I just finished listening to this seven and a half minute long MP3 podcast from QuickBooks on the importance of  small business owners working with a professional accountant from day one, as well as some good tips on selecting the right one to work with. 

I am going to add a link to this podcast on my page dealing with selecting a tax advisor.

List of all QuickBooks small business podcasts. 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2007 11:23:00 PM Send this post:

The bane of all tax prep offices, the shoebox clients.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2007 10:58:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2007 07:58:00 PM Send this post:

Q:

Subject: Nickel Creek "Taxman"

 Hello Sir,

   Though I have never met you I have a tiny favor to ask of you. My dad saw an episode of "Austin City Limits" where Nickel Creek covered the song Taxman, and he loved it. That was back in 2002 and he has searched for a copy of it ever since, only to find nothing. However, I recently stumbled into your post and actually gasped in amazement, after five years of searching I finally found a copy. It couldn't have come at a better time since my dad's birthday is coming up. So I ask of you sir, please, please, please could you send me a copy of that song?

Thank you for your time,

   ( I am only 14 so please disregard any non formal mistakes in my letter. )

A:

That blog post includes a link to download the mp3 file of the song.

If you do search on my blog, you will find dozens of other versions of the TaxMan song by several other artists, with links for downloading.

I hope this helps you prepare for your dad's birthday.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 11:09:00 PM Send this post:

Q:

Subject: Quicken versus Quick Books

 

KMK:

 

I liked your comparison of Quicken vs QB on the webpage http://www.taxguru.org/qb/qbvsquicken.htm as I am considering that exact question now for a non-profit (daycare) company.  I have been doing books for a church on Quicken for a number of years and have found it satisfactory but I admit that I may not know what I'm missing.

 

I have a question about QB that maybe you can answer for me.  Can QB exchange files with an earlier edition of QB?  I know that the 2002 version of Quicken that I am available with will not do a "Save to an earlier version of Quicken."

 

Thanks for your time,

A:

QB data files have always been the same as Quicken's.  You can roll them forward to a newer version of the program, but can't roll them backwards to an older version.  Thus, you need to be careful of upgrading data files, because you can't go back after you've moved forward.

I hope this helps.

Good luck.

Kerry Kerstetter

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 10:55:00 PM Send this post:

Q:

Subject: Suggestion

Hi there,

 

I have a site suggestion for your tax blog.  I'm currently promoting my "AMT" article. If you'd like to exchange links I'll be happy to add your link to my resource page.   I'm sure this will prove beneficial for both of us considering traffic, etc.

 

Thank you much,

Robert Valentine

A:

Robert:

Thanks for sharing your article on the AMT.  If you've read my blog, you should know that this insane tax is one of my top pet peeves and I appreciate any effort such as yours to further educate people on its stupidity.  The fact that its thresholds aren't adjusted annually for inflation like most other tax items, is just one indication of how far removed it is from reality and how incompetent our rulers in DC are at addressing this problem. 

I will be posting this on my blog, which should generate more visits to your site.

Thanks again for writing.

Kerry Kerstetter

Follow-Up:

Thanks, Kerry. I couldn't agree more...If you'd like to write back with your linking info i.e. desired title, description and linking URL. I'll be more than happy to link to your great resource. Hopefully I can give you some traffic as well.

 

Thanks again,

Rob

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 10:46:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 10:30:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2007 05:04:00 PM Send this post:

Q:

Subject: Money for Car

 

Kerry, We have a grandson turning 16 next month and we want to help him get a car. Is there any way to give his Dad the money we want to spend and get a tax deduction? We do not want any ownership in the car but we have committed to help our son with the purchase of this car. We plan to give $12,000.00 as a gift to make this happen. I believe you told me at one time the limit was $10,000.00. If I have my facts correct we would have to make two gifts, one to our son and the other to his wife. If I have made myself clear please reply if not maybe we should talk.

Thanks for your help,

A:

It must have been a while since we last discussed the tax rules regarding gifting because the annual tax free limit hasn't been $10,000 for several years now.  It was increased to $11,000 a number of years ago, and is now at $12,000.

I have some basic info on Gift Taxes on my website.  

Basically, you and your wife can each gift your son, grandson, or anyone, up to $12,000 during each calendar year without having to file any gift tax returns or use up any of your one million dollar per person lifetime gifting exclusion. 

However, the way gifts work for income tax purposes is that they are not considered taxable income to the recipient, nor are they deductible by the giver on his/her income tax return.  In taxes, there has to be a sort of balance between deductions and income.  In other words, the only way for you to claim an income tax deduction would be for your grandson to claim the same amount as taxable income.  If the recipient isn't willing to pick it up as taxable income, the giver can't claim an income tax deduction.

The Gift Tax is actually part of the Estate (aka Inheritance, aka Death) Tax system because one of its main benefits is to reduce the size of a person's estate, ideally bringing it down below the tax free threshold.

One other clarification of a common misconception surrounding gifts of this nature.  They can only come from humans and be given to humans. Corporations and other artificial entities are not subject to estate or gift taxes, so they can't make the kind of large gifts you are contemplating.  Thus, any gifts would have to be made from your personal accounts and not out of your corporation.

I hope this isn't too confusing.  Let us know if you would like to set up a phone appointment to discuss this in more detail or explore other options.

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2007 11:49:00 AM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/28/2007 11:05:00 PM Send this post:

A Taxing Time for the Bush Legacy
“Does he really want to be the second Bush to have his name associated with general tax increases on the American people?”

 Double Whammy: the Taxation of Social Security Benefits – One of the Clinton-Gore team’s proudest moments, retroactively raising the taxes on seasoned citizens.  Remember that the original promise under Social Security was that all of the benefits would be completely tax free.  Any similar tax free promise (Roth IRAs, for example) should be considered just as reliable

DemonRats Bringing Back 'Death Tax' – That headline says it all.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/28/2007 03:58:00 PM Send this post:

Q:

Subject: Regarding your article

 

Mr. Kerstetter,

 

I realize you must be extremely busy, and I hope to take as little of your time as possible.  Thank you in advance for whatever small amount of time you may have to share with me.

 

Regarding your article (http://taxguru.org/corps/scorp.htm), I wonder if you might point me to more information on the following section:

“Double Taxation

The biggest fear of c-corporations has to do with double taxation, where after-tax earnings are distributed to shareholders as non-deductible dividends. This is rarely a problem with small corporations because there are plenty of ways to pull money out of the corp in a manner that is deductible, and thus only taxed once.

    Compensation - wages or consulting income
    Interest Payments
    Lease Payments
    Royalty Payments
    Contributions to Retirement Accounts”

Specifically, I’m looking for background on the following questions:

1)     What size corporation is a “small” one?

2)     Are wages and consulting income treated differently?

3)     Are there interest, lease, and/or royalty payments that may be payable to the owners of a corporation so as to avoid the double taxation?

Any information/direction you can provide in these areas will be greatly appreciated; I’m willing to do the research, but I don’t know where to look.

Thanks once again for your time!

A:

You can find a lot of info on these subjects in the QuickFinder books, as well as The TaxBook from TMI.

I have also been impressed with the coverage of these topics in the TaxCoach Software reports.

Good luck.  I hope this helps.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/27/2007 01:19:00 PM Send this post:

(Click on pic for full size image)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2007 09:57:00 AM Send this post:

'Structured Sales' Aim to Ease Tax Bite, but Returns Are Slim – Similar to installment sales for spreading the tax bite out over several years.

Why Middle Age May Be Healthy for Your Wallet – Do we become more financially savvy after we reach our 50s?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 09:30:00 PM Send this post:

Q:

Subject: SECTION 179 QUESTION / PARTNERSHIP

 

I'm not quite sure how to post a question to your blog, so email was the best way I could find.  I have a 2 person LLC taxed as a partnership.  I have W2 income from a previous job in 2006 of $85,000.  The LLC's profit for the year is $10,000.  The capital account of each of the 2 members is $41,000.  I have equipment that I bought for this LLC during 2006 worth $84,000 that I would like expense using section 179.  Is the section 179 expensing limited to my $10,000 in business profit or can I pass it through to my W2 (married filing jointly) to offset the W2 income of $85,000.

 

Thanks,

A:

This is the kind of thing that you need to be discussing with your personal professional tax advisor because it can basically play out two different ways, depending on a key factor that wasn't very clear in your email.

If the equipment was purchased by the LLC and set up on its books, any Section 179 deduction would be limited by the LLC's income before even showing up on the K-1s for the owners.

If you purchased the equipment in your personal name to be used on behalf of the LLC, you would be entitled to a much higher Section 179 deduction based on your other W-2 earned income and the other owner would receive no part of that deduction, unless it's your wife.

If maximum deduction was important, how to purchase the equipment should actually have been discussed with your personal professional tax advisor before buying it. 

If, as it seems, you have been trying to navigate your way through the operation of an LLC without benefit of the guidance of a professional tax advisor, you need to start working with one immediately.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 05:55:00 PM Send this post:

Q:

Subject: Self-Directed IRA

Hi Kerry,

I came across your blog as I was researching self-directed IRA facilitators. The company I'm taking a look at is Guidant Financial and I'm wondering if you have an opinion on how they compare to Benetrends or SD Cooper?

Thank you,

A:

I'm sorry but I don't know anything about that company.

I'm sure a Google search would turn up complaints, if there any unhappy customers out there.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 05:48:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 02:39:00 PM Send this post:

Q:

Subject: copy of 2004 federal income taxes

 

Dear Kerry,  I would like to know if there is any possible way of me getting a copy of my 2004 Federal income taxes. I need these documents for a court case and I can not find my copies. I would appreciate if you could email me and tell me any information that may help me to obtain these records.   Thanks in advance for any advice that you may be able to provide.                

A:

I'm assuming you didn't use a professional preparer for your 2004 1040, because you could always get a copy from him/her.

IRS has two forms that can be used to get either a transcript of the numbers from your tax return (4506-T) or an actual copy of the return (4506).  The transcript is free, while the copy is $39.

You can download these forms from the IRS website:

          4506–T

          4506

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 11:18:00 PM Send this post:

From A Reader:

Subject: WSJ's bad advice

Kerry,

You posted a link to a WSJ article basically telling people not to buy a house in most instances.

Much of what it said was just wrong.

For one thing, even if you assume 4% growth, we're talking about 4% of the total value.

So, if you put 10% down, in a year you've had a 40% roi (less the interest paid during that year).  I have yet to see that in any of my stocks.

The author also completely missed the aspect of control.  Homeowners don't have to wait for the super to fix something and if they've got a fixed rate mortgage they don't have to worry about rents raising (taxes, but not rent).  Homeowners will also never get a note saying "I don't like you anymore.  You have 60 days to leave."

You can also refinance to take advantage of lower rates.

 

Is home ownership a free ticket to cushy retirement?  Of course not.  But it's also not the doom of wasted opportunity the author paints (even the author admits you can walk away with a quarter million in cash if you move from a high market to a low one).

My Reply:

Those are very good points. 

The principle of leverage in an appreciating market has always been the main reason I have always been a big fan of real estate investments.

The issue of control and not being at the mercy of a landlord is also very near and dear to me, and why I have never felt comfortable renting a home.

Thanks for writing. 

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 11:14:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 05:55:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 01:51:00 PM Send this post:

Q:

Subject: Older client sells home and retains right to live in it until death or abandoned

I have an older client who sold her home to her neighbor below fair market value because she retained the right to live in it rent free until she died or abandoned the property (nursing home for example).  We are now trying to see if she can take the $250K exclusion on the sale.  It was arms length in that the buyer paid less and can't take possession until a future unknown event.  The neighbor went through a regular escrow. 

My feeling is that the "discount" was an arms length transaction with a lot of give and take before a price and terms were agreed on.  The tax person is saying that since she did not sell her entire interest (retained a right to live there) that the entire gain is capital gain.

Thoughts?  I have been doing research and have not found anything on point.  Most retained life interest data refers to 706 preparation.

Mahalo,

A:

As long as her neighbor wasn't related to her, it seems that she can utilize the Section 121 exclusion, as described in IRS's own Pub 523.   

Sale of remainder interest.   Subject to the other rules in this publication, you can choose to exclude gain from the sale of a remainder interest in your home. If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately.

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

The sale that you described sounds exactly like the normal definition of a remainder interest, so it should be eligible for the exclusion, as long as the neighbor wasn't a relative.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank you for your quick reply. 

Thanks Again

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 12:11:00 PM Send this post:

Q-1:

Subject: Fiduciary - Estates & Trusts

 

If a trust return 1041 has a total   of only $10,000.00 in taxable interest for the year, can the trust pass on a proportion of the tax obligation via k-1 to the beneficiaries, and show the remaining income for that same year on the 1041?  For example, show $8000.00 income on the trust return and show $2000.00 on the k-1's to the beneficiaries.

 

thanks

A-1:

The governing documents for the trust should either specify how the income is to be allocated and distributed or at least empower a designated person (usually the trustee) to make those decisions during the lifetime of the trust. 

Kerry Kerstetter

Q-2:

guess I was more concerned if the IRS would allow part of the income each year to be listed on the trust return and the rest of the income for that same year, and its tax obligation, be put on k-1's to the beneficiaries

thanks for your comments

A-2:

You can technically enter the income any way you want in regard to how much is passed through via K-1s and how much is taxed at the trust level.  However, if IRS were to ever question the methodology of the allocations, via a direct audit of the 1041 or more likely, a 1040 audit that reaches back to the 1041, you would have to provide the auditor with documentation (the trust's governing documents) that the allocation was properly authorized and not just done arbitrarily.  If there is no such documentation, the auditor will be able to reclassify the income allocation to whichever method results in the highest taxes for the government, plus penalties and interest.

I hope this clarifies how this matter should be addressed.

Good luck.

Kerry Kerstetter

Follow-Up:

thanks you are very good at your work.  best to you

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/21/2007 12:24:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/19/2007 10:35:00 PM Send this post:

Republicans Warn of Tax Hikes Ahead – With so many of Bush’s tax cuts expiring in the next few years, we are looking at some huge tax increases just from our rulers continuing to sit on their hands and failing to act on extending them; or better still, making them permanent. Hillary is literally chomping at the bit to be in command and responsible for even bigger tax hikes than the humongous ones the Clinton-Gore team retroactively forced on us back in 1993. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2007 11:45:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2007 05:29:00 PM Send this post:

Q:

Subject:  Permission to print your web page on corporations

 

I would like to recommend your web site C vs S Corporations in a brochure about starting a business. Your site is very well written and easily understandable.

 

My intent is to print the pages out and included in a handbook but of course I will not recommend such without your permission.

 

Allow me to thank you advance for your consideration.

 

Sincerely

A:

As long as you mention where you found it, such as the URL to my blog or website, feel free to print and distribute anything you find.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks,  I'd wouldn't do it without mentioning you! That is the only way I know how to play.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2007 04:31:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/17/2007 07:39:00 PM Send this post:

Q:

Subject: Question

My Mom wants to gift me and my brother $100,000 each.  Her entire estate is worth approximately $300,000. 

Question:  Can she do this with paying a gift tax ? 

Question:  Will we have to pay any taxes.

Question:  I assume the 5 year time period will have to pass before this money is considered no longer her asset??

Thank you,

A:

It sounds as if your mom is trying to do some impoverishment planning to qualify for Medicaid and/or other programs that penalize people with too much net worth.  This is an actual specialty with some attorneys and financial planners, so she really needs to work out such a strategy with a professional experienced in this area, including the specific look-back rules for her state.

She also needs to consult with a qualified professional tax advisor who can explain the mechanics of making such large gifts in regard to gift tax returns and how this will affect her future exclusion from estate taxes. 

In regard to you and your brother, there will be no taxes required on the receipt of the gifts.  What you do with the gifts could create tax issues, that you and your brother need to discuss with your own professional tax advisors. 

If those gifts are made via money, documenting the transactions will be simple.  If you are being transferred assets, such as real estate, you will need to determine your mom's cost basis in those assets, because that will now become your costs basis in the event of a future sale of those items.  A good tax advisor can help with this.

While you are not required to report the receipt of gifts on your income tax returns, you may want to attach a note to your return describing the gift, especially if you use some of the money in ways that show up as large deductions on your tax returns, such as donations or business expenses.  Without an explanation of the tax free source of the funds, IRS could suspect you of under-reporting taxable income and launch an excruciating examination of all of your finances.  I have seen its happen, so t's not mere alarmist fantasy.

I have some basic info on Gift Taxes on my website, which you should look over before meeting with a professional tax advisor.

Good luck.  I hope this helps. 

Kerry Kerstetter

Follow-Up:

Kerry,

Thank you so much for your response.  I just wanted to make sure we were not doing anything illegal.  We will take your advise and contact a

professional.

Kind regards,

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/16/2007 02:44:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/16/2007 01:24:00 PM Send this post:

From the free WSJ:

How to Trim Taxes as You Age

 

Your Home Isn't the Nest Egg That You May Think It Is

 

Patents on Tax-Related Ideas Stir Worry – Includes a link to IRS’s 31 page 2007 Tax Hints.

 

H-P's Pension Switch Signals End to Era Of Cozy Retirements

 

Can Friends Be Strong Business Partners? – They’ll soon be ex-friends.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/15/2007 03:53:00 AM Send this post:

Typical Tax-Time Trip-Ups – From Forbes

Franchises Versus Nonfranchised Businesses – From the free WSJ

Traditional or Roth? Which IRA Are You Eligible For? – From Gail Buckner

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 02:39:00 PM Send this post:

Q:

Subject: Exchange Question

 

Hello,

 

I was never informed by my Realtor of this 1031 rule. Now, after the exchange, I was just notified by my accountant that I owe a large amount of money. Has anyone won lawsuits against Realtors for mistakes made by not even mentioning that I should contact a tax specialist when asked if we are doing everything correctly in this transaction?

 

Thanks,

A:

That's a very interesting question because in all of my speeches and seminars to Realtors over the past decades, I have always made a big point of stressing that if they ever smell any possibility of a 1031 exchange being relevant with a client's property, they should advise that client to consult with his/her personal professional tax advisor to see if in fact the deal should be structured as a 1031. 

It is not the Realtor's job to actually advise on the feasibility of a 1031 for a particular client because that is well outside their area of expertise and responsibility, and they couldn't possibly have enough specific information to render a competent analysis. 

I always warn Realtors that if a client were to learn after the fact about 1031s, and that subject was not mentioned, s/he could try to sue the Realtor for the taxes that had to be paid.  Many Realtors accused me of being an alarmist by discussing this possibility; but I assured them that it was based on real life situations that I have seen, as well as calls and emails such as yours. 

I am not a big believer in litigation for every little thing that happens; so only you can decide if it's worth it to you.  Over the past 30 years, I have seen instances where Realtors have been sued for this kind of alleged negligence.  The results have been all across the board.  In some cases, the judges awarded nothing because they believed that the taxes would have been due some time anyway and that the clients were at fault for not being smart enough to consult with their own tax advisors before selling a highly appreciated property.  In some cases, Realtors were required to reimburse clients for some or all of the taxes they had to pay because Section 1031 wasn't used.  In other cases, there were out of court settlements for compromised amounts. 

I am not an attorney, but my understanding of the current trend in regard to this kind of issue is that, since 1031s have been around for so long now, it is becoming more difficult to convince a court that an experienced real estate investor has never heard of it.  You would most likely have a better case of winning if you can convince the court that you are not a frequent real estate seller and are not very knowledgeable in tax saving strategies.  If it is true that you have just now learned about 1031 exchanges for the first time, that must be the case. 

There is no way to know how your case would turn out.  You will need to discuss the merits of your case with an attorney and/or the managing broker in the office of your listing Realtor.

Good luck.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 02:11:00 PM Send this post:

From a Reader:

Subject: Child support as a form of income tax

 

[Please post the following with no email address]

 

Attitude aside, MarianContrarian has a legitimate point about children being entitled to some lifestyle component of child support.  The amount is subject to political tug-of-war, but the principle is thoroughly established by now.  At the percentages typically assessed these days, this rule has the effect of turning child support into an 18-year stream of alimony for upper income fathers paying support.  (There are essentially no custodial fathers who have high-income ex-wives and who did not waive child support in order to win custody.)

 

Agree or disagree with the wisdom of this system, those are the facts. What should interest a tax guru is that the computation of child support strongly resembles an income tax system.

 

In the case you cited, a payer of child support was assessed a flat percentage of AGI.  You claim that this was not fair if the income was on paper rather than in cash.  I respectfully disagree on that point. If one has control of the Sub-S corporation, one can control the timing of distributions, delaying them until child support is no longer due at all.  That would be a huge loophole.  If you are going to have an income-based assessment, it must be based on economic income, meaning change in net worth.  AGI is a reasonable, albeit imperfect, proxy for economic income.

 

In an attempt to be more fair, some states assess child support as a percentage of after-tax income rather than AGI.  Take a moment to think about that.  Do you see the problem?  Neither did I at first.

 

Congress generally gives you a tax break in recognition of an expense that has some socially redeeming value.  Medical expenses, mortgage interest, local taxes, whatever.  The more breaks you get, the more expenses you had, and... the more child support you pay!  Under a child support system based on after-tax income, someone with a $3000 per month mortgage can pay $500 more child support than someone with a fully paid-off house.  That's an absurd and indefensible result.  For this reason, the most structurally fair of the current systems are based on AGI, not after-tax income.

 

For political reasons, the assessment percentages have been set quite high.  In a nutshell, parents of modest income are very reasonably assessed a high percentage in order to provide proper support, meaning money that will actually be needed to support the child.  Because voters tend to believe that more child support is always better, politicians then extend similar percentages all the way up to about 95th percentile incomes.  Above about the 80th percentile, child support begins to exceed 100% of total cost, allowing the recipient to spend or pocket the excess.

 

Solutions?  I have none that are politically feasible.  We need to realize that for every payer above the 80th percentile there are probably ten recipients who are getting nothing because the father is in jail, unemployed, or otherwise not paying.  So it's like when your mother asked you to clean your plate because people were starving in Africa: Be happy overpaying your child support because others are paying nothing.

 

If there is any common ground to be found on the contentious subject of child support, it is in improving its structural fairness.  I believe that every state should switch to guidelines based on gross income, not after-tax income.  And ideally the upper-income payers should not be overcharged because lower-income payers are underpaying. The problem is that whenever any change to child support laws are considered, a political death match ensues between advocates of higher vs. lower overall support levels.  Politicians hate that, so they leave the current system in place, defective or not.

My Reply:

Thanks for your comments.  I can see that the issue of child support is a complicated mess and is not something I want to spend any more time debating.   We can leave that to the family law specialists.  However, my gut feeling is still that requiring a parent to fork over a certain percentage of his/her AGI in non-deductible child support, regardless of the actual costs of raising the kids, is not fair.  Just as with the tax system, it may be the law to do things that way; but it's still not fair.

The original context of my comments was to contrast the financial effects of S versus C corps.  Your comment that S corp distributions can be controlled is flat out wrong.  You are missing the point and are making a good illustration of how little understanding there is about how S corps function. 

With an  S corp, the shareholders have to recognize their share of the corp's income regardless of whether or not any money is actually taken out of the corp.  That was the real life problem that my client had encountered. With a C corp, there is a lot more control over how much of the corp income ever reaches the shareholders' 1040s, if any.  There is no such ability with an S corp, which is something that many people fail to realize when they sign and submit the S election form to IRS.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 02:01:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 11:50:00 AM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/13/2007 10:19:00 PM Send this post:

This version of a simplified tax return comes around every year. This latest is from Debt Proof Living.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/13/2007 04:06:00 PM Send this post:

IRS has announced that their interest rates for the quarter from April 1 through June 30, 2007 will remain the same as they currently are.

• eight (8) percent for overpayments [seven (7) percent in the case of a corporation];
• eight (8) percent for underpayments;
• ten (10) percent for large corporate underpayments; and
• five and one-half (5.5) percent for the portion of a corporate overpayment exceeding $10,000

I have updated this on my Quick Reference page.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/13/2007 03:11:00 PM Send this post:

Q:

Subject: selecting a tax professional

 

Kerry,

 I take exception to your statement, "This means you need to work with a tax pro who will spend the time necessary to properly understand your situation and not just do your return as fast as possible, as is the case with the big assembly line franchise operations (H&R Block, Jackson Hewitt, Liberty Tax, etc)."  As with all groups you have bad apples, but there are those in this group that employ EA's and CPA's that are competent tax advisers.  I'd suggest sticking to your "selecting a tax professional" article. Find someone with the right qualifications and experience.  The sign on the door might surprise you.

A:

I'm sorry you were offended by my comments.  I have nothing against tax pros who work for the big franchise operations.  In fact, I had hired a number of Block alumni to work for me in my offices in the SF Bay Area over the decades and was quite happy with the quality of their work once I trained them in my way of doing things.

However, you must realize that the work environment is different in a high end CPA office, where we spend as long as it takes to properly address the client's tax matters versus a store-front office that handles walk-in traffic and measures its productivity in number of returns prepared.  While I admit there are exceptions, most such offices do operate in an assembly line style that can't possibly allow enough time for the kind of thorough work that more complicated clients require. 

If your office is an exception to that assembly line style that many people (not just me by any means) perceive of the big tax prep franchises, you should have a good marketing edge by pointing that fact out in your advertising.  As it is, most of those chains are more focused on emphasizing how fast they can prepare returns rather than how thorough they are in helping clients minimize their taxes.

I hope this helps you better understand the context of my comment.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2007 11:00:00 PM Send this post:

Q:

Subject: Sales of business

Hi Kerry,

 

If we sold a business (C-corp) for $220k without realizing gain or loss.  $200K is for inventory & $20k is for goodwill. 

 

Which form should we use to report the sale?  On form 4797, there's no section to report the sale of inventory of $200k.

 

Pls help us.  We're filing form 1120-A.

 

Thank you very much for your assistance & wish you have a wonderful weekend.

A:

You need to be working directly with an experienced professional tax advisor because there are numerous critical aspects to this that you haven't addressed and are obviously confused about. 

First is the issue of what was sold.  Did you sell your stock in the corporation to someone else?  If so, you need to properly calculate your cost basis in that stock and then report it on Schedule D or Form 4797 with your 1040.  If you are selling at a loss, you need to determine if it qualifies for the expanded loss deduction under Section 1244.  Was the full payment received in the year of sale or is it being spread out over a number of years?

On the other hand, do you still own the corp and it sold off its assets?  That's reported on the 1120 and will also be affected by whether or not the full sales price was received in the sale year. 

There is no way you can properly handle this on your own.  You actually should have consulted with a tax pro prior to the sale.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2007 10:56:00 PM Send this post:

Q:

Subject: Form 1040 & Other Estate Related Spreadsheets

 

Kerry,

 

I have browsed your 1040 Tax spreadsheet many years with interest.  I have recently been given the responsibility of preparing tax forms as an executor of an estate.  I have tried to find an EXCEL spreadsheet fhat addresses Form 1041, Depreciation, and other related forms and schedules.  Do you have any or know where I might look?  Any place I might get  assistance with questions regarding estate related taxes.  Every one seem to skirt the subject and tells me I need to consult a Tax Specialist or Lawyer.  That may be my only source.  How about it? 

 

Any spreadsheets for rental property management (inherited)?  I keep reading that Schedule E and other forms are made easier by using spreadsheets.  They must be out there somewhere?

 

Thanks for any help!

A:

I'm not sure what spreadsheets you are referring to because I don't use any Excel sheets for tax return work. 

The absolute best way to prepare records for any kind of tax return is with everything entered into QuickBooks, with a Class set up for each schedule that does allow you to produce spreadsheet-like income statements with columns by Class. 

I have seen people try to set up Excel spreadsheets to do accounting; but they are much more work and much less reliable than what QB does automatically.  This is in addition to the fact that most home-made spreadsheets use very unreliable single entry accounting methods rather than proper good old double entry accounting that QB does automatically. 

Since you've never prepared a 1041 for this estate, you are taking an unnecessary risk by attempting to do this on your own.  There are too many variables to work with, starting with the choice of the estate's fiscal year, for you to tackle this on your own.  As executor of the estate, you will be personally liable for any screw-ups you make; so the wisest move would be to use the services of a tax pro who has experience with 1041s to reduce your potential personal liability.

Any professional fees related to the settlement of the estate, including yours as executor, can be paid from the estate's assets and deducted on the estate's tax returns.  If you have to buy a copy of QB for this task, that cost would also be deductible by the estate.

These may not be the kinds of answer you were looking for; but they are the best I can provide.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2007 10:48:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2007 08:57:00 PM Send this post:

It’s no coincidence that the states with the lowest tax rates are leading the U.S. in employment growth. – How many State rulers ignore this extremely simple fact of life?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2007 10:14:00 AM Send this post:

Q:

Subject: Got a few questions...

 

Hey Tax Guru,

 

I am a business owner, that likes to have and understanding of all that goes on within my business.  I'm not the kind of owner who is willing to just do something because of the advice that someone's gives me...I really want to understand the reasons why.  I'm not sure my accountant likes that, I think that he would rather just lean on him, and be dependant on him to make those decisions...which I resist, because I want to understand and be responsible for the decisions that effect my business .

 

Anyway, I have been a dba for the last 7 years, and have recently formed "C" business structure.  Now I'm in unchartered waters because I don't know how I can best take advantage of this structure to directly benefit me and my immediate family.

 

I have a friend who has a company that does the same, and he is receiving conflicting advice from his lawyers and his Accountant as to whether he should be "s" or "c".  (He has formed it as "s" for now)

 

Anyway...Is there a book or someone who could advise us on what is the best structure to use?  So many conflicting voices, so many conflicting ideas.....just need some clarification!

 

If you got the time to advise where to turn...it would be very helpful.  Email or per phone...doesn't matter to me.  

 

Thanks for the time.

A:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.  While books can explain how various types of business entities function, no book is a substitute for the expertise of an experienced tax pro.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances.  Such a tax pro should thoroughly explain the justifications for any decision that affects you, such as the use of a C or S corp.  If s/he can't properly defend any such decision, that is a sign that you need to be working with someone else.  Similarly, any tax pro who reaches a conclusion as to the best entity for you without asking you dozens of very probing and personal questions should be avoided.  Such decisions must be custom tailored to the situation and not taken off the rack as a one size fits all solution.

While your friend obviously needs the same kind of assistance in straightening out his business plans, you should not base your business strategies on what may be proper for him.  While his business may be similar to yours, there are too many other factors that need to be considered which can't possibly be exactly the same, such as family and other personal issues.

Jumping into a new corporation without knowing what you were getting yourself into was a very reckless and foolish thing to do.  However, if you get competent professional assistance ASAP, any damage should be minimal.

I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you. 

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/08/2007 02:26:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/07/2007 10:45:00 PM Send this post:

Q:

Subject: Re: Help!

 

Is there a way to find out what the annual tax free allowance for gift tax was back in 1957?
Thank you!!!!!!

A:

It was $3,000 during the years 1943-1981.

I found this via a Google search that led me to this post from Paul Caron.

If you download the report he cites, you will see a very comprehensive history of the Gift Tax.

Kerry Kerstetter

Follow-Up:

Thank you!!!!!!!!!   Thank you!!!!!!!!!   Thank you!!!!!!!!!   Thank you!!!!!!!!!  

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/07/2007 10:13:00 AM Send this post:

The stories have been spreading all over the media on how the IRS needs to stop all of those nasty tax cheats who are stealing from the government.  As always, one of my biggest pet peeves about this issue is the way journalists accept the amount of the Tax Gap as gospel when it’s nothing more than a WAG (wild ass guess) by IRS. Could the journalists be afraid of offending the IRS by pointing out the simple fact that measuring unreported income and taxes with any degree of accuracy is impossible? 

My other pet peeve about this issue is the sweeping generalization that everybody is a tax cheater, when the truth is that most people overpay their taxes because of their confusion and lack of understanding of how to effectively reduce their tax bills.

A couple of recent articles I came across:

Attention, eBay sellers: Congress eyes $300B tax gap

Unpaid Taxes Equal $2,680 Per Household

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/06/2007 10:28:00 PM Send this post:

Additional info:

Tax Day this year is actually Tuesday, April 17, 2007

Rather than panic and rush out an inaccurate tax return, file Form 4868 to extend Tax Day until October 15, 2007. That's what we're doing for almost all of our clients.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/06/2007 02:19:00 PM Send this post:

Q-1:

Subject: Tax info on your blog

 

Kerry, I found your blog and feel you are the only person I have found who is up on the question I need answered. Here is what I have:

 

First off, I am a Real Estate Broker. I own my own business and work out of my house. (write off a portion for business) I bought a 2004 Nissan Armada in November 2003 to get in on the tax break. It was priced at I think 33,300 but with tax it was around 35,000. My tax person said I got most of the writeoff but not all. I didn't understand. I don't think he gave any bonus depreciation if there was any then. He said I can only write off actual expenses such as tires, gasoline, oil changes repairs. Of course, it is under warranty so the expenses are low except gas. I was hoping to get mileage but he says I can't. Also besides the first year, I got no further depreciation I was told. Again, I am pretty sure there was no bonus depreciation in 2003. Maybe there wasn't supposed to be, I don't know.

 

So the one time break was good but now it is hurting me. I called him a couple of weeks ago and asked him how long I had to keep it before I could do it again. And also what is considered to be the useful life? He said I can buy again in 2008 (5 years) and do it again but this is the example I got. If I trade it in on a 45,000 SUV (which I have to have) and get a 20,000 trade-in, I can only write off the 25,000 difference. Thats it. Then I don't get mileage still. Is there a point, it is said to be at the end of its useful life as far as recapture goes? Or say if I were to sell it, do I have to pay a recapture back? I am not planning on doing that without getting something else as it is a business vehicle. I have 3 others at home to drive. I haul signs etc, and show multiple people so need the 3rd row seating. No way for me to go back to something smaller so I want to take advantage any way I can of tax breaks. The article below said I can write off mileage if I office at home.

 

I found an article on Smartmoney.com that says this:

 

Next, Play the Home-Office Angle

As mentioned above, the lucrative Section 179 write-off is available only when you use your heavy SUV, pickup or van over 50% for business. Your business-use percentage is based on your business and personal mileage.

Unfortunately, this over-50% business-use test can be difficult to pass. You're much more likely to clear the hurdle if you can also claim a principal place of your business is an office located in your home. Why? Because then all the commuting mileage from your home office to various temporary work locations (client sites, etc.) will be considered business mileage. Ditto for commuting mileage between your home office and any other regular place of business — such as another office you keep in the city. (Frustratingly, if you only have an office outside your home, your drives between home and office won't count as business mileage.) You can also treat all the mileage between your other regular place of business (that office in the city) and your various temporary work locations (client sites, etc.) as additional business mileage. Source: IRS Revenue Ruling 99-7.

More business mileage also means a bigger first-year Section 179 deduction. For example, a $60,000 heavy non-SUV used 100% business means a $60,000 first-year write-off (100% x $60,000 = $60,000). In contrast, 70% business use cuts your deduction down to $42,000 (70% x $60,000 = $42,000).

Last but not least, your home-office deduction counts as a business write-off as well. As such, it reduces your federal income-tax and self-employment tax bills. And as if that's not enough, you'll probably also get a state-income-tax write-off.

All that — plus the option of showing up for work in your pajamas. You just can't beat it.

Making Your Home Office a Principal Place of Business

So how do you make your home office a principal place of business if you haven't done so already? The tax law gives the self-employed types (sole proprietor, partner or LLC member) two ways to qualify:

1st Way: You conduct most of your income-earning activities in the home office.

2nd Way: You conduct your administrative and management functions in the home office. However, to take advantage of this taxpayer-friendly qualification rule, you can't make substantial use of any other fixed location (like that other office downtown) for your administrative and management chores.

For either qualification rule you must use your home-office space regularly and exclusively for business purposes during the year in question.

 

I just feel like since I don't know exactly how this works, I am leaving money on the table. Maybe I am wrong and am getting correct information, but when I ask, it usually takes me a couple of weeks to get an answer from someone he consults with. He is an auditor for the State of Texas health systems and also does taxes. He was a client of mine I sold a house to years ago so I got him to do my taxes. They were easy and basic at the time. Now they are more complicated and we are making more money. We need as much tax write offs as we can get. Taxes are going to eat us alive this year as we will be hitting probably well over the 200k mark this year. the (including wife making 100k or more)

 

My house is almost paid for and will be paid for this year. That was my goal. It was paid down so low anyway, I didn't pay that much in interest. Maybe 4,500 a year and going down each year. I still pay taxes and insurance of course and usual business expenses. Sorry for this long message. Again, I was glad to find your blog as I could tell you knew what you were talking about. I am impressed.

 

My wife is upset with me and wanting me to get someone else to do my taxes. It is very awkward and I just need to know this has been done correctly. If you need any more info I can provide it. I am not sure you even answer questions like this. I need these specific answers and not general ones which I have been finding.

 

Plus for 2008 is there the same tax break or would I need to do something this year? Again, my tax guy says 5 years, not sure why as I sell Real Estate and don't understand this suff. If you can answer these questions or direct me where to go, I would greatly appreciate it.

A-1:

It's very obvious that you have outgrown your current tax pro and need one who is full time and experienced in working with clients to reduce their taxes, as well as explain simple issues to you like the topic of vehicle depreciation.  There is nothing complicated with any of the topics you raised in this email; so there is no excuse for your tax pro having to find answers from someone else.  Any competent tax pro should know every one of these points off the top of his/her head.

If you are making that kind of money in real estate, the vehicle deductions are small potatoes in comparison to other very easy tax savings strategies that you should be using.  For example, using a C corp could easily reduce your annual taxes by over $20,000.  I have seen this happen with several clients who are real estate pros.  A good tax pro should have no problem finding ways to save you huge amounts of money.  Only you can decide if it's worth $20,000 a year in easily avoidable taxes in order to not hurt the feelings of your current part time tax advisor.

There are obviously some basic factors involved with your vehicle depreciation that you are very confused about.  As I said, a good personal tax pro will be able to explain these in more detail with your specific numbers; but here are a few key points that seem to be messing you up in your understanding of how vehicle deductions function.

While the cost of business vehicles above what has been expensed via Section 179 is required to be depreciated over five years, there is no minimum amount of time that you have to keep a business vehicle.  You must be misunderstanding your tax guy in regard to having to wait until 2008 to buy a new business vehicle.  You can sell it or trade it in at any time.   I used to have a Realtor client who traded in his vehicles every six months for new ones because the image of new vehicle was more important to him than the thousands of dollars he was losing on each one. 

The tax consequences will be different under each scenario,  Before decoding whether to sell or trade, what is critical to know is the adjusted cost basis of the vehicle; which is generally its purchase price less depreciation and Section 179.  If the sales price is higher than the adjusted cost basis,  you will have taxable gain on the depreciation recapture.   If the sales price is less than the adjusted cost basis, a sale could generate a deductible loss, depending on the business usage percentage.

On the other hand, if you trade in the vehicle on a new one (new to you that is), any gain from the trade-in value exceeding the cost basis is not currently taxable, but reduces the cost basis of the replacement vehicle.  This is calculated on Form 8824.  If your trade in allowance is less than the adjusted costs basis, the loss isn't currently deductible, but is added to the cost basis of the new vehicle, also on Form 8824.  

As in your example, the Section 179 expensing can only be claimed on the excess over the trade-in allowance because this is the value of the newly acquired asset.  As with any mixed use assets, the deduction can only be claimed for the business usage percentage of the newly acquired value.

Another area of confusion you have is with which method of vehicle expense deduction you can use.  The IRS standard per mile rate includes an amount for depreciation based on the straight line method.  If you choose to claim accelerated deprecation, which includes Section 179 expensing, that vehicle is not allowed to use the standard mileage rate and must continue to use the actual expense method for as long as you own that particular vehicle.   This is quite fair because to allow you to switch would effectively allow you to over-depreciate the vehicle.

I have been maintaining a page on my main website dealing with Section 179, with the annual limits, for several years now.
 
You can see what the maximums will be at least through 2010, subject to any future changes in the tax law.

I hope you find these comments useful. Most important, you need to work one on one with a full time tax professional who can help you save on your taxes.

Good luck.

Kerry Kerstetter

Q-2:

Kerry thanks so much. I really appreciate this and it is alot to absorb. I had a friend who is a home inspector. A few years ago we were talking and he said he formed a C corp. I asked him why and he said he is saving on taxes. We talked further and after we talked, I discovered we made the same exact amount of money that year which was a coincidence. He told me how much he has paid in taxes and said he had very little write offs except miles as his work doesn't use materials only his expertise. Plus he didn't advertise. I had tons of deductions and paid twice in taxes what he did. I called my tax guy and he said it would not benefit me to do it. At the time, I wasn't making a huge amount, just average. I will be making over 100k a year just myself, probably quite a bit more as it usually is. I am at 40k already this year, and my wife makes about 125k. So we will be hitting closer to 250k a year this year on. This opened my eyes.

 

He did tell me I had to wait 5 years to trade but he must have meant in order to not get a big tax penalty. I do need to sit down with someone and learn this stuff so I am more educated about this end since taxes are for sure going to be a huge issue. Here is what I thought:

 

If I trade in my vehicle that I paid 35,000 for say for a 45,000 vehicle and drove it five years (although don't know where that came from) I know that I took the up front deduction in 2003 for my current vehicle so that was 35k but I have to confirm that as he had told me we didn't take the whole thing the first year. It has been a while so I need to investigate. I know we haven't done any further depreciation after year 1. That much I know. I figured after the up front ne time write off was it. I know for a fact that is the only time we wrote anything off on it except actual expenses. Here is what I was wanting to do possibly.

 

I bought in November of 2003 for 35,000 total including tax. I want to buy a vehicle around 45,000 (or more) in 2008. I thought if I wrote the first year off and it sold for say 20k, and I bought a vehicle for 45k, I could take the 25k exemption that year. (the difference) Plus I am not sure how it would depreciate out after that. So this is what I thought. I really didn't want to trade anyway until 2008. I think he said I would have a huge recapture if I traded any earlier than 5 years so the longer I have it, I guess the less it is worth was his thinking also. And yes, I could have misunderstood some of these things. 

 

You for sure know your stuff and it will hard to find someone so educated about this stuff. I wonder how much money I have lost already. Thanks again, I really appreciate your taking the time out of your busy schedule to answer these questions for me. I will talk to another CPA this week for sure. One that does it for a living.

A-2:

Your tax person is sounding more and more "dangerous" to your financial health with each comment you make.

He is obviously one of the many "tax pros" who are scared and uneducated on how corporations work; so they tell their clients they are a waste of time.  The fact that a properly used C corp could very easily save you over $20,000 per year doesn't seem to be a concern of theirs. 

The very ironic thing is that C corporations are very easy to work with.  I have gone through this learning curve with several people who have worked for me who were scared of corporations when I assigned them their first ones; and then discovered that they are actually much easier to work on than individual 1040s.

You are still making some misstatements regarding vehicles that I need to clear up for your benefit and that of my readers.  You should have a depreciation schedule showing how much has been claimed in Section 179 and normal depreciation for that vehicle as of 12/31/06.  Subtract the accumulated depreciation figure from the original cost of the vehicle to arrive at your adjusted cost basis (aka Book Value).  If you sell that vehicle for any more than that figure, there will be taxable depreciation recapture.  This applies to a sale in six months or 20 years.  There is no "waiting out" period where you can sell an asset for more than its adjusted cost basis without having a taxable gain.

If the vehicle is traded in, the gain is deferred into the replacement vehicle and not currently subject to tax.  Again, this applies to a trade at any time.

The only actual time triggered issue has to do with a vehicle on which you claimed Section 179.  If you still own it and its business usage drops below 50 percent within five years, you will have to recapture a proportionate amount.  This time triggered issue does not apply if the vehicle is sold or traded within the five year period.

Again, these are all very basis tax concepts that any competent tax pro should be able to explain to you off the top of his/her head.  You need to start working with one ASAP. 

Good luck.

Kerry Kerstetter

Q-3:

Thanks Kerry, For sure I am going to get this resolved this week and have someone professional do my taxes and set me up a corporation. That is not even a question in my mind anymore. Ok, I just pulled the depreciation schedule from 2005 taxes. It has some stuff listed under the part about 179 but I have equipment so I went to page 2 and found my vehicle listed.

1. 2003 Armada it says (it is really a 2004), Date placed in service is listed at 12/12/2004. I placed it in service November 28 I think, of 2003 so I could get the 2003 writeoff.
2. Business use - 96.11 percent
3. Cost or other basis 27,000. Not sure how I got that unless he took my old vehicle I sold my brother for 6,750 and added that to the 27,000 which would be about right. I had the other one 5 years or so.
4. Basis for depreciation - 0
5. Recovery period - 5 years (now you see where I got the 5 years from)
6. Method/Convention - 200DB/HY
7. Depreciation Deduction - 0

He goes to section B and lists my miles but he doesn't give me a write off for miles. That he has told me. You said that was correct also.

So from reading over this, it seems I got a one time deduction up front of 27,000 in year one and that was it. Now you see where my misstatements came from.

On page one it had listed computer equipment I bought for 179 deduction, no carryover listed in line 10 (carryover of disallowed deduction from line 13)

So now you have all the info. This was 2005 and I bought the vehicle in 2003. I got the 27k up front and that was it. Nothing showing on here unless I am looking at the wrong part but there isn't much to this and I think I am looking correctly.

Now I guess you can use me as an example of what not to do? Oh and I do have the home office depreciation which is pretty small. I guess when he started this my house was worth less. He has it listed as 175,000 including land. Basis of building 165,000. Actually our market is up and my house is worth around 275,000, not 175,000. Still I don't care as much on the home office as I won't be here but maybe another 5 years and am not keen on giving that money back when I sell. It is a case of pay me now or pay me later isn't it?

A-3:

So, this proves that your Armada's adjusted cost basis is zero.  This means a sale for any amount of money at any time will result in taxable recapture of Section 179.  A trade-in at any time will not trigger any taxable recapture.

Any time you buy a new piece of business equipment, such as a vehicle, you have the choice between deducting its full cost in the first year under Section 179 or spreading the cost deductions out over the item's useful life.  You obviously chose the quickie first year deduction for your Armada.  The trade-off for that decision of yours was zero depreciation for the rest of the time you own that particular vehicle.  This should have been explained to you by your tax advisor before you submitted your 2003 1040.

While you may no longer be entitled to any depreciation on this vehicle, you can still deduct its operating costs, prorated to the business usage percentage.

Don't fall into the trap of buying things that you don't really need just for the deductions.  That is just plain counter-productive (aka stupid) because the tax savings don't fully reimburse you for the amount you had to spend. As long as the vehicle is doing its job, keep it. When it is no longer suitable for your needs or becomes a "money pit," you should trade it in on a new one.

In regard to your home depreciation, this can only be claimed based on your actual cost basis in the home.  Any appreciation in value while you own it is completely irrelevant for depreciation purposes.  It only becomes a relevant issue when you sell the home. 

Your new tax advisor should explain to you the principles of basis for tax purposes. 

I am sure that your experiences are not unique and hopefully this exchange will help others in a similar situation as yours.

Good luck.

Kerry

Follow-Up:

Well at least he did this part right. I knew it would be done up front. He told me that part. This really answers all of my concerns. Now I don't have any incentive for trading next year as I love my current vehicle and unless something happens, I would like to keep it. So I just need to not sell it and when the time comes, just trade it in to avoid triggering a recapture. I don't need an extra vehicle but I guess if I did drive it a few more years and then just keep it and buy a new one, it works the same way. This isn't an issue though as I won't do that.

 

I am deducting operating costs as he told me this. Gas, oil changes, everything else to do with it. Just not mileage. Now this all makes sense so he didn't do everything wrong after all. He still should have helped me set up the C corp. That alone is huge. 

 

On the home depreciation part it seems he got that right also. I understand now that the appreciation doesn't matter. Trading in not triggering a recapture is great if I need to do it as I guess I just write off the difference between what I wrote off (27,000 one time) and the new vehicle of say 45k. So in this instance 18k I can write off again. That is still good. You are right. It is foolish to trade for the sake of trading. I was actually thinking about it as I thought it would benefit me tax wise. Now I see. Again, I really appreciate your taking the time to explain this to me. It all makes sense now. I think this topic for sure would help others as you have been so thorough.

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/06/2007 10:59:00 AM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/05/2007 09:08:00 PM Send this post:

Q:

Subject: S-corp

 

Mr. Kerstetter,

 

I just read your article on S-corps on the internet, and now I am more confused than ever.  I am an insurance agent and my wife is a teacher.  In

2004, we had a net income of $112,000.00 and we paid $27,000.00 in state and federal taxes.  A friend of mine who is also an agent say's that he will only pay around $13,000.00 on the same income.  Can you give me an idea of where I can find out what is best for me?  I really do not want to pay $30,000.00 in taxes if I can legally pay less.  I appreciate your article and any help you can give me.

 

thanks,

A:

It is really not possible to do a direct comparison of two tax returns with the same amount of income because of all of the variables that come into play to affect the bottom line.

However, if you are reporting all of your income on Schedule C, odds are that you are paying in several thousands of dollars each year just in self employment tax that could easily be reduced or eliminated by using a C corp.  A C corp also allows you to keep your maximum Federal income tax rate at 15% if you use the income shifting techniques properly. 

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

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

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 @ 3/05/2007 07:23:00 PM Send this post:

Q:

If the next Congress does away with the inheritance tax exclusions, if someone has already given away

part of his estate (against the now legitimate exclusion), I assume that will not be taxed retroactively.

What do you think?

And do you think the Democrats will work to repeal all the exclusions?

Thanks.

A:

I wouldn't be so sure of that.  There used to be a time when laws weren't changed retroactively.  That sense of fairness is no longer the case, especially for the Dems. 

One of the first things the Clinton-Gore team did when they assumed power in 1993 was to ram through a huge tax increase that they made effective retroactively to before they were even in office.  This included sticking it to Senior Citizens by raising the taxable portion of their Social Security benefits from 50% to 85%.  They are still very proud of this achievement.

When Hillary is coronated for her third term as co-president in 2009, we can expect the same kind of thing.  Repealing all of the Bush tax cuts has been a very explicit goal of the Dems, so we can pretty well kiss them goodbye when the Clintons move back into the White House.

Kerry Kerstetter

Follow-Up:

Thanks for your cheery reply.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/05/2007 07:12:00 PM Send this post:

Real-Estate Professionals Say IRS Snares Them by Mistake – IRS auditors are very selective in how they define real estate pros for the much more lucrative rental loss deductions.

Private tax both wrong and sneaky – This is basically like a homeowners association fee; but they call it a tax.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/04/2007 10:33:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 08:45:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 01:29:00 PM Send this post:

Q:

As far as changing the payroll taxes from the payroll expense account, should I go into payroll item lists and edit each account and create one new account called "Payroll Taxes" for all the different taxes or create an account for each tax? Or create sub accounts for each tax under a payroll tax account?

A:

For the QB payroll set-up, it is completely customizable, starting from how the program comes, with all of the liabilities lumped together and all of the payroll related costs lumped together. 

At a minimum, we need to separate out the gross wages from the payroll taxes because one of the basic reviews IRS does is a match between the wages expense deducted on the corp tax return and the total from the W-2s for the year.

For reconciliation purposes, I like to have sub-accounts that tie into the tax forms.  On the expense side, I like to set up a sub-account called Payroll Taxes under the main Taxes expense account.  Then, under the Payroll Taxes account, there should be a sub-account for each payroll tax form:
941 (FICA + Medicare)  
940 (FUTA)
SUI (State Unemployment)

Then, those company expense items in the payroll item list should be edited to be mapped to their new sub-accounts.  Items reflecting withholdings from the employees' checks, such as Fed and State income taxes and their share of FICA + Medicare, should not be mapped to the expense accounts. Those need to be mapped to the appropriate liability accounts.

Similar to the sub-accounts for the payroll tax expenses, I like to have sub-accounts under the Payroll Liabilities accounts that correspond to the various tax forms:
941 (FICA + Medicare + FITW)
940 (FUTA)
SUI
SITW

The balances in these accounts can then be reconciled at the end of each month to agree with the payments that need to be sent in.

I hope this isn't too confusing.  Until a few years ago, I was actually able to make all of these changes in my QBX version of client files.  For some reason, the QB programmers removed that capability a few versions ago, and those changes can only be done on the master QBW file.

Assuming the program hasn't been changed too much, if you make those edits to the payroll items now, they will be effective for all payroll entries in your data file, including all prior years.  This will make doing the 2006 1120S even easier.

Kerry

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 12:21:00 PM Send this post:

Q:

Subject: S-Corp Timeshare purchase

 

I have a client who’s S-corp (family owned) purchased a timeshare for use as the location for the Corporate Annual meeting.  Would the S-corp be able to depreciate this assets…if so what type of Asset would this property be termed as?

A:

 I have seen a lot of small corps buy timeshares for purposes of their annual meetings. 

I have depreciated them over the standard 39 years for commercial real estate and expensed the annual maintenance fees.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 11:56:00 AM Send this post:

Q:

Subject: C corporation question

Hi, I'm enjoying your blog.  I have a question I'm having difficulty getting the answer to.  If a C corporation is doing something illegal, it can expose officers to personal liability, but does the corporation have an obligation to inform shareholders of the illegal activity?  I don't know whether you might be familiar with this issue.  I'm guessing it might be covered by SEC rules?

Thanks for any info.

A:

Any time there is a financial element involved, there is a fiduciary responsibility to not harm or do things that would jeopardize the value of the assets entrusted by others. 

In a case such as you describe, officers of a corp have a definite legal responsibility to do everything possible to safeguard and protect the value of the shareholders' equity in the company.  Any officer who uses corp assets and resources to conduct an illegal activity, which would obviously harm the value of the shareholders' investment, would be civilly liable to those shareholders, in addition to any criminal prosecution for their acts.

Part of the fiduciary responsibility includes full disclosure of anything possibly relevant to the value of a shareholder's investment in a corp.  If pertinent information were withheld from the shareholders that would have an effect on their decision to hold or sell their investment, that would also be actionable.

The laws for specific remedies available to shareholders vary by state; so an attorney in the applicable state should be consulted as to how to proceed to recover compensatory damages.

I hope this helps.  Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 11:51:00 AM Send this post:

Q:

Subject: Section 179

I read with interest your page on Section 179 deductions.  It doesn't mention where to put the deduction found on line 12 of form 4562.  Many of us that expense simple items like computers need to know where to transfer the line 12 deduction.  Can you help please?  Thanks.

A:

The Section 179 amount is added to the regular depreciation expense and shown on the 1040 schedule where the particular asset is being used. This could be C, F, E, or A.

You really should be working with a professional tax preparer whose knowledge and software will ensure that the Section 179 is handled properly.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 11:47:00 AM Send this post:

Q:

Subject: HELPFUL ARTICLE

 YOUR ARTICLE WAS VERY HELPFUL (S VS C CORP)

 

I AM THE WIFE OF AN OWNER IN AN S CORP AND WE FILED OUR TAXES LAST NIGHT. I REALIZED THAT WE ARE DEFINITELY NOT BENEFITTING FROM THE ARRANGEMENT AS THERE ARE THREE PARTNERS IN THE COMPANY.

 

WE HAVE SIGNIFICANT MEDICAL EXPENSES BECAUSE OF A SON WITH DISABILTIES

 

YET LAST NIGHT , THE ACCOUNTANT TOLD MY HUSBAND THAT BECAUSE OF THE PROFIT THAT IS SPLIT OVER THE THREE OWNERS, WE PROBABLY WON'T SEE A REFUND THIS YEAR.

 

MY PROBLEM WITH THIS IS THAT THE OTHER TWO PARTNERS WILL HAVE A TAX BILL AND GET THE BENFIT OF THE COMPANY PAYING FOR THAT.  SHOULD WE ASK THAT THE COMPANY GIVE US SOME DIFFERENCE TO COMPENSATE FOR OUR REDUCING THE TAX BURDEN TO THE COMPANY YET NOT RECEIVING ANY BENEFIT OURSELVES>>> PLEASE HELP ME IF YOU CAN  I DON'T WANT TO SAY ANYTHING TO MY HUSBAND WITHOUT SOMETHING REAL TO SAY

 

THANKS

A:

I'm not really clear on what you are asking.  However, that isn't as important as the fact that you need a good personal professional tax advisor who can help you tailor a strategy for your family's specific needs better than the S corp's accountant can do.  It's really almost impossible for one multi-owner entity, such as your S corp, to be able to properly satisfy the particular needs of each owner.  For example, it may work out that you and your husband need to set up your own C corp to which you can shuffle your share of the S corp income. 

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/03/2007 11:44:00 AM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/02/2007 08:41:00 PM Send this post:

From Nolo Press:

Deductions Your Small Business Shouldn't Miss – Whenever someone asks me to list out all of the possible tax deductions for a small business, I explain that it’s easier to approach it from a different angle. Look at each kind of thing you spent money on and if you can connect it to the operation of your business, directly or indirectly, it’s deductible.  Every business operation is unique, so no list can possibly cover every conceivable possible deduction one would come across.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/01/2007 12:57:00 PM Send this post:

Courtesy of The Late Show

These would also apply to tax pros.

Top Ten Signs You Have A Bad Stockbroker

10:   When stocks go up, his pants go down

 9:   He's unavailable whenever "General Hospital" is on

 8:   Invested your entire portfolio in JetBlue

7:    Instead of Wall Street, he works at Wal-Mart

6:    He shaves his head and goes into rehab

5:    Hot stock tips, no -- nude photos of Alan Greenspan, yes

4:    Keeps using the word Ga-zillion

3:    No number 3 -- writer depressed after losing everything in stock market

2:    A few years back told Martha, "Sure it's legal"

1:    Claims he once had a three-way with Morgan Stanley and Merrill Lynch

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/01/2007 11:53:00 AM Send this post: