat them as personal usage. 

For this to work, you and your brother-in-law would have to report the sales of the partial interests on your 1040s, which may or may not be taxable to you.  There is also a restriction on 1031s between related parties if the replacement properties (your homes) are disposed of within two years, except for extraordinary circumstances (such as death or illness).  

Your FIL would also have to comply with all of the rules for 1031s.  The amount reinvested would have to be equal to or higher than the net sales price ($400,000 less selling costs) and there would need to be proper documentation of all legs of the exchange.  The handling if the cash proceeds would have to be set up so that he doesn't have access to it.

However, the way you are proposing structuring the deal sounds more like he would be investing his money into the mortgages as a lien-holder instead of an actual equity owner.  Such an arrangement would not qualify as a like-kind replacement for his old property.  A lien-holder interest is not the same as an equity ownership.  Your repayment plan makes it even less likely to fly because you would be treating him as a lien-holder by paying him interest and not as a co-owner.

One possible way around this would be for you and your BIL to rent your FIL's share of the homes from him and pay him monthly rent, which he would report on Schedule E of his 1040.  That would properly document the replacement properties as rental, which qualifies a like-kind for his Florida investment property.  This would also give him some monthly cash income to live on.

How your FIL wants to distribute his shares of the homes after his passing is completely up to him and doesn't really affect this possible transaction.

These are just some of the details that all of you need to discuss in much more detail with qualified professional tax advisors.

Good luck.

Kerry Kerstetter

 Follow-Up:

Kerry,

 

Thank you for such a thoughtful response.  Is this the type of work that you could (better yet, would be willing to) do for us if we decide that this is the way to go?

Based upon your response - I think I would sell him my house and pay him rent (I qualify to exclude the gain on my 1040) - my house has an appraised value of in excess of his land purchase.

Best,

My Reply:

My wife, Sherry, has her own company, Tax Free Exchange Corporation, that handles 1031 exchanges all over the USA.

You can learn more about her services, as well as her fees, on her website.

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/29/2006 02:16:00 PM Send this post:

Q:

Subject: RE setup

I am setting up an accounting system for my daughter and it seems like a lot of people would like to use QBooks for a RE brokerage. Is QBooks a good piece of software to use for a RE brokerage firm and all the types of transactions associated with it?  Escrow, pending sales, non pending listings, multiple commission schedules, in house marked up services, closings, paying agents.

A:

I doubt that you will find one computer program that will handle everything needed to properly run a real estate office.

QuickBooks can do all of the basic accounting that you will need to prepare the business's financial statements and tax returns, as well as 1099s and payroll.

It isn't suitable for keeping track of the status of escrows and actual real estate transactions.  I know that there are various specialized software packages that are set up for his kind of thing; but I don't have any names to pass along at this time.  You should check with other Realtors, as well as the NAR and local Realtor associations for recommendations.  

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/29/2006 02:08:00 PM Send this post:

I’ve frequently discussed the additional tax breaks for C corporations as opposed to S corps.  One of those tax benefits is to have the C corp cover all of the employees’ medical costs.  As described here, those medical costs can even include things that wouldn’t be deductible on the employees’ Schedule A, such as over the counter medications. 

I have no idea what this company provides for $147; but I doubt that it’s much more than the forms already included in CFS Tax Software’s Small Business Tools program, such as this Medical Reimbursement Plan template.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/28/2006 04:40:00 PM Send this post:

The WSJ’s list of five best tax books

1. "The IRS Problem Solver" by Daniel J. Pilla

 

2. "Confessions of a Tax Collector" by Richard Yancey

 

3. "What the IRS Doesn't Want You to Know" by Martin S. Kaplan

 

4. "Tax This! An Insider's Guide to Standing Up to the IRS" by Scott M. Estill

 

5. "J.K. Lasser's Your Income Tax 2006" by J.K. Lasser Institute

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/28/2006 11:55:00 AM Send this post:

Tax Deductions for Home Office Expenses – From NATP. 
I’m constantly amazed at how many people still believe the old urban myth that claiming a home office deduction is a guaranteed IRS audit.  With the internet making it possible to do almost anything from home, it’s expected that more people are entitled to claim it.  Those folks who have home offices, yet don’t claim it out of fear of the IRS, are more examples of how people are intentionally overpaying their taxes and thus decreasing the infamous tax gap.

Borrowing from Mom and Dad To Buy That First Home – From WSJ

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/26/2006 08:44:00 PM Send this post:

Some interesting articles from the most recent Intuit ProConnection Newsletter

What’s New on the 2005 Form 1040

Tips for Bringing CPA Clients to the Door of Your Bookkeeping Business

Freelance Bookkeepers Jubilee

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/26/2006 04:19:00 PM Send this post:

Bank Employee Pleads Guilty To Taking, Destroying Tax Returns  that were sent to IRS lockbox in Pittsburgh, PA.   This, and last year’s incident where lockbox payments ended up in San Francisco Bay, don’t instill a lot of confidence in the IRS’s ability to control the money they receive. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/25/2006 07:46:00 PM Send this post:

More Companies Phasing Out Retirement Option – Satire on alternative employee relations from The Onion; never let go of employees.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/25/2006 12:19:00 PM Send this post:

Commissioner Everson Calls for Improvements to Refund Fraud Program

Institute of Global Prosperity Co-Founder Apprehended in Panama and Arrested for Tax Evasion – This was scam to hide income and assets in bogus offshore trusts.   We had to dump a husband & wife client a number of years back who failed to heed my advice to stay away from these scammers.

Tax Tips for Married Business Owners – From SmartMoney.

From Nolo Press

Corporations vs. LLCs

 

Running a Business With Your Spouse

 

Ten Good Reasons Not to Buy a Franchise

 

LLC Basics

 

Sole Proprietorship Basics

 

Formalize Your Freelance Business

 

Creating a Partnership Agreement

Ten Tips for Making Solid Business Agreements and Contracts 

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/24/2006 10:23:00 PM Send this post:

Pair face federal tax fraud charges – Thanks to Russ Fox for finding this story from Texarkana of a crooked tax preparer and a jailer using prisoners’ Social Security numbers to prepare phony tax returns claiming over $50,000 in bogus refunds.  It looks like the jailer will soon be learning how life is on the other side of the bars.    

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/24/2006 11:13:00 AM Send this post:

Willie Sutton

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/23/2006 05:35:00 PM Send this post:

Richard Hatch Trial Update: Prosecution Rests, Defense May Be Grasping at Straws – Good recap of the trial from Reality News Online.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/23/2006 04:51:00 PM Send this post:

Q:

Subject: Re: SE tax on LLCs

 

Where is the grey area regarding SE tax on LLCs? I thought the rule was that if the income would have been subject to SE tax had you earned it personally (sales of inventory, personal services) then you owe SE tax, and if it isn't subject to SE tax if earned personally (dividends, interest, rents from real property, etc) then you don't owe SE tax.

Basically, LLC members are treated as general partners of a partnership. The only grey area I'm aware of is whether you can treat passive members of LLCs as limited partners e.g. no SE tax is owed even if the income would be subject to it if earned personally.

A:

While that interpretation may be fine for you, that is by no means widely accepted. 

This has long been a very widely contested issue, which is not helped by the fact that there are no firm laws or regs on this topic. 

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/23/2006 04:12:00 PM Send this post:

Investors recoup third of cash lost in trading scam – Once again, it’s hard to feel much sympathy for folks foolish enough to believe that an investment promising a yield of 21% per month was legitimate.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/22/2006 04:42:00 PM Send this post:

Our friends at the US Postal Service have five free educational DVDs available on various scams that seem to be luring in more and more people.  This is one more deal I learned about from TechBargains

The titles include:

Dialing For Dollars – On telemarketing fraud

Work at Home Scams

Identity Crisis – on identity fraud

Long Shot Foreign Lottery Scams

Web of Deceit – on internet scams

I ordered a copy of each and will check them out when they arrive. Since they are probably going to send them for free via the US Snail, it may be quite a while. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/21/2006 10:00:00 PM Send this post:

Q:

Subject: Exchange Question

 

I have funds from the sale of investment real estate sitting in an exchange fund.   Can I have the trustee buy shares in a REIT?

A:

What is most disconcerting is why, in the middle of an exchange, you are asking this critical question of a stranger.  Both your personal professional tax advisor and your exchange facilitator could very easily tell you that shares in a REIT are not eligible like kind replacement property for real estate.  They are essentially equivalent to shares of stock in a corporation, another non-like kind asset.

If you are doing this exchange without the services of both a professional tax advisor and an independent exchange facilitator, you have probably screwed things up with your exchange; and should consult with some competent professional advisors ASAP to see if it can be salvaged.

Good luck.

Kerry Kerstetter

Follow-Up:

THANKS FOR THE PROMPT REPLY.

 

As you may be aware you can get multiple answers from multiple people.  Your answer was affirmed by an article in the June 2005 NY CPA Journal.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/21/2006 05:26:00 PM Send this post:

Note:  This is the email exchange to which I referred in my item on the Tax Gap and how people intentionally overpay their taxes rather than risk IRS hassle.

Q-1:

Subject: Property sale

Dear Mr. Kerstetter,

I had written to you once about a year ago regarding the sale of primary residence with under 2 years occupancy.  You said that it sounded like I had a good case if I chose to sell my house under 2 years.

I am in the Marines and was transferred to Yuma, Arizona in February 2004.  I signed a contract to build a house in December 2003 which was completed 15 August of 2004.  When I purchased this 4BD/2BA 1768 sq ft home, it was with in mind that only my domestic partner of 2.5 years and myself would be residing there full time with occasional visitations from our children.  We each have a son and daughter from previous marriages for a total of 4 children. 

After moving to Yuma, Arizona in February of 2004 my son came to live with me at the demand of his mother in March 2004.  In June 2004 both of my domestic partners kids came to live with us full time and we moved into the house on 15 August 2004.  A custody battle arose over my son and daughter in August of 2004 due to the mother wanting my son back and both kids wanting to live with me due to an unstable and hostile home at their Mother's.   I was granted temporary custody of my son at that time until the custody hearing was completed. 

With 3 children living with us full time now and my daughter coming for visitations it quickly became apparent the house was going to be crowded with all 4 children living there, only 1 bathroom between them, and my son needing his own room now that he was a teenager. 

In February of 2005 (This was about the time in which I e-mailed you before.) I signed another contract to build a house 5BD/2.5BA 2261 sq ft. to be completed in December 2005.  The final hearing was in May of 2005 and I was granted custody of both children beginning June 2005. 

I sold the old home 23 November 2005 and closed on the new house on 9 December 2005.  (I resided in the house I sold for 15+ months.)

I bought the first house for $147,000, owed $130,000, and sold it for $269,900.  Gross gains = $122,900.  I left the money with the title company until closing on the new house.

I bought the new house for $265,000.   I at first was going to finance $130,000 and put all the proceeds from the 1st house into the new house, but thought best to finance another $20,000 for possible capital gains tax.  $115,000 from the old house rolled right into the new house at the title company I never touched it and I received a little over $20,000 back from the title company due to financing more to cover taxes just in case.

I received a 1099 from the Title company for gross amount of $269,900.

My question is; does this still sound like a good case for a pro-rated exemption under "unforeseeable circumstances"?  Should I request a private letter ruling or am I just wasting my time and money? (Apparently there is fee of $200 or ?more? to do a request.)

I have consulted the military base tax center, done exhausted reading online, and even called the IRS 1 (800) number and am even more confused than I was before.  I appreciate any help or guidance that you can provide.

Thank you,

Sincerely,

A-1:

It still sounds as if you would qualify for the pro-rated exclusion, which any properly experienced tax professional should be able to confirm.

It's not necessary to get prior approval from IRS.  Just attach a statement of the facts to your 1040.

The residence sale rules don't have any restriction on use of the cash or requirement to reinvest anything.  That's only required for 1031 exchanges of business and investment properties.

The fact that you did buy a larger house to accommodate the unexpectedly larger family should be included in your explanation of why you qualify for the pro-rated exclusion.

Good luck.

Kerry Kerstetter

Q-2:

Thank You for responding to my letter Mr. Kerstetter.

I was close to just surrendering and paying the capital gains tax to avoid having to pay any penalties or fees.

I just have one more question if you have the time to respond.

If the IRS finds that I do not qualify for a pro-rated exclusion and it's after the 15th of April or even 2 years later will I have penalties or be fined more money?

Thanks again,

Sincerely,

A-2:

In the extremely unlikely (perhaps one in a thousand) chance that IRS questions your eligibility to use the pro-rated tax free exclusion, it's not an automatic requirement to pay the additional taxes.  You and your representative will have plenty of opportunity to present more information to convince them that you are correct.  Worst case scenario, if you are unable to convince them and don't want to drag it on, you would have to pay the extra Federal and Arizona taxes and interest on those taxes.  Penalties are negotiable, and it shouldn't be hard to have them waived in a situation like yours.

 If, on the other hand, you choose to not take any chances and pay those taxes with your original returns, there is absolutely zero chance that IRS will come back and tell you that you didn't need to.  It is also the case that if you pay the taxes and then later change your mind, it will be practically impossible to get that money back.  IRS will use your  original self assessment of tax as an admission that you owe it, and it will be a hundred times more difficult to change that after the fact.  It's the same as a murderer trying to recant a confession.

Your case is a perfect example of why I have long contended that, contrary to popular opinion that everybody is a tax cheater, more people intentionally or accidentally overpay their taxes than underpay.  Millions of people are just like you, looking for 100% assurance that their position is sound and will not ever be questioned by IRS.

As I have said for decades, tax law is at most 10% black and 10% white, with the other 80% as gray as can be.  My position has always been that things falling into the gray area should be interpreted in favor of the taxpayer.  Unfortunately most other tax preparers and taxpayers themselves prefer to interpret the gray areas in favor of the IRS in the hope that this will buy them some safety from attacks. I have many cases over my career where people have still been attacked by IRS, even though they intentionally overpaid their taxes by several thousands of dollars; so that scenario isn't a guarantee of safety. 

It's obviously your choice which way to treat this.  I hope I've given you some food for thought before you send in your 1040.

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/21/2006 03:17:00 PM Send this post:

Q:

Mr. Kestetter,

 

I ran across your Web site and was hoping you could answer a question for me. In 2003 I filed a federal tax return but did not file an arkansas state income tax return. I moved out of the state in 2004. But I recently recieved a notice of non-filing from the dfa.

 

Here's my question: on my federal return I took a lot of deductions and am thinking twice about taking them again with the state as I do not want to get audited. With just a standard deduction I will be due a refund. But I'm wondering if I just use the short form with the state and take the standard deduction, will that raise any red flags with the IRS because my returns will be different? Also, is my state return likely to recieve heavier scrutiny because it is being filed late?

 

I would really appreciate your help.

A:

IRS and DFA do share tax data; so I would keep the Ark. numbers in synch with what you reported to IRS. You could open a can of worms for yourself if you try to submit different figures.

Filing the return late doesn't increase its audit potential. 

DFA doesn't do the kinds of audits that IRS does.  The only time they will hold up processing a return is if you forget to attach various documents, such as W-2s, 1099s, and Federal schedules.

A qualified tax pro should be able to help you stay in compliance with the DFA.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/21/2006 02:59:00 PM Send this post:

Q:

Subject: Exchange Question

 

If an exchange was declined at closing of escrow and the property has been sold, can the seller still decide to purchase a home, invest the money into a new property and still get tax even though an exchange was not established?

A:

The answer is no.

The exchange has to be set up before the sale leg closes.  It is also critical that you never touch the money. 

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/21/2006 02:52:00 PM Send this post:

Q:

Subject: 1099 forms

Kerry - The web site where I have been getting the 1099 & 1096 forms say you can no longer use these off their site because they are in red and there is a penalty if you use them.  Can you tell me where I can get these forms?  I've call the Post Office and the Library...they don't have any.  Thanks,

A:

Actually, nothing has changed in regard to the 1099 forms. 

The copies you need to give to your payees by January 31 can be of the regular black and white variety as produced through QuickBooks or that you can download or photo-copy.  Those are super easy to prepare.

The hassle is with the copies that are to be sent to IRS by February 28.  They do have to be printed on a special scan-able red-ink form that is a pain in the butt to line up properly in laser printers.  You can buy these forms at most office supply stores.  You should buy a few more than you will actually need because the first test ones will probably be messed up.

Good luck.

Kerry 

It’s also time for my annual reminder that it’s best to not rush the 1099 and W-2 forms in to IRS and SSA.  They are not due to the government until February.  It will make everyone’s life much less complicated if you give your payees time to review their copies and notify you of any errors before you send in the government’s copies.  

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/21/2006 02:48:00 PM Send this post:

Woman leaves entire $1.1 million estate to pay down national debt – The big difference between this woman’s estate plan and what happens to most others is that hers was voluntary.  For others, the government and probate attorneys confiscate part of their estates instead of allowing them to pass their accumulated wealth to whomever they want to. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/21/2006 12:38:00 PM Send this post:

Fact Sheet Covers Credits for Installation of Energy Efficient Home Improvements; Purchase of Alternative Vehicles

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/20/2006 11:31:00 AM Send this post:

Report Alleges IRS Misconduct in Investigation of Cisneros – We’re still waiting for the release of the rest of the Barrett report that is said to include other examples of how the Clintons used the IRS to persecute their political enemies; something that I am personally very well acquainted with.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/19/2006 09:39:00 PM Send this post:

While I don’t use TurboTax, I was somehow subscribed to their email newsletter.  The most recent issue had some good articles.

Summary of Tax-Law Changes

10 Tax-Savvy Steps for After the New Year

FAQs on the Alternative Minimum Tax

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/19/2006 08:36:00 PM Send this post:

Accountant 'stunned' by Hatch's IRS filing – Testimony from the tax preparer Richard Hatch scammed into producing a bogus 1040 without his Survivor winnings. This should be a warning to all of us practitioners not to ever do that, especially for someone who has been on national TV, where he won a prize for being the most devious and conniving.

"It was just for analysis," said Wallis, a key witness for the prosecution in Hatch's federal tax evasion trial. She said she took her name off the sample return and had Hatch sign a letter from her stating, "This return is not intended to be filed and is simply for your information."

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/19/2006 06:58:00 PM Send this post:

Certain Tax Returns Go to Different Centers than Last Year – IRS’s annual reshuffling of the workload for the service centers we have to send returns to.

Charities Not Thrilled With Latest IRS Guidance on Vehicle Donations – Nobody likes to have to deal with additional paperwork; but this did deal with some very real abuses by donors.

 IRS Progressing Toward Development of Data Clearinghouse – Nothing could go wrong here, right?  IRS has such a stellar track record when it comes to upgrading computer capabilities that we have nothing to worry about.   

 Adding Roth options to your 401(k) saving plan

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/18/2006 09:53:00 PM Send this post:

New Incentives Make 'Going Green' Easier – Including some new tax credits.

How to Get Rid Of Private Mortgage Insurance

Retiree Helps Others Manage Their Nest Eggs

Is It Time To Unload Your Investment Properties?

Why Some Supermansions Are Priced Not to Sell

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/18/2006 02:21:00 PM Send this post:

While I have never in the least felt my business to be threatened by do it yourself tax software, that hasn’t been the case for many other tax professionals, such as in this email from Ohio CPA Dana Stahl.

Mr Guru - saw your blog this am.  You really do know tax pros who "are desperately looking for clients?"  I know I've had a hell of a time trying to build the accounting end of my practice, what with some of the marketing programs I've tried.  The tax end has grown, however.  But I do worry about the future, particularly with the tax software available for people to do their own plus the IRS making tax prep available online.  I know we've discussed that before, but I do need to pay attention to the trends affecting our profession.  That's why your comment about desperation jumped out at me.

 

Talk to you soon,

DS, CPA, ABA, ATA, ATP

Dana:

As you well know, there is a growing mini-industry that focuses on helping accountants get new clients; so there is obviously a big market for that. I also frequently see messages on the discussion boards asking for help on how to generate new clientele. 

As I've always said, tax preparers who are nothing more than form fillers do need to worry about competition from do it yourself software.  Those of us who use our knowledge and experience to massage the info have nothing to fear from those programs.

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/18/2006 11:33:00 AM Send this post:

Ohio CPA Dana Stahl has been watching the discussions on the tax gap issue.

Mr Guru - I finally got around to looking at the Roth & Co post on the "tax gap".  He, as you know, took you to task for "selection bias", citing restaurant owners & others who keep revenue off the books & those who come up with bogus deductions (of course, you would NEVER know about those matters, right?  You've only been preparing taxes for how many years now?

Guess that means you've got no clue to how the real world really works).

Anyway, he does raise an issue here.  Wondered what your counterpoint would be.  Something for your blog in the future?

DS, CPA, ABA, ATA, ATP
Sandusky, OH

My Response:

In regard to the tax gap debate, I have never said that nobody cheats on their taxes.  In fact, I make a point of posting plenty of articles on tax cheaters.  Maybe it's just the difference in my outlook on humanity.  Most other people, including some other bloggers, seem to always see the worst and start from the premise that everyone is dishonest and will cheat on their taxes.  Based on my 30+ years of working with people from pretty much all cross sections of our society, I know that assumption is not true and is an unfair characterization.  I stand by my opinion that it is wrong to treat everyone as a criminal and punish us all with more Gestapo like powers for IRS just because of a small number of people who refuse to obey the laws.

I'm nearing the end of an email exchange with someone who is a classic example of how people intentionally overpay their taxes that I hope to post in the next few days.

Kerry

 

Update: I have posted the above-mentioned email exchange.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/18/2006 11:19:00 AM Send this post:

Q:

Subject: Section 179

 

Kerry,

 

We are trying to figure out whether Section 179 still applies to RV's in 2006; it was our understanding that 2005 would be the last year. Could you help us with this?

 

Thank you,

A:

For some reason, that bit of misinformation has been circulating for several months now by many irresponsible people.

As you can see from the info on my website, the rules for 2006 are the same as they were for 2005, except that the maximum has been increased to $108,000.

Kerry Kerstetter

Follow-Up:

Kerry,

Thank you so much for your quick response.  We really appreciate it!

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/17/2006 03:59:00 PM Send this post:

Q:

Subject: help

Kerry:

 

I have a client who owns a home with his wife which otherwise would qualify for the Section 121 exclusion.  They want to "sell" their home for a promissory note to a controlled entity (LLC or S corp) and then have it developed into condos to be sold.  The entity/purchaser will be 99% owned by the seller and 1% by another.  Assume the sale is "respected" by the IRS.

 

Results:  no ability to use installment sale treatment (453(g)); ordinary income on the sale (707/1239).

 

Even given the potentially "bad" tax results above, this is no problem because 121 still excludes the gain even if it is ordinary income under 707/1239.  Do you agree??

A:

I'm not aware of any restriction on the Sec. 121 exclusion for full unrestricted sales to a related party.

The only mention of any such restriction in Pub. 523 is the following for when only a remainder interest is sold to a related party.

“Exception for sales to related persons.   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Related persons include your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations.”


Kerry Kerstetter

Follow-Up:

agreed.  Thanks!!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/17/2006 03:48:00 PM Send this post:

Q:

Subject: Tax Question

Dear Kerry,

I have friends that want to sale their residence valued at $1.5 million.  They also want to make a contribution to a charity of approximately $500,000.  They are wondering if they can donate 1/3 of the residence to charity before it is sold.  Then after the home is sold and they get $1 million for their 2/3 share of the residence, still deduct the $500,000 exclusion for sale of a partial interest of a residence.  Your thoughts are appreciated.

A:

Such a plan could be possible, with proper documentation, including an IRS approved appraisal of the value of the partial interest.

However, such a plan might not work out to give your friends the lowest tax.  It could very well work out that having them sell the home as 100% owners and then donate $500,000 cash would have a smaller bottom line than the scenario you are proposing.  Long term capital gains are taxed at a much lower rate than is ordinary income. 

Their personal tax professional should run the numbers under both scenarios.  It could end up showing that a $500,000 cash donation saves them more ordinary income tax than the extra capital gains tax on $500,000 additional taxable profit from their residence sale. 

Of course, with numbers that large, all kinds of other factors will kick in, including the insane AMT and phase-outs of deductions and exemptions.  The only way to get a decent handle on the figures is with a good tax software program, which their personal tax professional should have.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/17/2006 11:07:00 AM Send this post:

Q:

Subject: Any advice?

 

I have just found our website after months of IRS torture. We are being audited for the year 2003 and it’s been going on since August. My husband is a small business owner (LLC construction company) and I worked as a physician assistant in 2003. I am now in medical school. Anyway, we are being given hell over my unreimbursed employee business expenses. The majority of these expenses are for 2 medical conferences and for a Palm Personal Digital Assistant. I have receipts, credit cards statements, and my own records as kept using the It’s Deductible program. However, the IRS auditor insists that I must produce documents from the employer explaining the reimbursement policy of Tulane and documents showing my requests were denied. The problem is that I had been told prior to even requesting reimbursement that there was no more money in the department for reimbursement. Why would I ask my employer for money I had already been told would not be reimbursed? Also, concerning the Palm, they say that it is only deductible if it was “required” by my employer. Our CPA has really gone to bat for us and has argued tirelessly with no success. Today, my husband and our CPA had a conference call with the auditor and her supervisor who is in Houston . (We live in Pineville, LA—4 hours from Houston.) He backed the auditor on everything. My former supervisor and chief of the department had written me a letter explaining that these expenses were not reimbursed and that a Palm PDA was ordinary and necessary. However, the IRS agents dismissed that saying that my former supervisor was a “personal friend” and couldn’t offer information. They said I had to get something from Tulane’s Financial Office. (I was employed by Tulane University School of Medicine in New Orleans. I’m sure you can see the problem with that.) However, I have studied all the IRS documents thoroughly and I disagree with their position. I don’t see anything that says I must keep records of my previous employers reimbursement policies. All I can see is that I must keep accurate, complete receipts which I have done. The agent has already been through all our bank statements thoroughly so she knows good and well I was not reimbursed. Well, I don’t mean to go on and on but we are very worn out over this. She told our CPA today that she now intends to dig into 2004 even though she told him at their last meeting that she wasn’t going to. We feel like they are just fishing and angry because we are fighting them. Please offer any insight you can.

 Thanks,

A:

With IRS audits, there is an element of luck in regard to whether you get an auditor with some smarts or an imbecile.  It sounds as if you got the latter.

From the way you described it, you have provided much more substantiation for the legitimacy of the unreimbursed employee expenses than it normally takes.  The auditor is being an unreasonable jerk.

I have had plenty of experiences just like yours.  I long ago realized that asking the audit supervisor or manager for help is a big waste of time.  While a case in underway, they always rubber stamp their auditors' opinions.  I have actually had a number of times where I was speaking with an IRS audit manager about a new case and they admitted that their auditors on previous cases were out of line.  It was obviously too late to have any effect.

In cases like yours, the best thing is to try to close it out at the auditor level ASAP and then take it to Appeals, where the people have more brain power and are required to consider the hazards of litigation.  This means that an Appeals Officer would know that the IRS would be laughed out of Tax Court by insisting that the documentation you proved wasn't good enough.

Your CPA will have to decide exactly how to end the audit.  One technique I have used in situations like that was to just tell the auditor and his/her manager that we will not be providing any more information to them and they should just go ahead and issue their report.  When the report is issued, your CPA should then submit a formal request to have the case transferred to Appeals. 

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for your advice. I have forwarded it to my CPA. I think you are right. I want this out of her hands.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/16/2006 02:12:00 PM Send this post:

H&R Block Sues Intuit – Not happy with TurboTax ad campaign.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/16/2006 02:00:00 PM Send this post:

Q-1:

Subject: Unfiled Taxes

Hi. I was wondering what I can do about two years of un filed federal taxes.

I'm 22 years old. Own a small business. In the year of 2003 I filed an extension for my personal federal taxes. Payed est. tax I thought I would owe. Worked hard at my business (which I started in my teens). Incorporated and started switching it over to the LLC. When it came time for the extension to be over, I found out had to have major surgery, went through a deep depression.

The business flourished without me strangely. I did the minimum to keep the business running. Deposited the checks. Paid its bills etc.I spent most of those two years holed up in my apartment, buying groceries, surviving on the minimum, and staying out of public life. Surgery time came, everything went well and I was healthy again. Decided I had no reason be depressed.

Now I owe two years of un filed personal taxes and one year of un filed taxes on the LLC. I believe I have the money to pay it as I did nothing with the profit from the business, just let it setting in the account. I'm in a bit of a mess as I have no CPA for myself or the business.I want to get it all sorted out, pay the taxes to the IRS I owe, and hope to avoid jail time.

Could you lead me in the right direction?

Thanks,

A-1:

You aren't that far behind on your tax returns that you need to be worrying about prison.  I know plenty of people much further behind than you are.

You absolutely must engage the services of a qualified tax pro who can help you get the past year tax returns prepared as accurately as possible.  Trying to do this on your own is asking for serious trouble.

If there are taxes due, your personal problems will be important in getting the IRS and State tax agencies to reduce or waive the late penalties for reasonable cause. 

Good luck.

Kerry Kerstetter

Q-2:

Kerry. Thanks a lot for the response. I value your opinion greatly because of your site and your writings.

There are  many CPAs in my area, most who either seem to have clients who are either employed clients, or large business. I cannot seem to find any who do small business specifically.

Do you have any suggestions for finding a qualified CPA?

Thank you,

A-2:

I know that there are tons of tax pros desperately looking for clients.  You may want to widen your search area.  Choosing one based on close proximity to you is the wrong way to go about it.

Unfortunately, we don't have anyone else to whom we could refer you. If you haven't already done so, you should check out my tips on how to select the right tax preparer for you. 

Good luck.

Kerry Kerstetter

Follow-Up:

I will carefully read the advice on the page.

Thanks again!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/15/2006 09:25:00 PM Send this post:

While QuickBooks is the best way to keep track of money paid out to charities, it doesn’t have the ability to easily track and properly document noncash items donated, such as old clothes and furniture.  There are various ways to assign value of used items donated to charities.

You can use WAGs (wild ass guesses), the most common technique.

You can use one of the various guides, such as this one from the Salvation Army.

A computer program to do this that’s been around for several years is It’s Deductible.  Intuit purchased the company that produces it a number of years ago and now includes it in TurboTax.  A few years back, Intuit said they were going to add It’s Deductible compatibility to Lacerte, another company they bought (and the tax prep program we have been using since 1985); but so far that hasn’t been more than an empty promise.

H&R Block has its own version of the It’s Deductible program, called Deduction Pro, that also includes info on other Schedule A deductions. The website lists the price as $19.99.  For the past year or so, I have been subscribing to the free RSS feed from TechBargains and have learned about several money saving opportunities.  This morning’s feeds included one linking to a free copy of DeductionPro.  I downloaded it and checked out some of the values for noncash items and was impressed with how many it includes. When you install it, you have the option of setting it up for the year 2004 or 2005.

I pass this along for informational purposes.  As always, I must warn that no software, including the extremely expensive Lacerte programs that we use in our offices, can take the place of a knowledgeable and experienced professional tax preparer. Programs like those mentioned here should only be used to help you better organize your information for your personal tax pro.  

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/15/2006 02:57:00 PM Send this post:

Q:

Subject: Section 179

I assume you get hundred of random dumb emails so I would like to apologize if this is just another one.  To minimize the inconvenience I have attempted to keep my questions short.

I am trying to understand the 179 rules as it pertains to a business opportunity which is being promoted in the boating world.

1. My question is can you deduct the boat under 179 if used in a S or LLC structure. The purpose would be for a sailing charter business.

2 The vessel is currently in a S corp, and for sale at 550K.  Would it make sense to purchase the S Corp instead of a asset purchase and book the asset (the Boat) at 400K and the Goodwill at 150K. Thus meeting the 430,000 limitation on 179.

3. For the purpose of building basis, does making monthly payments into the corporation and have the corporation pay the finance company allow me to build basis as paid in capital.

4. Does signing for the note personal negate the 179 because of limitations on converted assets or does it act as paid in capital , once the boat is listed as a corporate asset?

Thank you for your time.

A:

You most definitely need to be discussing all of these points with your own personal professional tax advisor.  As I have to continuously warn people, this is not a place for do it yourselfers, especially when you get into S corps and dollar figures that large.  Without competent professional help, you are pretty much guaranteed to screw things up and get yourself into big trouble with IRS, which is currently undertaking a special examination program of S corps and their shareholders.

Some points in your email that you will need to discuss with your personal tax pro include the following.

1.  Purchasing assets to be leased, such as expensive boats, is very often done through the use of an LLC or S corp.  How much actual deduction the shareholders or members will receive depends on too many things (many of which are covered on my website) to be able to give anything close to a "one size fits all" answer. 

2.  Section 179 can only be claimed on newly acquired assets that are being placed into service.  If you were to buy the corp stock, no new Sec. 179 could be claimed for assets that it already owned.   If you were to set up a new LLC or S corp and it purchased the boat from the previous owner, a new Sec. 179 deduction is possible.

3 & 4.  Shareholder basis in S corp stock is far too complicated for me to detail here.  However, you are correct that the more money you pay into your corp capital account, the higher your personal basis would be.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/14/2006 12:45:00 PM Send this post:

Q:

Subject: I liked your article

I liked your article.  I'm still a little naive.  Today I just sent in the S corp 2553 form my accountant gave me, signed and all, to the Dept of commerce of the state of utah.  And now after reading your article I'm a worried I should have put my foot down and demanded a C corp filing.  Up until it gets filed in a few days I'm just, and have been for the last couple of years, a sole proprietor, DBA, or what ever you call it.  2004 I made only 95k and this year I think I'll only barely break 100k.  For what I make do I still have to be worried and switch to a C corp.  I origionally thought the C corp was the way to go but when I told my accountant this he just said, "oh you don't want to be double taxed,...so we'll go with an S corp."  Me not knowing any better I just agreed. 

 

I am a consultant in that I contract directly (as apposed to subcontract) with clients to go in and help them out with back-log stuff.  I charge them an hourly fee and every week I submit my invoice and they pay me a couple weeks later.  I'm 34, married, and in 2 months will have 3 kids, and travel all over the U.S. twice a month.  So what should I do as far as my S or C corp. filing?

A:

Only your personal tax advisor can properly assess which entity type is best for your particular situation.  As I've noted, many tax and legal do take a "one size fits all" approach and set up S corps without properly looking at the big picture.  You should have your accountant go over the points I raised in my article and make sure he has properly addressed them for your circumstances.  You should be concerned if you hear a lot of "oh, I didn't think of that" from him.

From the confusing way you describe things, it may not be too late to choose a C corp status.  Form 2553 is filed with IRS after the corporation has been chartered by your state, and a Federal ID number (FEIN) has been obtained.  Until the 2553 is sent to IRS, and it is accepted, the corp is a normal C corp.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for responding.  I have already dropped the Articles of Incorporation with the 2553 form in the mail,..so its on its way to be filed as an S corp.  I'll print off your article and go over it with him.  Thanks again

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/14/2006 12:31:00 PM Send this post:

Q:

Subject: Gift & Estate Tax

First, let me say thank you for posting your website.

It is very informative and I appreciate the time it took to provide this information on the web. 

If I may, I do have a couple of follow-up questions?

I and my father are residents of another state.  He is now 75 yrs. old and owns property in AR with a current estimated value of $600,000.  His total estate is less than $1M.  He is planning on gifting the property to me now.  I understand the value of the property would be subject to Gift Tax, but could be used against his lifetime exclusion (2006 at $2M).  Are there any AR State taxes that would come into play now or upon the sale of the property?  Thank you for your time.

A:

You and your father really should be working with a competent professional tax advisor to work out the best plan because there are some big issues to consider. 

Mainly is the issue of cost basis.  While gift and estate taxes are based on the property's fair market value, the basis of the property for you as recipient will be the same as it was for your father.  This means that you will be accepting responsibility for future capital gains taxes (Federal + Arkansas) if you sell it.  This is very different from the cost basis you would have if you were to inherit the property from your father's estate.  In that case, under current law, your cost basis would be the fair market value as of the date he passed away, essentially wiping out all of the accumulated gain.

There is a very simple and frequently used method to transfer property while your father is alive and avoid the basis problem.  He could sell it to you at the current market price and carry back the sales price as a note.  This would establish the higher cost basis for you.  You could then either pay off the note or your father could gift you forgiveness of all or parts of its balance.  Any competent tax advisor could help you structure this technique.  

If you all and your advisor do decide to do a straight gifting of the property, you will have to file a Federal Gift tax Return (Form 709).  Arkansas does not have a gift tax. 

You are mistaken on the lifetime exclusion amount for gifts.  It did used to be true that this amount was the same as the estate tax exclusion.  For some reason, our rulers in DC decided to uncouple the two figures  While the estate tax exclusion is $2,000,000 for people passing away in 2006, the lifetime gift exclusion is still only one million dollars and will not be increased in future years, even though the estate tax exclusion will be going up in the future, until it drops back down to one million dollars in 2011 if our incompetent lazy-ass rulers in DC don't take any action. 

I hope this gives you some ideas of what you and your father should be discussing with your personal tax advisor.  Good luck.

Kerry Kerstetter

Follow-Up:

From your message I take it that there is an AR tax on the gain from a sale of the property?  thanks

My Reply:

That's correct.  It normally works out to be 5.0% for long term capital gains.

KMK

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/14/2006 12:24:00 PM Send this post:

Q:

Subject: Exchange Question

I'm selling a property for a more expensive one. I'm thinking about doing a 1031, a friend of mine told me I wont have to pay taxes on it if I deferr the income as personal income over a 5 year period. Reason being I lost my job because of a accident and can't work so I have no income except for the money from this property I'm selling, part of the money will be used to buy the new property/ Can this be done or is he wrong? Should I go ahead and do the 1031? also on the new land Im buying I will be building a house to live in for two years then I'll built another on the same property and do the same again.......Thank You

A:

You really need to be working with a tax pro who can go over all of the options you have.  There are several issues involved here.

The next best thing to a 1031 exchange is an installment sale, where you receive the sale price over multiple years and then report a pro-rated portion of the gain on your tax return. 

You can do a combination of a 1031 exchange and installment sale; but this usually results in 100 percent of the installment note principal payments being taxable in the year received.

In regard to reinvesting 1031 proceeds into a property that you intend to use as a primary personal residence, that is not allowed.  The replacement property has to be used for business or investment purposes.

You weren't really clear on the type of property you are selling.  In case it is your primary residence, Section 1031 doesn't apply.  There are entirely different rules, which you can see explained here.

Any competent tax pro should be able to help you with exactly what your situation is.

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/14/2006 12:17:00 PM Send this post:

Q:

Subject: Tender Offer for Cash

 

Recently BASF announced a tender offer of $37/share in cash for Engelhard.

For a long time shareholder of the latter, this takeover can be a capital gains tax nightmare. Is there a provision in the tax law which would allow for an even exchange with no tax consequences if the proceeds were invested in BASF?

Thank you.

A:

There would be a tax free swap if BASF were to give you shares of BASF stock in exchange for your Engelhard stock.  However, if you actually receive cash, that will be a taxable event; even if you turn around and buy the BASF shares on your own.

Kerry Kerstetter

Follow-Up:

Thanks for the info; another income tax disaster when long time holders are bought out for cash; reminds me of the 1994 cash buyout of American Cyanamid by American Home Products  - another capital gains windfall for the IRS. Although I regard it as an involutary conversion the IRS would say otherwise.

 

As a side note, BASF bought the American Cyanamid division from American Home Products in 2000 for $3.8 billion in cash.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/14/2006 12:10:00 PM Send this post:

Survivor winner and tax cheater Richard Hatch is trying what many of us call the “Willie Nelson defense,” as in this quote from a recent article on his trial.

Hatch …was relying on the advice of a self-employed accountant who was "in over her head."

 Hatch also conned another accountant:

One accountant Hatch hired estimated he owed about $230,000 in taxes for 2000, Reich said. The television star asked for a second return showing his estimated tax bill had he not won the million-dollar prize.

Despite warnings that the second analysis was for comparison only, prosecutors said, Hatch filed the return with the IRS.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/13/2006 07:20:00 PM Send this post:

If Speculators Get Itchy, Residential Market Could Fall – As big a fan of real estate investing as I may be, I have always known that buying property based on the same kind of “greater fool” theory of investing that propelled the late 1990s dot-com stock market bubble, is just as reckless with real estate. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/13/2006 03:56:00 PM Send this post:

Art Berkowitz, the CPA whose spreadsheet I mentioned earlier regarding keeping track of the different states’ rules for licensing of out of state CPAs, has a blog devoted just to this topic, called CPA Out-of-state licensing.   He has some interesting feedback from other CPAs who are just now learning about these new rules around the country.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/13/2006 01:18:00 PM Send this post:

My opinion on the foolishness of relying on do-it-yourself tax prep software for the actual returns that will be sent  to IRS and State tax agencies hasn’t changed any.  However, as I mentioned on several occasions, they can be useful tools for organizing data for your personal tax professional, especially when doing trial runs before April 15, when you need to know how much, if any, to send in along with your extension.

I came across the following helpful articles.

Tax Software – What Do You Really Get in That Box? – From NATP (1/13/2006)

PC Magazine’s review roundup of tax prep software.

Kay Bell’s tips on getting the most from tax software.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/12/2006 09:29:00 PM Send this post:

QuickBooks QuickMaps in Lacerte – Intuit guide to transferring data from QuickBooks into Lacerte tax programs.  I’m looking forward to giving this a try. Since all of our corporate tax clients are required to use QuickBooks, I’m hoping it will speed up the tax prep process.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/12/2006 09:01:00 PM Send this post:

Schedule D Guidance Helpful; Clarity Still Sought For E-Filers – From CCH

One of the main reasons I have always had for avoiding electronic filing of tax returns is the inability to attach additional info.  This Schedule D issue makes that difference very apparent, and is causing concern for tax preparers in states that mandate e-filing, such as the PRC.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/12/2006 10:19:00 AM Send this post:

What You Need To Know About Real-Estate Investing – From the WSJ

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/11/2006 09:52:00 PM Send this post:

Richard Hatch Jury Selection Begins

Hatch’s accountant cannot testify as to Hatch’s accounting abilities, nor will he be able to discuss an accountant’s ethical duties in preparing income tax returns. Another rather odd request for his testimony was also forbidden, as he will not be allowed to talk about whether tax problems can result from personal trauma. Is this a hint into Hatch’s defense strategy? Not guilty because he was traumatized and didn’t know he wasn’t paying his taxes?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/11/2006 03:07:00 PM Send this post:

Energy Policy Act of 2005 Tax Credits – Courtesy of Lowe’s

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/11/2006 02:51:00 PM Send this post:

Q:

Subject: Self-Employment Tax

Guru,

Much to my own fault I believe, I was surprised to work through my first year's tax return to realize partner distributions from an LLC would pay self-employment tax.  Is this definately the case, and might I have been wrong to structure the business as an LLC with multiple members?  I've read that chapter S corp sharholders don't pay self-employment tax, but I'm sure it's not that clear cut.  My annual income is $150K+.

A:

As I've discussed several times in my blog, such as this one, there are differences of opinion over whether the K-1 net profit distribution from an LLC is subject to SE tax. 

Guaranteed payments or payments made to LLC members that are specifically identified as being for services rendered are subject to SE tax.  That's not really debatable. 

My opinion on the K-1 net profit hasn't changed on this matter because no laws or regulations have been passed firming up the issue; so it is essentially voluntary. 

You may also want to download and listen to Ed Zollars' podcast  from July on SE tax and LLCs.  I just found it a short while  back.  He has a lot of code cites, and emphasizes that the IRS is afraid to firm up the rules after issuing some temporary and proposed regs.  You can download it from his website here.

There are plenty of other tax pros around the country who have the same opinion as mine on this matter.  If your LLC's tax pro isn't one of them, you will have to decide if that's a big enough issue to warrant finding a new one.

Good luck.

Kerry Kerstetter

Follow-up:

Thanks for the information.  I'm reading that some people believe an s-corp has a more favorable tax position than a multi-member LLC where each member does not pay self-employment tax (as your blog recommends).  Are there any advantages from moving to an s-corp, assuming net income is always drawn from the business?

My Reply:

While the SE tax issue is still in the gray area for LLCs, things are a bit more settled with S corps.  Trying to avoid all payroll taxes via an S corp is dangerous because IRS has the power to reclassify S corp income as W-2 compensation (with all of the related payroll taxes) if they are not satisfied that the corp has already set up enough.

This issue has been around for decades; so any experienced tax pro should be able to help you see how it would affect your particular business.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/11/2006 01:34:00 PM Send this post:

Q:

Subject: 179 Depreciation

Can a Game Center business take the 179 expense for the video games purchased a during the year? I was thinking it is consider asset but does it has to be a fixed one.  I think you can because it is consider software. Also how should I calculate depreciation for a short year. The business open in May of this year and most of the property was purchased and placed into service in June expect for two Xboxes which was purchased in November.

A:

You really should be discussing this with your own personal tax advisor.  If you are trying to operate as a legitimate for-profit business without a professional tax advisor, you are asking for big trouble.

I have this all explained on my website.

but only a qualified tax pro will be able to give you more specific numbers for your situation.

Good luck.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/11/2006 01:27:00 PM Send this post:

From QuickFinders (pdf)

From TMI – The Tax Book

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/10/2006 05:50:00 PM Send this post:

Stadium cook whips up winner — from scratch: $1M prize is chef’s surprise 

Maybe these past comics, touting lottery tickets as retirement plans, weren’t so far fetched.  Let’s hope employers don’t start dumping their conventional retirement programs and replacing them with Lotto tickets.

From 5/7/05

From 10/19/05

From 10/18/05

From 12/19/05

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/10/2006 12:45:00 PM Send this post:

IRS Erroneously Withholding Thousands of Legitimate Refunds

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/10/2006 11:37:00 AM Send this post:

Ed Zollars has a special follow-up podcast on the issue of Schedule D detail that I discussed earlier.

The IRS clarification letter he discusses can be downloaded here.  Here is the IRS answer that is attracting the most attention:

Yes. Taxpayers may submit attachments in lieu of completing lines 1 and 8 on Schedule D or D-1 as long as the attachments contain all the required information and are in a similar format. This means investors may follow the same format required of traders.

 

Update from CCH on this issue.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/09/2006 11:34:00 AM Send this post:

Q:

Subject: 1031 Like Kind Exchange

Hi,

A quick question for you if you have time about a 1031 Like Kind Exchange.

 

In 2002 I sold a resort in South Texas with a $300K profit, $120K went to our residence (not taxed) and the remainder was rolled over with a 1031 when we bought a resort in Eureka Springs. Sold that resort last Aug. with a $190K profit also showing $120K as residence. I bought another type of business, sales, no resort or lodging and I am now being told that I am looking at anywhere from a $10K to $100K tax bill this year since I did not roll that money over to the same type of business. The new business I bought was $262,500.00 and all that money came from the sale of my last business, I rolled all my money over into my new business and am being told that I now have to pay taxes on both resorts profit. Is this so, all my profit went right into another business!

 

Friends from Eureka told me about you, happy to see that you are my neighbor, are you taking new clients and can you help me keep my money?!?!?!?!?!?

 

Kind Regards, :)

A:

Two issues in your email don't look good.

A 1031 exchange is technically called a "Like-Kind Exchange."  The old and new assets have to be the same kind.  The most common is real estate for real estate, which sounds like what you had in 2002.  If you then disposed of real estate in Eureka and reinvested into other kinds of business assets, you can't have a valid like-kind exchange and the real property sale is fully taxable.

The other issue is how the reinvestment was handled.  If you took the money from the Eureka Springs sale and used it yourself to buy new business assets, a 1031 exchange is not possible, even if you had purchased like kind real estate.  One of the rules of 1031 exchanges is that you cannot touch the money.  You either have to have it go directly from the first property to the replacement one, or you have to have a third party exchange facilitator hold it on your behalf.  Your email doesn't mention an exchange facilitator.

You can see the rules for how 1031 exchanges should be handled at www.tfec.com

It sounds as if you didn't get good advice before the disposal of your Eureka property; so you are probably going to have a big taxable gain to contend with.  If you didn't seek out any advice before selling the Eureka property, you have just learned an expensive lesson.

The possible good news is that the new business assets you purchased may qualify for the Section 179 expensing election, which was up to $105,000 for 2005.  Your personal tax advisor should be able to help you in this regard.

As it says below, we are not accepting any new CPA clients.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your time and information Mr. Kerstetter.

 

 

Labels: 1031, 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/09/2006 10:28:00 AM Send this post:

IRS fees to rise steeply in February

Arkansas warns residents of phony IRS e-mail

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/08/2006 08:58:00 PM Send this post:

Mesa Arizona Couple and Their Firm Falsely Claimed Wages Were Not Taxable Income – And now they have been busted by the Feds.  Their website is still up.  Their scheme to file bogus amended returns in return for 25% of the recovered taxes is one more reason IRS is scrutinizing all 1040Xs claiming refunds.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/06/2006 09:31:00 PM Send this post:

Q-1:

Subject: Wonder if you could answer a question about QuickBooks

I recently purchased QuickBooks Premier for a small company.  They presently use Peachtree and I am a Peachtree expert and new to QuickBooks. I purchased the monthly support from QuickBooks but it took hours on the phone to get one question answered so after three months I quit.  I have investigated several options to convert from Peachtree to QuickBooks but all only convert G/L, Vendor and Customer balances.  The customer wants to maintain the detail.  Now the year-end has been reached, I thought they could convert the customer, vendor and purchase detail manually, set the balances at year-end to the year-end numbers in Peachtree and start this new year in QuickBooks.

What my question is, if it takes several weeks to convert the detail(during which the balances would be changing and not final)will QuickBooks let you move on with the new year and when the detail is all in for 2005, create the year-end less 2006 detail and reset the 2006 beginning numbers?

You may get too many requests for information that you would not want to answer my email, if so I understand, Thanks anyway.

A-1:

I was under the impression that it was possible to automatically transfer full transaction details between PeachTree and QuickBooks.  However, I just checked out both the built-in conversion tool, as well as the one offered by Big Red Consulting, and they both seem to only allow conversion of PeachTree lists and ending G/L balances and not the individual transactions. 

One of the nice features of QB compared to other acctg packages is the fact that the P&L is never formally closed out to retained earnings.  This allows transactions to be entered in any order at any time.  As long as each one is entered with the proper date, you can get an accurate P&L for any time period that you specify in the report.

Now, to what I think your question is really about.  If you enter or transfer starting balances for the balance sheet accounts as of a certain date (i.e. 1/1/06), and then you enter a bunch of individual transactions for dates prior to that, will the 1/1/06 balances change, and thus affect the later date balances?  Yes, they will.  

What I have done in similar cases is go in and either modify the entry for the initial setup for the 1/1/06 balance to adjust it to the correct amount, or just make an AJE to do that, depending on which version of the file I am working with at the time.  With a QBW file, we can modify pre-existing entries.  With QBA files, we need to use AJEs.

I hope this helps.  If this isn't what you were asking about, please let me know.

Kerry Kerstetter

Q-2:

Thank you for the reply.  You have answered my question.  I know I will have to do AJE's to correct the beginning 2006 balances.  I had not planned to do anything to the balances until all the detail was entered and then I would do an AJE to make the balances Zero then add the balance from the Balance Sheet of Peachtree as of 12/31/2005.  That will give me the right audit trail. I am so accustomed to Peachtree closing out each period so I was not sure what Quickbooks would do to close out periods.  I heard that Quickbooks future releases will begin closing out periods so you can reduce the number of transactions in the file.  Have you heard that too?

A-2:

I am not aware of any plan by Intuit to change the way QB handles retained earnings.

What you are probably thinking of is a feature that has long been available in QB to manually clean up data as of a certain date.  An archive file is created with the detailed transactions and the main working file is purged of those details, with summary entries made to replace them.  This is used when the data file becomes so large as to really slow the processing down.  The QB reference guide describes how to use this feature. 

Good luck with QB.

Kerry Kerstetter

Follow-Up:

Thanks for your help!!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/05/2006 07:37:00 PM Send this post:

Oops!

H&R Block is scrambling to alleviate privacy concerns after accidentally including Social Security numbers on the labels of an unsolicited mailing sent to select taxpayers across the country.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/04/2006 07:22:00 PM Send this post:

Ohio CPA Dana Stahl sent me the following in response to the recent news about our rulers’ unwillingness to tackle AMT reform.

Mr Guru - more detail on the AMT.  Notice how, several paragraphs down, the commentary is on how much a total repeal of the AMT will "cost" so many billions of tax revenues.  The focus on "cost" is, of course, part of the propaganda, right?

 

DS, CPA, ABA, ATA, ATP

My Reply:

Dana:

As you know, it has always been a pet peeve of mine when money is accepted as a justification for doing bad things to people.  Being fair to people has always been a very distant second place to our rulers, behind the money. 

To me, it's no different than stories where a reporter expresses outrage over someone being murdered for a small amount of money.  I used to actually write to reporters and editors asking why it's so bad to kill someone over $5, yet it would be understandable for a much larger amount.  I tried to explain that killing someone over a million dollars is just as wrong as killing someone over 25 cents.  Needless to say, they never responded to me. 

While many people may consider this an inappropriate analogy to tax policy, I don't see it that way.  Immoral and unfair socialist confiscation of wealth from people is just plain wrong, regardless of how much money it generates for the imperial government rulers.  Unfortunately, those of us who think this way are too small a minority in this country to influence such policy decisions in the face of the "soak the evil rich" mob mentality that is so pervasive.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/04/2006 02:14:00 PM Send this post:

Permanent AMT Fix Poses Difficult Choices – Same MO for our rulers as with the Social Security fiasco.  They prefer to just keep their heads in the sand and do nothing while millions more people are reamed by this insane tax.  Both parties are being completely irresponsible by ignoring this long festering issue.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/03/2006 12:04:00 PM Send this post:

Q:

Subject: Children with special needs

Kerry -

 

We have a 3 year old daughter with special needs. Our out of pocket cost of care is approximately $45,000 per year. My wife is self employed and our CPA suggested we incorporate and run all of my daughters health costs through the corporation. He stated we can deduct that cost as a medical benefit. I have a couple questions.

 

1. Does this advice sound reasonable? Basically, our CPA says that we may have no deductions for medical costs in 2005 because of AMT??? He also says we can stagger income with the corporation which was just confusing.

2. Are there other options? or do we trust this advice.

 

I would love to see expanded coverage on these issues as developmental delays now impact 1 out of every 100 births and cost of care can be staggering. There is very little coverage out their yet the average family with a special needs child has over $20k in out of pocket health care costs.

 

Thanks for your response.

A:

It sounds as if you have a well versed and creative thinking CPA on your team and that you are on the right track. 

The ability to have unlimited medical reimbursement plans is just one of the big tax benefits of using a C corporation, as I discuss on my website and blog.

Good luck.

Kerry Kerstetter

Follow-Up:

Any comments on the AMT issue? Thank you for such a rapid response and validation of the idea. Seemed to good to be true:-).

My Reply:

The insane AMT is hitting more people each year because our incompetent rulers in DC have refused to adjust the thresholds for inflation.

Under AMT, fewer personal Schedule A deductions are allowed.  With medical expenses, the regular tax allows everything over 7.5% of AGI, while AMT only allows what's above 10% of AGI.

If used properly, having your C corp pay all medical costs should allow you to receive a tax deduction for all of them.  If you don't have a corp, your AGI will be higher, making less medical costs deductible because of the 7.5% and 10% disallowances that are built into the 1040.

Your CPA should be able to show you more realistic figures for your particular situation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 1/02/2006 02:21:00 PM Send this post: