Don’t Forget about 2006 Tax Law Changes – From Intuit’s latest issue of ProConnection

IRS Related Photoshop contest – Some funny IRS pics from the creative folks at FreakingNews. Too many to post here, so take a browse through them.

House Leaders Indicate Budget Process Reform, Spending Cuts Likely – I’m not holding my breath waiting for this to actually ever happen, especially not with the current crew of drunken sailors in charge. 

Estate Tax Must Go, Says Frist – Uphill battle against the growing number of supporters of Marxist wealth redistribution, such as this blogger.

Questions Remain on Private Collection as IRS Poised to Hand Out Contracts – What could possibly go wrong with freelance tax collectors?  Look at who’s waiting to use his skills in this lucrative profession.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2006 10:39:00 PM Send this post:

From an attorney:

Subject: EIC disallowance

Dear Mr. Kerstetter:

Regarding your blog reader who inquired about challenging the disallowance of the EIC, another alternative would be to contact the nearest law school.  Many law schools offer low-income tax law assistance and can help with a Tax Court petition.  The matter will probably be resolved before it gets to litigation, and the representation is free.  Not all taxpayers qualify, and not all schools have this program, but it is an effective recourse for a taxpayer with limited means.

My Reply:

That's a very good idea, which I will pass along.

That sounds like a slightly more technical version of the IRS's VITA program, where I got my start in the tax prep profession over 30 years ago while an accounting student in college. 

Thanks for sharing that idea.

Kerry Kerstetter

 Follow-Up:

I appreciate your reply.  I did both VITA and tax law clinic as a law student at Quinnipiac and enjoyed both of them.  The clinic requires students to focus much more on tax procedure than on aspects of the return.  If you want more information on these programs, I would suggest asking Prof. Paul Caron of the TaxProf Blog; he probably can get you a list of schools that offer assistance to low-income taxpayers.  Thank you for your work on your sites; they're always enjoyable.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2006 08:19:00 PM Send this post:

From David Letterman’s Late Show:

10. "Instead of CPA training, employees got CPR training"

9. "Forgot to carry the one 32 million times"

8. "For years we've been secretly funding Hamas"

7. "H was out sick that day and R was on jury duty"

6. "We were using Martha Stewart's guy"

5. "Were testing the world's first accounting monkey"

4. "Come on, it's a couple of dollars. It's not like we shot a guy in the face..."

3. "Hard to stay focused when you've been drinking since April 16th"

2. "Thirty-two million dollars?! We lose that much on a good day"

1. "Hoping for hot make-up sex with the IRS"

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2006 01:43:00 PM Send this post:

Q:

Subject: Question regarding 179 expense

Hello,

I happen to stop by your web site and read your article regarding 179 expense.

 

I am a major stock owner of a S corporation.

Last year, the company got not a samll loss

 

I have other source of income and overally I have some income to report last year.

In this case, may I apply section 179 expense deduction for the S-Corp.

 

Your prompt and kind reply will be highly appreciated.

 

Best regards 

A:

As your corporate tax accountant can tell you, an S corp with a net loss before counting the Sec. 179 deduction cannot claim Sec 179 on that year's 1120S. Sec. 179 is limited at the S corp level, and it doesn't make any difference whether or not the shareholders have other income to offset it.

Work with your corporate and personal professional tax advisors to work out the best strategy for your unique situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your kind and concise answer

bye

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/27/2006 02:42:00 PM Send this post:

Q:

Subject: Stocks to Offer

 

Good Morning,

 

We are a small group of R&D researchers looking to form a small C Corp and would like to offer stocks to investors in order to try and gain enough funds to prototype a few different models for producing liquid fuel with the co-generation of electricity of systems we've been designing and preparing to build out.

Can you tell me where we can learn about the stock offer limitations and total funds we can collect? I understand there are limitations on the number of offers that can be made as well as cap on total funds.

We are also looking at partnering (or possibly contracting with) a Canadian Company. Are there restrictions for receiving funds from their investors directly or through the Company and would one way or the other be better?

Thank you so much for your time and an advice you can offer. Have a great week.

A:

This is area where you absolutely must work with an attorney and a CPA firm that both have experience in public stock offerings in your state.  The rules differ in each state and can get very complex in regard to several different aspects of this kind of thing.  Your attorney will inform you of the potential penalties, including investor lawsuits, that can arise from failing to properly dot every I and cross every T.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 10:35:00 PM Send this post:

Q:

Subject: Section 179 Deduction

I'm hoping you can answer my question.  I work in a bank and I'm wondering about the effect of the 179 deduction on the company cash flow.  Is this considered a depreciation expense that can be added back to get traditional cash flow?  (net income + depreciation + interest expense)

A:

Section 179 is essentially a form of accelerated depreciation and is usually included on the same expense line with regular depreciation expense, except for pass-through entities, where it is shown separately on the K-1s because of the individual-level limits . 

Any adjustments you make to book income to add back in depreciation expense should be sure to add back the Section 179 if it is not already included in the stated depreciation total.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 10:30:00 PM Send this post:

Gambling With Your Taxes: How to Report Your Wagers – Some good tips from Gail Buckner

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 01:07:00 PM Send this post:

Arkansas DFA has set up an online refund inquiry service for individual taxpayers.  You just enter your SSN and zip-code.  I’m not sure how useful this will be. I just tried it for a couple of clients, and it came up with the following message in each case.

Income Tax: Refund Inquiry

There is currently no return found for the Social Security Number and ZIP code you entered. It may take as long as six (6) weeks from the time you mail your return until it can be located in our processing system. Also, you may want to verify the Social Security Number, and ZIP code you entered with those found on your copy of your return. If you have additional questions, please call (501) 682-1100 inside Pulaski County, or outside of Arkansas, or 1-800-882-9275 WATS, in Arkansas.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 12:50:00 PM Send this post:

Q:

Exchange Question

What if I sell Florida then use only some of the money for another property in another state?  Or can I use it to pay off one of the other financed properties?

A:

Like kind replacement real property can be in any state; not just the one where the original property was located.

If you reinvest less than the net sales price, you will have to report as taxable income the difference; the amount you missed the target replacement price by.

Paying off loans on property you already own is not a like kind investment.  You have to acquire new property.

Your personal professional tax advisor should be able to help you with real numbers for your unique circumstances.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 10:55:00 PM Send this post:

Q:

Subject: tax website

I saw your tax web site, and was wondering if you could help me.

 

Simply, the IRS disalowed my EIC, ( never recieved it, (( refund froze )),  later after i protested, they reassessed their own review and sent me a letter stating that i have to pay them the EIC amount in question, if i disagree, then i have to go to tax court. If i go to tax court, then i will have to pay penalties and interest on an amount that i never recieved.

 

Is their any service that you can offer me to fix this ?

Have you seen anything like this before?

A:

There are far too many variables involved for me to be able to advise on your particular situation via this medium. 

The person who prepared your tax return should be able to help you with this.  If you did your own return, you learned an expensive lesson.

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.

I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

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

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 10:51:00 PM Send this post:

Q:

Subject: question

 

If I take the section 179 deduction of $25,000 on my new truck for 2005 can I take mileage in 2006?

Thanks

A:

No, and here is why.

The IRS standard mileage rate includes a portion for straight line depreciation (17 cents per mile for 2005 & 2006).  If you use the actual expense method of deducting vehicle costs, and use the straight line depreciation method, you are allowed to switch to the standard mileage rate in subsequent years for that particular vehicle.

However, if you use any accelerated depreciation method, of which Section 179 is the most accelerated, you must stick with the actual expense method for as long as you have that vehicle.  To allow you switch to the standard mileage rate would in effect be allowing you to over-depreciate the cost of the vehicle.

I hope this helps.  Your personal professional tax advisor can give you more specific figures for your particular situation.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 10:46:00 PM Send this post:

Investment Interest Deduction Remains Alive and Well  – This is one of the many parts of a tax return that I would never try to do without a computer.  Even then, there is no guarantee it’s done properly.  I have seen Form 4952 computed all sorts of different ways by different software programs, both professional and consumer ones. 

Readers Fume Over Forced Upgrades – Not happy about Intuit’s sunset policy for Quicken and QuickBooks.

IRS Finds Charities Overstep Into Politics

FTB immune from liability for tax collection activities

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 07:04:00 PM Send this post:

Q:

Subject: Unfair state tax structure for partial year residents

 

Unlike most states that I have lived at, Arkansas computes state income tax for partial year residents by adding both total year income and total Federal taxes paid in their calculations.  By doing this, it automatically raises the percent of tax because Federal taxes are higher.  This penalizes the part year residents because they pay a higher percent than full- year residents.  This doesn't seem fair or legal.

Example:  I made $28,000 in Mississippi and paid $500 in state taxes (after my refund).  I made $17,000 in Arkansas and paid $875 and they want another $500!

Does that seem fair or legal to you?

I realize you may not want to answer that without a fee, but I was hoping to get advice from someone who had knowledge.

Thanks,

A:

While I don't prepare any tax returns by hand, I do prepare several partial year and nonresident Arkansas tax returns each year with my Lacerte software.  Your description of how it's done didn't sound right; so I just reviewed the actual 2005 AR1000NR form. 

You are misinterpreting how the Arkansas state income tax form works.  It doesn't add in Federal income taxes to the taxable income; although I have seen this on some other state tax forms. 

The Arkansas tax is calculated for nonresidents with the same tax rate schedule as for full year residents.  The twist comes in with the apportioning of the total tax based on the percentage of taxable income from inside Arkansas to all income.

While your claim that Arkansas is unfair to nonresidents isn't correct in the context which you intended, I have seen plenty of cases in other states around the country where that is the case, especially California.  Some of the most outrageous examples are taxes on rental cars and hotel rooms, which are aimed at tourists from outside the state. 

How they can justify this is easy to explain.  Nonresidents can't vote; so the rulers in those states have nothing to worry about in regard to punishment for screwing over those people.  In fact, they can sell the idea to their in-state constituents that the more money they are able to squeeze from out of towners, the lower the tax burden is on the full year residents.

In regard to your multi-state income tax returns, you really should be working with a qualified tax pro who can ensure that each state's apportionment is calculated properly and that you are receiving the proper Other State tax credit on your home state tax return.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your help.  I certainly appreciate it.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/23/2006 12:19:00 PM Send this post:

Atlanta Man Helped Customers Falsely Claim They Are Exempt from Federal Taxes as Members of Purported Native American Tribe

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/22/2006 10:36:00 PM Send this post:

Q:

Subject: quicken

wonder if you could help me with something.  I am using quicken 2006 professional and my calendar is using february 26 and it is the 18th?  how do I change this date to reflect it using the present date?

 

thanks for any help you can offer ...it is also posting transactions on the 26th so this means to me some how the calendar think it is another day?

A:

My guess is it's one of two things causing this.

1.  Your computer's date is off and needs to be corrected.

2.  You have the box in the Options checked to "Complete Fields Using Previous Entries."   If your previous entry was dated 2/26/06, all future entries will start with that date, until you manually change it.  Then, that new date will become the default setting for future entries until it is manually changed again.

Remember that even if you accidentally enter the wrong date, you can always go back in and correct it.

Good luck.

Kerry Kerstetter

Follow-Up:

thans Kerry..you were right..doh!!!

thanks

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/22/2006 10:35:00 PM Send this post:

Tax cuts make money – Amazing to see this in the normally lefty US Today.

A Better Way to Tax – An endorsement of the FairTax plan from someone at MIT.

Feds Bust More Professional Tax Scammers

St. Paul Preparer Allegedly Claims False Head-of-Household Filing Status for Married Customers

Pure equity trust scams based in Tacoma

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 10:14:00 PM Send this post:

Q:

Subject: Section 179 of the Internal Revenue Code

 

Good Afternoon,

 

In regards to Section 179 of the Internal Revenue Code. I have a small computer repair company I need to purchase a larger truck to visit clients and move equipment. I would prefer to purchase an SUV as that would be more practical than a Van . My question is does the auto need to be new or can it be used.

Thank You

A:

It just has to be new to you; not brand new.

You can see the rules for Section 179, including the weights of SUVs, on my main website.

You really should be working directly with a tax pro who can help you tailor things to your unique circumstances.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 12:58:00 PM Send this post:

Q:

Subject: Kerry's Quicken Tips

 

Thanks very much for this free article! This is by far the best information I've found anywhere to use Quicken for rentals I am starting.  A point of confusion (from Quicken Forums) I'm still working on is:

 

Do I need 2 accounts for each property, a cost basis account and an expense account?

 

Or is a Cost Basis account per property sufficient, where principle payments and improvements are transferred to it from cash/credit card, and expense reports are generated from classes ?

 

An article in Quicken Forums has one splitting an improvement expense so it is transferred to cost basis account AND is categorized in the  cash/credit card account. I just don't know how relevant this is.

 

I'll gladly pay for this info. Thanks

A:

If you are going to properly account for your rental properties, you are in serious need of some training from a professional accountant because I can see that you are very unclear on how things work. 

I don't have time to give an entire lesson, but here are a few fundamentals that you will need to cover with your personal advisor.

There are basically two types of expenditure - those that affect the balance sheet and those that affect the income statement (P&L). 

Balance sheet payments are generally capital improvements that are set up as fixed assets and depreciated on your tax return, and payments of loan principal, which reduce the loan liability balance. 

Principal payments do not get transferred to the property's cost basis.  When you book the purchase of your property, you debit the fixed asset account for the full cost and credit the cash you paid and the full amount of the loan.

Income statement expenditures are operating expenses, including mortgage interest.  Because you need to have  a Schedule E for each property, it's best to set up a Class in your Quicken for each property that will coincide with the Schedule E columns when you run a  P&L with columns by Class.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 12:56:00 PM Send this post:

Q:

Subject: capital gains tax

 

Hello,

 

I am from Virginia and I have a property(condo) that I want to sell and have lived in for less than two years.  I only want to sell inorder to acquire a larger property for my family.  I have only gained 21,000 of value in my home and want to use that $ for closing costs and expenses.  I do not want to pay capital gains tax and am not sure what the regulations are.  Can you help me out or give me a place where I can get some information?  I have been getting confliction information from many different places.  I only have one primary residence.

 

Thank you

A:

You should be working with a tax pro to ensure that you have properly accounted for the total cost basis of your home.  There is a good chance that you may have overlooked a lot of additional costs that will reduce your net gain.  Your net gain will also be reduced by your selling and closing costs.  Chances are that the actual potential taxable gain will be either nonexistent or so small as to not be worth a lot of worry.

I have a lot of info on home sales here on my main website.

If you do a Google search on my blog, you will also find dozens of posts discussing home sales.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 12:53:00 PM Send this post:

From a CPA:

Subject: Death of A Partner

Dear Tax Guru...

Re your reply to the 2/14/06 Death of A Partner question:

 

       The person asking the question needs to  be made aware of the IRC Code 754 election that may apply in this situation.

My reply:

 That's a very good point. 

I will got some info on that posted soon.

Thanks for writing.

Kerry Kerstetter

 

Additional Info:

Proving again why no one reference book can be all things for all people, I compared the info included in both The TaxBook and the Small Business QuickFinder and have to give the nod to QF for including a lot more info on Section 754 than the brief summary in The TaxBook, such as the following quotes from the new QF Online Service, where they have the same content as in the books:

Optional Adjustment to Basis of Partnership Property (Section 754 Election)

Section 754 Election Because of differences between basis and FMV of assets in a partnership, inequities can result when partnership interests are sold or transferred.

Under a Section 754 election, the purchaser’s basis in partnership property is adjusted to reflect the purchase price and the partnership interest. This reduces negative tax effects when basis in acquired partnership property is less than the amount paid for the partnership interest.

Gain upon liquidation of a partner’s interest may occur from a Section 754 election. The election is used to remedy the negative tax consequence when an amount paid for a partnership interest is greater than the partnership’s basis in its assets. Since the election can increase the partner’s ability to deduct depreciation on partnership property, the gain upon liquidation of the partner’s interest may also be increased.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/20/2006 04:34:00 PM Send this post:

Q:

Dear Kerry:

Our corporation can purchase the 2006 Denali Pickup with the crew cab and short bed for $39,784.  No trade-in or down payment is involved.  The GVW is 7,000 lbs.

Please let me know as soon as possible if this vehicle would qualify for the full deduction or do we need something bigger?

A:

You’re not going to believe this one.  I checked the specs for that Denali on the GMC website and they show the short bed as being 69.2 inches long. The rules for deducting more than $25,000 for a vehicle specify that it:

“is equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment”

Since six feet is 72 inches, the short bed is 2.8 inches too short to qualify for more than a $25,000 Section 179 deduction.

While the Standard Box is specified as being 78.7 inches long and the Long Box as 92.6 inches, neither seems to be available with the crew cab. 

I hope this helps you decide what vehicle to purchase. Remember that even if you can only claim $25,000 under Section 179, the remaining cost can be depreciated over the five year life of the vehicle.

Kerry

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/19/2006 02:58:00 PM Send this post:

Bush Says Mortgage Interest Deduction Safe – This will hold off the much anticipated burst in the real estate bubble a little while longer. 

Bridging the Gap Between Selling Your Home and Buying a New One

When Entrepreneurs Make a Decision to Hire

Using the Web to Buy a Home

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 10:20:00 PM Send this post:

Q:

Subject: 1040 Express Answers

Hello, I noticed you mentioned that you are using the CCH 1040 Express Answers book. I am considering this book. How does it compare to similar products, such as Quickfinder and The Tax Book?? I noticed in one of your posts that you couldn't find the updates page for the Express Book. I came across it doing a Yahoo search. I'm sure I can find it again, if you haven't found it by now. Any feedback greatly appreciated.

A:

Check out this post from last December.

Since I wrote that earlier piece, I have been using The TaxBook almost exclusively and have rarely had to open any of the QF books, which I did buy this year.  I have been most impressed with the table of contents it has on each tab page.  It's made finding things much more efficient. 

A few weeks ago, I finally received my copy of TMI's All States Edition of the TaxBook.  I was similarly impressed with how they set this book up and already consider it superior to the comparable book from QuickFinder.

If you are looking for just one book to work with, I heartily recommend The TaxBook.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry, so I gather from your post, that you would recommend The Tax Book over the CCH 1040 Express Book? I am trying to find just one book to have as a reference. Thanks for your reply.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 05:34:00 PM Send this post:

I just printed out my first 2005 extension form (Form 4868) for a client and was disappointed that nowhere does the version that Lacerte prints out say that this year’s first automatic extension is for six months. Knowing that this will create a lot of confusion, as well as a lot of anxiety around August 15, I used my Microsoft Publisher program to create a label that we will be sticking on each 4868 we prepare.

That’s still no guarantee that everyone will actually read the date, as I’ve noted with how many clients overlook the extended dates printed on the other extension forms.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 04:49:00 PM Send this post:

From a reader in Iraq with a USMC email address:

Subject: Your web site

find your references to the filthy rich disgusting.

 Furthermore, if we had a decent tax scheme (VAT) we could do without most of you deadweights and lawyers and hope you found real work.  Talk about a filthy line of work…..

My Reply:

You obviously haven't read much of my stuff because your anger at the tax system is very misdirected by blaming me.  I have long been a very outspoken and active member of the fight to repeal the 16th Amendment and eliminate the entire income tax system.  I actually worked in the 1996 & 2000 Libertarian Party presidential candidate Harry Browne's campaigns, which included a plank in his platform to eliminate the income tax entirely.  I was on some radio interviews with him expressing my 100% support for this objective.

I have been in this business for over 30 years and long ago recognized that it is well beyond any kind of repair, which is why I have also long been a supporter of the FairTax movement to replace the income tax with a national sales tax.

Far from being scared at losing a lucrative income stream, I would like nothing better than to be able to use my skills and knowledge for other tasks than helping people battle the IRS.

In regard to your problems with the filthy rich, I'm not sure what you mean.  You may have the same misconceptions as I addressed in several posts over the years, such as this one.

Thanks for writing.

Kerry Kerstetter

Follow-Up:

I  may have jumped the gun and apologize.  I was looking for 2005 tax schedules and your page came up on Google - all I saw were references to the filthy rich and no tax schedules....

I would love to see a flat user-based tax, and to see Congress go home part of the year with less taxes to spend, or tax laws to write.  The abolishment of the IRS would be a great side benefit.  I read long ago the tome, To Harass Our People by the Idaho representative who later was incarcerated for his cajones to take on the IRS.....

Mea Culpa and hang in there-

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 03:05:00 PM Send this post:

Q:

Subject: Sale of a Timeshare at a loss

Kerry, how do you treat the sale of a two week timeshare unit purchased in 2001 and sold in 2005 at a loss on your 1040 Federal Tax Return and also on your state tax (CA)?  Can you deduct the loss on Schedule D? I have received a Form 1099S.  The instruction there tells you that if the real estate is not your main home you must report it on Form 4797, and/or Schedule D (Form 1040).  CONFUSED!  Can you help, please.  Thank you. 

A:

The sale price definitely needs to be reported in order to match up with the 1099–S amount.  To leave it off completely will allow IRS and FTB to assume it to be 100% profit.

Which schedule you will need to use, as well as whether the loss is deductible, depend on how you have been using the timeshare. 

If you have been using the timeshare as a business property, and depreciating it accordingly on your business schedule, the sale will be reported on Form 4797 and the net loss, after accounting for depreciation recapture, will be deductible on Page 1 of your 1040.

If the timeshare was only used as a personal second or vacation residence, the sale needs to be shown on Schedule D, but the loss is not deductible or available to be used to offset other capital gains.  There has long been a double standard in the tax code making gains on the sale of personal use property potentially taxable, while denying any loss deductions for personal use property.

With other kinds of real estate, a case could possibly be made that it was acquired for investment purposes, making a loss deductible.  Since it has long been widely known that timeshares are the worst possible investment, with zero chance of resale profit, that wouldn't fly in your case.

These have long been the rules.  Any competent professional tax advisor should be able to work with you on this.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for responding so quickly to my query re how to report the sale of a timeshare unit at a loss.  I very much appreciate it and the answer you provided. 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 06:38:00 PM Send this post:

It seems that not many people are paying attention to a key new feature in the QuickBooks 2006 programs.  Twice in the past week, bookkeepers for clients have sent me QuickBooks 2006 data files in the much larger QBB format instead of the much smaller QBM format.  Here is one message that I wrote back to one of the bookkeepers.

I downloaded the file and will look it over and give my comments.

With QB 2006, please use the new Make Portable Company File feature to create a much smaller sized file (QBM) than you get when you make a QBB backup.  With this file, the QBM is only  3.3 mb, while the QBB you sent was 24 mb.  This will save us all a lot of upload and download time.

I commented on this new feature on my website shortly after the new program was released:

Backing Up Data Files
The regular QBB backup file doesn't shrink the size as much as it used to. It used to go to about one-fifth the size of the full QBW file. The first file I worked with had a QBW of 25.4mb and a QBB of 17.0mb

They do have a new type of backup, called a Portable Company File, that you access through the File menu. It makes a file ending in QBM. With the data file I previously mentioned, it was only 3.2mb in size.

When you create a QBX Accountant's Review copy, it was the exact same size as the QBM file.

I had also updated the instructions for sending me QB files to include this new QB 2006 feature. 

Thanks for your help.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 05:23:00 PM Send this post:

Q-1:

Subject: blog question

 

I invested in a startup S corp about four years ago.  So far there has been no income and there is still hope of getting a lucrative government contract

sometime in the future.  The company has incurred lots of expenses in trying to get it going but the tax form, K-1 shows no losses.  The accountant says

they are capitalizing everything as start up costs.  Can they take a more aggressive posture and under what circumstances? I know my loss is limited to my investment.

A-1:

There is a quite a bit of flexibility in deciding which exact costs are capitalized as pre-operations start-up costs, to be amortized in future years, and currently deductible operating costs.  All of the shareholders should consult with the corp's tax accountant to establish a policy that you can all agree on for handling the different kinds of expenditures.

I just consulted my favorite reference, TMI's The TaxBook, and it has a good summary of the rule that allows S corps to elect to deduct up to $5,000 of organizational costs plus $5,000 of start-up costs, with the excess amortized over 180 months.  The actual statement (on page 24-10) shows that these deductions are to be reduced dollar for dollar by the amount total start-up or organizational costs exceed $50,000.  You and your fellow shareholders should check with the corp tax accountant to see if this would apply in your case.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,  Thanks for your response.  To clarify, this business depends on getting a government contract.  Most of the dollars have been spent on

consultants and paperwork to get the contract.  These would seem to be operating costs rather than organization costs.  Could the shareholders

agree on writing these off before getting the contract?

A-2:

There is some flexibility in regard to what costs have to be capitalized and held off to be amortized against future income.  However, there are fewer options with this when you aren't producing any income at all.  If you were making a lot of small sales while building up for the big payoff from the anticipated government contract bonanza, you would have a better rationale for deducting more as current operating costs than would be the case if the only money your business is ever expecting to ear is that future contract. 

You should all coordinate with your professional tax advisor on how you all feel comfortable in booking the various kinds of expenditures you have.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your advice.  Unfortunately you seem to agree with the company's tax preparer.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 11:26:00 AM Send this post:

Q:

Subject: Recapture

Hello,

I happened upon your website and was interested in what you said about the recapture tax rates.  I wanted to know one more thing on that subject:

Using a rental property as the subject for discussion, is the recapture tax rate on the amount recaptured from depreciation still 25%?  Or do we use the Long Term Cap Gains rate of 15%?

Where is that written in the IRS Tax code?

Thanks for your time

A:

Depreciation recapture has been around for decades and is accepted as part of the tax benefit concept.  Basically, if depreciation expense has been allowed or allowable to reduce your ordinary income tax, its recapture should also be subject to ordinary income taxes.

With one basic exception, all depreciation recapture is reported on Form 4797 and is subject to ordinary income tax rates.  The one main exception is straight line depreciation on Section 1250 property, which includes most kinds of real estate, which has a special federal recapture rate of 25%.  If accelerated depreciation was used, the excess over what the straight line method would have been is taxed as ordinary income.

In the sale of a rental property, it is often the case that depreciation recapture on the structure (Sec. 1250 property) is taxed at the 25% rate, while depreciation on other separately identified assets, such as appliances and fixtures (Section 1245 property) are taxed at the normally higher ordinary income tax rates.

The special 15% long term capital gain tax rate only applies to any gain remaining after accounting for the depreciation recapture.

Your personal professional tax advisor can better assess how these rules will work in your case.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thanks so much for your useful info.  It was quite helpful to me.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 11:02:00 AM Send this post:

A comparison of three do-it-yourself tax prep programs: TaxCut, TurboTax, TaxAct.– As with all postings on such programs, I must add my warning that these programs epitomize the term GIGO (garbage in, garbage out).

Static tax scoring at the Treasury Department may soon be a thing of the past – The fact that our rulers have relied on the concept that changes in tax policy have no effect on taxpayer behavior for so many decades is the big scandal that nobody on the Left wants to address. 

 Everson Says IRS Could Collect Up to $100 Billion More Per Year – If they were only given more power and money.  Can anyone say “biased tax gap analysis?”

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 10:15:00 PM Send this post:

Q:

Subject: question for blog

 

Kerry:

 

Someone (my girlfriend) had the poor sense  to work in a start-up and the start-up fails (all within the tax year) and the business is closed and the  owner (who registered with the IRS via an EIN) did not report/deposit all withholdings (this is probable as there is no W-2 to be had) :

 

I know how to file her tax return using the last paystub and the appropriate IRS self reporting form in lieu of a W-2; but my question is will she be liable for payroll and withholding taxes deducted but not remitted by this so-called fiduciary/agent  employer (if of course all wages were not appropriately reported/deposited)

A:

Unless your girlfriend was in a position within the company to have some control over the payment of bills, she shouldn't have any problem with IRS.  It is the responsible parties within the company, those who chose to use the money for other things than paying IRS, who will receive the wrath of the IRS and be hit with major penalties.  IRS considers those people to be thieves, who stole the employees' tax money, and will act very aggressively to recover it from them.  The powerless employees whose money was stolen will not be penalized, and will receive the same credits with the government as if the full amount of the taxes had been forwarded to IRS.

If your GF did have any power over the company checkbook, she should retain the services of an attorney and work on negotiating the scope of her liability with IRS.

If she attaches Form 4852 (Substitute For W-2) and includes an explanation of what happened and how her figures were determined, she shouldn't have any problem and her 1040 will be processed just as if she had her actual W-2. 

Kerry Kerstetter

 Follow-up:

Thanks Kerry

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 11:47:00 AM Send this post:

Employer-Reimbursed Medical Benefits Excludable by Employee, Deductible by Employer; Burden of Proof Shifted to IRS – I have long worked with small business owners and explained many of the lucrative tax benefits of hiring their own kids and spouses, such as employee benefits, including medical costs and education assistance which are deductible on the business schedule, but not income to the family employees.  This case is a good example of how that works, including a common misconception that I have had to fight with IRS over on a number of occasions, that benefits can be in lieu of actual wages.

The amounts paid to the husband, which were in lieu of compensation, were reasonable because they were substantially less than the wife would have had to pay someone else to perform the same duties.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 11:28:00 AM Send this post:

Tools That May Make Tax Time Easier for Property Owners – While this article from the WSJ speaks highly of the Quicken Rental Property Manager program, I am still adamant that QuickBooks is a much better double entry accounting system for keeping track of all kinds of business activity, especially rentals.  I prepare hundreds of tax returns a year for clients who use the Class function in QB to easily get a P&L for each separate property, making it a very easy task for me to enter the details into Schedule E and Form 8825.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 10:59:00 AM Send this post:

IRS Updates Tax Gap Estimates - No surprise here because IRS had earlier told us to expect a new SWAG from them. It's also not surprising that so many others are swallowing these figures as gospel, such as TaxAnalysts.  The fact that these higher tax gap calculations are being used to justify more money and power for IRS couldn’t possibly have influenced their measurement of something that is inherently impossible to measure with any precision, could they?

Feds bust father & daughter tax preparers in Wichita for claiming bogus deductions on their clients’ returns.

Despite Federal Tax Credits, Solar Power Isn't for Tightwads

Even with the new federal credit, it often takes 20 or more years to recoup the initial investment through energy-bill savings.

Taking Inventory of Your Home To Get Adequate Insurance – Dealing with insurance adjusters can often be worse than IRS auditors.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 10:36:00 PM Send this post:

Q:

Subject: Illinois State Taxes

 

Kerry Kerstetter: We are considering moving to Illinois and I find their residential real estate taxes are double ours in KS. Is there a site or resource that has a net, bottom line analysis of all state's total taxes, so one can compare them to determine the most expensive/least expensive? Thanks! 

A:

Check the following that I found via a quick Google search

http://www.stateline.org/live/ViewPage.action?siteNodeId=136&languageId=1&contentId=28297

http://www.taxadmin.org/fta/rate/tax_stru.html

http://www.taxfoundation.org/publications/show/335.html

http://www.retirementliving.com/RLtaxes.html


Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 12:00:00 PM Send this post:

Q:

Subject: Tax question about vehicle

 

 I have my own business and I want to be able to write off mileage and my cost for he vehicle.  If I have advertising signs on my vehicle are my mileage allowances still subject to percentage use rulings?  That is the primary use of the vehicle is to advertise my business and get to and from appointments.

A:

If you are serious about running your business properly, you will engage the services of a tax professional who can give you guidance. 

Any competent tax pro will tell you that just placing a sign on a vehicle doesn't make the vehicle's costs deductible.  Any deductions for that vehicle will be based on the business miles driven, either via the IRS's standard per mile allowance or based on a pro-rata percentage of actual costs. 

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 11:56:00 AM Send this post:

Q:

Subject: Preparing 1065 & K1's the Year of Partners Death

Kerry, I came across your website and Blogs while I was doing research regarding the preparation of this Partnerships 1065 & K1’s.

 I work for a partnership founded in 1946.  The percentage of ownership was as follows:

Founder – 10%

Partner 1 (Son) – 20%

Partner 2 (Son-in-law) – 20%

Partner 3 – 16.667%

Partner 4 – 16.667%

Partner 5 – 16.667%

As of June 28^th 2005, our founder passed away.  He held 10% of the ownership at the time of his passing.  His percentage was absorbed by his son and son-in-law who now own 25% each of the company.  How do you suggest I set up Turbo Tax?  Am I required to do the first half 2005, second half 2005, and then a final combined return?  If you could please advise I would greatly appreciate it “oh Grand TaxGuru of ours”.

Best Regards,

A:

I don't use TurboTax, so I can't give any specific data entry advice on it.

However, it sounds as if you may need to make manual allocations of the 2005 K-1 info between the various partners, including the deceased one, to account for the proper split.  The actual computation of the allocation can be done various ways. 

In similar cases that I have worked on, I have figured the P&L for the time with the old ownership (1/1 to 6/28 in your case) and figured that split.  Then, I did the same for the rest of the year with the new ownership percentages and then totaled the two figures to get the full allocations for the year.   The method used should be designed with the input of all of the surviving partners, the deceased partner's survivors, as well as all of their personal tax and legal advisors.

You only need to do one 1065 for the entire year of 2005, with proper notation on the K-1s of the beginning and ending ownership percentages of each partner.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 11:53:00 AM Send this post:

Q:

Subject: Yet another Section 179 Q

Hi Kerry,

Sure appreciate your blog and I thank you in advance for any insight you can provide.

A friend of mine started an LLC this year with another partner/member.  They wrote a note for this “Asset Purchase” and acquired mostly computer equipment, which happens to be the total assets they’ll start with at the newly formed LLC.  They purchased the computer equipment from the same company they used to work for and would have been “rightsized” out the door from if they had not agreed to this “opportunity”.

 Would these computers qualify as Section 179 property so long as they only attempt to deduct up to $105K in year 2005?

 Thank you,

A:

As long as they didn't have an ownership interest in the previous owner of the equipment, it should qualify for possible Section 179 expensing.

The actual amount of the Section 179 deduction that can be claimed will depend on the amount of income the LLC has.  It can't be used to create a net loss.
 
Your friends should be working with their own professional tax advisor to make sure they handle the LLC properly rather than rely on second hand information.  There are dozens of ways in which they can screw things up if they try to handle things on their own.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 11:49:00 AM Send this post:

Q:

Subject: THANKS FOR THE S VS C ARTICLE

HERE IN FL. MOST SMALL CONTRACTORS WORKING ALONE HAD TO REVERT TO CORP. STATUS TO BE ABLE TO CONTINUE IN BUSINESS DUE TO WC.

WE CHOSE S CORP.  HOPE WE MADE THE RIGHT DECISION. 

THANKS AGAIN  

A:

If you made that decision based solely on what you read on the web, I would have no faith in your conclusion.  You absolutely must work with a competent tax professional who can take all of the particular factors into consideration.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 11:43:00 AM Send this post:

Q:

Subject: Quickbooks

 

I am using Quickbooks Basic.  It is my understanding that this program is no longer available.  My question to you is, do I need to upgrade to Quickbooks Pro or can I continue to use this program for now?

Thanks

A:

It is true that, starting with the 2006 QB programs, they have dropped the least expensive Basic version.  It's an obvious scheme to squeeze more money out of people.

It doesn't matter to me which year's version of the program you use.  I have a dozen different ones installed on my computer to enable me to work with everyone's data files.

You should upgrade to newer versions whenever you feel that you want the newer features or the official Intuit support, which they drop after three years.  If you are using QB to process a company payroll, you will need to upgrade more frequently in order to keep the withholding tables accurate.  However, for basic bookkeeping tasks, which is really all that most people need, you can stay with your current program for as long as you want.

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2006 05:13:00 PM Send this post:

Q:

Hi Kerry,

I have a quick question, I hope you have time to help me out.  My brother and I started a s-corp in the state of Washington last year, we do not have any employees.  It's year end and we have around 60k in the bank, I've taken about 5k out of the corp and he has taken $0.00.    What would you recommend we do with the 60k?  I'm married and my wife and I made about 35K last year, my brother has made about 30k outside of the corp.  I know this is so last minute, but any insight would be so helpful.

Thanks in advance!!

A:

You really should be discussing this with your own personal tax advisor.  If you are actually trying to operate an S corp without a tax advisor, you are asking for big trouble. 

A tax pro will inform you that paying S corp money out to the shareholders will have no tax effect, and is something that should have been evaluated when you decided to become an S corp in the first place.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2006 05:05:00 PM Send this post:

Q:

Subject: Section 179 Upper Limits

Hello--

 

I have the opportunity to purchase (and take delivery) of two qualified pieces of equipment.  One costs $79,000 and the other $133,000.  Is my 2005 deduction limited to the $105,000 (plus accelerated depreciation) or is it $79,000 + $105,000 = $184,000 (plus accelerated depreciation)?

 

Thanks.

A:

The $105,000 limit is per tax return, not per asset.  You could have dozens of items totaling $105,000 or just one.

As I have described several times, a 1040 can claim $105,000 in Section 179 and a C corp can also claim up to another $105,000 on its 1120.

If you are spending this much money on business equipment, you are being very irresponsible by not working with a tax pro who can assist you and ensure that you don't screw things up.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2006 04:58:00 PM Send this post:

Q:

Subject: S-Corp-Vs C-Corp

 

Hi,

I was on your site and I would love to speak with you. Not one accountant or attorney In spoke with out here has said a C-corp is good  and that an S-corp is mandatory.

Why are these so-called educated minds not in alignment with your thinking?

Is it so hard to miss?

Sincerely,

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.  There is no such things a one size fits all. 

You must be misunderstanding something because there is no such thing as a mandatory S corp status.  In fact, shareholders have to sign and submit a formal election on Form 2553 to IRS to be treated as an S corp.  If it were mandatory, it would be the other way around.

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.

There are plenty of other tax pros who properly understand the differences between C and S corps.  Nothing on my web sites is unique to me.  It is all very common knowledge.

I wish I could be of more help to you; but I already have too many clients to take care of; so we are not accepting any new ones at this time and are still trimming back on the client load that we currently have.

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

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/12/2006 01:39:00 PM Send this post:

Q-1:

Subject: Quicken Tips

 

Hi Kerry,

 

I came across your Quicken tips today and found it quite helpful.  I've been doing on-line banking for quite some time now and I'm a bit confused about managing multiple accounts.  We have several accounts at our bank (home chequing, home savings, child's savings, 2 business acounts, a line of credit and a visa card) all with on-line banking.  It's really handy being able to download all our transactions for each account into Quicken, but I'm running into problems when I try to use Categories/Transfer List since the transaction appears as a deposit in one account and a payment in the other account.

 

I figured out that using a Category doesn't work since it looks like income when it really is just a transfer.  So I've tried using the Transfer List, but when I do this, it duplicates the entry in the other account.  I'm not sure the best way to handle this.  I've been using the Transfer List while in one account, then just deleting the one generated by the on-line banking in the other account, but I was wondering if you knew of a better way.  Any suggestions you have would be greatly appreciated.

 

Thanks,

 

PS  I hope this makes sense - I don't have much of a background in this so I'm not too up on the lingo.  I'm also not sure if I've totally missed the boat on this.

A-1:

As I said in my online tips, transfers between bank accounts should not be posted to anything that will show up on the P&L, such as an Income or Expense category in Quicken. 

Ideally, only one entry needs to be made to reduce the balance in one account and increase the balance in the other.  If your online banking downloads the entries into each account's register, you could very easily end up with duplicate entries for the transfers. 

You have a couple of ways to handle this.  You could just delete the duplicate entries.

Another way is to set up a new Bank Account in your chart of accounts called "Transfers."  When posting transfers between actual bank accounts, have the offsetting side go to this new Transfers account.  You can train the online activity downloads from your bank accounts to use this account automatically.  If posted properly, the ending balance in the Transfers account should always be zero.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

Hi Again,

 

I liked your explanation of Cash Accounts.  I tried setting this up awhile back, but found I was very bad at keeping track of where the money was going.  My question is, what do you do in this situation to update your cash account to reflect the actual balance when you don't know where some of it has gone.

 

Sorry if this is a totally silly question.

 

Thanks again,

A-2:

What I usually do is make a big adjusting entry as of the end of the year to bring the balance in line with reality, with the offset to something like Personal Supplies.  You should actually do this occasionally throughout the year, with the offsetting categories the closest to where you think the money was spent.  As long as you aren't claiming a tax deduction for these expenditures, accuracy isn't that crucial a matter.

I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank-you so much!!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/12/2006 01:23:00 PM Send this post:

Q:

Subject: section 179

Hi,

I’m thinking of purchasing a new vehicle in 2006 (no SUV)

I’m self employed realtor.

Is there still a bonus depreciation (exta$) deductible on 2006 returns?  I think you can write off a lot in the first 3 years but I’m not sure.

Thanks

A:

You really should be discussing this with your own personal tax advisor.  If you are trying to operate as a professional Realtor without a professional tax advisor, you are asking for big trouble.  Buying a new vehicle just for tax breaks would be a big mistake.  Don't make matters worse by trying to do this on your own.

I assume that you are looking at buying a lighter weight vehicle. The maximum Section 179 for a vehicle under 6,000 pounds is much lower than for one over 6,000 pounds.

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 @ 2/12/2006 01:19:00 PM Send this post:

Q-1:

Subject: Tax question

Hi Kerry,

I am willing to pay for this advice, just please tell me how and how much.

My ex and I share custody of our 2 children exactly 50%.  Our divorce decree in 2004 states that we shall each claim one child as an exemption and shall each file as Head of Household. 

The IRS is disallowing my claim for HoH in 2003.  We were legally separated and meet all the other requirements. 

My question is:  if two parents have two children and each keep them exactly 50% of the time, can they each file as HoH?  How do you “prove” this to the IRS?

The IRS is asking for school records or medical records, which I don’t have.  Is there a precedent for this?

Thank you!

A-1:

What makes this a little more difficult than normal is the fact that you were still legally married as of 12/31/03.  Following are the rules for persons in your situation to qualify for HoH status, copied from page 4-7 of my QuickFinders book:


Considered unmarried. A married taxpayer can file as HOH if all of the following tests are met:
1) The taxpayer files a separate return.
2) The taxpayer paid more than half the cost of keeping up his or her home for the tax year.
3) A spouse did not live in the home during the last six months of the tax year. [Tax Court denied HOH status to a taxpayer whose spouse slept a single night in her home during the last six months of the year (Hopkins, TC Memo, 1992-326).]
4) The taxpayer's home was the main home for more than half the year of his or her child or step-, adopted or foster child.
The child must be a dependent unless the child's noncustodial parent is allowed the exemption under a decree, agreement or release of exemption. To qualify as a foster child, a child must be a member of the taxpayer™s household for the entire year.
5) The taxpayer is a U.S. citizen or resident during the entire year.

Keeping up a home. The cost of upkeep includes property tax, mortgage interest, rent, utilities, repairs, property insurance, food consumed on the premises and other household expenses.

Two unmarried taxpayers living with their own dependent children in a shared home may both qualify as HOH if they maintained separate households and each paid more than half the cost of his or her separate household (SCA 1998-041). Factors discussed in the memorandum that showed separate households include: the adults did not share a bedroom, each household had a separate phone, and the taxpayers gave gifts separately and made separate charitable contributions.



If you note, the rules specify "more than half the year."  This means that claiming exactly 50% custody for each of you makes you both ineligible.  You may want to negotiate with your ex and decide which one of you would most benefit from claiming more than 50% custody for 2003 for at least one of the kids so that either you or she can benefit from the HoH filing status.  Changing the custody to something like 49/51 and 51/49 might allow you both to qualify for HoH.

Unfortunately, this is a very commonly misinterpreted technicality in the tax code, where the dividing point is designated as more than 50% and not exactly half. 

This is also not going to just be a problem for 2003.  Even when you are single, the language to qualify as Head of Household specifies more than 50%.  Whoever advised you that you could both claim the HoH with an exact 50/50 division of custody was not reading the tax rules properly.   You may want to revisit the entire agreement for your custody situation to see if you can work out a better plan than the screwed-up one you currently have.  

Having two kids should make the solution a lot easier than if there were only one.  While your own legal and tax advisor may come up with a better solution, I have often seen cases like this where each parent gets to claim that one of the kids was with him/her for more than half of the year.  That would make both parents eligible for the HoH.

I hope this helps.  As always, you should consult with a tax pro for more specific advice on how these and other tax rules affect your situation.

Good luck.

Kerry Kerstetter

 Q-2:

Thanks, Kerry.

I guess the real glitch is how you prove the >50%.  Using your recommendation of each kid being 51/49 and 49/51,

It could be a challenge because it looks like the only acceptable methods regarding the kids are:

 DOCUMENTS TO SUPPORT Head of household status

 1.   School records listing the qualifying person’s address as the same

 2.   Medical records listing the qualifying person’s address

 The kids’ records would need to be different.

A-2:

I don't see how the school record addresses are as important as you and your ex coming up with a consistent record of the number of days each child lived in each home.  If you can coordinate the preparation of a kind of attendance record for each kid that you will both vouch for, and if that shows you each with one of the kids more than 182.5 days in your home during the year, you should be okay in terms of qualifying for the HoH status.

I'm assuming that you and your ex each pay the cost of maintaining your own separate homes, so there will be no problems covering that part of the HoH requirement.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/12/2006 01:10:00 PM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 07:40:00 PM Send this post:

Think Twice Before Taking that 'Standard Deduction' – According to Gail Buckner, a GAO study showed that 2.2 million tax returns intentionally overpaid because the filers were too lazy to itemize their deductions rather than claim the standard deduction.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 04:30:00 PM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 03:31:00 PM Send this post:

Q:

Subject: Gift Question

 

Hi,

I found your website while looking for an answer.... I understand the single gift limit of $11k per person. However. Is there a annual limit of gifts. In other words... How many $11k (or $12k etc. depending on the year) gifts can I give? As long as each gift is to a different person is there a limited number?

 

Thanks

A:

You really should be working with your own personal professional tax advisor on matters such as this because you are misunderstanding the rules.

As you can see on my website, the annual allowance of $12,000 (as of 1/1/06) is not per gift.  It is total per recipient per calendar year.

There is no maximum number of people to whom you can make gifts.  The gifts do have to be bona fide to the original recipients without conditions.  For example, you can't give 100 people each $12,000 with the requirement that they pass that money on to another person in order to avoid the per person limit.

Gifts totaling more than the annual allowance won't automatically cost you any actual gift tax.  You will have to report them to IRS on a Gift Tax Return (Form 709), but they can be offset against your one million dollar lifetime exclusion.

Again, any competent professional tax advisor should be able to help you set up an appropriate gifting strategy for your particular circumstances.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 03:22:00 PM Send this post:

Q:

Subject: Quickbooks -vs- Quicken H&B -vs- Peachtree

Sir,

I notice that your comparison was published 2003.

What is your opinion and comparison of the subject programs.

The user is a non-accountant type, non-for-profit form Quicken H&B bookkeeper.

What’s best?

Thank You.

A:

As I've said in numerous blog posts, each year's versions of the Quicken and QB programs makes them more and more dissimilar.  Each year, I have a lower opinion of Quicken and a higher opinion of QB for proper handling of double entry accounting.

A non-profit organization should definitely be using QB and not Quicken.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 03:09:00 PM Send this post:

Q:

Subject: Annuities in a irrevocable trust - Tax Deferred?

 Hello Kerry,

I am considering purchasing an annuity for my brothers trust.  This trust is an irrevocable special needs trust where my brother is the beneficiary.  The trust was designed to preserve the bequest from my dad, target it for growth should the money be needed to take care of John, and to be careful not to disqualify John from and State or Government benefits.     

I have posed the question that since the trust is a non-natural personal will the tax deferral benefit of an annuity be void and will the trust be taxed on growth each year.

The investment representative says no it will not be taxed, the growth will be deferred.  However, the CPA who has been managing the returns says the gains will lose their tax deferred status.

Can you shed any light on this matter?

Thanks for you insight.

A:

Unfortunately, there is no easy answer here.  I browsed through the annuity and trust sections of my reference books and things are different depending on what kind of annuities are involved, the details of the trust, along with the actual ownership and beneficiaries of the annuities.  Each combination of those factors changes the net tax effect.

It would be best to have both your annuity salesperson and CPA lay out their evidence for their conclusions in terms to the factors I mentioned.  I obviously don't know either of those persons, and this may seem a bit biased; but in similar cases like this, I have found the CPA's objective analysis of the facts to be more trustworthy than the opinion of a person who is looking at earning some very substantial commissions from the sale of annuities.  Too often, I have seen cases where annuity salespeople say anything the clients want to hear just to close a sale, without doing any actual research as to its accuracy. 

Good luck with that.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 03:03:00 PM Send this post:

Q:

Subject: just wandering

Can cash withdrawals from the corporations business account be considered a payroll expense if it’s withdrawn from an ATM machine at a casino?

Seriously,

A:

As you know, every bit of activity in the corp bank account has to be accounted for on the corp's books and reported on the 1120.

If an employee receives his payroll via ATM withdrawals, you could post it that way on the books.  Of course, if it's a W-2 employee, you will need to gross up the actual cash taken out to arrive at the gross pay and applicable tax withholdings, which you will also have to report on the 941.

There are obviously many other ways to treat ATM withdrawals, such as loans from the corp, or even as straight 1099 pay.  You obviously need to work with the persons concerned to make sure everyone is in agreement with how the withdrawals are being posted on the corp books.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 03:01:00 PM Send this post:

Q:

Subject: Exchange Question

If a Section 1031 exchange is set up, but cancelled when one of the partners cashes out, are there any IRS penalties?

Thanks.

A:

If an exchange falls apart before being finalized, the disposal will be reclassified as a fully taxable sale, which would generally result in high taxes and possible late payment penalties.  There is no separate penalty on the failed exchange itself.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 02:57:00 PM Send this post:

Q:

Subject: Schedule C

Hello.

What do you charge for an EBAY type Schedule C and SE?

Thanks,

A:

If you are asking this in order to compare with what other tax preparers charge, that is not possible.  I have never used a flat rate or per schedule fee system.  I have always charged based on my actual time spent, at my current billing rates.  Clients who have their books in good order pay much less than those who have messy or non-existent accounting records.

If you are asking because you want me to prepare your tax return, that is also not possible.  We are still in the pruning back phase of adjusting our work load and are not accepting any new clients.

If you haven't already done so, please check out my info on selecting a new tax pro on my website.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 02:51:00 PM Send this post:

Q:

Subject: 179 Depreciation

 

I have a vehicle placed in service December 19, 2003.  I used the full first year depreciation in the 2003 tax year.  I am now considering trading it off and leasing a different vehicle.  What are my tax consequences for the vehicle I trade off and for my new vehicle? 

Example; Would I owe back depreciation.  I have a $12,000 payoff on my current vehicle.

A:

If you expensed the entire cost of your vehicle on your 2003 tax return, its adjusted cost basis on your books is zero.  Whatever you sell it for will be taxable as depreciation - Sec. 179 recapture.  Even if you don't receive any money and the loan is paid off, you will have a sale for the $12,000 loan balance.

If you trade it in for the purchase of a more expensive business vehicle, the gain can be deferred by reducing the cost basis of the replacement vehicle.

Selling the current vehicle and then leasing a new one will not qualify unless you trade it in and the lease is treated as a purchase, such as with a one dollar buy-out at the end.  If the buy-out is the vehicle's fair market value at the end of the lease, that is not the same as a purchase.

You really should be working with personal tax pro to see what is the best strategy for you.  I have almost always found that leasing vehicles is a much more expensive (rip-off) way to go than a normal purchase; so you should work with your personal tax advisor to see if that makes sense.

Good luck.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 02:50:00 PM Send this post:

Q:

Subject: Is an S corp transferable?

 

Tax Guru,

           Upon the sale or transfer of the business (assuming that it is an s corp. in the first place); do the new shareholders have to sign a new IRS 2553 or does it just remain in effect?

Thanks for the advice

A:

The original 2553 remains in effect until either formally revoked or if the corp fails to qualify for S status by violating one of the restrictions.

Assuming the new owners are not one of the ineligible types, and the total number of shareholders is still less than 100, the original S election will continue to be in effect.  The new owners will be obligated by the original 2553 even though they have not signed it.  This mean that they will have to include their pro-rated share of the corp's income on their 1040s.

If the sale of stock is effective mid-year, how you allocate the income or loss to be reported on the K-1s is negotiable between the buyers (old shareholders) and sellers (new shareholders) and should be spelled out in the sale agreement so that there is no messy dispute when the 1120S is prepared.

I hope this helps.  A tax pro can help work with your particular situation.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 02:46:00 PM Send this post:

Q:

Subject: RE: tax question

 

I have a question for you, if I have lived in my home less than 2 yrs and I sell it and take the money and put in to the new home will I pay capital gaines tax on that money. I am married

A:

You can see all of the residence sale rules here on my website.

You can see that what you do with the sale proceeds has no effect whatsoever on your possible tax obligation.

You should work with your own personal tax advisor to see if you qualify for the pro-rated tax free exclusion.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2006 02:40:00 PM Send this post:

Hurricane Victims Have More Time to Claim Losses on Prior Year Returns - Victims of Hurricanes Katrina, Rita or Wilma wishing to claim disaster-related losses on their 2004 federal income tax return will have until October 16, 2006, to make this choice, a six month extension of the original deadline.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/10/2006 09:32:00 PM Send this post:

Is Outsourcing Payroll Worth the Expense?

Those @%# tax cuts!  – From Larry Elder

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/09/2006 10:05:00 PM Send this post:

Financial scams expected to boom as boomers age – Because that’s where the money is.

13 States Mandate E-filing, Tax Administrators Group Hopes More Join

Snow: Keep taxes low to shrink deficit

3 rules of home-office deductions

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/08/2006 10:06:00 PM Send this post:

'Survivor' Champ Learns From Hatch – She paid her taxes on the winnings.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/07/2006 05:41:00 PM Send this post:

Q:

Subject: Tax software for individuals?

 

Hi Kerry,

I've been watching your blog but haven't seen you cover this topic yet. Are you planning to write an entry comparing the major tax software packages for this season?

A:

I don't have time to test the programs myself; but I did include links to some articles that did in these posts last month:
www.taxguru.net/2006/01/consumer-tax-software.html

www.taxguru.net/2006/01/non-cash-donations.html

Paul Caron picked up on this topic on his blog:
taxprof.typepad.com/taxprof_blog/2006/01/pc_magazines_ra.html

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks much!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/07/2006 05:22:00 PM Send this post:

Credit Card Sharks – Interesting look at the many ways in which loan sharks are more ethical than credit card companies.

Feds bust Minnesota tax preparer who created bogus deductions for immigrants from Africa. 

Does Your Insurance Cover a Home Business?

Getting Wise to Mortgages; Web Sites Help Borrowers

Broker Commissions Add To the Real-Estate Bubble

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/07/2006 05:16:00 PM Send this post:

Wealth tax initiative signature deadline looming – People who wonder why I refer to my former home state as the People’s Republic of California need no better example than this attempt to confiscate $200 billion of wealth from the evil rich.  This is exactly what communists do, as former property owners in Cuba are well aware of.

New Steps Taken By IRS to Improve Questionable Refund Program

The IRS established the Questionable Refund Program to deal with the serious problem of refund fraud, which has increased significantly in recent years. The IRS estimates that fraudulent refund claims now exceed a half-billion dollars a year.

Avoid An Audit: Don't File Electronically – I’ve always refused to use e-filing because of the inability to add additional explanatory information to assist in avoiding IRS problems.  This writer’s less realistic theory is that not all paper tax returns have their data entered into the IRS computer and are thus out of the loop for selection for audits.  The comments section of this blog post also has some misguided debate on the wisdom of e-filing based on whether it costs more or less than the postage to mail in paper returns.   

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/06/2006 11:05:00 PM Send this post:

Q-1:

Subject: C CORP TO S CORP

 

HI

I HAVE A SIMPLE QUESTION REGARDING CHANGING C CORP TO AN S CORP THAT HAS REAL ESTATE PROPERTY ALREADY DEPRECIATED OVER THE YEARS.

THIS C CORP HAS 6 STOCKHOLDERS RETIRED AND WISH TO DO WHAT IS RIGHT FOR THEIR CHILDREN

THIS C CORP HAS SEVERAL PROPERTIES VALUED AT  4,000,000 (estimated, not appraised)

IF THE CORP. IS CHANGED FROM A C TO AN S DO THE STOCKHOLDRES, OR THE CORP. HAVE TO PAY TAXES NOW  ON THE CURRENT MARKET VALUE OF THE PROPERTIES EVEN IF THE PROPERTIES ARE NOT SOLD NOW.

IF THERE ARE TAX IMPLICATIONS, HOW MUCH TAX WILL BE DUE

THANKS FOR YOUR HELP

A-1:

You definitely need to be working with a tax pro on matters such as this.  In fact, you should have been working with one from before you even set up your C corp.

You are obviously referring to the 35% Built-In Gains (BIG) Tax that comes into play with appreciated assets in C corps that are converted to S status.  That tax isn't payable at the date of the conversion.  It's payable when the asset is sold, if that happens within 10 years after the date of the S election .

Planning for this can be tricky, especially depending on any future sale plans for the property.  You all, along with your professional tax advisors, need to take a serious look at the wisdom of converting the existing C corp to an S instead of just starting up a new S corp and leaving the existing C corp as is.  You didn't mention any rationale for doing the conversion, so I have no idea what is behind that plan.  Too many people jump into S corps just because they've heard it's the "cool thing" to do or because they heard of someone else doing it, without fully investigating all of the related ramifications.  This is why I posted the comparison of C and S corps on my website several years ago.

Another strategy that is often applied is to have the C corp sell the property before converting to S status so as not to have any potential BIG tax.

You may also be interested in this article I came across recently, explaining that S corps provide less lawsuit protection for assets than do C corps or LLCs.

I hope this helps.  A tax pro can better apply these concepts to your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

 DEAR KERRY

THANK SO MUCH FOR YOUR PROMPT REPLY

IF I MAY TROUBLE YOU JUST ONE MORE TIME

MY FATHER-IN IN LAW AND HIS PARTNERS ARE ALL OVER 80 YEARS YOUNG AND I AM THE ONE THEY TRUST TO GIVE THEM A LOGICAL AND ACCURATE ANSWER ON THIS MATTER.

SINCE WE ARE TALKING ABOUT 6 partners and THE CHILDREN (HEIRS ARE 11 + SPOUSES)

IT IS VERY PROBABLE THIS INCOME PRODUCING COMMERCIAL PROPERTY WILL NOT BE MANAGED IN THE FUTURE WITH SO MANY PEOPLE HAVING THEIR OWN IDEAS.

THEREFORE, I WILL LIKE TO NARROW THE POSSIBILITIES AS FOLLOWS AND PRESENT THE SCENARIO THE THE STOCKHOLDERS AND THEN GO ABOUT GETTING A TAX PRO AS YOU SUGGESTED TO GET THIS TASK DONE.(if you can, you can refer us to a pro?)

==============THE PROPERTY IS DEPRECIATED TO $0.00================

EX#1 THE C CORP IS NOT CONVERTED TO S

          THE PROPERTY WORTH TODAY 4,000,000 IS SOLD NOW---HOW MUCH DOES THE CORP PAY IN TAXES AND HOW MUCH DO THE STOCKHOLDERS PAY IN TAXES

EX#2 THE C CORP IS CONVERTED NOW TO AN S CORP AND THE PROPERTY IS SOLD IN THE NEXT TWO YEARS FOR 4,000,000 -- HOW MUCH DOES THE CORP PAY IN TAXES AND HOW MUCH DO THE STOCKHOLDERS PAY IN TAXES

EX#3 THE C CORP IS CONVERTED NOW TO AN S CORP AND THE PROPERTY IS SOLD 12 YEARS FROM NOW (over the 10 yr clause)  FOR 4,000,000-- HOW MUCH DOES THE CORP PAY IN TAXES AND HOW MUCH DO THE STOCKHOLDERS PAY IN TAXES.

THANKS A GAIN FOR ALL YOU HELP

SINCERELY

A-2:

There is no way to accurately answer any of those questions without analyzing all of the details, including the owners' personal tax situations.  Taxes are based on several factors, including what other income and losses they may have.

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

I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

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:

thank you very much 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/06/2006 03:21:00 PM Send this post:

Q:

Subject: Question--blog topic?

Kerry,

 

Thanks for taking the time to help so many people understand tax matters.  I have gotten better information on your blog than I have in meeting face-to-face with my tax preparer.  Since you seem to be "plugged in" to such matters, I wanted to ask you about my situation...

 

I'm a full time grad student, married since 2003.  In December 2003 I started buying government surplus equipment and reselling it on Ebay, usually selling about 2 items a week.  This is to supplement my wife's wage income and help pay for tuition.  In 2003 I only sold a few things and had a small loss, which I did not list on my return for that year.  In 2004, I made a stupid mistake on a spreadsheet, which led me to believe that I had no net profit for 2004 either.  While this didn't seem quite right, I was in a hurry to finish the 2004 return, and again did not list my business on it.  The 2004 return showed (correctly) $9K in wages for my wife and I, $35K in capital gains from sale of a rental house, and about $5K in expenses relating to that house, for an AGI of $39K.

 

Well, in 2005 my little Ebay trade did make a profit of over $15K.  When I started getting everything together for the 2005 return, which I've not yet filed, I found the error on my spreadsheet and realized that I actually made a profit in 2004, of about $5K.  So now I have to file an amended return for 2004.  I've had many sleepless nights lately and would be glad to hear your opinion on:

 

1.  Do you think my amended return will trigger an audit?  The error was due to my own carelessness, but I would imagine the sudden appearance of $5000 in previously unreported Schedule C income would look somewhat unusual.  There will be a check for the full amount due attached to my amended return, of course.  How would you phrase the explanation for this error?

 

2.  I use the cash accounting system since my gross receipts are (way) under $1 million.  This means what would otherwise be the "cost of goods sold" is instead treated as an expense, pushing my expense ratio to about 80%.  I have read on other tax sites that this ratio should be kept under 60% or an audit can be expected.  Is this something to worry about?

 

3.  Is there any truth to the persistent rumor that the IRS is targeting Ebay sellers this year, and that they have obtained a list of "powersellers" - those grossing over $1000 monthly on Ebay - and are systematically auditing them?  I heard this from a fellow "powerseller" who was audited recently, who said his auditor was the source of the info.  If so, they may already be investigating me.... fantastic.

 

Sorry for the long-windedness.  I am so busy with school - and our financial margins are so tight - that I want to do everything I can to avoid future trouble.  I've even taken the time to go back and account for every penny deposited into our bank account for the past two years, just in case.  I've read and heard so many horror stories about the IRS that I live in perpetual dread of an audit.

 

Thanks again-

A:

In regard to filing amended tax returns with IRS, the highest risk of triggering an audit seems to be with those claiming  refunds.  I haven't heard of any such risk with 1040Xs where the people have "volunteered" to pay additional taxes.

Interest will be due on those tax payments; but IRS generally doesn't charge late penalties on voluntarily disclosed  additional taxes.  That is not the case if you fail to file a 1040X on your own and then IRS later discovers your unreported income.  Penalties will be assessed in that case.

If you  live in a state with an income tax, you will have to file an amended State return as well.

You claim to have had a net loss for 2004.  In the old days, I would have advised filing a 1040X for that year; but that is not advisable now because of IRS's policy of auditing refund claims.  You should work with a professional tax advisor to see if some of your 2004 costs can be set up as start-up expenses and carried over and amortized on your  2004 and subsequent years' returns.


You seem to be misunderstanding the concept of cost of goods sold for a cash basis business.  You do still need to keep track of inventory cost in the CoGS section of your Schedule C.  Any experienced professional tax advisor should be able to instruct you on this.

I have heard that IRS is aware that many online businesses, such as eBay sellers, are not reporting their income.  IRS can get eBay records with no problem and go after the biggest sellers.

Besides the peace of mind, there are tons of benefits to reporting all of your business income and expenses.  Any experienced professional tax advisor should be able to help you stay legit. 

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

 

Thanks so much for your help.  I will do as you recommend and hope for the best.

 

Regards,

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/06/2006 02:40:00 PM Send this post:

Q:

Subject: Section 179

 

If I purchase equipment for the sole purpose of leasing or renting it to my customers is this equipment "Qualifying Property"?  It would be machinery

and motor scooters.

The reason I ask is that you say "Nonqualifying Property:

* Property held for the production of income (investment property, most rentals).

most rentals is vague.  If rental is my business would I my personal property I rent to others be "Qualifying Property" or "NonQualifying Property"

Also I'am a small minority owned business.

Thank for any help you might have.

A:

You should really be working with your own professional tax advisor on matters such as this. 

Whether your scooters qualify for Section 179  depends on how long the rental periods are.

The following quote from the Depreciation QuickFinder Handbook spells it out very well.

"Leased Property.  For noncorporate taxpayers, leased property is not eligible for 179 expense, unless:

The taxpayer purchases the property to lease to others and both the following tests are met:

1.  The term of the lease (including options to renew) is less than 50% of the property's class life.

2.  For the first 12 months after the property is transferred to the lessee, the total business deductions on the property exceed 15% of the property's rental income

This rule does not apply to corporations."


In your particular situation, this means that if you are leasing the scooters for less than 2.5 years per renter, and you are paying the maintenance costs, you should be eligible to claim Section 179.  If you are renting on a per day or per hour basis, you would definitely qualify.  If you are leasing for several years at a time and the lessees has to pay all of the maintenance costs, Sec. 179 wouldn't apply.

Of course, the amount of actual Section 179 deduction will be phased out if you place into service more than $430,000 of new qualifying assets during 2006.

I hope this helps.  A tax pro can better apply these rules to your unique circumstances.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for the reply and info.

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/06/2006 12:31:00 PM Send this post:

Q:

Subject: Exchange Question

 

My brother and I own a house as investment property together.  We purchased it for $60,000.00 about 5 years ago.  We are now thinking about selling it for $160,000.00 and replacing it with a house or condominium in the $100,000.00 to $140,000.00 price range.  Do we have to pay any capital gain tax in this transaction?  My accountant told me that we would have to pay capital gain tax on the $40,000.00 we use to pay off the mortgage unless we replace the property with property for $160,000.00 or more.  Is this true? Thank you for your advice.

A:

That's not exactly right.

Basically, to have a completely tax deferred exchange, you need to acquire new property or properties that cost at least as much as the net selling price of your old one.  The net selling price would be the gross price less the selling costs.  I call that the target replacement price.

Whatever you under-reinvest, or miss the target replacement price by, will generally be subject to taxation.  In your example, assuming you have no selling costs, a $100,000 replacement property would put you $60,000 short of your target.  This would mean $60,000 would be taxable; not just $40,000.

Another twist to consider.  The gain that will be subject to tax will be the most expensive portion, which is normally the depreciation recapture.

If you don't want to pay taxes on the $60,000, you and your brother may want to consider acquiring one or more additional properties as part of this 1031 exchange costing at least $60,000.

This is a relatively simplistic way to look at it.  There are a few more twists in terms of the cash in and out, as well as the amount of debts on both the old and new properties that will affect the exact amount of taxable gain; but the concept is fairly straight forward and I hope clear to you.

As you hopefully know, you must use the services of a neutral third party exchange facilitator to prepare the proper documents and hold the cash proceeds.  You can't just sell your old property and take the money to reinvest on your own.  You can see all of the rules for properly handling a 1031 exchange at www.tfec.com 

Good luck.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2006 02:23:00 PM Send this post:

Q:

Subject: 1041 software

Hello,
I am individual who is trustee for my three adult children's trusts of $250,000 each inherited from my father. I just ran into your Web site and hope that your software would be what I need to prepare their tax forms. All the money is invested with a broker and I plan to distribute the income to them. Please let me know if your product would be good for me and put me on a mailing list to let me know when it is available.
Thanks.

A:

I'm confused by your inquiry.  We don't sell software.

If you are referring to the QuickBooks programs, which you can buy via some referral links on our websites, that is the best program for keeping the books for trusts, as well as anything where there is money involved.  Most of my clients who have trusts use it and then send me their data discs to use in preparing the 1041s.

QuickBooks can prepare basic 1099 and W-2 forms; but not the 1041 or other income tax forms.  While I use the very expensive top of the line Lacerte programs to prepare all kinds of income tax returns, including 1041s, there are other less expensive products out there, if you plan to prepare them yourself.  A web search should locate those programs.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2006 02:17:00 PM Send this post:

Q:

Subject: Gift Tax Question

 

Thank you for the important information. 

 

If I am giving a child a loan between them and ourselves, expecting them to pay us back in a timely fashion, and if I have already given them the max of $11,000, that is not considered gift tax is it?  Does this amount, maybe around $5,000, need to be reported on our income tax as something?  Thank you for your input. 

A:

Loans and gifts are two completely different things.  A gift has no requirement to be repaid. 

A loan has no dollar limit and the repayment terms are negotiable between you and your child.  Loans are not taxable deductible by you or taxable income to the borrower.  The only thing you will need to report on your tax return is the interest income you receive.

A loan can be reclassified as a gift if you forgive all or part of the balance. 

Your personal professional tax advisor should be able to give you more useful information based on your unique situation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2006 02:16:00 PM Send this post:

Q:

Subject: What is your opinion?

 

I have been trying to read up on the best way for our business to go, so I would like your opinion.

We have a poultry and cattle farm.  We have asked a lawyer and our accountant.  The lawyer says s-corp to avoid double taxation and our accountant says c-corp; there won't be much profit after all of our deductions and if there was we could buy something at the end of the year and do section 179.  The accountant also says we are not providing a service for the public and the IRS will not recognize us as a s-corp.

Since we are just getting into this, we really want to go the right way to begin with.  What do you think?

Thanks,

A:

There's no way I can say what would be the appropriate format for you to use.  Only someone who has closely reviewed your current and future situation can do that.

I do find it very unnerving if the quote from your accountant is accurate.  S corps do not have to be service oriented.  S/he may be confusing it with a PSC (personal service corp) because many farms are set up as S corps.

Make sure your lawyer has reviewed the many tax saving opportunities of C corps and isn't just focusing on the perceived double taxation issue to the exclusion of all of those other areas, as far too many lawyers do.

It sounds as if you  may need to consult with a tax pro who better understands how corporations function.

Good luck.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2006 02:10:00 PM Send this post:

Q:

Subject: Tax Advice

 

Kerry,

I do taxes for individuals, but not for businesses.  A friend of the family approached me about doing taxes for his business but I am referring him on to someone who can help him.  For my own personal knowledge and because he is a family friend, I have a couple questions on his situation.  He has not filed his business taxes for several years.  In addition, he paid his employees as contractors (but did not issue 1099's) even though I believe they would be considered employees under the IRS's 20 step test.  As this goes back several years, it is difficult to rectify the situation just by issuing 1099's and hoping the IRS doesn't audit.  Will he have difficulty finding a preparer (i.e. does the preparer have liability if he prepares the taxes for those years knowing the workers should have been classified as employees)?  Any suggestions on how he should proceed?

Thank you for your help.

A:

While every tax pro has his/her own approach to handling cases such as your friend's, there shouldn't be a problem finding one to take this on.  Over the past 30 years, I have worked on several cases just like this.  Most tax pros who are looking to expand their practice would be glad to have a big multi-year project.  The most critical issue is to bring the income tax returns up to date. 

In those cases, we decided the best approach was to keep the worker classifications as they were for the past-due returns.  Going back and filing very late 1099s or worse, changing the status to W-2, has far too much potential for opening a very messy and expensive can of worms with IRS and the State tax agencies.  I always warned the clients that they were on shaky ground with the status, and that IRS and/or the state could try to change it.  Luckily, they never did.  They were just glad to receive the delinquent income tax returns.

For future payments to workers, we made sure the clients were treating their workers properly in accordance with the rules.  This sometimes meant setting them up as W-2 employees or having them sign independent contractor agreements.  In some cases, the client insisted that any workers themselves be incorporated in order to prevent any possibility of being classified as a W-2 employee.

I hope this helps. 

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2006 02:05:00 PM Send this post:

Q:

Subject: section 179

 

i am very confused on section 179. does the purchase have to be on NEW or can USED equipment qualify?

A:

It just has to be new to you.  It's all explained on my website.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2006 01:59:00 PM Send this post:

Q:

Subject: Tax Question

 

What are the rules governing health insurance premiums for the single shareholder of an S Corp who is also an employee?  Is it considered taxable income on the W-2?

A:

Any person owning more than 2% of the S corp stock must report the health insurance premiums as taxable wages on his/her W-2. 

As I've mentioned countless times, that is not the case for shareholders of C corps.

Your personal tax advisor can give you more detailed assistance with this.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2006 01:26:00 PM Send this post:

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- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/03/2006 10:40:00 PM Send this post:

Feds bust Michigan man peddling corporate sole scams

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- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/02/2006 10:32:00 PM Send this post:

Q:

Hi,

I was wondering if you could tell me what power I have as a 30% owner, with one other owner at 70%.  The other owner is my father and he is not doing the job he should be doing as the President of the corp.  Do I have any legal control or say in the operation of our business?

Please help!

A:

You will need to work with an attorney on this matter.  S/he will need to see all of the documentation for the corporation and the issuance of the stock, including any governing documents that set out the legal and fiduciary responsibilities of shareholders and officers of the corporation.

If you don't have any such written documentation, you may be SOL since anyone owning over 50% of a corp can usually run the show.  You then have the choice of selling your shares, subject to any restrictions in the corporation's governing documents.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/01/2006 02:03:00 PM Send this post:

Q-1:

Subject: HELP Please!  Re: Reverse 1031 Exchange

 

Hi, I must open this by saying I am very embarrassed to ask this as I have an MBA and really should not have let myself get into this predicament.  Here is the situation - perhaps you can offer some sound advice.

 

My father passed away in 1988 leaving his only heirs - myself, my younger sister and my developmentally disabled brother his very modest home (he did not have a will). 2 years later, I moved another disabled man in with my brother and they became involved in an Independent Living Program that offered life-skill assistance (and supplemented their "rent" - which basically covered expenses - property taxes, utilities and upkeep.)  The 2 men lived in the home until 2005. In late 2004, I took out a home equity loan on this home (#1) to purchase a new home (#2) for them (for $270K) in order to move them closer to my sister and myself.  House #1 was on the market for several months (unoccupied) and finally sold 5 months later for ($402K) -- it is located across the street from the bay at the New Jersey shore and the land is suddenly quite valuable.  The dilapidated home itself was leveled by the new owners to build a new house on the lot. I went to settlement to sell House #1 with my sister (with a Power of Attorney for my brother who is mentally 6 years old).  We signed papers for about 4 hours - while the buyers read every word and signed 3 or 4 different sets of mortgage papers and their infant cried the entire time.  When it was all over, it was almost 3:00 pm and my 9-yr-old son was due to get home from school and would be home alone.  The Title Company handed me a check for the FULL AMOUNT of the sale of the house (less closing costs) -- I grabbed it and ran out to get my son.  When I got home, I called the mortgage company that held the home equity loan (on home #1) asking to whom I needed to send the check to pay off the loan.  They said I needed to go to the bank and get a cashier's check to pay it off and send it to them.  They were confused as to why the Title Co. did not see them as holding a Lien on the property.  All the while, I had no idea that I should have been doing a 1031 Reverse Exchange on these two properties to avoid the payment of capital gains taxes.

 

What can I do now?  I paid the Home Equity Loan off as well as another Equity loan that we had on home #1 - (to pay for siding and windows, a new bathroom and carpeting the year before.)  There is no money left over and I certainly do not want to pay gains on $402K.  Please advise if you can - I am really freaked out after doing some research on the Internet about this and realizing that I did not do this properly. My family (sister and brother) rely on and trust me to handle everything and I hate to think that I have totally screwed up.  Is this something that can be rectified after the fact??? 

 

I appreciate any help you can offer!  I was actually considering calling the IRS to set up an appointment to talk to them about this.  Then, I saw your site.  Thank you very much,

A-1:

You do have a messy situation here.  Asking the IRS for advice would be a crazy thing to do.  You need to remember that their job is to make you pay more taxes.  They do not want to help you lower them.  You need to work with a professional tax advisor who can thoroughly analyze all of the many factors involved here for you and all of the property's co-owners.

Doing a 1031 exchange on the old house is not possible. You have received the money; so it is now a sale and cannot be converted into a tax deferred  exchange, regardless of what happens to the money.

Some of the issues that need to be analyzed and evaluated with your personal professional tax advisor will include the following.

What was the cost basis of the old home?  Normally, inherited property is given a stepped up costs basis to its fair market value as of the date of your father's passing.  Any capital improvements made since then can be added to the cost basis.

Whose names were on the title of the old home?  If you brother's name was on it, his share of the profit could possibly be excluded since it was his primary residence.  These rues are explained on my website.

How was the old home being reported on each of the owners' income tax returns?  Has anyone been claiming depreciation on it?  If so, that has reduced the cost basis and increased the taxable gain.

Good luck.

Kerry Kerstetter

Q-2:

Dear Kerry: 

 

Thank you so much for taking the time to consider and answer my question.  I realize that calling the IRS would be insane.  I have made a call to an accountant and left a message for him to call me when he gets in. I am going to discuss this with him in detail as you suggested.  I did consider that my brother may not have to pay any gains on his share as it was his primary residence and he is entitled to up to $250K in profit from the sale of his home. Is that right?  I am going to go to the link to your site you mentioned and read it carefully.  (But does it matter that the new home is in just my sister and my name?  We decided that although it is for him to live in until he dies, it was just too difficult to get his name on it and stuff due to his limitations. In other words, does the money he gets from the sale of his primary residence HAVE to go into the purchase of a new primary res.?) My sister and I did alternately claim the rental income and therefore did depreciate it - as you mentioned. However, we also did put quite a bit of capital improvements into the house and have every receipt for the entire 17 years. I really do not know how to figure out the cost basis of the old house though. We did not have it appraised in 1988 and the property taxes were probably based on it's worth being about $100K. (I wasn't about to question that at the time.) Perhaps insurance records showing what we insured it for (for replacement value???) -- but that probably was not too much either. Trying to figure out fair market value for a property 17 years ago may be a bit tough.  Perhaps there were sales in the area that I can research. As I said, the house has been demolished so it may be hard to prove that it was worth more or less than houses in the area.

 

I wish I had contacted you before we did all of this (or someone who is an expert in this) --- hopefully, the accountant I have contacted will have some kind of creative thoughts on the best way to do this without losing our shirts. If you come up with any alternative thoughts, please pass them along!  I have only tried to do what is best for my handicapped brother and I feel like we are going to get screwed royally by the IRS.  Not to mention, my sister will probably never talk to me again if I hit her up with a large tax bill due to my stupidity!

Thanks again,

A-2:

If you read the info on home sales, you will note that requirement to reinvest into a new home was repealed in May 1997; so it makes no difference whether your brother ever buys a new home in his own name.

I am confused on your cost basis issue.  If you have been claiming depreciation, you must have already set up your cost basis of the home on your depreciation schedules, which have been attached to your 1040s.  You will probably be stuck with that figure; but your personal professional tax advisor will be able to see if that's the case.

Good luck.

Kerry Kerstetter

Q-3:

Dear Kerry - I met with my accountant yesterday and you were correct -- the fact that my brother was one of the owners and resided there for more than 2 years (17, actually) allows him to declare the $250K w/o having to purchase another primary residence.  Also, the depreciation (about $43,000 over the 17 years) will come off of the original cost basis.  But, I have found some like-properties from the local tax office from 1988 and have 5 comps to the house we sold that bring the total to just about $250K  (Fair Market Value in 1988, less depreciation, plus capital improvements over 17 years, which I have ALL receipts for) -- therefore, my Accountant will file a return for my brother claiming the sale of the property and we should be ok. (He did say keep everything for 3 years just in case it comes back to haunt us.) He also agreed with you in that trying to do a Reverse 1033 now is a huge mistake and will only raise BIG red flags with the IRS.

 

This is all so good to know as my husband and I are in the process of selling an investment property in Fla. and buying a condo instead.  All of this info will come in very handy next month when we settle --- better late than never, huh?  Once again, thank you for your time and advice.  I will stay tuned to your site - it is very informative.

 

As a quick aside -- my husband jokes with me that even though I have an MBA (graduated with full honors too!), I am educated way beyond my intelligence -- or so he says.  This whole mess may just prove him to be right!

 

Have a great day! 

Oops - I meant 1031 not 1033, see what I mean?

A-3:

I'm glad to see that you've found competent professional tax help.

The one piece of your puzzle that still confuses me is how you were able to claim depreciation for all of these years without establishing your inherited cost basis on the first 1040 where you showed it as rental property.  If you are now going to change that figure, your tax preparer will need to attach an explanation to the 1040 as to why you have been using the wrong cost basis for so many years.

Taxes are a very specialized and complicated area.  Having an MBA or even a CPA doesn't make anyone an expert.  There is no substitute for real life experience working on tax returns and with their related issues, including audits.

Good luck.

Kerry

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/01/2006 01:54:00 PM Send this post:

There Is No 'Number' That Guarantees a Secure Future – Fox News review of Lee Eisenberg’s retirement planning guide.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/01/2006 01:39:00 PM Send this post: