Valuing a Business Is a Tricky Calculation – An extreme understatement.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/31/2006 12:13:00 PM Send this post:

Q-1:

Subject: Quicken question

 

Dear Mr. Kerstetter,

 

My husband and I really appreciate your website and the wealth of information you provide.  We are trying to settle into a more organized way of handling our rental properties, personal expenses, and misc assets/liabilities and are wondering if we could pick your brain on the following issue.

 

We are trying to figure out if we can use Quicken in conjunction with another software package called Neat Receipts.

 

We’d like to export data (payee, category, charge/payment) from Neat Receipts in a QIF format and import that data into Quicken.  Specifically, we’d like to import that data into the “Register” area of our Credit Card Account, then, have Quicken download transactions directly from the credit card institution and perform “matching” in order to rid the account of any duplicates.

 

We’ve figured out that we cannot import the QIF directly into the credit card account in Quicken.  We created a regular cash flow account as a “placeholder”  where we can import the QIF and cut/paste the data into the credit card account.  What we’re not sure how to do is “ask” Quicken to perform the matching.

 

Do you have any suggestions on how (or if) this can be done???

 

We would be happy to pay you for your time if that is appropriate.

 

Thank you,

A-1:

As I've mentioned a number of times recently, I am no longer using Quicken and have focused all of our clients on QuickBooks; so I can't help you with your Quicken specific issue.

I checked out the website for that product and saw that the company claims to be able to export scanned data to QuickBooks, as well as Quicken.

I have always been a gadget nut and was intrigued by that product; so I read a lot of the info on the website and even watched the Martha Stewart demo video.  Unfortunately, I'm not seeing how using it will save any data entry time in either QB or Quicken.  Entering checks and credit card charges directly into either program would take much less time to do than the scanning in and/or downloading scenario, especially under your cut & paste strategy.  Both programs are very smart in terms of recalling previous transactions and prompting the correct entries after just typing in a few letters in the payee's name; so data entry isn't as time consuming as many people believe.

Good luck.  I'm sorry I couldn't be more help.

Kerry Kerstetter

Q-2:

I would not be opposed to using Quickbooks, if it will do the task I'm trying to accomplish. 

 

The main reason we would like to use Neat Receipts in combination with Quickbooks/Quicken/Micro Money, is for the receipt image "storage."  The key receipts we deal with for rental properties, home construction/improvements, and big ticket items (for warranty issues) can be easily searched/found without having to riffle through shoe boxes of paper. 

 

Would Quickbooks have the capability to import data from Neat Receipts into the credit card account register and look for duplicates or "match" what is downloaded from the credit card company? 

 

Thank you for you're time.

A-2:

I don't know if QuickBooks can import that data efficiently or not.   You may want to post that question on one of the QB discussion boards to see if anyone will share their real-life experiences with you.

I have links to some good discussion groups on my website.
 
Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/30/2006 07:53:00 PM Send this post:

Q:

My Mother is wondering if she buys things for our farm or pays bills for our farm are there ways she can get tax breaks.  The money that she has from when my grandmother passed away...I don't know alot about it.  I just know Momma said the only reason she didn't have to pay taxes this year was because my grandmother had paid ahead.  She is wanting to help us some but she needs the breaks.

 

Also, when we incorporate is there a way she can benefit from that?

A:

These are the kinds of things she really needs to be discussing with her own personal professional tax advisor.

Most kinds of inheritances are tax free for the heirs.  Investment income earned on those assets after she owns them are taxable.

Basically, tax deductions are only allowed if there is a profit motive behind them.  She can't just pay for your expenses and deduct them unless there is some expectation of income from that operation.  One possible scenario that could allow deductions would be if she were to buy some pieces of farm equipment and lease them to you.  She could potentially deduct up to $108,000 of the cost in the first year; but there would have to be some lease income showing on her 1040 to justify it.  Her tax advisor can give her more specifics.

In regard to working with your corporation, there aren't as many tax savings for a non-owner as for the owners.  However, if you were to set her up as an employee of your corp, and have a corp medical reimbursement  plan available for all employees, the corp could pay for all of her medical costs and she wouldn't have to report any of that as income.  Again, her personal tax advisor can give her more specific advice, including whether it would be even better for her to set up her own corporation.

Good luck.  I hope this helps.

Kerry

Follow-Up:

Thanks and I am sorry to keep bugging you with questions.  She doesn't have a tax advisor and that is the problem!!!  I am encouraging her to do something.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/30/2006 07:43:00 PM Send this post:

Health Insurance Covering S Corporation Shareholders – Interesting clarification from IRS. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/30/2006 02:49:00 PM Send this post:

From a Texas CPA:

Subject: GOOD DEEDS

 

re: LIFE-LEAGUE LADY...

 

JEEZ... I HOPE THIS LADY IS NEVER MY HOSPITAL CARETAKER.

AND NOW I KNOW WHAT THEY MEAN WHEN THEY SAY...

"NO GOOD DEED GOES UNPUNISHED".

 

PEACE.

My Reply:

That was pretty much the exact same reaction my wife and I had to that email.  It doesn't instill a lot of confidence in the quality of care from a hospital that would have someone so obviously mentally unstable on their staff.

Thanks for writing.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/28/2006 06:37:00 PM Send this post:

That’s all I can think of after the final response from this woman, who I’m sure would love to hear from other readers.  As always, these are unedited, copied and pasted, from our actual emails.  I’m sure her employers at the local hospital are so proud of her for the way in which she represents their attitude towards people.

Q-1:

From: "Life League" <lifeleague@lifeleague.com>

Subject: Tax question

I was wondering if you could answer a very basic tax question for me.

If myself and a partner were to setup an LLC, and have it organized as an S Corp with the IRS, and then we were to for example receive a payment of $100,000.00 to the LLC.

 

What would be the best way for myself and my partner to split the $100,000.00 generated by the LLC with the minimum tax burden on us personally?

Would the LLC be taxed as an S corp and then could we as members of the LLC take some sort of distribution from the LLC that would not be considered personal income?

Or would it be best to take the money out and then just pay standard IRS Personal income tax on the money?

 

Thanks much.

 

Liz

Life League

A-1:

Liz:

You absolutely must be working directly with a professional tax advisor to set this kind of thing up.  You are heading for major problems if you go any further without such assistance.

You need to cover with your professional tax advisor how the various types of entitles are taxed because it is obvious that you haven't any idea how it works.  For example, if you elect to have your LLC treated as an S corp, that means that  you agree to have all of the LLC's income pass through to your 1040s regardless of how much money you take out of the LLC.

Good luck.

Kerry Kerstetter

Q-2:

So if the S Corp LLC made $100,000.00 and as you say, that means we agree to have all the funds flow through to our 1040's, would each partner be responsible for 50% of the $100,000.00?? (Provided that the partners are 50/50 partners in the LLC that is.

 

Thanks much.

 

Liz

A-2:

Basically, that's how it works.  Any business expenses are deducted and the net profit flows to your and your partner's 1040s via the K-1 forms.  How much actual cash you each receive personally will have no bearing on the taxability to each of you. 

You need to be working directly with a tax pro and not relying on advice you find from strangers on the internet.

Good luck.

Kerry Kerstetter

Follow-Up:

From: "Life League" lifeleague@lifeleague.com

Subject: Thanks so much for all your help.....

Your unprofessional condescending comments are appreciated and well noted!!!

And I quote: "You need to be working directly with a tax pro and not relying on advice you find from strangers on the internet".

And yet again from your previous email: "....because it is obvious that you haven't any idea how it works"

How do you know I am not a local resident of AR near Harrison and looking for a tax professional and just testing the waters to see what you in fact do and do not know? You can be sure I will NOT be calling you for one of your "seminars" after all of your little rude comments you unprofessional prick.

And good luck selling your hilarious "K.M.K. Ranch" property for a MILLION DOLLARS!!! And you think I need a tax professional? Maybe you should do some research, asswipe, because you are in serious need of a real estate agent or a pscharitrist for asking one million dollars for that broken down shithole regardless of the acreage size!!!! Its ALMOST as funny as asking $4950 for a 1978 truck that blue books at less than $1000!!!!

Maybe try not to be such a prick next time and maybe you would not receive responses like this....It does not make you very happy, does it?  And FYI...I am employed by the North Arkansas Regional Medical Center on North Willow here in Harrison, and will be sure to advise all of my friends, family and anyone at KHOZ that will listen to me about how unprofessional and rude you have been.

Oh, one last thing..you are now blocked from this email account...so please....Get a life, moron!! Or should I say, Get a life "GURU".....

Love and kisses!

Liz

My Reply, which I cc’d to her hospital:

To: "Life League" <lifeleague@lifeleague.com>

Subject: Re: Thanks so much for all your help.....

Cc: pr@narmc.com

 

Liz:

I'm sorry that you don't appreciate the value of FREE advice and can't grasp the concept that you need to be working directly with a tax professional whom you pay for advice.

I'm sure your employers at NARMC are so very proud of the way in which you represent the professionalism of the hospital.  YOUR attitude says a lot about that aspect of the hospital's feelings towards people.

It also sounds as if you don't have enough work to do there at the hospital if you have time to nit-pick so many items that have nothing to do with you.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/27/2006 03:32:00 PM Send this post:

Working around the new kiddie tax – Need to modify strategies for shifting investment income to kids.  This is all part of the never ending tax game.  Our imperial rulers change the rules and we adapt accordingly. 

AARP returns to the mutual fund business – Just pointing out what hypocrites the AARP leaders are.  As pointed out frequently at the Social Security Choice website, AARP fought hard against the idea of allowing people to own and invest their own retirement funds under the premise that the stock market is too dangerous a place to put money, while at the very same time AARP has been earning huge commissions from selling the exact same kinds of investments.  This kind of attitude is one of the main reasons we refused to renew our AARP membership a few years ago.

Tax Advantage Is Driving Deal To Buy Braves – We need to look more into how we can help our small corporate clients use this “cash-rich split-off” technique to avoid taxes on cash deals.

If You've Got a Tax Refund, You're Crazy – Good tips from Gail Buckner on how to adjust your W-4 to avoid giving the government an interest free loan.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/27/2006 01:06:00 PM Send this post:

John J. Miller at National Review has a interesting list of his top 50 conservative rock songs.  Two of those songs are especially appropriate for posting here.

#2. “Taxman,” by The Beatles. 
A George Harrison masterpiece with a famous guitar riff (which was actually played by Paul McCartney): “If you drive a car, I’ll tax the street / If you try to sit, I’ll tax your seat / If you get too cold, I’ll tax the heat / If you take a walk, I’ll tax your feet.” The song closes with a humorous jab at death taxes: “Now my advice for those who die / Declare the pennies on your eyes.”

#45. “Taxman, Mr. Thief,” by Cheap Trick.  
An anti-tax protest song: “You work hard, you went hungry / Now the taxman is out to get you. . . . He hates you, he loves money.” 

Update: While I have posted dozens of versions of the very familiar George Harrison song over the years, the Cheap Trick song was new to me; so I found this copy on the web and uploaded it.  The lyrics are a bit hard to make out, so I found these on the web as well.

Taxman, Mr. Thief Lyrics

You work hard, you make money
There ain't no on in the world who can stop you
You work hard, you went hungry
Now the taxman is out to get you
You worked hard
And slaved and slaved for years
Break your back sweat a lot
Well, it's just not fair
He hates you, he loves money
And he'll steal your shit and think that it's funny
Like the Beatles, even Dylan
Now the taxman is out to get you
You worked hard
And slaved and slaved for years
You played
And you played and played for years
Taxman, Mr. Heath (he's a thief)
He's looking for run-in, yeah
Taxman, Mr. Heath (he's a thief)
He's looking for run-in, yeah
You work hard, you make money
There ain't no on in the world who can stop you
You work hard, you went hungry
Now the taxman is out to get you
You worked hard
And slaved and slaved for years
Break your back sweat a lot
Well, it's just not fair
Taxman, Mr. Heath (he's a thief)
He's looking for run-in, yeah
Taxman, Mr. Heath (he's a thief)
He's looking for run-in, yeah

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/26/2006 07:16:00 PM Send this post:

Creative Like-Kind Exchanges – From Practical Accountant magazine.

A new hip-hop version of George Harrison’s classic TaxMan song by that out of control crazy tax and spend lunatic, New Jersey Governor Corzine.  

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/25/2006 06:39:00 PM Send this post:

Confirmation of New FEMA Director Hits Snag Over "Questionable" Personal Deductions – Those hypocritical imbeciles in DC are at it again. The very idea of Congress Critters (CC) auditing and passing judgment on income tax returns is just one more example of how the inmates are running the asylum in this country. They seem to care more about a non-CC’s travel expense deductions than the proper handling of congressional bribe money stored in freezers.

The fact that most of our elected rulers don’t have to pay their own travel expenses because lobbyists pony up for those costs is just one more illustration of how out of touch our royal leaders are and how badly we need a thorough house-cleaning, as in kick all of the bums out this November.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/25/2006 03:23:00 PM Send this post:

Q-1:

The barn I am depreciating is a specialized barn to be used for horses only. I've read somewhere that it could be all deducted in one year if that is so. Could the barn be written off against the yearly 100,000$ deduction for equipment or specialized barn in this case? Thanks.

A-1:

The Section 179 expensing election absolutely does not apply to barns or other buildings that have multiple uses.

I hope this clears up any confusion you have.

Kerry

Q-2:

Kerry, the 179 expensing thing, The barn was constructed for horses with horse stalls, horse bath, tack room and birthing room. Since it can only be used for horse , I thought it could all be expensed in one year. Did I miss something? Thanks.

A-2:

I have no idea who told you that a barn could be expensed in the first year.  That has never been possible.  I have prepared hundreds of tax returns with barns over the years, and would have known if they could be expensed.

So that you know this isn't just my personal opinion, I have just faxed you copies of two pages from my QuickFinder Depreciation reference book, where it lists what types of property qualify for Section 179 and which don't.  You will note that Barns is second on the list of types of property that DO NOT Qualify for Section 179 expensing.

Kerry

Q-3:

Kerry, I'm sorry. The info I had was that a specialized building such as a barn could be expensed in 5 YEARS.  Sorry 'bout that. Is that correct? Thanks.

A-3:

I have never hear of using such a short depreciation life.

I just checked my QuickFinder Depreciation reference book and it shows barns being depreciated using lives of from 15 to 25 years.  No mention of 5 years.

Is your new tax accountant suggesting these crazy things, or is it you coming up with them?  You may want to let him look it over and make any changes you want before mailing it in.

Kerry

Follow-Up:

No, I heard it from the people I bought the prefab barn from. Thanks.

My Reply:

That's a perfect example of why it's dangerous to believe tax advice from someone who will say anything in order to make a sale.  I constantly hear stories of big tax breaks being promised by car, boat and RV salespeople that turn out to be completely bogus.  Whether the salesperson intentionally lied or actually believed the information to be correct is irrelevant because the consequences are exactly the same. 

The smart thing to do when a salesperson makes such a claim is to verify its accuracy with an actual tax pro before making the purchase because it will be too late to do anything about it later.   Salespeople can't and won't stand behind their tax advice and you have no recourse when their tax claims evaporate.

Kerry

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/24/2006 12:09:00 PM Send this post:

Local Doctor Found Guilty of Tax Evasion – This idiot from our area hoped to convince the jury that just because he believed taxes were voluntary, he had no intent to defraud the government and should be found innocent of the 25 criminal charges he was facing.  The jury obviously was smarter than the doctor and didn’t agree with his ludicrous line of reasoning. 
Update – Other Arkansas Coverage:
      Arkansas Democrat Gazette
      Harrison Daily Times

Florida Snowbirds Question Fairness of Property Tax – Taxation without representation is growing in popularity with local government officials.  Just as they love to hit tourists with huge taxes on travel and lodging costs, nailing property owners who can’t vote with higher property taxes than on voters is another underhanded tactic that they have no qualms about using in their insatiable thirst for tax dollars.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/23/2006 06:39:00 PM Send this post:

From a reader:

Subject: 2006 Tax Law

 

Thanks for a link to the new tax law. The following item was a shock:

New law, IRC §6049(b)(2): Effective for interest paid after December 31, 2005, the payment of tax exempt municipal bond interest of $10 or more must be reported to the recipient and the IRS on a 1099.

Good grief; the noose tightens [retroactive to the January 1, 2006 coupon payments] for items which are not taxable. I wonder which of our masters sneaked in that provision.

My reply:

One of the many insane aspects to how our rulers draft tax laws is the fact that despite constant real world proof that lower tax rates result in higher overall revenues, they persist in using static analysis numbers that assume lower rates will lower revenues. 

There is also a rule that, whenever possible, any new tax law has to be revenue neutral. This send those financial geniuses scrambling all around for any little bit of new revenue they can find to offset the expected costs.  This often ends up with assorted provisions to plug up suspected "tax leaks."  This new law has a good assortment of those, especially the expansion of the Kiddie Tax to cover children under 18 instead of just 14.

I haven't read all of the background info on this new tax law; but I tried to think of the potential revenue justification for the new muni interest reporting rule.  If you look at the worksheet for computing taxable Social Security benefits, tax exempt interest income is added in to the calculation of gross income to see if the individuals qualify as evil rich and subject to the tax.  Our rulers' staff flunkies probably figured being able to match up 1099s for this income will generate a few million dollars in new revenue by catching evil rich senior citizens who fail to pay enough tax on their SS benefits.

Thanks for writing.

Kerry Kerstetter

Follow-up:

Thanks for your swift & incisive reply.

When those "staff flunkies probably figured being able to match up 1099s" they probably over looked the accrued interest paid on purchase that is paid buy the buyer to the seller which is going to put the 1099s out of balance OR is the IRS going to start requiring non-issuer sellers to report accrued interest received & buyers to report accrued interest paid? I buy munis 6 times a year & usually have to pay some accrued interest to the seller, so there are potentially 6 items that  won't agree with the 1099s sent to the IRS.

Next up for the IRS? They will require all buyers of securities to report their purchases in detail, sort of an anticipatory Schedule D.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/22/2006 11:45:00 AM Send this post:

The folks at The TaxBook have just released a very handy summary of the recently signed tax legislation.  In spite of its actual name, I will continue to refer to it as the 2006 Tax Law. 

This temporary legislation is just another example of the incompetence of our rulers in actually tackling substantive tax reform.  How can we ever expect anything resembling tax simplification from those Bozos in DC, when a law that is passed and signed in 2006, and is effective as of 2006 is given the name 2005? 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/20/2006 06:26:00 PM Send this post:

Save Money by Researching The Tax Climate Before Moving – And you need to factor in all of the types of taxes.  States with no income tax normally make it up through higher sales and property taxes.

Pensions Still Work Well For Some Businesses – Especially for small businesses with no other employees to cover.

Get a Head Start In Planning a Hand-off – Succession planning for family businesses is always important and one of the many areas that offer plenty of opportunities for tax practitioners to assist their clients.

Religious Groups Seek Faith-Based Profits – They need to be very careful of violating IRS rules that could jeopardize their tax exempt status.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/19/2006 12:25:00 PM Send this post:

I generally don’t comment on items in the DemonRats’ official propaganda publication, which has less credibility in regard to accuracy than the National Enquirer; but I couldn’t resist this item that Ohio CPA Dana Stahl passed along:

Subject: NYTimes on the new Roth IRS provisions

 

Mr Guru - more of the same BS from the NY(Commie)Times.

DS

My reply:

Dana:

While they are true to their nature in attacking another "Bush bonanza for the evil rich," it's based on the ridiculous assumption that the tax free status of Roths will remain intact decades from now.

As I've written several times, I have never trusted our imperial rulers in Congress to be able to keep their hands off of that provision long enough to advise clients to pay real taxes today on IRA conversions in anticipation of tax free benefits later down the road.  Congress royally screwed Social Security recipients by breaking this exact same kind of promise, and they will have no qualms about doing the same thing to "evil rich" owners of Roth IRA accounts. 

Since they have already defined "evil rich" to be any single person with more than $25,000 of annual income, or married couple with over $32,000 of annual income, for Social Security purposes, to feel that they won't nail just about everybody is very naive thinking.

However, the Times couldn't make their point about Bush only caring about rich folks if they were to mention that these same rich folks are almost certainly going to get screwed over when their tax free income promise is revoked.

Kerry

Dana wrote back:

Mr Guru - amen to that, bro'.  I've advised any of my clients who want to convert over to or start a Roth IRA not to trust that the withdrawals will be tax free years down the road, citing Social Security as an example, as you just did, that government promises are, like Lenin once said, "pie crusts made to be broken".  It seems that most people would be better off to set up a regular IRA and take immediate deduction, so at least they get something out of it.

DS

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/18/2006 09:17:00 PM Send this post:

I received the following from a Texas CPA in response to my earlier post on helping a friend (caps were his):

Subject: MONEY LAUNDERING

 

HI KERRY, [RE: BELOW]

 

I USUALLY CONCUR WITH YOUR ANSWERS AT LEAST 90-95%, BUT THIS QUESTIONS CONJURED UP VISIONS OF MONEY-LAUNDERING IN MY MIND.  ESPECIALLY IF THEY WANT TO PAY IN CASH, AND GET BACK A CHECK, OR CREDIT FOR SOME THING THEY WERE GOING TO PAY LATER ANYWAY.  BESIDES, IT JUST SOUNDS TOO GOOD TO BE TRUE. [AND WE KNOW WHAT THAT MEANS].

 

HAVE A GOOD ONE.

My Reply:

You're correct that this was intended to be a form of money laundering. 

However, I felt what was more important for my client to understand was the real underlying substance and motivation for the transaction his friend was proposing.  That was obviously to mislead the leasing company and obtain cash under false pretenses, which would have implicated my client even though he wasn't going to be keeping more than a small fraction of the money. 

Luckily, he took my advice and turned this deal down.  He didn't say how well his friend accepted that decision.

Thanks for writing.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/18/2006 09:07:00 PM Send this post:

Q:

Subject: Quick Question

 

Hello,

 

I have a quick question, a friend and I were talking and he works for a large auto dealer, he is interested buying a Lincoln Navigator from his dealer because he said he can use it as a rolling bill board and write it off under section 179. I have friends that do use their suv to take clients to homes and show real estate but would my friend qualify for section 179 working at the Dealer and using it as a "rolling bill board"?

A:

Your friend should be discussing matters such as this with his own personal professional tax advisor rather than relying on second hand advice from strangers on the internet.

I'm sure your friend's personal tax advisor will  answer this question in the same manner as I have in the number of times I have addressed this exact same issue in postings on my blog. 

Business deductions for a vehicle, including Section 179, are purely based on the business usage, which is measured by business miles driven as a percentage of total miles driven for the year.  What is painted on the vehicle is completely irrelevant. 

Another thing your friend will discover from his personal tax advisor is that, as an employee of the auto dealer, his miles back and forth between his home and the dealership count as personal non-deductible commuting miles, which will lower his business use percentage for the vehicle.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/16/2006 08:36:00 PM Send this post:

Q:

Subject: Question on lease/credit transaction

 

Kerry,

 

A friend of mine has asked me to run some lease/credit transaction through my company. I'm a bit hesitant as I don't know if there are any potential issues (tax and/or legal) with it. Could you let me know what you think about it?

 

Here are the details from this friend's mail:

 

----------------------

Basically, our company has a lease credit line of like an additional 90K. We need the cash to pay for current expense as behind a bit on cashflow in expansion. We’ve used the lease credit before for all kinds of product/services purchases.

 So, what I’d like to do is get a software product/services Invoice from you for 80K. The leasing company will pay you 80K. Then you can issue us a credit back of 75K, that will be paid to you company anyway for normal development services over the course of few years. I need to discuss this with you quickly, as it will take a few weeks to get this finished. On your books it will look like 80K income for product/services and a credit or expense of 75K out.

 -----------------------

 thanks

A:

From an income tax perspective, there would be no problem with this transaction, as long as you report the full $80,000 received as income and then the $75,000 paid out as an expense.

From the perspective of legality, it sounds like a completely different story.  I'm not an attorney, but there are aspects to this that smell very bad to me.

What could potentially be a problem is with the leasing company.  This sounds suspiciously like a fraud against them.  You should contact that company before submitting an invoice because I am guessing that they are either planning on using the product you are selling as collateral for a loan or as an actual purchase by them to be leased to your friend.  If they were to find out that no such product exists,  they could sue you, or file criminal charges against you, for theft.

It would be like selling someone an item and not delivering it after being paid for it.  It may be possible that future consulting services would be acceptable to the leasing company, but that is not very likely.  I would be amazed if it was acceptable.  They generally prefer to work with tangible assets that could be re-possessed and resold or re-leased.

It's obviously your call; but unless you can get assurance from the leasing company that there is no problem with your submitting an invoice for future work to be done, I would stay away from this.  Although your friend is instigating this, the leasing company would have very strong grounds for legal and criminal action against you for the full $80,000 because you are the one they are paying that to.  The fact that you are only keeping $5,000 of that money won't do you a bit of good in this kind of case. 

The final decision is yours; but I hope this helps you make a safe and rational decision.

Good luck.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/16/2006 08:31:00 PM Send this post:

Q:

Subject: Estate Tax

 

My mother is selling her home of 20 years and moving closer to us. My father died 10 years ago. Does she qualify for up $500k estate tax exemption or is she only qualified for the $250k? Her home is on the market for $400k.

 

Thanks

A:

This is the kind of thing your mother should be discussing with her personal professional tax advisor rather than relying on second hand advice from strangers on the internet.

What you are referring to is income tax not estate tax.

Assuming your mother is single, she would be entitled to a possible maximum exclusion of $250,000 of profit from the sale of her home.

Your father's share of the profit was already wiped out when he passed away.  When a person dies, his heirs receive the property at its stepped up fair market value (FMV) as of the date of death (DOD), effectively cancelling out the accrued profit. 

In your mother's case, she would have inherited half of the home from your father.  You didn't say where she lives.  If she lives in one of the nine community property states, the cost basis for the full home was stepped up to its FMV at the DOD, and her gain will only be based on the appreciation since then.  If she lives in a non-community property state, the cost basis of her original half remains the same as before your father's passing; but the cost basis of the half she inherited is stepped up. 

She really needs to work with a qualified tax professional to calculate her cost basis in the home, which will take into account the FMV as of your father's death. as well as the cost of any improvements to the property she has paid for since then.  When her tax pro figures her adjusted cost basis and deducts that, plus selling costs, from the $400,000 sale price, I am betting that the net profit will be well below the $250,000 threshold, making all of it tax free for her.

I hope this helps.

Kerry Kerstetter  

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/11/2006 06:43:00 PM Send this post:

Q:

Subject: S Corps & Rentals

Kerry

 

    I read with interest the e mail about short term housing being a Sch C business. I currently have plans to turn

a vacation home into a short term rental. I approached my tax guy about this problem and he said I could

include the rental in my already existing S Corp (retail) and file Form 8825 on the rental income thus avoiding FICA.

I receive a hefty pay check from the corporation. Can this dual purpose exist in a single corporation?

 

    Later I got to thinking about the liability issue. Wouldn't the corporation have to own the rental property? On the other hand,

my original corporation operates out of my home. Is my home at risk because the business operates out of it? My tax person

didn't seem sure on these points. What's the best setup?

 

    Thanks  

A:

I can't possibly know enough about your unique circumstances to advise a specific course of action.

However, you mentioned several issues that you need to explore in more detail with your current tax pro, or one with more experience in this area.

First is the fact that a corporation can conduct more than one kind of business and is not restricted to only the original activity.  It is very common for corps to add new business ventures all the time, just as individuals do.  Your existing S corp could operate rental properties.

The issue of avoiding FICA tax only applies of there is going to be a net profit after all expenses, including depreciation.  If you've seen my comparison of C and S corps,  you know that profitable businesses can often have lower taxes via a C corp.

Depreciation can only be claimed by the actual owner of the property.  While transferring ownership of your property to a corp might sound like a good idea, the long term effect could be expensive.  Capital gains tax rates are generally higher for corporations than for individuals. 

What some people do is own the property in their own personal names, and then lease it to their corp, which in turn operates the B&B or other rental activity.  Any experienced tax pro should be able to help you with such a configuration.

There are obviously a gamut of pros and cons to every possible scenario, making an easy "one size fits all" answer impossible to find.  Make sure all of these points are covered in your discussions with your tax pros.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/10/2006 10:38:00 AM Send this post:

Q:

Subject: additional paid in capital

 

C-corp has accumilated additional paid in capital,  can this capital be taken out of the corp by shareholder? is this taxable to the shareholder or just the shareholder taking out his equity?

 

thanks

A:

This is the kind of thing you should be discussing with your personal professional tax advisor rather than relying on  advice from strangers on the internet.

Basically, any time you are repaid for your capital investment in a corp, you will need to show that on Schedule D of your 1040.  It won't necessarily be taxable because you can deduct your cost basis that you allocate to that particular payment, which is normally the exact same amount for payments taken from the Paid in Capital account.  It's not costly tax-wise, but is a big nuisance to have to report.

This is why it is generally better to keep the capital accounts as low as possible and use loans to transfer money between the corp and the owners. None of the principal payments in either direction has to be reported on your tax return, although interest payments obviously do.  This is something I learned almost 30 years ago, when I first started working on corporate tax returns, and any experienced tax pro should understand.

Your personal tax pro can give you more specific advice for our unique situation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/10/2006 10:32:00 AM Send this post:

Which is Better: Roth IRA or 401(k)? – From Gail Buckner.

Maker of Tax Software Opposes State Filing Help – And this is a surprise to whom?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/07/2006 02:22:00 PM Send this post:

Q:

Subject: How long to wait for a refund?

Dear Mr. Kerstetter,

I wonder if you could point me to a simple explanation of what happens if you think you deserve a rebate but the taxing authority thinks you've paid the right amount?

I would assume they would at least have to tell you that they disagree with your tax return.

Also, how long should it take to hear back?  I filed my taxes in the last week of March, and received my Maryland refund a couple of weeks later, but I still have not heard anything from California.

Thanks for your time.

A:

It is normal practice for IRS and State tax agencies to send taxpayers a notice if any change is made to the tax return that was filed.  The explanations often leave a lot to be desired, but there is notification of a change.

If you have heard nothing from the FTB, you may want to contact them to see if they even received your 540.  Tax returns do get lost in the mail every day.  You may need to send a replacement copy if they have no record of receiving the one you mailed in March.  You should also know that they advise to wait eight weeks after submitting a tax return before getting concerned.  They process a lot more tax returns than any other state, and thus take more time to get refund checks out.

You can call the FTB at 1-800-852-5711 or try to locate info on your taxes online via their website.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/07/2006 01:37:00 PM Send this post:

Q:

Subject: question

 

We need to help a family member track down his assets (bank accounts, CDs, etc.)  His wife had taken care of all this, and since her death several

years ago, he has lost track of important details.

 

Do you have any suggestions as to who we might hire to help us do this on his behalf?

 

Thank you,

A:

It's been a while since I mentioned Mark Colgan's excellent resource for people in your situation, his Survivor Assistance Handbook.  It is packed with tips on how to take care of matters such as tracking down a decedent's various assets. 

You can order the handbook from Mark's website. 

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for your helpful reply!!

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/05/2006 03:10:00 PM Send this post:

Q:

Subject: LLC vs S-Corp

Kerry,

You raised some interesting points to consider when choose b/t a S-corp and C-corp. I wanted know what you thought the important points to consider when choosing b/t a S-corp and a LLC taxed as a partnership (besides the fringe benefits).

Thanks again for your input.

A:

Listing all of the distinguishing factors of LLCs and S corps isn't the way to approach this.  What you and the business's other owners need to do is all meet with a qualified professional tax advisor, who should ask you a ton of questions related to the business goals, before mutually working out what would be the best entity for that particular business venture.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/05/2006 03:01:00 PM Send this post:

Q:

Subject: Exchange Question

 

Dear Tax Guru:

 

One of my clients did a 1031 exchange during 2005, and I want to make sure I'm handling the accounting for the transaction correctly.  There was a cash boot paid for the new property.  I would like to know the specifics of the needed entry for book and tax purposes.  Any guidance you can provide would be greatly appreciated. 

 

Sincerely,

A:

You generally want the books to match the 8824 for the exchange.  If your tax prep program doesn't produce detailed worksheet for exchanges, as Lacerte just started doing a few years ago, you can use a manual or computerized worksheet. 

CFS's TaxTools program has some excellent 1031 exchange worksheets that I often use to double-check the Lacerte 8824.

Several years ago, I posted a manual worksheet on TFEC's website that is also very useful.

Good luck.  I hope this helps.

Kerry Kerstetter

 

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/05/2006 02:54:00 PM Send this post:

Q:

Subject: Question for your Blog:  Adjusting W-4 Withholding Allowances

Dear Kerry,

 

For both 2004 and 2005, my wife and I, who both work, filed our federal income taxes as “Married filing jointly,” and in both years, we received over $4,000 in federal refunds.  I am assuming this is because neither of us has changed our withholding allowances on our W-4s (both of our W-4s list us as “Single” with only one allowance each).

 

When I went to the IRS "2006 Withholding Calculator" and entered all of our information, the web site directed each of us to REDUCE the number of allowances for 2006 to zero and to specify that we withhold an addition $45 from each of our paychecks.

 

I thought that if we wanted our employers to withhold LESS tax, we should INCREASE the number of allowances.  I didn’t think we would need to see a CPA for something as "simple" as this.  What is going on here?

 

Thanks in advance.

A:

You are correct that you need to increase the number of exemptions you booth need to claim on your W-4s.

Most people don't handle the itemized deduction part of the W-4 calculator and under-count the number of exemptions they are entitled to.

This is the kid of thing you should be working with a professional tax advisor on.  Nothing in the tax arena is simple enough to handle on your own.

Good luck.

Kerry Kerstetter

Follow-Up:

"Nothing in the tax arena is simple enough to handle on your own." -- I'm beginning to see that.

Thanks for your quick response and help, Kerry.  I certainly appreciate it.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/04/2006 01:40:00 PM Send this post:

Q:

Subject: Exchange Question

My wife and I own 2 homes within 55 miles of each other.

We consider one our primary, the second we are there all our free time.

With retirement coming in 8 years or less we wonder if we will be able to afford to keep both and if not is there a way one of us can change address, auto registration, voting etc. and have 2 primary residences with the hope that if we had to sell one or the other we could avoid capital gains ?

Thank you.

A:

This is the precise kind of thing that you need to be working with your own personal tax professional on.

Issues that you will need to consider when working up a strategy with your personal professional tax advisor should include the fact that no person is allowed to simultaneously have more than one primary personal residence.  You and your wife could each have one, but you would have to be ready to prove that you each lived full-time in separate homes.  Each house would also only be allowed a maximum of $250,000 tax free gain.

A more lucrative plan, depending on the size of the profits involved, would be to sell the home in which you have lived for at least two years, claim up to $500,000 of tax free profit, and then move into the second home, live there for two years, and sell it with up to $500,000 of tax free gain from its sale.

This is a overly simplistic description of the plan and will need to be fine tuned with your own personal professional tax advisor, especially in regard to any depreciation that may have been claimed on either home.

Good luck.

Kerry Kerstetter

Follow-Up:

 Thank you Kerry, I hope to get help soon as I am a "pre-retirement" person of 58 yrs old.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/04/2006 01:33:00 PM Send this post:

Q:

Subject: Tax vs. Book depreciation - quick question

 

Dear Mr. Kerstetter,

I had a quick question for you - I have looked around to try to get a definite answer to this, but to no avail yet.  I was wondering if you could help me.  Based on the S Corp tax summary outlined below, I was wondering if you would be able to tell me what the actual depreciation charged to book/financial income was by looking at this?  Thank you in advance, and I enjoy your website!  Thank you - Greg Torgerson, from Iowa

 

S Corporation Tax Return Summary:

Form 1120S

Total Income                                                     $1,266,997

Depreciation  (ln 14a)                                        $ (87,612)

Other Deductions                                              $ (1,156,919)

Ordinary Income                                               $ 22,466  (flows to Sch K, ln. 1)

 

Schedule K                                                       $  22,466

Charitable Contributions                                  $ (215)

Section 179                                                       $ (100,000)

Income                                                              $ (77,749)

 

M-1 (col. 1)

Net Income, Books                                            $ 90,770

Expenses recorded on books,

not included on Sch. K:

Depreciation      $45,928

Other                   $1,132                                    $ 47,060

                Total                                                       $ 137,830

 

M-1 (col. 2)

Deductions included on Schedule K not

Charged against Book Income (Depreciation)$ 215,579

                                                                          $ (77,749) (ties to Income Sch K) 

A:

Greg:

It has always been my policy not to answer homework questions.  I only deal with real life issues for real life people.

You should ask your professor and teaching assistant for help.  That is what they are paid the big bucks for.

Good luck.

Kerry Kerstetter  

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/02/2006 12:29:00 PM Send this post:

From a Reader:

Subject: Multiple residence sales

Dear Mr. Kerstetter,

On your blog page someone asked about selling multiple homes in less than 2 years.

You told him he could not exclude all the sales and should see about amending past filings to decide which one he would be better off having taxed and which excluded.

This is missing something though.

You referenced him to From IRS Pub 523.

If you look closely, he could qualify for a partial exclusion.  He didn't say the reasons for selling or his profits, but if he sold for one of a few certain specified reasons, he might be able to exclude a portion of the allowed limit.

You said it's part of the tax code that is not a gray area.

That doesn't mean it's free from exceptions.

I'm only aware of this because I'm in a similar circumstance, trying to time a move such that I can avoid the tax hit on the house since I sold my last house less than a year ago.

My Reply:

You are correct that some people may qualify for a pro-rated tax free exclusion for more than one home sale within two years, if it was caused by unforeseen circumstances.  I have covered dozens of such examples in postings over the past few years.

I didn't mention it with this person because he didn't claim to have any such special circumstances and was actually claiming to never have known about the two year rule at all.  I posted it as an example of how slowly details of tax laws spread, even after being around for almost nine years.

Thanks for writing.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/02/2006 12:22:00 PM Send this post:

Who's opposed to free tax help? – The old saying, “you get what you pay for” isn’t strong enough for people crazy enough to allow the PRC’s Franchise Tax Board to prepare their income tax returns.  Another appropriate issue is “conflict of interest.” As the most aggressive tax agency in the country, how can anyone trust the FTB to help people minimize their taxes?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 5/01/2006 09:47:00 PM Send this post: