Thanks to Ben Cunningham for passing along this story about how some folks in Tennessee are reacting to receiving notification of large increases in their property tax assessments.  Specifically, the following quote from one property owner whose assessment went from $70,000 to $200,000:

It was worse than getting an IRS audit. It was like getting a heart attack in the mail.

I'm guessing this woman hasn’t actually been through an IRS audit.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/29/2005 12:49:00 PM Send this post:

Rarer than certain species of woodpeckers are TaxCutters in the halls of power.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/29/2005 11:46:00 AM Send this post:

Jesus recruited to fight tax cheats – While this is in Sierra Leone, how long will it be until our IRS starts a similar PR campaign? 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/28/2005 12:54:00 PM Send this post:

Q:

Subject: "C" vs "S" and Home Office

Tax Guru

I have been following the "C" vs. "S" debate in your blog with great interest. My tax guy hasn't brought it up yet, but I have two questions before I ask him about it.

Is there a net income amount where a "C" corp would be better than an "S" corp (my business is at $150,000 presently).        

 

Also as a sole proprietor now, on what form would my office in the home expenses go for my 100% at home business? I've heard you can't take it and since this amounts to several thousand dollars before depreciation now, I wouldn't want to lose it.

 

Your assistance will be greatly appreciated.

 A:

 If your business is making $150,000 per year, you're asking to be raped financially by trying to do your own taxes and not using the services of a tax pro who understands the very simple techniques of minimizing taxes.

As I said in my article on S vs C corps, an S corp only makes sense tax wise if it has a net loss, or you have plenty of other deductions and losses on your 1040 to offset its income.  If you have a positive taxable income before counting the S corp K-1 pass-through, you will just be pushing yourself into the higher brackets.  The best approach is to use a smoothing technique of spreading income between the 1040 and 1120 so that the overall effective tax rate stays as low as possible.  Having good up to date QuickBooks data for both your corp and personal finances is essential to accomplishing this goal.

Form 8829 has long been the official home office schedule, as any tax pro would know.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/24/2005 12:10:00 PM Send this post:

I frequently receive email similar to this:

REREAD YOUR INFO. DAMN IT! WAS HELPFUL.KEPT ME FROM MAKING YET ANOTHER DUMB MISTAKE. WHEN MY AZ CORP MAKES ME RICH, I'M GONNA OFFER YOU

A FREE  FISHING TRIP.

I usually reply with the following warning, which I hope everyone will heed.

I'm glad that you found the info useful.

However, I hope you realize that it is dangerous to use any such info, from my website or any other source, without the additional counsel of a tax pro in order to ensure that you come up with a strategy that works best for your particular circumstances.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/21/2005 01:37:00 PM Send this post:

Q:

Subject: capital gains on personal residence

just finished reading your post, and wanted to ask this:  How does the IRS define the purchase of the one’s personal residence – is that the day that the title is transferred?  What if you leased with the option to buy for some time before exercising the option, does that time count?

Thank you for your informative blog!

A:

To qualify as owning it, your name must be on the title for the property.  Leasing it does not qualify, whether you have a purchase option or not.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/21/2005 01:28:00 PM Send this post:

Arkansas Corporate Franchise taxes due earlier this year – May 2 instead of June1, as it had been for several years.  The minimum tax has been tripled, from $50 to $150, as our rulers in Little Rock squeeze every dollar they can out of small businesses in this state.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/19/2005 07:22:00 PM Send this post:

Top Ten Signs Your Accountant Doesn't Give A Damn Anymore
 

10. Tells you to expect a refund in three weeks and an audit in five.

9. Does all calculations on the TV remote control.

8. Tells you to deduct yourself.

7. No longer gets that magical glint in his eye when he talks about deferred contributions to tax-favored annuities.

6. He says, "I thought the 1040 was EZ until I met your wife!"

5. Keeps asking when he can do your kitty's taxes.

4. Whenever someone mentions a joint return, he whips out his special brownies.

3. Recently moved office to cave in mountainous region of Afghanistan.

2. Instead of working on your taxes, he's reading lame jokes on Letterman.

1. Constantly trying to arrange a threesome with H and R block.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/19/2005 09:46:00 AM Send this post:

A tax-free day: Is it possible? – Just try to think of an activity that isn’t taxed. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/18/2005 10:00:00 PM Send this post:

IRS security flaws expose taxpayer data to snooping, GAO finds – and this is surprising to whom?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/18/2005 09:50:00 PM Send this post:

The estate tax made Paris Hilton what she is today. – If the thought of more of her kind around doesn’t scare everyone to support repealing the communistic estate tax, we have a tougher battle than I thought.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2005 08:02:00 PM Send this post:

Q:

I have just finished reading your comparison on the S vs C corporations. I currently have a $ 12 million computer supply business that is a C corporation. I have repeatedly been told by attorneys and others that I should be an S corp because of the large bonus that I take at year end.  They say that the IRS could say that this is a dividend. I don't understand because as it is now I pay full  taxes on the bonus also. After reading your comparison, I believe I should stay C. for the reasons you explained. Am I missing the point here? Thank you for your very enlightening article.

A:

I would say that keeping at least one C corp would have more tax saving opportunity than running all of your income through an S corp.  Just having an S corp piles all of your income into just the individual income tax brackets, missing the chance to use the lower C corp brackets.

How to pull the income out of the corp with the lowest tax hit is always an adversarial game between you and the money hungry IRS.  IRS would love for you to consider the payments nondeductible corporate dividends because that would allow them to actually tax the same income twice, once on the 1120 and again on your 1040.

The best plan is to use a combination of deductible corporate payments, such as wages, interest, leases, and royalties, in order to avoid the double taxation. 

Fringe benefits paid by the corp and which are tax free to the employees, are also much more lucrative with C corps than with S.

The term "reasonable" is subjective and the cause of skirmishes with IRS, which obviously wants that number as low as possible in order to classify everything above that as double taxed dividends.  Good documentation of how your numbers are calculated, as well as good records, and consistent treatment between the 1120 and 1040, are the best was for you and your tax advisor to make this immune to IRS challenge. 

Having both the corp and your personal taxes use the cash basis of accounting is also an important aspect to avoiding IRS problems.  If the corp uses the accrual method, that is so open to abuse that IRS auditors will have a field day  ripping apart the accrual methods used.     

Of course, when a business become large, I am a big believer in not putting all of your eggs in one basket and using multiple entities at the same and in staggered levels of ownership to help reduce your tax burdens, as well as the inevitable liability and lawsuit exposure that success brings.  These can include an assortment of C and S corps, as well as LLCs and trusts.

These are a just a few ideas I had, as I unwind from the April 15 crunch.

Good luck.

Kerry Kerstetter 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2005 07:18:00 PM Send this post:

Q:

Subject: forfeited $12,200 by withdrawing from RE purchase

 

Dear Tax Guru,

 

My 92 yr old dad put up $12,200 in May 2003 to buy a house but decided to withdraw from the purchase in March 2004 and forfeited the $12,200 -- how does he claim the loss for tax purposes?

A:

 It depends on what kind of property it was for.  There is a long standing double standard in our tax code that losses on personal property are not deductible, while profits on them are taxable.

On the other hand, if the house was being acquired to be used for rental or investment purposes, the loss would be deductible on Schedule D (investment) or Form 4797 (rental).

If the loss qualifies as deductible, it should be claimed on your father's 2004 1040, since that is when the deposit became worthless.

Good luck.  I hope this helps.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2005 06:57:00 PM Send this post:

Q:

Subject: Personally paid corp expense article

 

Would the same technique described in option 2 be kosher for a corporate member of an LLC? The corporation has its own business credit lines and it would like to extend their benefit to said LLC.

I assume then the books would look like this:

Corp:

debit Loans to LLC, credit Corporate Mastercard

LLC:

debit expense, credit Loans from Members

A:

You can do it that way or through the capital contributions account.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2005 06:51:00 PM Send this post:

Q:

Kerry,

Thanks for the information in url http://www.taxguru.org/re/loanorigincosts.htm. I am glad i found the link. I have one question. I was filling out Section IV in form 4562. I am not able to find the proper Code Section (Column d) to use for the 'Loan expenses' for my rental property. I am not sure if i should use 195. Any help would be much appreciated.

Thanks

A:

I have always used Section 461, and IRS has never complained.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2005 06:46:00 PM Send this post:

Shortly after I posted the item about IRA accounts being off limits in bankruptcy, I received this from a reader.

Subject: Re: Supreme Court: Creditors Can't Seize IRAs

 

I find it interesting that, like most, you focus on OJ's exemption of his *residence* equity when OJ also used Florida law to fully exempt another large asset: his NFL pension. I assume the $1 million cap on exempt pension assets in the bankruptcy bill is an anti-OJ provision, since I can't think of any other high-profile cases where a wealthy debtor used Florida's or Texas' unlimited pension exemption. Note that unlike homestead it has no safe harbor after which state law applies.

Given the defendant's modest means, I suspect this is a result-driven decision. I doubt the SC would have ruled the same way had a debtor with a $2 million IRA came before them even though the decision technically protects them too. Given that, I doubt they will give any relief for the BK bill's $1,000,000 cap, should it pass and a suitable case come before them.

I should note the BK bill has a serious flaw: the new federal caps on homestead and pension exemptions are not inflation-indexed. It won't take long for their value to be eroded significantly, and I suspect political will to revisit the bill and raise the exemptions will be quite lacking.

My Reply:

You have some very good points.

I guess the reason we focus on the homestead exemption more than the one for pensions is that it is easier for lawsuit fugitives, such as OJ, to plow money they want to shelter into the purchase of an expensive home than it is to legally add it to an existing pension plan.   

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2005 06:38:00 PM Send this post:

Q:

Dear Kerry,

I was reading your website and I hope you will be able to answer a question for me.

I moved across country from my primary residence in order to go to a highly ranked school.  I can't afford to maintain the property any longer and wish to sell it. 

I left my primary residence for school.  Does that qualify as a change in place of employment so that I may get the tax break?

Thanks.

A:

While the law and related IRS explanations don't specifically mention school related moves in relation to the reduced pro-rated tax free gain exclusion, such a justification should be eligible for at least a few reasons. 

In many other parts of the tax code, being a full time student is equated with being an employee.  This seems like a perfect place to do the same thing.

To qualify, you do need to be ready to prove if asked that the move to the school was unknown at the time you bought or moved into your residence.

Another way to justify it would be an unexpected change in your finances.  If you had originally believed that you would be able to afford keeping the home, and the new schooling situation changed that capability, you have met that test.

This is definitely a good example of one of the many gray areas in taxation.  Unlike most other tax pros, who want to interpret gray areas in favor of the IRS, I have always done the opposite.  If the law doesn't specifically say that unexpected education related moves don't qualify, I say you should use it.  

Those are just the thoughts that came to mind.  You should work with your personal tax advisor for more specifics.

Good luck.

Kerry Kerstetter

Follow-up Q:

 Kerry,

  Thank you for the prompt reply.  Proving going to school was unanticipated at the time I moved in is easy since I lived there for a couple of years and worked a couple different jobs before deciding to go to law school.  I even though I'd go back, but didn't manage to get a job offer in California (where the home is) but did get one in Maryland.

  If you could point me to some other parts of the code that discuss full time students, I would appreciate it.  I'll keep doing my own research but any support to convince my wife would be helpful.  She thinks like the tax pros you refer to (though she's an engineer, not a tax pro).

Thanks again.

Follow-up A:

I don't have time to dig up all of the references to students as equivalent to employees.  I have a ton of tax returns and extensions to finish by April 15.

The one that I do encounter quite often is Form 2441 for the credit child and dependent care expenses.  In order to claim this credit, both the taxpayer and spouse need to have earned income.  However, if either of them is a full time student, they are imputed a certain amount of income to qualify for the credit. 

I hope this helps. 

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/17/2005 06:21:00 PM Send this post:

States yearn to collect online sales taxes – The more money that changes hands via internet transactions, the more tempted our rulers will be to take their cut of the action.

Income Redistribution Day 2005 – Excellent look at the history of the unrestrained growth in taxation in the USA, often in direct violation of the Constitution, which nobody in power cares about any more.  This quote from John F. Kennedy shows how far left the DemonRat Party has evolved in the past four decades.  JFK was more supportive of capitalism than are most current day Republicans.

Lower rates of taxation will stimulate economic activity and so raise the levels of personal and corporate income as to yield within a few years an increased -- not a reduced -- flow of revenues to the federal government. ... The present tax codes ... inhibit the mobility and formation of capital, add complexities and inequities which undermine the morale of the taxpayer, and make tax avoidance rather than market factors a prime consideration in too many economic decisions.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/16/2005 11:56:00 AM Send this post:

You never know where money will pop up:

Man finds $2,000 in shirt, turns it in

$10,000 is found wrapped in foil and tucked in fake vent

Story with photo

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/15/2005 08:26:00 PM Send this post:

IRS 'Outsourcing' Debt Collections – Of course, we all know that nothing could possibly go wrong with this idea. This sounds like a recipe for disaster.  It’s not bad enough dealing with IRS employees.  Now, we’ll have free-lance bounty hunters on the prowl.

Presidential Tax Returns Released – No privacy for the top rulers.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/15/2005 05:15:00 PM Send this post:

As a lifelong movie buff, I have long enjoyed the wealth of information on the IMDB website. I also enjoy its daily trivia quizzes and opinion polls, which often cover some very esoteric movie connections.

Today's poll is in the spirit of tax day, asking which movie accountant character would be most trustworthy in preparing your tax return.  While the results will obviously change between now and the end of voting tonight, the one I chose seems to have an insurmountable lead. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/15/2005 02:59:00 PM Send this post:

The President’s Advisory panel has issued a preliminary report with the ridiculously obvious title of AMERICA NEEDS A BETTER TAX SYSTEM.  The full report on how everything will be fixed is due on July 31, 2005.

Press release with key points

Six-Page PDF of preliminary report

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 4/14/2005 05:36:00 PM Send this post:

Q:

Sir:

 

I just had the opportunity to read your article on S and C Corporations, and I found it to be so interesting that I decided to ask I question, if i may.

 

Can you shed some light on the obligation of NON RESIDENT SHAREHOLDERS to pay state taxes in states where the corporation has physical offices? 

 

If there is such a requirement, where can I obtain a list of the states that have that requirement?

 

Your assistance will be appreciated, and thanks for writing articles that are really.

A:

As far as I know, this is required by every state that has its own income tax.

It's not just having an actual office inside the state that triggers the particular state to levy taxes on non-resident shareholders.  It also applies where incom