Labels: NewTaxLaws, Reference

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2008 01:59:00 PM Send this post:

This latest news release from the Calif. Franchise Tax Board, titled "FTB Reminds Taxpayers to Select Tax Preparers Wisely" has some good advice, along with a link to download their brochure on how to select an income tax preparer.

The following part of the news release sounds like it could be part of a Letterman Top Ten list; but it is unfortunately a true indication of the quality (or lack of) with some people in our profession.

Some common signs that a tax preparer may be abusive include:

· Claiming they can get bigger refunds than other tax preparers. Someone unfamiliar with your financial situation cannot make such a guarantee.

· Basing their fee on a percentage of the refund amount rather than the complexity of the tax return.

· Filing schedules where the information is fraudulent or lacks documentation to support the income or deductions.

· Refusing to sign the tax return as the paid preparer or not providing a copy for the taxpayer’s records. The preparer is required by law to sign the return.

· Require you to sign a blank return or in pencil.

· The preparer is not properly licensed or registered.

Labels: preparers

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2008 01:20:00 PM Send this post:

From a Reader:

Hi Kerry,

We just posted an article "50 Tools and Resources for Freelancers During Tax Season" 

I thought I'd bring it to your attention just in case you think your readers would find it interesting.

Either way, thanks for your time!

Amy S Quinn

My Reply:

Amy:

That's a very impressive listing of useful articles.

I'll be sure to post a link to it on my blog.

Kerry Kerstetter

Labels: Reference

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/27/2008 01:26:00 PM Send this post:

Q:

Subject: article

Thank you very much for your insightful article on S vs. C Corporations. I have a quick question I am hoping you can help me answer. You mention the possibility of double taxation with a C Corp on paying out dividends, what about paying myself commissions? Would that be similar to paying myself a salary? I have a small business, myself and sub-agents that I 1099 each year.

Please advise. Your response is greatly appreciated.

Thank you,

A:

You absolutely must be working directly with an experienced professional tax advisor on matters such as this.

Avoiding double taxation is very easy and is accomplished by shifting income from the C corp to yourself as an individual via expenses that are deductible from the corp's taxable income and are then taxable income on your 1040.

The most frequently used types of corp expenses for this are W-2 salaries, 1099 commissions, rents, royalties and interest payments. However, these are not equal in the overall tax burden they create because some of these are also subject to payroll taxes, while other ones are not.

That is why you need to work with a tax pro who can look at the big picture to help you achieve your goals, while minimizing the overall tax bite.

Good luck.

Kerry Kerstetter

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/27/2008 01:21:00 PM Send this post:

Q:

Subject: section 179

Kerry,
I don't know if you will read or answer this email but here goes with my question.  According to my CPA some
items that I purchsed in '07 will qualify for a section 179 deduction on my taxes.  When I read your blog I got really confused.  Let me explain my situation.

1031 exchanged residential real estate property that is fully depreciated.  Original purchase 1981.
In 2007 I remodeled and purchased ref, stove, dw, new tile & carpet flooring & new kit. countertops.  Cost
aprox $10,000.  Will these purchases qualify for 179?

I am retired and own two residential rental properties one rented 12 mos., the other only seasonal.

Thanks,

A:

The ability to deduct the costs of the new items depends on which schedule you are using to report the income and expenses for the properties.

For residential rental property reported on Schedule E, assets used there are specifically not eligible for Section 179 expensing.

For properties that are rented out for an average of less than seven days at a time, and which are thus reported on Schedule C, movable equipment purchased for those properties are probably eligible for Section 179 expensing, subject to the other limitations on Section 179.  Items that become a permanent part of the structure, such as tiling, flooring and kitchen counters, are not eligible.

Your professional tax advisor should understand the difference between these two types of rental properties and understand which types of equipment qualify for Section 179 and which don't.

Good luck  I hope this helps.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/27/2008 01:16:00 PM Send this post:

QuickFinder has a handy three page PDF summary of the Economic Stimulus Act of 2008 that can be downloaded for free. 

Labels: NewTaxLaws

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/26/2008 02:51:00 PM Send this post:

Labels: comix, taxes

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/26/2008 12:11:00 PM Send this post:

Courtesy of the Wall Street Journal's Opinion Journal

Labels: Clients, comix

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2008 10:48:00 AM Send this post:

Man Accused of Stealing 7-Year-Old's ID

Photo courtesy of FreakingNews.

Labels: comix, IRS, scams

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2008 07:57:00 PM Send this post:

From a client when sending in info for her 2007 tax returns:

… Also faxing a new item to consider - statement from manager of an LLC I own shares in, in which original investment was $15,000, showing a gradually-declining value of the company to a supposedly-possible low of $0.20 on the dollar.  This whole deal is in turmoil with questionable value.  Please let me know if some of this decreased-value loss can be deducted on the 2007 return and if some can be carried over or taken in future years... 

My Reply:

In regard to the offer to buy out your shares in the LLC, there can be no tax breaks until you actually make the sale.  Just the fact that the value of the shares has declined does not justify any kind of loss deduction on your tax return.

This may seem unfair; but it works in both directions.  Fluctuations in values of assets do not trigger tax consequences in either direction. Just as the fact that real estate with a very low cost basis may be worth $500,000 right now doesn't trigger a tax on the increased value until you actually sell the property, it is exactly the same thing with decreased values.  Since there is always the potential for the value to go back up, you can't claim an actual loss on your tax return until you sell the shares.

This is actually a common issue with many people who evaluate their investment portfolios at year end in the hopes of harvesting some tax losses that can be used to offset other gains they may have.  In order to avoid abuses in this area, IRS does have what they call the Wash Sale rule.  If the loss stock is repurchased within 30 days of the sale, no deduction is allowed for that loss and it has to actually be added to the cost basis of the replacement shares.  I just mention this in case you may be considering selling your shares to lock in the loss and then buying them back. You can do this and claim the loss, as long as you wait more than 30 days to make the repurchase.

I hope this is clear.  Let me know if you have any more questions.

Kerry

Labels: CapGains

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/23/2008 05:27:00 PM Send this post:

Labels: audits, comix

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/22/2008 06:42:00 PM Send this post:

(Click on image for full size)

Labels: Charity, comix

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/22/2008 04:48:00 PM Send this post:

From last night’s Tonight Show, as quoted by NewsMax:

This week on TV, John McCain said, “No new taxes.” You know who else said that . . . Wesley Snipes.

Labels: humor

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2008 02:02:00 PM Send this post:

Q:

We owned our home for more than five years and had it rented until 9/1/05 when it become our primary residence?  The IRS is asking us how many days we lived in California?  Before I put the answer on my tax form I would like to know if we spent approximately tow month traveling to our second home in Texas will it disqualify us for the exclusion?  We had to sell the home because of financial reasons.  This property become our primary residence on 9/1/05 to 11/8/07.  We had all our mail there, utility bills, bank accounts and registered to vote.  Thank you for your help as I am worried about this.

A:

You really need to be working directly with a tax pro to make sure everything is handled properly rather than trying to work through the rules on your own.

You are obviously trying to see if you qualify for the ownership and occupancy test of two out of the previous five years in order to be able to qualify for the full tax free exclusion.  You seem to be confused as to whether visiting your second home doesn't allow you to count that time as part of your time in the primary home.

As any competent professional tax advisor should be able to tell you, the occupancy rule doesn't require that you actually be physically present in that house for 24 hours of every single day or even every single day that you are counting.  Real life for most people does include time spent away from their main home for various reasons, be they business, medical or purely personal.  As long as your primary residence is still considered your main base of operations, time you spend away temporarily at another location, including your own second home in another state, shouldn't count against you.  As long as you don't take any of the steps to change your official primary residency away from the one you have had, you should be able to count that time as part of your ownership and occupancy.

Besides dealing with this issue, you will also need the assistance of a good tax  professional to help you calculate the proper adjusted cost basis of your old home, including adjusting it for deprecation, to see if the exclusion will be enough to cover your paper gain.

Good luck.

Kerry Kerstetter

Follow-Up 1:

Thank you for your reply.  I will contact a CPA and have him do our taxes.  I appreciate your advise.  The only reason that I became paranoid is the form ask" how many days did you spend in California."  We spent two years less about 90 days that we spent in our second home.

Follow-Up 2:

Thank you for your time in answering my question.  I have made an appointment with a CPA.
Sincerely,

Labels: 121

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/20/2008 05:35:00 PM Send this post:

From WebCPA:

Safe and secure: Protecting funds in a 1031 exchange 

Tax reform looms large in race for White House

McCain Makes No-New-Taxes Pledge – We know how well these kinds of pledges work out in the real world of DC.  Given McCain’s well known desire for Ted Kennedy’s approval, this promise will be broken so much faster than George Bush 41 reneged on his famous “read my lips” vow that it will be ridiculous.

From Nolo Press:

Top Tax Deductions For Your Small Business

Understanding Small Business Tax Deductions

Preparing for a Business Audit

Current vs. Capital Expenses

Top Ten Tax Deductions for Professionals

What Auditors Look for When Examining a Business

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/19/2008 09:03:00 PM Send this post:

Labels: comix, taxes

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2008 09:12:00 PM Send this post:

Labels: Charity, comix

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2008 07:59:00 PM Send this post:

Labels: comix

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/16/2008 08:39:00 PM Send this post:

Q:

Subject: Exchange Question

Will I invalidate the 1031 exchange if I don't use all the money held in escrow to buy replacement property? 

A:

Not reinvesting the full amount of your disposal leg proceeds won't invalidate the 1031 exchange if everything else has been done properly.

However, it will, in most cases, not allow you to roll all of the gain from the original property into your replacement property.  The actual calculation for the Form 8824 worksheet is a little messy; but the quick and dirty way to look at is that the unreinvested funds will be taxable in the year that you receive them.  For example, if your disposal leg happened in 2007 and the 180 day reinvestment period expires in 2008, and you are sent the remainder of the funds in 2008, the taxable portion of the gain will be shown on your 2007 tax return as a deferred installment sale, with the actual gain subject to tax on your 2008 tax return.  If both ends of the exchange happened inside the same tax year, the unreinvested potion will be subject to tax on that year's tax return.

The tax rate that the unreinvested funds will be hit with will be the highest rate applicable to the property's disposal.  This normally works out to be the 25% Federal depreciation recapture rate, plus the comparable state rate, if you or the property are located in a taxable state.

I hope you're picking up on the fact that the actual tax calculations are very tricky and are not something you should even think about attempting on your own.  The services of an experienced professional tax  preparer will more than pay for themselves in a case like this.

Good luck.  I hope this helps.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2008 03:09:00 PM Send this post:

Q:

Subject: Question about security deposit and 1099

We (the tenant) just received a 1099 for a refund of our security deposit (office space that we rented) from a previous landlord. It is my understanding that security deposit is not income to the landlord when received nor to the tenant when returned to the tenant. It would only convert to income if it is forfeited and that would be income for the landlord not the tenant.  Can you point me to some printed verification of my thought or tell me I am incorrect?

Thanks for your time

A:

How landlords treat the handling of security deposits is optional.

One way (and the technically correct way) is to book it when received into a liability account and not as income.  If it is later forfeited by the tenant, it is transferred from the liability account into the Rent Income account.  If it is repaid to the tenant, the check is posted to the same liability account as the deposit was and would thus not be a deduction from current year income.

Since that is a little too complicated for many people to keep track of, what is more commonly done in real life is for the landlords to use a more pure cash basis of reporting rental income and expenses.  Under this method, all monies received, including potentially refundable security deposits, are reported as rent income in the year received. Any security deposits refunded to tenants are then deducted as expenses in the year paid out.

As long as the security deposits are handled consistently under whichever method the landlord chooses, things will be fine.

This only applies to money specifically designated as security deposit and does not apply to any money paid by the tenant which is specified as Last Month's Rent.  That is taxable income to the landlord in the year it is received, even though the last month could be several years away.

Here is an excerpt from Page 7-5 of the latest edition of The TaxBook, a reference source any good tax pro should have:

"Security deposits. A security deposit is not included in rental income when received if the property owner plans to return it to the tenant at the end of the lease. If any amount is kept during the year because the tenant did not live up to the terms of the lease, include that amount as rental income. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent and is included as income in the year received."

It seems like your landlord is probably using the second method of accounting for security deposits on his tax returns and is planning to claim the refund as an expense on his current tax return.

As your own personal professional tax advisor will most likely confirm, your treatment of the refunded security deposit on your tax return will need to be consistent with how you accounted for the original payment of that deposit.  If you followed proper accounting methodology and booked it into an asset account on your books, the refund will be posted to that same asset account and will not be income to you.

If, on the other hand, you deducted that payment as a rent expense, you will need to pick up the refund as either income or a reduction of the current year's rent expense.  The latter would be the proper way to handle a refund of a previously deducted expenditure.

I hope this helps.  Your own professional tax advisor can give you more specific advice on this matter.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2008 03:00:00 PM Send this post:

Q:

Subject: Amortizing the cost of acquiring a mortgage

Hello Kerry:

Thank you for providing such wonderful information.

My question is rather simple.  I acquired rental property in 2007 and want to amortize the loan costs.  I understand how to calculate the amortization and that it is reported on line 18 ("Other") of schedule E.  However, since I acquired the property (and mortgage)in 2007 I need to file Form 4562.  The amortization is done in Part VI of the form and everything is fairly straightforward except for 2 things. 
1) What do I list in column (d) - "Code section"?

I've searched the IRS site and the intranet high and low but can't seem to find any information on this.  Form 4562 instructions list some codes, am I to use one of them?  The only one that seems to make sense is Section 197 - Certain intangibles.

2) If I put "Property A loan origination costs" as a description, can I use a 5 yr amortization like you suggest?  If I use code 197, am I stuck with a 15 yr term?

Thank you.

A:

When I enter a new loan costs item into the Lacerte depreciation schedule, I always choose Code Section 461 - Points as the appropriate amortization code section and manually enter the number of years that is appropriate for that particular item.  I've been doing that for over 20 years in Lacerte and IRS has never once had any problems with it; so that should work for you.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2008 02:48:00 PM Send this post:

Q:

Subject: section 179 limits

Hi Tax Guru:

I have just finished reading the 179 entry on your website. Quick question, as a small business owner, can I purchase a new 6000 lb suv every year to qualify for the $25K deduction?

A:

Of course you can, if you want that many SUVs.  I used to have a client who traded in his car every six months for a brand new one.

As I've discussed numerous times, there are tax consequences to the way in which the old SUV is disposed of; selling vs. trading.

Your personal professional tax advisor can give you more specific info for your unique situation.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2008 02:41:00 PM Send this post:

Q:

Subject: Confusion...

Kerry - Thanks for having your webpage! I found it very interesting reading. Unfortunately, I'm still wondering if I'm doing things correctly.

Suspect some background would be good:

I'm divorced, and paying child support (for another 5-6 years), and alimony. My wife had legal access to my 1040's until now (that has ended in 2008 without a court order).

I've remarried to a legal resident, but non-US citizen (think thats relevant to S-Corp designation?). We formed a C-Corp in late 2006 to deal with single family home rentals we were interested in doing. Since then, we have grown to 6 homes in the area. Someday we would like to own 10, but no more. All are mortgaged in my name, since personal mortgage rates are WAY lower than Corporate mortgages. The C-Corp is the public interface that manages the property, accepts rental payments, pays the mortgages, reimburses travel expenses, etc.

At 10 homes, this company MAY generate $5000/month in profits in perhaps 10 years - and will be losing money or barely breaking even for some time. It was our plan to simply pay my wife a salary to drain that income from the company.

I am wondering if I should convert this C-Corp into an S-Corp, or LLC, in order to simplify accounting. e.g. Turbo-Tax handles rental properties well... and Intuits Rental Property Manager can feed Turbo-Tax directly. This would reduce (eliminate) my dependence on a local CPA that if a MAJOR expense ($150/hr and he loves to try and verify every transaction that occurs in the year, running up the total bill).

Any suggestions?

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.  You will need to work directly with an experienced tax pro who can analyze your unique circumstances.

I wish I could be more 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.  You should note that geographic location should not be the main criterion for selecting a tax pro.

I do want to caution you from making these kinds of decisions based on your tax and accounting fees.  That is a very short-sighted approach to this kind of thing.  For example, I have plenty of clients with corporations whose annual charges are at least a thousand dollars more each year than they would be if we only had to prepare an annual 1040. However, I know for a fact that in almost every one of those cases, the proper use of their corporations allows them to reduce their overall tax bill by anywhere from $10,000 to as much as $50,000 each year.

I have long advised that there are what I call nuisance factors in having to keep separate books and file separate tax returns for corporations.  Only you can decide how much those factors are worth in dollars and cents.  However, for most people, spending a little extra time and $1,000 more in professional fees in order to save well more than $10,000 in taxes each year makes the nuisance factor seem quite affordable.

As I've constantly warned, there is no one size fits all in terms of the proper entities to use.  C corps do have a lot of tax savings opportunities if you work with an experienced tax professional.  Either way, if you were to use an S corp or an LLC, you would still need to keep separate books and file special income tax returns for them; so I don't see how that should be much of a factor in your decision process.

Also, as I've warned for decades, if you think any tax software, whether it's the consumer oriented TurboTax or the extremely expensive professional Lacerte software that I use, can take the place of a good tax pro, you are dangerously mistaken.  Nowhere is the adage of garbage in, garbage out more appropriate than with tax software.  Saving a few hundred dollars by trying to prepare your own tax returns is insane. Any good tax person will save you much more in taxes than his/her fee, as well as give you more protection against screwing things up on your own.

I'm sorry to be so blunt; but these points needed to be made.

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

Kerry Kerstetter

Follow-Up:

Appreciated Kerry - I'll go surf your section on selecting a tax preparer.

Thanks,

Labels: corp

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2008 02:34:00 PM Send this post:

The folks at the increasingly useful TaxCoach software have just produced the following handy and concise summary of the new tax law that can be automatically personalized for clients set up on their system.

President Bush has just signed a $168 billion stimulus package to prop up the economy and help prevent a recession. News reports have focused on tax rebates for individuals. But you may not realize that the package includes generous incentives for buying business equipment as well.

Want more cash in your pocket? The new law reduces the 10% federal tax bracket to zero for 2008 -- then delivers the savings now in the form of rebates ranging up to $600 for unmarried individuals, $1,200 for married couples, and $300 per child up to a maximum of $600. This break phases out for incomes above $75,000 ($150,000 for joint filers).

The new law also gives you a 50% bonus depreciation deduction for new equipment you buy for your business in 2008. It raises the Section 179 first-year expensing limit from $128,000 to $250,000. And it doubles the phaseout for Section 179 deductions from $400,000 to $800,000. This is great news if you're planning to buy vehicles or equipment for your business, or even to renovate business premises.

This is a special, limited-time break, so before you buy new equipment, be sure to call us.

Labels: NewTaxLaws

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2008 07:38:00 PM Send this post:

Q:

Subject: Section 179

My wife is currently are using the standard mileage deduction on a Chevy we transferred into business service 4 years ago.  We are expecting a large tax liability this year and next year my wife is taking off 3 months from her LCC business (she uses schedule C for business income) so we want to take the section 179 depr deduction this year.

If we buy the car on 12-31-07 and put it into service that day, it will be used 100% this year for the business.  The existing vehicle (which will be traded in with a $10,000 trade value) will have about 75% business.  Can I still claim 100% of the 179 deduction on the new SUV?

If next year the business use drops to 75% is there any recapture requirements or does that only effect next years actual cost deduction?

Finally, any problem with using both the standard deduction on the old vehicle for 2007 (it will be taken out of service on 12-28-07) as well as using the 179 deduction for the new car?  The cost of the new car is $45k, with the trade in my cash loan is $35k so I have $10k for deprecation, would I use the 30% or 50% method going forward in future years for the $10k left to deduct using the actual method?

Is the trade still considered like kind even though I changed deprecation methods?

I know this is late in the season, but we are making the purchase, now we have to decide how to handle the tax issues.

Thanks

A:

You really need to be working with a professional tax advisor on matters such as this rater than trying to stumble your way through the tax maze on your own.

Just some quick answers to your main queries.

There is no actual Section 179 or deprecation recapture required in subsequent years unless the business usage percentage drops below 50% or the asset is sold.  If you claim 100% business usage for 2007 and then the business usage drips to 75% in 2008, the 2008 depreciation deduction will most likely be zero, depending on how much of the purchase price you are expensing for 2007.

The numbers you gave are a little confusing.  Basically, the amount eligible for Section 179 expensing is the excess of the new vehicle's purchase price over the trade in allowance you are given.  For example, if the new vehicle is costing $45,000 and the dealer allows you a net of $10,000, the extra $35,000 is available for the Section 179, subject to the various other limits.  If there is a pay-off or assumption of an old loan on the old vehicle, the calculation changes, with a lower amount being available for Section 179.

Any undepreciated cost of the older vehicle would continue to be depreciated over the life of the new vehicle.  Since you have been using the standard mileage method, you will definitely need to have a professional tax advisor do the basis calculations on the old vehicle, the like kind exchange worksheet and form (8824) and the new basis of the replacement vehicle.  Like kind has to do with the vehicle for vehicle and the fact that you are going to be using different deprecation methods for the new vs old one doesn't have any bearing whatsoever.
 
Again, you should be able to see that this can get very messy on your 1040 and you definitely need to be working with a tax pro who can see that everything is reported properly.

Good luck.

Kerry Kerstetter

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2008 11:36:00 AM Send this post:

(Click on image for full size)

Labels: comix, Rebates

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2008 11:23:00 AM Send this post:

Labels: comix, TaxCuts, TaxHikes

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2008 09:15:00 PM Send this post:

Courtesy of the most recent email bulletin from ACAT.

If you are considering a like-kind exchange (also known as a Section 1031 or Starker exchange), you need to review the IRS regulations that apply…and do it right.

Like-kind exchanges allow investors to defer taxes when they dispose of property they currently own and replace it with similar property.  However, the Internal Revenue Service plans to increase audits and enforcement of these exchanges beginning mid-2008.

Usually when a business or investment property is sold, the seller must pay tax on any profit.  The tax varies depending on the type of income and the current tax rate.  For example, if you purchased land for $100,000 and sold it for $200,000, you could expect to owe $15,000 federal income tax on the transaction, assuming a current capital gains tax rate of 15%.

With a like-kind exchange, it is possible to purchase property for $100,000, sell it for $200,000, buy another like-kind property for at least $200,000, and avoid income taxes on that sale.  But you have to follow the IRS rules precisely, and this requires planning prior to the transaction.

First, the property sold and the replacement property must be “like-kind.”  IRS rules and regulations offer guidance to help determine what qualifies as like-kind property.  For example, you can exchange a single-family home for an office building, or an apartment complex for a shopping center. But you can’t exchange your home for an oil well and you can’t exchange real property for a business. 

Second, many like-kind exchanges will require the assistance of a qualified intermediary in order to comply with all of the requirements for a tax-free exchange.  You can usually find a qualified intermediary in your area by checking the Yellow Page listings under “Title Companies.”

All like-kind exchanges must be reported to IRS by filing Form 8824 with your federal income tax return.

Sounds confusing?  Studies by the IRS and the Government Accounting Office have found consumers don’t understand the rules.  But help is on the way.

The IRS has updated Publication 17 “Your Federal Income Tax” to better tell taxpayers about like-kind exchanges.  Additional information about the like-kind exchange process is found in IRS Publication 544 “Sales and Other Dispositions of Assets,” and in the instructions for Form 8824.

There are significant savings you can realize. But the best advice is to get your accountant involved at every step.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice.  For information on how these general principles apply to your situation, please consult an accounting or tax professional.

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2008 01:54:00 PM Send this post:

Courtesy of the most recent email bulletin from ACAT.

Did you hold a garage sale this year to get rid of excess “stuff”?  Or maybe you auctioned items on eBay…or started a home-based business of on-line auction sales?  The IRS has rules and guidelines to follow in reporting your income from these sales.

Did you sell a few personal items on eBay?

If you auctioned a few personal items on eBay and the sale price was less than what you paid for the item (or its depreciated value), you generally do not have to report this income on your tax return.

Did You Have an Online Garage Sale?
If your online auction sales (eBay or some other online service) are the Internet equivalent of an occasional garage or yard sale, you generally do not have to report the sales. In a garage sale, you generally sell household items you purchased over the years and used personally. If you sell the items for less than you paid for them, the sales don’t have to be reported on your tax return. Losses on personal use property are not deductible, either. However, see below for gain reporting.

Did You Sell Appreciated Assets at an Online Auction?
An “appreciated asset” is something that has increased in value with the passing of time.  Examples of appreciated assets often include art, antiques and collectibles. If you have online auction sales of property where the sales price is more than your cost, you usually will have a reportable gain. These gains may be business income or capital gains.

Did You Start a Home-Based Online Auction Seller Business?
If your online garage sale turned into a business and/or you have recurring sales and are purchasing or producing items for resale with the intention of making a profit; you may have started an online auction business.  The sales of these items must be reported on your income tax return.

Are Your Online Auction Sales a Business or a Hobby?
If you regularly purchase or produce items to sell online, you must report the income on your income tax return.  How you report that income depends on whether your online auction sales are considered a “business” or a “hobby.”  The factors to consider in making this determination are discussed at length in IRS publication 535.  In summary, the activity is a hobby if it is done primarily as a recreational activity without a distinct profit motive.  The activity is probably a business if it is carried on in a businesslike manner with a clear profit motive. 

If your online sales constitute a business, the income is reported on Schedule C, Profit or Loss from a Business.  Allowable business expenses are also listed and deducted on the Schedule C, so that only the net profit or loss is included in your adjusted gross income.    

If your online sales are a hobby, your expenses can not exceed the income from the activity, i.e. you may not show a loss.  You may not deduct any expenses at all unless you itemize your deductions on schedule A of your tax return.  In addition, your expenses may be reduced by a percentage of your income. 

Did You Sell Depreciated Business Assets?
If you sell business assets or close your business, you may have capital gains, ordinary gains and depreciation recapture to report. An example is the sale of an automobile used for business.

If you have questions, see your tax professional for details and instructions on your specific situation.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice.  For information on how these general principles apply to your situation, please consult an accounting or tax professional.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2008 01:47:00 PM Send this post:

Courtesy of the most recent email bulletin from ACAT.

If you are like most Americans, you make donations throughout the year.  Your schools, religious groups, museums, Salvation Army, Cancer Fund and many more non-profit organizations benefit from your giving.

The U.S. Congress recognizes the benefits of your generosity and has steadfastly maintained deductions on your federal income tax for charitable giving.  But this doesn’t mean that there aren’t regulations to be followed.  And the rules have gotten stricter for reporting charitable gifts on your 2007 tax return.

Donations of Cash

The good news: You are still permitted to take substantial tax write-offs for charitable contributions – as high as 50 percent of your adjusted gross income.

The old news: Charitable contributions of $250 or more require a specific written acknowledgment from the charity. 

The new (stricter) news: Any out-of-pocket cash donations you make without documentation cannot be deducted. No longer can you deduct cash dropped in the collection plate at church or synagogue.

The solution: Get a receipt for all donations.

All donations must be documented by a bank record (cancelled check or bank statement) or a written communication from the charity.  The documentation must include the name of the charity, the date of the contribution, and the amount of the contribution.

For contributions of $250 or more, you can deduct the contribution only if you have an acknowledgment of your contribution from the charity.  A bank record is not sufficient documentation for a donation of $250 or more.

Donations of Clothing and Household Goods

The good news: These donations are still deductible.

The hard to understand rules:  Experts are still working on how to interpret the language which reads, “to be deductible, clothing and household items donated to charity after August 17, 2006, must be in good, used condition or better.”  How does a taxpayer document the condition of used items?    One option: Consider taking photos.

The documentation required for deduction of a non-cash donation varies with the amount of the deduction.  If the deduction is less than $250, only a receipt from the charitable organization is required.  For a deduction of $250 or more, a written acknowledgment from the charity is needed.  If the deduction exceeds $500, detailed information on the items donated must be reported on your tax return.  For donations exceeding $5,000 in value, a qualified appraisal is required to support the valuation.  Recommendation:  For all non-cash contributions, keep an itemized detailed inventory of what you donate including cost, date bought, condition and current value.  Consider an appraisal or other means of documenting the value of expensive items that you plan to donate to charity.

In all cases: Consult your tax advisor for help with your specific situation.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice.  For information on how these general principles apply to your situation, please consult an accounting or tax professional.

Labels: Charity

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2008 01:42:00 PM Send this post:

(Click on image for full size)

(Click on image for full size)

Labels: comix, Rebates

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/13/2008 12:46:00 PM Send this post:

The folks at The TaxBook have released a very handy six page pdf explanation of the new bill that everyone should download and keep handy to explain to clients.  It includes much more detail on the increased Section 179 and special 50% depreciation allowance than you will find anywhere in the drive-by media, which have been only covering the ridiculous rebate portion of the law.

Labels: TaxCuts

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/11/2008 03:40:00 PM Send this post:

(Click on image for full size)

Labels: comix, TaxHikes

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/10/2008 11:40:00 AM Send this post:

This guy in Oregon learned a very expensive lesson about how not to pay his taxes.

The investigation started when a Benton County tax clerk noticed that the $600 in cash that Michaelis used to pay his taxes smelled like marijuana.

He should have used a different kind of money launderer first.

 Thanks to Neal Boortz for this story.

Labels: Money

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/09/2008 10:42:00 PM Send this post:

Q:

Subject: Cash Gifts

My 90 year old grandfather has been giving my brother and I $11,000 each for the past 2 years. I do his taxes but have not been showing these payments on his tax return as he does not itemize. How do I show these as cash gifts? Do I have to itemize to do this?

 

Thanks for any advice or tips you may have.

A:

Gifts are not shown anywhere on income tax returns, either for the giver or the recipient.  They are not deductible by the giver, nor are they taxable income to the recipients.

The Gift Tax system is actually separate from the income tax system.  If your grandfather were to give any single person more than $12,000 during a calendar year, he would have to file a Gift Tax return (Form 709).  There are exceptions for certain other kinds of expenses, such as medical and education costs.

If he starts giving away more than the annual $12,000 tax free limit, he should be working with a qualified professional tax advisor.

You can see more about the Gift Tax on my website. 

Good luck.

Kerry Kerstetter

Labels: Gifting

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/09/2008 08:03:00 PM Send this post:

Labels: comix

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/08/2008 06:56:00 PM Send this post:

Labels: comix, cpa

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/08/2008 06:15:00 PM Send this post:

As I had been predicting, the economic stimulus program from our rulers in DC includes a very generous increase in the maximum Section 179 deduction.  All of the media attention regarding the stimulus bill has been on the tiny rebates and they have overlooked and ignored this very substantial tax break for small businesses. 

Here is how it is explained in the recent Spidell Flash E-mail:

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/08/2008 05:41:00 PM Send this post:

Q:

Subject: Section 179 deduction for 2008

The information was last updated Oct 2007, I was just wondering if it still correct because there is different info on other sites?

Thanks

Regards,

A:

That info is correct.

We're still waiting to see if the current debates over economic stimulus plans will include an additional increase in the maximum Section 179 deduction.  If it does, I will update my web site info.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/08/2008 01:53:00 PM Send this post:

Q:

Subject: Re: INFLATION ADJUSTMENTS [LACK THEREOF]

Dear Tax Guru Blog,

Kerry, since I've only been a CPA since 1990, I asked an "old-timer" how long the $3,000 capital loss per annum limitation has been in place...
yes, that's right... since 1951.
I don't know a way to verify this, I just wanted you know how ridiculous the term of this limitation has been. Feel free to cut loose on a rant about this; because, as we know, this never hurts wall street insiders or white collar slicksters, it only hurts the working class, the weak, and the elderly.

Here's wishing you and yours the best of health,

I've done more than my share of ranting about this extremely unfair double standard in the tax code over the past decades.

I'm not sure about that 1951 starting date. My recollection of when I started preparing tax returns in the mid 1970s was that the annual limit was only $1,000 per person; but I can't lay my hands on a full history of this idiotic rule right now.

The aspect of this that has always fried me the most was the fact that unused capital loss carry forwards evaporate upon death. I have written on a few occasions about a client who was in his 80s and had almost a million dollars of stock market losses that I knew would end up going to waste at the measly $3,000 per year rate of use. He passed away in the middle of 2007 and I have had to break the news to his heirs that those unused losses are gone forever as well.

Unfortunately, we don't hear any of our supreme rulers in DC mentioning changing any part of this ridiculous rule; so we'll just have to continue living with it for the foreseeable future.

Thanks for writing and good luck with this tax season.

Kerry Kerstetter

Labels: CapGains

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/07/2008 01:01:00 PM Send this post:

Labels: comix, TaxCuts

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/07/2008 12:49:00 PM Send this post:

Labels: comix, cpa

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/05/2008 10:40:00 AM Send this post:

Labels: Accounting, comix

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/04/2008 07:14:00 PM Send this post:

Richard Hatch's tax conviction upheld


Actor Wesley Snipes Acquitted of Tax Fraud, but Convicted of Failing to File a Tax Return – This seems to be one more example of the stupidity of people in Florida.  Maybe we we’ll later discover how they determined what Snipes had done wasn’t fraud.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/01/2008 10:50:00 PM Send this post:

Q:

Subject: section 179

Hi,
Was just inquiring, as far as you know, is the deductions for the above section still in effect? There was speculaion about it being cancelled by congress this year.If not can it still be used?

If anything will be changed about the Section 179 deduction this year, it will be to raise the maximum amount that can be claimed; not lower it.

If our rulers in DC are serious about attacking what they perceive as an upcoming economic recession, they will encourage more spending on equipment by small businesses by making Section 179 more generous. Historically, that has been done many more times as a means of kick-starting the economy than has the ridiculous rebate program that is receiving more of the publicity right now.

Be sure to work closely with your own personal professional tax advisor to keep abreast of how the Section 179 can be utilized most efficiently for your unique circumstances.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/01/2008 06:24:00 PM Send this post: