My Quicken Tips
For some reason, my several years old Quicken Tips have been popping up on the internet search engines, prompting the following recent emails
Subject: Quicken Info Commendation
Thanks for a very informative web page re Quicken although a user for years I learned a great deal from the visit today and am in gratitude.
Subject: Your Quicken Tips Website is appreciated
Dear Mr. Kerstetter,
Being a fairly new user of Quicken Home & Bus. (converted from Money about 4 months ago) and having had the need to... well, shall we say clean it up and reorganize it... due to the launch of a second home business, I came across your website while looking for advice that would help be best utilize it for my needs.
After scouring many websites and forums and uncovering nothing but scattered bits and pieces of the sought-after info I came across your site. Just a quick scan of it has already proved to be of immense help - allowing me to understand how to properly treat returns and rebates, and applying the Class assignment to reduce the number of categories used when differentiating between expenses for each business.
I guess what I'm trying to say is thank you very much for posting your tips, it is appreciated.
I sent this same reply to both writers:
I'm glad to see that you found the info I've posted useful.
While I have no plans to add any more info specifically on Quicken to my website, I will be adding quite a bit of tips for QuickBooks, many of which will be just as applicable to Quicken users.
Subject: BeneTrends - ESOP
Hi Kerry, What are your feelings on the ESOP program which allows use of IRA funds for business start ups? I am weighing the options of using a small business loan, home equity or tapping my IRA for approx 150K.... Any advice is greatly appreciated. Thank you
I'm still as supportive of using one's own retirement account for a new business start-up as I was when I wrote my earlier article on this eight month ago:
There must be other companies providing this service; but BeneTrends is the only one I am currently aware of.
High taxes are driving people away from LI - Thanks to Ben Cunningham for this additional example of the steps people will take to reduce their tax burdens.
Lottery winner, 94, sues to get it all now - If anyone's a candidate for the secondary market to sell off her future rights to these payments, this 94 year old woman is. Making her wait 20 years to be paid off is ridiculous.
Nebraska Man May Have Rare Coin. Silver Dollar May Be Worth Millions. - Nice retirement benefit.
Taxes Do Motivate Behavior
Smokers make run on loose tobacco before tax begins - Just another reminder of how much taxes affect personal behavior. One of the long running frustrations in debates over tax issues is that the other side remains so oblivious to this simple fact of life. In their fairy tale world, tax rates can be raised and new taxes can be added and everyone will continue doing the exact same things as before. The fact, as proven over and over again, is that higher rates stimulate less taxable activity and lower rates encourage more. Please remember this in the face of so many calls to raise tax rates to attack the deficit.
This is also the reason I have never been in the least bit afraid of losing my livelihood if we were to achieve our wish and replace the Federal income tax with a national sales tax or any other such change in the way governments fund their activities. People will still need our services to help them minimze those new taxes.
Subject: Section 179 Deductions
I've been studying this section all day, and according to EVERYONE on the internet, a self-employed taxpayer may take a one-time deduction of up to $25,000 on a 6000+ lb. vehicle in the year the vehicle was put into service. BUT, according to the IRS, and 3 CPA's, who I have been on the phone with ALL DAY LONG, no such deduction exists! Where can I find this in an IRS publication? TaxGuru, help me please!
If you go to my blog (www.TaxGuru.net) and use the search tool at the top to look for 179, you will see dozens of postings on this very topic. You can also see it described on my main website at:
Since you don't seem to be doing very well at finding a tax pro who is very current on important tax topics, you should also check out my guide to finding a good tax advisor at:
The Feds have released more details on the six people convicted in the Anderson's Ark tax scam.
I couldn't agree more with Spidell that, in their unquenchable thirst for tax dollars, the rulers of the PRC are crossing even more fairness lines by adding new fangled penalties. Having worked with plenty of other former PRC residents, as well as non-resident owners of investment property there, I know that contacting Governor Arnold and other elected officials to play fair is a waste of time. Non-voters are easy targets for taxation who literally have no ability to punish those who want to fleece them.
AMT Can Complicate Timing of Tax Breaks From Charitable Gifts - Excellent point from the Wall Street Journal. Normally at this time of year, there's a mad rush to get as many deductible expenditures in as possible before January 1. However, if it looks like you will be subject to the insane AMT, you will just be wasting your money because the tax calculation will ignore many of your Sch. A deductions.
As I've frequently said, the tax savings are higher for any deduction that can legitimately be shown on the front of your 1040 instead of on Page 2 via Sch. A. This is just one of the reasons for that.
For those folks still wallowing in the naivete that the AMT only hits the evil rich, this quote should be a wake-up call to contact your elected rulers in DC before it's too late.
The AMT is expected to ensnare 29.9 million taxpayers by 2010, compared with 3.5 million this year, according to forecasts from the Tax Policy Center, a joint-venture of the Urban Institute and the Brookings Institution in Washington. More than half of those affected will be filers with income between $75,000 and $100,000, according to the center's database.
Bush Expected To Delay Major Tax Overhaul
State to tax illegal drugs. Tennessee targets dealers, users with new levy. - Thanks to Bill at HobbsOnline for this perfect example of "if you can't beat them, join them." Since the Drug War is impossible to ever win, governments might as well make some money off of it. Also, as Al Capone found out, not paying taxes is treated by our rulers as much more important crimes to prosecute than other trivial things, such as murder and drug dealing; so those drug pushers in Tennessee had better not miss a payment.
While working on finishing up my 2004 CPE over the past few weeks, I noticed that there are actually plenty of self study courses based on the infamous Enron shenanigans:
Six Convicted in Anderson's Ark Tax Shelter Case - My senses perk up when I see a story that looks like it may be about something going on here in Arkansas; but this isn't one of those. Joe Kristan at Roth & Co. has been doing an excellent job covering this "Ark" tax scam.
Bush Ready to Name Tax Reform Panelists This Week - My invitation seems to be hung up in the mail.
Subject: why aren't corporate brackets indexed?The same goes for the retained earnings limit. Neither have increased for what, 25 years?
You are absolutely right that the C corp tax brackets and threshold for the accumulated earnings tax haven't been changed in far too long and haven't come anywhere close to keeping up with the overall cost of living in this country.
We all take for granted the annual inflation adjustments for the beginning and ending points of individual income tax brackets, as well some other tax items, such as personal exemptions and standard deductions. However, these are a relatively new part of our tax code and are not even beyond repeal. Every so often someone in Congress will float the trial balloon of freezing the individual income tax brackets where they are, along with an estimate of the billions of additional tax dollars the Feds will be able to reap just from the bracket creep, where people just keeping pace with normal inflation in terms of their incomes are pushed into higher percentage tax brackets.
The C corp tax brackets are just one item in the tax code that hasn't been allowed to increase with the cost of living. There are actually several more, such as related to tax free employee benefits and dependent care expenses. For example, $50,000 of coverage under a group life insurance plan was a lot of money decades ago when this became the cut-off point for a tax free employee benefit; but it's nothing today when policies for millions are more common practice. Other unfair fixed dollar amounts that readily come to mind are the thresholds for taxing the benefits of evil rich Social Security recipients. Those figures of $25,000 of gross income for single people and $32,000 for married couples have been in place for so long that more and more people have found themselves having to pay tax on what were supposed to be tax free benefits.
Even parts of the tax code that have inflation adjustments aren't safe. The thresholds for the insane Alternative Minimum Tax (AMT) are actually scheduled to drop in 2006, forcing many more people to pay what was supposed to be a tax on only the evil rich.
When tax laws are passed by our supreme rulers in DC, they include language describing either specific dollar amounts that don't change or a specific provision allowing for an inflation adjustment factor. While I have never had the time to sit down and actually count each and every tax provision as to whether it uses a fixed dollar amount or one that is raised periodically, I would guess that there are more fixed amounts than floating ones. That would actually make a very interesting project for some college tax course. Each student could be assigned a portion of the tax code and tabulate the different threshold amounts and categorize them as fixed or adjustable. Adding them all together to encompass the entire tax code would be quite enlightening.
Back to your original questions about adjusting corporate tax brackets for inflation, I wouldn't hold my breath waiting for that to happen. In our society today, corporations are considered the focus of evil and anything to reduce their tax burden is a very tough sell. We would have better luck asking for inflation adjustments of things affecting lower income individuals.
I realize this is a long answer to a short question; but there are few simple things when it comes to discussion of our Frankenstein tax system.
The blogger take on the issues - A good look by Bruce Bartlett at the growth of specialized blogs, including a few of the tax related ones. He has completely grasped the fact that, while many of the other tax blogs cover taxation issues from an academic and theoretical perspective, mine strives to cover the more practical real world applications. I appreciate the recognition and am glad so many people are able to share so many viewpoints via blogs and the web in general.
As California Deficit Grows, Finance Director Vows 'Honest' Budget, No New Taxes - That will be the day. The rulers in Sacto are no more able to produce anything close to an honest budget than are their counterparts in DC. Smoke and mirrors are standard stock in trade for governmental budgets.
I really do appreciate the assistance of the other tax pros around the country who have been helping me keep up on the various topics we have been discussing here.
Mr Guru - just got off the phone w/Dan Pilla. Some items you may find interesting:1. Regarding the IRS/1040x matter, Dan said he is unaware of any national policy along those lines as we've previously discussed. He did say there is a "Revenue Protection Policy" in effect, which is an apparent threshold of a refund claim that would trigger an audit. Dan said he didn't know the threshold amount, but other than that policy, there is no movement within IRS he can identify. Dan commented that, if such a policy were in effect, it still shouldn't effect someone with a $10,000 or more refund, since one would not want to leave that kind of money on the table. Anyway, I let him know what you & I have discussed, and I said I'd let him know if any other information becomes available.2. I also asked him about those IRS abuse hearings, as you & I discussed a couple of weeks ago. I told him about the Edward Jones teleconference with the former IRS Commissioner denying that the abuses were true. Dan said that the abuses WERE true, and apparently Dan helped put together much of the research (including testifying before the Committee himself!) used during the hearings. He said there has been an effort to discredit the testimony given during the abuse hearings in order to undue the protections put into place as a result of the hearings (since the government now needs more money). I told him I'd let him know what kind of response I get from the Edward Jones people to my inquiry on the Ex-Commish's remarks (as I will you, also).
True, except in places such as the PRC, which charges corporations an annual minimum tax of $800 even if they had no activity at all.
Section 179 Recapture
Kerry- You have a great Website with lots of good information. Thank you for sharing your knowledge. I elected to purchase a SUV in 2004 and will take the 179 deduction. I have a LLC, but purchased it in my name and use it 95% for business. I do not really like driving it. It is OK for me to just give the Vehicle to my wife next year and let her inherit my cost basis which will be zero? Seems like that would be too good to be true. Thanks if you answer the question.
Your "too good to be true" analysis is right on the money.
The law is very explicit that any Section 179 deduction has to be recaptured if the business use of the asset falls below 50% during its normal depreciable life, which would be five years in your example.
Your plan would still have some merit if you are just looking to shift some taxes into a future, possibly lower rate, tax year. You could claim the Sec. 179 on your 2004 1040 and then pick almost that same amount up as income on your 2005 1040 when you convert the SUV to zero percent usage. Actually, the recapture amount will be less than the full Sec. 179 because you only need to pick up as income the excess of what you claimed on your 2004 1040 over what the normal depreciation deduction would have been without the Sec. 179.
Good luck. I hope this clears this matter up for you. Your personal tax advisor should be able to help you decide if claiming the Sec. 179 under these circumstances is a good idea for you and your wife or not.
National Sales Tax - Walter E. Williams' take on the plan to eliminate the insane Federal income tax system and its effects on the out of control spending by our imperial rulers in DC who long ago stopped caring what the US Constitution says about authorized government activities.
What Social Security 'crisis'? - We all know what they say about denial. This idiot's "solution" is to just repeal all of the Bush tax cuts for the evil rich and everything will magically balance out.
Social Security Reforms Could Make or Break Careers - To say nothing of the people who are stuck with whatever our rulers force on us.
Details Cloud Support for Social Security Plan - The opponents of private property ownership are using similar tactics to fight any change to the Social Security system as they do to fight tax reform. They scare everyone with so many different possibilities and details that the only recourse is to stick with the "devil we know" rather than take a chance on anything else that could possibly be worse for some people.
Quicken Rental Property Manager
I just learned that Intuit has another what appears to be unnecessary product on the way to the market place, Quicken Rental Property Manager. We have been using plain old QuickBooks just fine for keeping track of all rental activities for years and years. Setting up a Class for each property makes it a very simple task to complete Schedule E. If Intuit sends me a copy of this program to review, I'll check it out; but I doubt if it will be any more useful than the Simple Start program I reviewed a few months back.
As much as I love the QuickBooks programs, the folks at Intuit are creating a lot of unnecessary confusion with these various new versions that serve no useful purpose in the real world of accounting and taxes. Just a guess here; but it's as if they set a goal of introducing a certain number of new products each year and quantity has taken precedence over quality.
I wonder how many bad reviews of their products I am allowed before they kick me out of their Certified Pro Advisor program. I guess we'll find out if they continue to pump out stupid programs.
The 'Fair' Tax - No argument here that the current income tax system punishes achievement and is counter-productive to a capitalist society.
Average American Spends over $250,000 on Automobiles - Thanks to AutoBlog for this article. Amazingly, there is no mention of the fact that the financial wizards at the IRS long ago proved that vehicles cost much less to operate when used for charitable (14.0 cents per mile) or medical (15.0 cents per mile) reasons, than for evil money making endeavors (40.5 cents per mile). Think of the savings if we only used our cars for charitable or medical trips.
A FairTax Dream
As artistically inept as I am, I was able to create this in a matter of seconds at this Tombstone Generator website. I used 1913 as the IRS's birthdate because that was the year the 16th Amendment was ratified.
I guess last year's addition of less traditional people to the gallery of action figures (aka dolls), such as political commentator (and real life doll) Ann Coulter, should have tipped us off that other professions would soon be represented with semi-lifelike plastic replicas.
We financial pros now have MoneyMan to give to the younger generations so they too can dream of one day growing up to beat back IRS auditors and jump over tax shelters in a single bound. I doubt if MoneyMan could beat G.I. Joe in a fist-fight; but I'm sure he could reconcile a bank account much faster.
Feds Bust Some More Tax Scammers
Get rich quick, repent at leisure - More on the media manufactured malady, affluenza.
Fed says financial junk mail is useful - Plenty of fuel for fireplaces.
Social Security Tax Limit May Go Up - As I've long predicted, the cap on earnings subject to FICA will be removed just as it was for Medicare. To make matters even worse for those people, my other prediction still stands. They will most likely be frozen out of ever receiving any or all of their promised benefits when a means testing threshold is instituted. Regardless of how much they may have paid in over their lifetimes, evil rich people have no right to recover their contributions according to our rulers in DC. The definition of "evil rich" will be debated; but it can't get much worse than the one they already use to tax Social Security benefits; $25,000 AGI for singles and $32,000 for married couples.
Funny video from the folks at JibJab on how Santa wants cash this year instead of cookies, including an appearance by his rarely seen elf accounting department.
Snow Sees Spending Slashed in '06 Budget - Less spending by our rulers in DC? Not in our lifetimes.
Quiz Kid Ken Jennings Flat Broke, Seeks Bankruptcy Protection - Satire or prediction?
Don't Try This At Home
As simple as it seems to calculate depreciation for tax purposes, there are far too many options and variables to consider; such as in this recent exchange I had with a tax pro in Virginia:
One thing you should talk about is the fact that if more than 40% of depreciable purchases are made in the 4th quarter of a tax year, all depreciation of that asset class is subject to the mid-quarter convention, not the half-year. So long as a taxpayer is 179-expensing everything, this doesn't matter (with the exception of listed property converted from personal assets). However, someone hoping to depreciate other pieces of 5-year property using normal GDS tables would face a larger bill. Not a deal-breaker, just something to throw into the calculation.
I wrote back:
Excellent point, although a little more technical than I usually like to get in this forum, which isn't intended to replace consultations with tax pros.
That reminds me of the following email I received a while back from someone with a Federal government (not IRS) email address with the subject of "section179"
if i buy equipment for 400,000 (laser machine) in 04 how much can i depriciate?
Such an answer is impossible to give. There are too many variables to consider before being able to calculate the Section 179 and depreciation deductions on such a purchase; such as what your taxable income is, how much you have spent on new equipment for the year, as well as when in the year the item was purchased.
Your personal tax advisor can work out more precise figures for you. If you aren't working with a tax pro, and you're ready to plunk down that much money for one machine, all I can say is I wish you lots of luck.
Thanks for writing Ryan, and I hope your tax season goes smoothly.
Fed vs State Sec. 179
My accountant told me that as a C-Corp in the state of California, I do not qualify for the IRS code 179 immediate deduction of up to $100,000 and that I need to depreciate assets I buy this year (i.e. office furniture, computers, etc.). He also said that in California S-Corps do qualify for the 179 deduction but C-Corps don't which makes no sense to me. Is he correct? I hope not.......personally, I would rather deduct the whole amount and reduce my tax burden.
What your accountant is referring to is the fact that California tax law - for California income tax returns - does not match Federal tax law in regard to the Section 179 deduction. Similar differences exist in many other states as well.
A C corp does qualify for the up to $102,000 of Section 179 deduction on the Federal 1120. However, there is no Section 179 expensing allowed for C corporations on the California 100. Those assets would have to be depreciated normally.
On individual income tax returns, the Federal law allows up to $102,000 of Section 179 deduction on the 1040. On the California 540, the annual maximum is only $25,000. Anything above that would need to be depreciated normally.
Since S corps don't pay income tax, and their income and expenses are passed through to their shareholders via the K-1s, it is true that some of the of cost business equipment purchased by an S corp may be able to be deducted as Section 179 expense on the shareholders' 1040s and 540s with the same maximums as I mentioned above.
The real downside to this disparity between the Federal and State rules is that you need to keep two sets of depreciation schedules. When assets are sold, the gain or loss will be different on the Federal and State tax returns.
Over time, you will still be able to claim the same over all cost for business assets on the Federal and State returns. The difference is in the timing. It would be nice if there were more consistency; but that isn't always possible.
I hope this clarifies the situation for you.
For lottery winner, $113m hasn't bought happiness - In spite of this almost cliche result of sudden wealth, I doubt if any of us wouldn't want to have a chance to prove that we can be the exception to this.
As I've done for the past few years, I have posted the official QuickBooks 2005 Reference and Training Guides for anyone who is interested to download. They are large pdf files that I have zipped into one file. A link to this file can always be found on my main QuickBooks resources page. I don't normally use these guides a lot during the year; but they do come in very handy when taking the certification courses.
I have also added a page with some tips on how to best install and run multiple versions of QuickBooks on a computer; which is a necessity for anyone working with different clients. I've also included a screen capture of the folder system I have set up for the several versions of QuickBooks I am currently running on my main computer.
IRS and the Treasury Department Amend Circular 230 to Promote Ethical Practice by Tax Professionals - What a rip. We're not supposed to sell bogus tax avoidance schemes to gullible people with big bucks any more. Since I've stayed away from that lucrative specialty, this won't affect me; but the Big CPA firms will see a lot of revenue dry up, if they obey this.
"Taxpayers also may add to the table amount any sales taxes paid on:
A motor vehicle, but only up to the amount of tax paid at the general sales tax rate; and
An aircraft, boat, home (including mobile or prefabricated), or home building materials, if the tax rate is the same as the general sales tax rate."
My earlier comments on this still apply.
Treasury Tax Reform Proposal to Reach Bush in Early 2005 - That would be great; but I'm not holding my breath.
Buy SUV in 2004 or 2005?
Hi Tax Guru,
I was researching buying an suv for our business and ran into your column.
My husband and his brother (partnership) opened up a business in the mall (food court) on November 2, 2004 and it is doing fairly well. I was wondering if we should go ahead and buy an suv this year by Dec 31, 2004 to get the 179 deduction or should we wait until January 2005 to purchase our vehicle since we've only been in business for 2 months. I know that the deduction for a vehicle changed from up to 100k to 25k but I am not sure what that means since we've only been in business a short period of time. I also have a full time job not related to the business. Thanks for your advice.
As I always advise, it's never a good idea to spend money just for the tax break, especially on something as expensive as an SUV. However, since you seem to have already decided on getting one, the other standard advice kicks in. A deduction on your 2004 tax return (by buying the SUV and placing it into service by 12/31/04) is worth more in the time value of money than the same deduction on your 2005 tax return.
If your SUV is going to be purchased as a brand new vehicle costing more than $25,000, this decision is even more lopsided this year. As I've already discussed in a number of postings on my blog, the 50% bonus depreciation deduction will expire as of 12/31/04.
The Section 179 deduction is not based on how long the business was in existence. A business that has been operating two months of the year is entitled to the same $102,000 maximum Section 179 deduction as a business that was active for the full twelve months.
There is a limit on the amount of Section 179 that can be claimed on a tax return based on your taxable income for the year. However, this calculation isn't limited to the income generated by the specific business that will be using the new Sec. 179 equipment. If you have other income, such as from W-2s, the Sec. 179 can be used to offset that.
There could be a difference in the allowable Sec. 179 deduction depending on how the new SUV is purchased. If the partnership buys it, the taxable income limit will be calculated at the 1065 level, which could mean that nothing is allowed if the partnership already has an operating loss.
If you buy it in your personal name and show it on your 1040, you will be able to use other income, such as W-2s to qualify for a higher Sec. 179 deduction.
You really should be working directly with a tax pro who can work with your actual figures and circumstances to help you come up with the best game plan.
I hope this helps. Good luck.
Which of these is a parody?
FDR is dead - And so are the original goals for Social Security.
There will never be a better time to make the tax cuts permanent than now. - If the GOP can't accomplish this simple task with control of all three houses of government, they're a disgrace.
Deducting SUV On 1040 or 1120S
I am in a bit of a dispute with my CPA regarding the 179 deduction for a huge 6000 pound Range Rover.
I am considering making this purchase of this huge vehicle due to a huge tax burden that has fallen at my doorstep due to a very good year. I have a Sub Chapter S corporation in which I own all stock. Is it necessary that the automobile be titled in the corporate name or can it be titled to me personally? I get a much lower interest rate personally than the banks are offering for the corporation.
Any comments would be greatly appreciated.
With an S corp, the actual Section 179 deduction will end up on your 1040 either way.
However, to be technically correct, you need to show the actual asset on the books of the entity which has its name on the vehicle's title. If you register it in the corp's name, you will show it on the 1120S as a corp asset. The Sec. 179 deduction will flow through via K-1 to Page 2 of Sch. E on your 1040.
If you register it in your personal name, you will show it on your 1040. This then brings up a big difference on how you can deduct the SUV's costs if you own it personally. If you set it up as a rental asset on Schedule C or Page 1 of Schedule E of your 1040, you can claim the business related expenses, including Sec. 179, on that schedule. You would need to show rent income for it which would be by leasing it to your corp.
If you just show its costs as unreimbursed employee expenses, those will have to be reported under the Miscellaneous Deductions section of your Schedule A.
Bottom-line, claiming it on Sch. A will save you much less in taxes than if you claim it on Schedule C or E because anything that reduces your AGI has much more bang for the buck than personal Sch. A deductions. It is also a fact that high Sch. A Miscellaneous Deductions will often trigger the infamous AMT (alternative minimum tax), while those exact same amounts won't trigger AMT when reported on Sch. C or E.
While these comments should help you decide on the best strategy for your situation, you should also consider the issue of liability. Many people prefer to title their vehicles in the name of their corps so that any potential lawsuit caused by them would be less likely to jeopardize other personally owned assets.
IRS Screening Process
I've looked at the application process for these IRS advisory boards and am confident that Bernie Kerik would never have gotten very far in the selection process if he had been applying for a spot on any of them. It's a little frightening to know that members of tax policy boards are more closely screened than those in charge of homeland security.
Supporting Like Minded Businesses
Thanks to Neal Boortz for the info on this website, Choose The Blue, which supposedly has all of the political donations by businesses broken down by political party. Their goal is obviously to encourage consumers to patronize supporters of the DemonRat Party. However, their info is just as useful for those of us who prefer to let our money do the talking in supporting those companies that donated more to the GOP and punishing supporters of the high taxing and regulating Donkeys. Unfortunately, their data only includes info on donations to the two big parties. Those of us who support third parties, such as the Libertarians, won't be able to use these stats to identify our commercial allies.
New Study Quantifies Lottery Tax Revenue and Questions Government-Sponsored Gambling - It has long been said that lotteries are just a tax on the stupid. I know it's heartless to say things like this; but I can't help being grateful that those people are helping keep the other taxes lower for those of us who understand basic math.
Tax Bloggers Use Internet To Widen Tax Policy Appeal - I received a pdf copy of this article by Warren Rojas of Tax Analysts for their Tax Notes subscription publication a few days back and was just recently granted permission to post it here. He covers a good assortment of blogs from the practitioner and academic communities.
Bush to name tax reform panel - I'm still waiting for my invite.
Avoid QuickBooks Simple Start
As I was afraid would happen, the new Simple Start version of QuickBooks has created more confusion among potential users, as with this email I received from a client who I had told would have to upgrade from Quicken to QuickBooks if she wants me to continue to prepare her tax returns for 2004.
Is Quick Books Quick Start OK, or do I specifically need Quick Books Basic? Is one easier, or are they the same thing? What's easiest and fastest for you? A one word answer here is fine.
As you can see, I didn't know how to answer this in one word without creating more confusion.
The new Simple Start version of QuickBooks is a terrible waste of money. I published a review of it on my blog a few months back:
Since posting that review, I have actually spoken with a number of QuickBooks employees who told me off the record that they agree that it is a crappy program and were over-ruled when they tried to prevent its production from inside their company.
QuickBooks Basic costs almost the same and is a much better program. You can also use the more powerful versions of QuickBooks (Pro and Premier) if you prefer; but they really aren't worth the additional cost unless you're going to be doing a lot of bookkeeping for several companies, as I do. For just keeping your own books, Basic will do everything you need for much less money than the other versions.
I hope this clears up any confusion.
Colorado Smokers face 320 percent increase in state cigarette taxes on Jan. 1 - From 20 cents per pack to 84 cents. Nicotine addicts continue to be popular targets for financial exploitation.
2005 Ford Escape Sport Utility Vehicle Certified for Clean-Fuel Deduction - Someone was asking about this a few months back.
Tax Break Turns Into Big Business - I have heard of these facade easement donations; but haven't handled any myself. However, with as much work as I do with real estate, I wouldn't be surprised to see some of these.
Reticent to Reform Social Security, Dan Rather & his fellow left wing journalists prefer Taxes to Stock Market - Allowing people any control over their own money just goes against the grain for those media folks who are so much smarter than we little people are.
As I've mentioned on countless occasions, vehicle leasing is a huge rip-off, often representing an implicit interest rate of between 20% and 30%. However, they are very popular; so these recent articles (courtesy of AutoBlog) are interesting.
Choice of Entity
I have been reading your blog and your site for some time now. I am an accountant, but not a tax cpa.
My question is:
If I rehab house for future sale, I will probably be classified as a dealer. I have 3 other partners providing capital and services. Should I record those sales in a C, S, or an LLC that is classified as a partnership. I will have some rental income as well form some of the properties, but the majority of the positive cash flow will come from the sale of the rehabed residences. Each sale will net 50-75 K with about four per year.
Any quick insites would be very helpful, but if you can't thanks for your site and ideas.
I hope my previous writings have made it clear that there is no such thing as a "one size fits all" for situations such as yours and the services of a tax pro to set up a customized game plan would be well worth the cost.
Having said that, I will share what I have seen work in many cases.
For profitable businesses owned by just one person or a married couple, a C corp usually makes the most sense.
For businesses that have multiple owners who are not married to each other, LLCs have been very effective for keeping everything straight for that specific business. Each owner then has to decide wither to own his/her shares in the LLC in their own personal name or through a C corp that they own themselves. There are a lot of benefits to using layers of ownership, both in regard to taxes as well as liability.
Good luck. This should give you a starting point when consulting with your own tax pro.
Notifying Clients Of IRS Policy To Audit Amended Returns
I sent the following to a client who was asking if I would have their 2003 tax returns finished by the 12/15/04 extended due date:
I am hoping to have your returns done by the 15th. If not, I'll file another extension.
I hope you've had a chance to catch the recent info on my blog about why it is so important to take our time to do the original returns as perfectly as possible. IRS has started a policy of opening full blown audits on anyone who files an amended return requesting a refund. This has changed my mind set that just getting a tax return in on time is fine because we then have three years to correct any mistakes. With this new IRS policy, we really only have one chance to get it right.
One of the big reasons I have been running so far behind with 2003 tax returns is the fact that I have had to work on audits that started from very basic amended tax returns, and IRS decided to go on fishing expeditions into other years and issues that weren't even part of the amended returns themselves. I am doing my best to protect all of us from having any more of these occur.
I also added the following to be printed on the cover letter that accompanies all 1040s I prepare.
Please review the enclosed tax returns closely and notify us if you find any significant errors before you send the returns in. It is in all of our best interests to make sure the original tax returns we submit are as close to perfect as possible because IRS has recently started a policy of initiating full blown audits of any person who files an amended return requesting a refund. This has changed the mind set that just getting a tax return in on time is fine because we then have three years to correct any mistakes. With this new IRS policy, we really only have one chance to get it right.
Conspiracy To Destroy Social Security?
As someone who has been advising people for over thirty years as to the futility of trusting in the Social Security system for our retirement protection, I got a kick out of the quotes from California Congresswoman Nancy Pelosi (aka Miss America) as played on Rush's show yesterday.
PELOSI: There are those who set out to undermine Social Security and one of their tactics was to introduce privatization of Social Security, introducing these private accounts. I have questions about them, but as I said, I'm willing to go to the table with no preconditions. You know what the right wing of our country did on this subject. About a generation ago, in their interest to eliminate Social Security, they developed an age warfare. They undertook a multi-multi-multi-million dollar initiative to convince young people that they wouldn't see a dime of Social Security [sic].
I never considered myself to be part of any conspiracy. I have just been stating the black and white facts as a financial professional. As I've mentioned on several occasions, I can still remember the financial analysis we did of the Social Security program in my very first accounting class in college back in the Fall of 1973. It was proven to be a terrible investment back then, and all of the changes made to the system since then have made it even worse. It's no conspiracy. It's just the truth. As I've long said, any financial pros who advise that their clients pay in as much as possible to the SS system and don't help them use the many legal methods of avoiding flushing money down this rat-hole are guilty of professional malpractice.
Rush explained it very well:
"They undertook a multi-multi-multi-million dollar initiative to convince young people they wouldn't see..." You know who figured this out first? The young people! When they get into the job market and they start to see what their FICA deduction is and they start adding things up and Ms. Pelosi, this is not a multi-multi-million dollar effort. This is one of the cheapest efforts in the world. It's called "the truth." It's un-fundable now. People paying into Social Security are not getting their own money back; they're getting the money paid by current taxpayers. Now, let me give you the numbers. Right now, it takes the payroll taxes of four workers in this country to provide benefits for one Social Security recipient. It used to be 12. It used to be 15. It used to be that no taxpayer had to fund a recipient's Social Security because his own contributions came back to him. But that ended years ago when the numbers of workers and retired got to a certain level where there were more retirees than workers and bammo! The truth is the truth. Right now the burden of providing benefits per beneficiary is four workers. In 20 or 30 years, without changes, that burden is going to be down to two workers.
A Republican Senator pushes Social Security tax increases - Attack of the RINOs
Tax shelter promoters need to start worrying about going to prison. With more than 400 investigations of tax shelter promoters under way, Everson said he ultimately expects to see criminal indictments of promoters, "some of whom have been leading practitioners and have crossed a line that they should not have crossed."
For the past few years, Dana Stahl and I have been discussing the comments that frequently pop up in left wing news stories (New York Times, et al) claiming that all the horror stories about IRS abuses over the years were bogus and that IRS has nothing but the sweetest people working for it and should be allowed to have much more money and power to carry out its function of bringing in money for the exalted Federal government. That is of course a big load of donkey crap. I have personally seen many examples of those things that were covered in the news stories and congressional hearings. If anything, those stories downplayed the true horror of what some people had to endure due to some power-mad IRS personnel.
I liked Dana's latest take on this.
Yesterday, I attended an Edward Jones tax seminar for year-end tax planning, which was a nationwide telecast. One segment featured Sheldon Cowan, a former IRS Commissioner. You may recall the 1997 IRS abuse hearings held by Congress. Comm. Cowan mentioned those hearings in this interview. His comment was that the hearings were on the "supposed abuse by the IRS. And they were just that: supposed." He went on the claim these abuses didn't happen, even citing how lawsuits filed over IRS abuses resulted in no settlement for Taxpayers and in proving there were no abuses. During the call-in portion of the seminar, I tried to get thru so I could ask the panel (since Cowan wasn't there) if: 1). why didn't Cowan give some specific examples of false charges of abuse, 2). what % of the charges were proven to be untrue (10%, 20%, 30% - all of them???), & 3). why weren't the accusers then charged with perjury, since I understand false testimony before Congress is under oath and subject to various perjury laws. Unfortunately, the line was busy, but the EJones rep sent a wire instead. I'm supposed to get a response. Anyway, just like some prior articles you & I have discussed about how the IRS abuse hearing had false charges leveled against IRS, this matter continues to pop up sometimes. Nonetheless, I'm interested if anybody will put his money where his mouth is and cite some real examples accordingly. I'd sure like to find the truth about this matter.
More On Ohio IRS Audit Policies
Ohio CPA Dana Stahl has been doing some inquiring of his own to see if the IRS in his state is targeting all 1040Xs with refunds due for full blown audits as they are doing here in Arkansas. He sent me the following reports over the past few days.
Mr Guru - I spoke to a TAS rep located in Cleveland whom I've worked with previously. I believe she has integrity and is honest. She said she has no knowledge of any IRS policy to target 1040X's w/large refunds. Her comment was that it has always been IRS policy to review such 1040X's anyway, but no new trend concerning 1040X's is afoot inside the IRS, as far as she knows. So, I guess the mystery deepens. At least I've obtained some evidence from local IRS personnel here in Ohio.Let's see what anybody else comes up with. Based on what my TAS contact said, I'll carry on with my planned 1040X's for my problem IRS clients.Let me know,DS, CPASandusky, OH
This 1040X/audit issue is really getting murky. My TAS contact from Cleveland seemed to have no idea there was any controversy about this, but you've talked directly to IRS people in your neck of the woods who confirmed the IRS is moving into a hard line position with 1040X's. Perhaps it really does boil down to the part of the country one resides in. I'm planning to prepare 1040X's as part of my process for some IRS problem clients. As a matter of fact, I prepped one today for a client who had been denied the EIC for her son. We found that the son's SS# was incorrect on Sch EIC, so I made the correction on the 1040X. I can't imagine this would get my client audited.We'll talk again. Thanx for the heads-up.DS, CPA
The 1040X/audit controversy doesn't appear to exist in my part of the country. As I told you, neither of the IRS people I talked to about this have any idea something brewing within IRS to give a 1040X "the audit treatment". What are practitioners saying in other areas of the USA?
Consultant Leads Secret Double Life As Internet Sleuth Exposing Tax Scams - This woman spends even more time than I do analyzing and exposing the various tax evasion scams that are spreading around the country among the more gullible of our population.
References About LLCs
Just want to thank you for a well written site. Most CPAs speak a language that no one understands.
Where can I go to learn about LLCs?
I'm glad you find my site useful.
Nolo Press (www.nolo.com) has some very good books on LLCs. I still have one that I received a few years back as part of a self study CPE course I took.
The QuickFinder Small Business Handbook (www.quickfinders.com) has more pages covering LLCs in each year's edition and I find myself referring to it frequently for most of the basics of how LLCs work.
Good luck. I hope this helps.
Hard work wins -- still - Good debunking of Marxist Congressman Little Dickie Gephardt's favorite phrase, "that anyone doing well has won life's lottery."
Corporate Fiscal Years
I wanted to thank you for your article about the differences between the S-Corp and C-Corps. I ended up filing my new business as a C-Corp because of your article. The IRS made my fiscal year December 31 and I need to change it. I haven't filed a 1120 yet. My question is what is the best month to end a fiscal year?
I wish you were out here in Colorado. I need to find a CPA as knowledgeable as you. Have you thought about teaching other CPA's your knowledge and then endorsing them on your web site? Just a suggestion.
I appreciate all your help,
I hope you've checked out my info on choosing a fiscal year:
You are correct that, regardless of what year-end IRS has assumed you are using, or even what you may have entered on the SS-4 when you applied for the corp's FEIN, nothing is set in stone. Until you file your first 1120, you can change the year-end.
While there is no universal best month to use as the year-end, I have found that June 30 usually works out better than other months because it allows the most time on either side (six months) to shift income & expenses between the 1120 and calendar year tax entities (1041, 1065 & 1120S).
It has long been a dream of mine to have a network of independent like-minded tax professionals around the country to whom we could refer people. Perhaps with the growing popularity of this and other similar blogs and websites, we will be able to do that someday.
IRS Audits On The Left Coast
I received the following update from William Perez:
My firm prepares several amended returns each and every year, and most of our clients are based in California. So far, we haven't had any audits on our 1040X's (thank goodness), but your warning has caused me to re-think whether it still makes sense to file amended returns. The only (anecdotal) evidence I can provide is that earlier this year, one of our tax preparers was sending in 1040X's with explanations like "Amending return to correct the information on the 1040." Or something vague like that. Several of these returns were returned as unprocessable. The IRS wanted a more detailed description of the changes. It has been my habit to provide a thorough narrative of the revisions, such as which credits we are now claiming, or responses to any examinations or assessments, and referring to the specific AUR control number or other identifying number so the IRS can process the amendment correctly. I have a gut feeling (no feedback from the IRS) that this practice makes it easier for the processing center to figure out what to do, and whether there's an audit risk or not. Saying on the amendment: "Taxpayer was eligible to claim the Lifetime Learning Credit for the year 2001, but didn't know she could do that." Makes a lot more sense than an amendment with little or no explanation but with a change in the tax credits column.
As always, I try to prepare my returns with the auditor in mind. I ask myself: if I picked up this return and started looking at it, how fast would it take me to put it down and move on to the next return? In my example of the education credit, the auditor will either think to himself, ok this makes sense, or will do a quick search for a 1098-T document in the payer documents to find a match, and then either close the case, or dig deeper if something's amiss. Am I thinking too logically here? I do realize that the IRS may be embarrassed over the amended return scams, but if you tell the IRS what's going on and why you're claiming a refund, I think that may go a long way to creating a smoother process.
Until I hear more about what's going on around the country (from your blog), I will approach amended returns with much more caution.
Very sincerely yours,
Your About.com Guide to Tax Planning
Thank you very much for the feedback from the Left Coast.
Let me add some more descriptions of my experiences with amended returns so you can see that it's not just vaguely described changes that are triggering these new audits.
It has always been my policy to attach a ton of detailed explanations to every 1040X, including almost an entire copy of the revised 1040, except for schedules that had not changed at all. When there are several changes, I also attach an Excel spreadsheet listing each one in the same three column format as Page 1 of the 1040X. For decades, the 1040Xs have been processed by IRS with no problem. The only ones they wanted to review more backup documentation had been ones where the refunds being claimed were very large, as in $100,000 or more. Even in those reviews, the auditors only looked at the items being changed. After their reviews, they accepted the 1040Xs as I had prepared them and the clients received their refunds, along with quite a bit of interest.
This new policy by Arkansas IRS employees of auditing all 1040X refund claims has caught up two of my clients and has already taken a lot of our time. Those returns that I prepared had all of the additional documentation that I had always been including. The IRS personnel with whom I spoke were very explicit that their review of 1040Xs is in no way limited to the items that were changed and they will examine everything in order to try to find some mistakes in the other direction that will offset the refund claims and even hopefully make some more money for the government.
This is a classic "fishing expedition" tactic that has already cost my clients thousands of dollars in my fees, and we're still not finished because of all the tangential issues that the auditors wanted to explore. I have a feeling that this may be a strategy by IRS to wear us down and have us just drop our refund claims. It has drastically altered the economics of when it's practical to file amended tax returns for clients and has already caused me to back off from preparing a number of them that would have been easily justifiable before Arkansas IRS employees started their aggressive anti-refund tactics.
In my discussions with IRS agents, I asked point blank if there is anything else we can attach to the 1040X to avoid this kind of extremely invasive examination of even the smallest refund claims. I was told that attaching extra documentation to the 1040X couldn't hurt; but probably wouldn't help because they only receive transcripts of the return from the service center. Because of classic distrust of their own systems, most auditors don't even request the actual tax return from their own people and instead ask for one from the taxpayer or rep.
For your and your clients' sake, I hope this IRS policy is isolated in certain parts of the country and doesn't hit you all on the Left Coast. If you do notice such a change, I would appreciate your sharing that with me.
Thanks again for taking the time to write with your experiences on the front lines.
Trucks vs SUVs
As with any new tax law, the result is confusion among the public and the professional tax practitioner community, such as in this email I recently received.
I just ran across your website. Can I ask you a question?
I just purchased a Ford F350 Super Duty Diesel Truck. The price was $29,000. Can I deduct the whole amount on SEC 179 for this tax year? My CPA said it has to weigh over 14,000 lbs. Does that count for vehicles that are not SUVs?
The new law restricting the Section 179 deduction to $25,000 and setting a new weight limit of 14,000 pounds for a higher deduction, only applies to SUVs.
I posted the actual text of the new law spelling this out on my blog a few months back:
You should pass this along to your CPA.
Let's Not Hold Our Breath Waiting For Big Improvements
IRS Policy In Ohio
In regard to whether the IRS in Ohio is doing the same thing as they are in Arkansas in relation to auditing people who file amended tax returns claiming refunds, I've already received two conflicting assessments from Ohio CPAs.
What an IRS employee told Ohio CPA, Dana Stahl:
Mr Guru - I spoke to Dave Holscher, who is in the Taxpayer Education & Communication section for Ohio. He denies there is such a movement afoot within IRS. His comment, which sounds reasonable, is that IRS just doesn't have the resources for such an undertaking. He also suggested I call the local TAS office, which is in Cleveland. So, I'll try that, probably tomorrow. I'll let you know what I find out there.
What another Ohio CPA actually experienced:
I have run into the exact same situation in
. Cleveland, OH
I filed a 1040X for a client that owns a minority interest in a company that has lost money for a number of years. The taxpayer has not had basis in any losses for many years. The taxpayer preferred to file without an extension (the S-corp was always extended). Upon preparing the 1120S one year, we discovered the taxpayer made a loan to the S-Corp, giving basis. We amended the 1040, and an audit started. After a full audit, a no change came through. It was partly due to the fact the auditor was going to be promoted and wanted to clean his files quickly. He beat on the rental property to death. The auditor told me ALL refund requests will be audited. Due to the changes in geographic service centers, it took many months for the client to actually receive their refund.
I also filed an amended 2002 1065 which has four partners. The effect was refunds, to each partner, in the $35,000 range. Strangely, three partners immediately received their refunds and one is currently being examined internally. I am hoping that an audit doesn't start!
I hope this helps your search for justice.
I am still waiting for word from tax practitioners in Florida, Nevada and California. I have clients in those states for whom I would like to file amended returns; but would appreciate some advance warning as to whether they will be punished by IRS for that and put through the wringer if we dare try to recover taxes that they erroneously overpaid.
Jury convicts hunter who tried IRS dodge - When I saw this headline, I thought it was about another tax protestor facing the reality of his idiotic arguments. It turned out to be a new spin. This moron tried to get out of trouble with wildlife officers for taking more than the legal limit while hunting by pretending to be an IRS agent who would audit the officers. That brilliant move added a felony conviction for impersonating an IRS agent to his misdemeanors for violating hunting limits. After the deer hunter massacre in Wisconsin a few weeks ago, this additional example of a hunter's brain power doesn't help the image of hunters.
Amending H&R Block Returns
I have been receiving some excellent responses to my earlier piece on the new IRS practice of auditing people who file amended tax returns claiming refunds. I will pass along and report on these.
There is an interesting slant to this story that I hadn't considered until I received this email from another CPA:
Mr Guru - I didn't realize that IRS is now targeting 1040X's for full audit. This does put a damper into some of my problem client solutions. But, just the same, I appreciate your warning. I'll see what happens around here regarding this matter.
Also, on the Jennings/H&R Block deal, your comment "Their free service offer is worth every penny." Jeez, talk about a back-handed slam! I take it you don't think highly of H&R BlockHead, right?
There's actually a connection between those two topics that I didn't notice until your email.
It has long been a very lucrative part of a tax practice for those of us who believe in truly minimizing taxes for clients in preparing amended tax returns for clients who used H & R Block. We could very easily recover thousands of dollars in taxes that the clients had overpaid under Block's legendary wimpy approach to tax preparation, and we had loyal clients who were able to directly compare the two approaches.
This new policy of IRS auditing amended returns with refund claims will put a stop to many of those changes we would normally make to previously filed Block returns. I have never heard of any connection between Block and this new IRS policy; but you have to admit that this will most likely help them. I guess we could always still prepare the amended returns for new and prospective clients in order to illustrate the additional taxes they flushed down the toilet by using Block; but warn them not to send the returns to IRS unless they are gluttons for punishment of the audit type.
Thanks for helping me make this connection.
Judge won't continue freeze on Xelan assets - From their local San Diego paper.
IRS Discouraging Amended Returns Requesting Refunds
Earlier, I mentioned a new practice by IRS to instigate full audits of people who file amended tax returns requesting refunds of erroneously overpaid taxes. Since then, I have had one on one discussions with various IRS personnel, including auditors and even an audit manager; so I am confident that this is a very real issue here in Arkansas. It is also one that makes me angrier each day as I see more and more people victimized by it and forced to pay thousands of dollars in fees to defend themselves, as well as lose thousands of dollars in overpaid taxes that we are now too afraid to claim.
Everyone at IRS claimed that this is in fact a national policy and not just isolated in this state. Not that I don't trust every single word from IRS employees, but I would appreciate some input from other practitioners around the country as to whether or not they have seen the same practice in their parts of the country.
According to one auditor, IRS was so embarrassed by their sending out huge checks for people who claimed the bogus slavery tax credit that they decided to scrutinize every amended return requesting a refund. That was then expanded to incorporate a fishing expedition into everything else on that year's tax return, as well as on all other years that are still open under the three year statute of limitations, plus occasionally closed years, in an effort to scrounge up more tax dollars. Rather than train their own employees to be more careful in doing their job, IRS is making all of us suffer.
I have already held off preparing several amended tax returns, and warned others not to do so, that would have been no-brainers a year ago just to avoid having IRS put us through the hassle of full blown audits.
I have also been holding off finishing several 2002 and 2003 1040s so that we can be certain of not needing to file amended returns later. I sent this email to a client this morning who was concerned about not having her 2003 tax info in to me yet.
There's no rush unless you expect to owe money with the tax return.
It's much better to take your time to make sure everything is as accurate as possible. IRS has recently changed its policy on handling amended tax returns. If we were to whip out a fast tax return with a lot of things that need to be changed, we would be asking for a mess with IRS. They have recently started a policy of running full blown audits of anyone who files amended tax returns requesting a refund.
This means that we essentially have only one chance to file an income tax return; so we need to be sure it is as accurate as possible, even if it's several months late. I actually have some 2002 tax returns in process, as well as several 2003, that I am holding off finishing until I am as confident as possible that there will not need to be any changes made later on.
I think this new practice by IRS stinks. Actually, my feelings warrant some stronger language than is appropriate for this family-friendly blog. I have been raising hell with the Arkansas IRS offices over this, as have some other CPAs in this state. I am very interested in hearing from practitioners around the country as to your experiences in regard to IRS auditing clients who file amended tax returns requesting refunds.
Update On Alleged Doctors' Abusive Tax Shelter
I received the following press release today from an attorney involved with the xelan case that was mentioned in the feds' press release a month ago. I have no personal experience with this group; but it is impressive that they were able to get their bank accounts unfrozen in the face of the serious charges leveled at them by the feds. It is also important to remember that many of us do still believe in the concept of "innocent until proven guilty," even though official IRS policy is the exact opposite.
COURT UNFREEZES FUNDS AND DISSOLVES RECEIVERSHIP
San Diego, CA -- December 3, 2004 -- The
United States District Court, for the Southern District of California, Judge Larry A. Burns presiding, declined to grant a preliminary injunction sought by the U.S. Department of Justice, and dismissed a receiver that had been appointed pursuant to a temporary restraining order that the Government secured on November 4, 2004 without the defendants having an opportunity to be heard.
Well over $500,000,000 of the assets of Doctors Benefit Insurance Company, Ltd. ("DBIC"), a Barbados licensed and regulated insurance company, had been frozen by the temporary restraining order, crippling the ability of DBIC to operate during the one month period prior to having its opportunity to be heard in open court.
After a lengthy hearing, Judge Burns told the crowded courtroom that based on the evidence presented, the government had failed to show that it was likely to be successful on the merits of the case, the first prong of a test for the Court to be able to grant a preliminary injunction. He further said that the proportionality of the relief sought by the Governments was out of balance with the harm alleged.
DBIC noted in its papers and argued in court, among other things, that the IRS' complaint and application for injunctive relief were nothing more than an effort by the IRS to resolve, in its favor, and without litigation, its long running dispute with DBIC's insurance program, by freezing DBIC's assets and thereby putting it out of business. DBIC noted that two separate lawsuits had been initiated to attempt to resolve in federal court the IRS's several year challenge to DBIC's insurance policies. Rather than proceed with those cases, the IRS chose instead to attempt to freeze DBIC's assets and have a receiver appointed to run the company, by transforming a dispute over the tax treatment of insurance premiums into an unfounded claim that DBIC defrauded its policyholders. And, perhaps most disturbingly, the IRS based its effort to freeze DBIC's assets on the declaration of a revenue agent, who did not purport to have expertise in insurance, that he had, based on incomplete information, preliminarily determined that DBIC's disability insurance was not in fact insurance, or, if it was insurance, that only a portion of the premiums could be deducted.
The Court noted that the IRS had not come to any final conclusions about DBIC's disability insurance and it declined to grant injunctive relief on the basis of unproven suspicions. The Court further noted that the relief sought by the Government would negatively impact the lives of doctors on disability as well as DBIC's ability to operate.
DBIC and its predecessor have been writing supplemental disability insurance since 1995. DBIC presented opinions from five respected actuarial firms who had previously reviewed DBIC's insurance, each stating unequivocally that the disability insurance was in fact "true" insurance, and satisfied all tests for what constituted insurance. DBIC also presented legal opinions written by two respected law firms opining that the disability insurance was "true" insurance.
In addition, DBIC submitted evidence that it had complied with the requirements of the Supervisor of Insurance in Barbados, to whom it regularly submitted audited financial statements and actuarial opinions. Those actuarial opinions confirmed that DBIC's reserves were redundant -- that is, more than sufficient to pay all existing and future expected claims. DBIC also presented the rating report prepared by A.M Best, the world's leading insurance rating company, which treated DBIC as a bona fide insurance company offering supplemental disability insurance to professionals.
DBIC has published a website containing many of the filed court documents at www.doctorsbenefit.com.
Private Firms to Chase Delinquent Taxpayers - It looks like groups such as the Sopranos will be working for IRS as collection agents, using slightly more aggressive techniques to squeeze money out of people.
Section 179 Usage By Multiple Businesses
I recently received this email from a very perceptive reader:
Suggestion: "their different businesses" did you their different corporation. A corporation may have various DBAs or business but only qualifies for 1 section 179 expense election. Keep up the good work.
As I have described elsewhere, the Section 179 expensing election is much more lucrative for owners of C corporations because they can literally multiply their total deduction by splitting their purchases of business assets among their different businesses. With an S corp, the Section 179 deduction is limited to just the one amount. Likewise, the deduction for net rental losses is magnified by using a C corp because it can use rental losses to offset all operating income. An S corp's rental losses are subject to the restrictive passive loss rules.
That is an excellent point. I should have referred to different "business entities" (1040 Sole Proprietorships vs. 1120 Corporations) instead of the less descriptive different "businesses" because a single 1040 or 1120 could each contain several different and distinct businesses and the Section 179 deduction is limited to a total of $102,000 for the entire 1040 and $102,000 for the total 1120, along with similarly controlled 1120s (a related topic I will probably be discussing soon). I also appreciate your copying & pasting the text from my site. That made it easier for me to go in and make the correction.
Thank you very much for your comments and please continue to point out examples that you notice where I may have said something in a confusing or otherwise less than precise manner. The last thing the tax game needs is more confusion.
Property taxes rising nationwide - Eventually this reaches the breaking point, as it did in the PRC in 1978, sparking Proposition 13.
Aide Takes Blame for Tax Return Snooping Provision - So, it wasn't an immaculately conceived provision after all. It was actually added by an oblivious human being who has no concept of the principles of privacy. Thanks to TaxProf Paul Caron and his sources for the latest on this topic. Unfortunately, this kind of thing happens all the time. The actual language in tax and all other laws is actually drafted by staffers and none of our elected rulers take the time to read the entire text before casting their votes. Sometimes these little hidden gems are discovered before the final vote; but most of the time nobody, other then the persons who snuck the text in, notice them until after it is passed. If they are outrageous enough, they may be changed in the technical corrections bill that inevitably follows many major pieces of legislation.
No Change in IRS Interest Rates for the First Quarter of 2005 - Will remain at 5.0% for at least three more months.
IRS Considering Mandatory E-Filing for Business Returns - Not a good idea. As I've mentioned on countless occasions, electronic filing does not allow attachment of additional explanatory info to prevent unnecessary audits.
Charities React to New Vehicle Donation Rules - I have been hearing a lot of these commercials lately, encouraging people to donate vehicles before the end of the year in order to receive a higher deduction than will be possible starting in 2005. It's basically an invitation for people to cheat on their deductions. I don't intend to encourage any more excessive scrutiny by IRS; but this is almost a no-brainer for an opportunity on their part to check on inflated values being assigned to donated vehicles.
Corp Reference Materials
I just read your articles on corporations on your website and wanted to let you know how useful they have been. I am a beginning real estate investor, residing in California and in the process of aquiring some property in the PHX,AZ area. I formed a California C-corp for my investments and was wondering what books/products you recommend for doing all my corporation minutes, bylaws....etc. I would like set my fiscal year to be on Jan. 31. I've been skimming the Nolo Press website about their Setting Corp info but seems like their products seem to be biased towards S-corp. As a matter of fact, I've scored all through the internet and the taxguru website was practically the only site that mentioned the positives of forming a C-Corp. All the others went into great details on why its beneficial to form LLC and/or S-Corps. I am wondering if you take on clients that are out of state(like CA) and if you could recommend any books/sites for what I need to do next as getting my C-corp all "legit"
I have long been a big fan of the books and other materials from Nolo Press, as well as Corporate Publishing Co.
The distinction between S and C corps really only affects taxation of the corp income. All of the other rules and requirements for maintaining a corporation (minutes, officers, stock, etc) are exactly the same; so there aren't separate books on these topics for C and S corps.
We do already have clients in almost every state of the country. Unfortunately, I am so far behind with just their work that I am unable to accept any new clients from anywhere.
Buy new vehicle in 2004 or 2005?
Hello Mr Kerry M. Kerstetter,
My name is T***y and and I would like to thank you for the wonderful advice/information you have on your website. I have two questions if you can answer for me:
I am an independent contractor with no employees, 34 yrs old, have an LLC, and am thinking of setting a 419 plan- Do you recommend this. I plan to put 41k in SEP, 3k in IRA, and rest in 419. If this is not a good plan, what other vehicles are there to save more of your income?
Second Question) I plan to purchase a vehicle but do not want to purchase 6000lb one. If I purchase a luxury car @ $45k is there a benefit to purchase one this year vs next year. I have heard this is the last year where one can deduct 10k and next year it will be only 3-4k. Does the vehicle have to be new, or can I purchase an old one like 2002/2003 with 18k miles?
I can't advise you on the various retirement plan options in this format. You need to work one on one with a professional tax and/or financial advisor for that.
In regard to the issue of buying a new business vehicle, there are some big differences. The approximately $10,000 of first year bonus depreciation is only available for brand new (not used) vehicles and this will not be available in 2005 because it was not renewed by our rulers in DC.
The other Section 179 and regular depreciation deductions are the same for used and brand new vehicles, as long as it is new to you.
I've discussed other various aspects of this in numerous recent postings.
The 6,000 Pound Rule
There is a lot of confusion over the reason for the importance of the requirement for a business vehicle to weigh more than 6,000 pounds for maximum tax deductions. I'll give another very short history of this.
Back in 1984, our rulers in DC instigated severe limits on the cost of business vehicles that could be depreciated. It was called the "Luxury Car Rule," which is still in place today, with slightly higher dollar amounts. Before that time, vehicles could be depreciated over three years with no dollar limit. This had to be capped because so many people shot their mouths off about this great tax break and those who weren't using it became so resentful that they pressured Congress to trim it back.
This is just one classic example of why, if you are benefiting from a certain tax break, you should be happy about that, but keep it to yourself. Other people do not like hearing about your tax breaks and will make it their mission to deprive you of it; which is what just recently happened with the $25,000 limit for Section 179 on SUVs. That was a direct backlash from environmental wackos, SUV haters, along with people who resent the fact that business vehicles are tax deductible, while personal ones are not.
At that time, in 1984, there was debate over how to distinguish between a normal passenger vehicle and a more utilitarian utility vehicle, which were normally trucks and vans. The line was set at 6,000 pounds GVW. Any vehicle weighing more than that was not subject to the luxury car limits and could be depreciated fully over five years. It was also extended in interpretations of how to claim the Section 179 expensing election for business equipment.
While many people, including a lot of tax practitioners, only discovered this rule a short while ago, when the Section 179 limit was raised from $24,000 to $100,000, it has been around for more than twenty years, and has been a part of my seminars, speeches and articles all of that time.
Business vehicles weighing less than 6,000 pounds do qualify for a Section 179 deduction, but a much smaller amount than the heavier ones. There are also much lower annual depreciation limits.
For 2004, brand new business vehicles of any weight may also qualify for the special bonus depreciation; so it's not true that lighter vehicles receive no tax breaks. They just generate much lower tax breaks than do vehicles weighing more than three tons.
Company's perk: $5,000 to buy clean car - And that $5,000 will have to be added to the employees' W-2 income.
Why you can't trust Congress - I've long though that voting on legislation that they haven't even read should be grounds for impeachment.
Greenspan is the man to reform Social Security - According to George Will.