Don’t Forget about 2006 Tax Law Changes – From Intuit’s latest issue of ProConnection

IRS Related Photoshop contest – Some funny IRS pics from the creative folks at FreakingNews. Too many to post here, so take a browse through them.

House Leaders Indicate Budget Process Reform, Spending Cuts Likely – I’m not holding my breath waiting for this to actually ever happen, especially not with the current crew of drunken sailors in charge. 

Estate Tax Must Go, Says Frist – Uphill battle against the growing number of supporters of Marxist wealth redistribution, such as this blogger.

Questions Remain on Private Collection as IRS Poised to Hand Out Contracts – What could possibly go wrong with freelance tax collectors?  Look at who’s waiting to use his skills in this lucrative profession.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2006 10:39:00 PM Send this post:

From an attorney:

Subject: EIC disallowance

Dear Mr. Kerstetter:

Regarding your blog reader who inquired about challenging the disallowance of the EIC, another alternative would be to contact the nearest law school.  Many law schools offer low-income tax law assistance and can help with a Tax Court petition.  The matter will probably be resolved before it gets to litigation, and the representation is free.  Not all taxpayers qualify, and not all schools have this program, but it is an effective recourse for a taxpayer with limited means.

My Reply:

That's a very good idea, which I will pass along.

That sounds like a slightly more technical version of the IRS's VITA program, where I got my start in the tax prep profession over 30 years ago while an accounting student in college. 

Thanks for sharing that idea.

Kerry Kerstetter

 Follow-Up:

I appreciate your reply.  I did both VITA and tax law clinic as a law student at Quinnipiac and enjoyed both of them.  The clinic requires students to focus much more on tax procedure than on aspects of the return.  If you want more information on these programs, I would suggest asking Prof. Paul Caron of the TaxProf Blog; he probably can get you a list of schools that offer assistance to low-income taxpayers.  Thank you for your work on your sites; they're always enjoyable.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2006 08:19:00 PM Send this post:

From David Letterman’s Late Show:

10. "Instead of CPA training, employees got CPR training"

9. "Forgot to carry the one 32 million times"

8. "For years we've been secretly funding Hamas"

7. "H was out sick that day and R was on jury duty"

6. "We were using Martha Stewart's guy"

5. "Were testing the world's first accounting monkey"

4. "Come on, it's a couple of dollars. It's not like we shot a guy in the face..."

3. "Hard to stay focused when you've been drinking since April 16th"

2. "Thirty-two million dollars?! We lose that much on a good day"

1. "Hoping for hot make-up sex with the IRS"

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/28/2006 01:43:00 PM Send this post:

Q:

Subject: Question regarding 179 expense

Hello,

I happen to stop by your web site and read your article regarding 179 expense.

 

I am a major stock owner of a S corporation.

Last year, the company got not a samll loss

 

I have other source of income and overally I have some income to report last year.

In this case, may I apply section 179 expense deduction for the S-Corp.

 

Your prompt and kind reply will be highly appreciated.

 

Best regards 

A:

As your corporate tax accountant can tell you, an S corp with a net loss before counting the Sec. 179 deduction cannot claim Sec 179 on that year's 1120S. Sec. 179 is limited at the S corp level, and it doesn't make any difference whether or not the shareholders have other income to offset it.

Work with your corporate and personal professional tax advisors to work out the best strategy for your unique situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for your kind and concise answer

bye

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/27/2006 02:42:00 PM Send this post:

Q:

Subject: Stocks to Offer

 

Good Morning,

 

We are a small group of R&D researchers looking to form a small C Corp and would like to offer stocks to investors in order to try and gain enough funds to prototype a few different models for producing liquid fuel with the co-generation of electricity of systems we've been designing and preparing to build out.

Can you tell me where we can learn about the stock offer limitations and total funds we can collect? I understand there are limitations on the number of offers that can be made as well as cap on total funds.

We are also looking at partnering (or possibly contracting with) a Canadian Company. Are there restrictions for receiving funds from their investors directly or through the Company and would one way or the other be better?

Thank you so much for your time and an advice you can offer. Have a great week.

A:

This is area where you absolutely must work with an attorney and a CPA firm that both have experience in public stock offerings in your state.  The rules differ in each state and can get very complex in regard to several different aspects of this kind of thing.  Your attorney will inform you of the potential penalties, including investor lawsuits, that can arise from failing to properly dot every I and cross every T.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 10:35:00 PM Send this post:

Q:

Subject: Section 179 Deduction

I'm hoping you can answer my question.  I work in a bank and I'm wondering about the effect of the 179 deduction on the company cash flow.  Is this considered a depreciation expense that can be added back to get traditional cash flow?  (net income + depreciation + interest expense)

A:

Section 179 is essentially a form of accelerated depreciation and is usually included on the same expense line with regular depreciation expense, except for pass-through entities, where it is shown separately on the K-1s because of the individual-level limits . 

Any adjustments you make to book income to add back in depreciation expense should be sure to add back the Section 179 if it is not already included in the stated depreciation total.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 10:30:00 PM Send this post:

Gambling With Your Taxes: How to Report Your Wagers – Some good tips from Gail Buckner

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 01:07:00 PM Send this post:

Arkansas DFA has set up an online refund inquiry service for individual taxpayers.  You just enter your SSN and zip-code.  I’m not sure how useful this will be. I just tried it for a couple of clients, and it came up with the following message in each case.

Income Tax: Refund Inquiry

There is currently no return found for the Social Security Number and ZIP code you entered. It may take as long as six (6) weeks from the time you mail your return until it can be located in our processing system. Also, you may want to verify the Social Security Number, and ZIP code you entered with those found on your copy of your return. If you have additional questions, please call (501) 682-1100 inside Pulaski County, or outside of Arkansas, or 1-800-882-9275 WATS, in Arkansas.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/25/2006 12:50:00 PM Send this post:

Q:

Exchange Question

What if I sell Florida then use only some of the money for another property in another state?  Or can I use it to pay off one of the other financed properties?

A:

Like kind replacement real property can be in any state; not just the one where the original property was located.

If you reinvest less than the net sales price, you will have to report as taxable income the difference; the amount you missed the target replacement price by.

Paying off loans on property you already own is not a like kind investment.  You have to acquire new property.

Your personal professional tax advisor should be able to help you with real numbers for your unique circumstances.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 10:55:00 PM Send this post:

Q:

Subject: tax website

I saw your tax web site, and was wondering if you could help me.

 

Simply, the IRS disalowed my EIC, ( never recieved it, (( refund froze )),  later after i protested, they reassessed their own review and sent me a letter stating that i have to pay them the EIC amount in question, if i disagree, then i have to go to tax court. If i go to tax court, then i will have to pay penalties and interest on an amount that i never recieved.

 

Is their any service that you can offer me to fix this ?

Have you seen anything like this before?

A:

There are far too many variables involved for me to be able to advise on your particular situation via this medium. 

The person who prepared your tax return should be able to help you with this.  If you did your own return, you learned an expensive lesson.

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

I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

Unfortunately, we don't have anyone else to whom we could refer you. If you haven't already done so, you should check out my tips on how to select the right tax preparer for you.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 10:51:00 PM Send this post:

Q:

Subject: question

 

If I take the section 179 deduction of $25,000 on my new truck for 2005 can I take mileage in 2006?

Thanks

A:

No, and here is why.

The IRS standard mileage rate includes a portion for straight line depreciation (17 cents per mile for 2005 & 2006).  If you use the actual expense method of deducting vehicle costs, and use the straight line depreciation method, you are allowed to switch to the standard mileage rate in subsequent years for that particular vehicle.

However, if you use any accelerated depreciation method, of which Section 179 is the most accelerated, you must stick with the actual expense method for as long as you have that vehicle.  To allow you switch to the standard mileage rate would in effect be allowing you to over-depreciate the cost of the vehicle.

I hope this helps.  Your personal professional tax advisor can give you more specific figures for your particular situation.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 10:46:00 PM Send this post:

Investment Interest Deduction Remains Alive and Well  – This is one of the many parts of a tax return that I would never try to do without a computer.  Even then, there is no guarantee it’s done properly.  I have seen Form 4952 computed all sorts of different ways by different software programs, both professional and consumer ones. 

Readers Fume Over Forced Upgrades – Not happy about Intuit’s sunset policy for Quicken and QuickBooks.

IRS Finds Charities Overstep Into Politics

FTB immune from liability for tax collection activities

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/24/2006 07:04:00 PM Send this post:

Q:

Subject: Unfair state tax structure for partial year residents

 

Unlike most states that I have lived at, Arkansas computes state income tax for partial year residents by adding both total year income and total Federal taxes paid in their calculations.  By doing this, it automatically raises the percent of tax because Federal taxes are higher.  This penalizes the part year residents because they pay a higher percent than full- year residents.  This doesn't seem fair or legal.

Example:  I made $28,000 in Mississippi and paid $500 in state taxes (after my refund).  I made $17,000 in Arkansas and paid $875 and they want another $500!

Does that seem fair or legal to you?

I realize you may not want to answer that without a fee, but I was hoping to get advice from someone who had knowledge.

Thanks,

A:

While I don't prepare any tax returns by hand, I do prepare several partial year and nonresident Arkansas tax returns each year with my Lacerte software.  Your description of how it's done didn't sound right; so I just reviewed the actual 2005 AR1000NR form. 

You are misinterpreting how the Arkansas state income tax form works.  It doesn't add in Federal income taxes to the taxable income; although I have seen this on some other state tax forms. 

The Arkansas tax is calculated for nonresidents with the same tax rate schedule as for full year residents.  The twist comes in with the apportioning of the total tax based on the percentage of taxable income from inside Arkansas to all income.

While your claim that Arkansas is unfair to nonresidents isn't correct in the context which you intended, I have seen plenty of cases in other states around the country where that is the case, especially California.  Some of the most outrageous examples are taxes on rental cars and hotel rooms, which are aimed at tourists from outside the state. 

How they can justify this is easy to explain.  Nonresidents can't vote; so the rulers in those states have nothing to worry about in regard to punishment for screwing over those people.  In fact, they can sell the idea to their in-state constituents that the more money they are able to squeeze from out of towners, the lower the tax burden is on the full year residents.

In regard to your multi-state income tax returns, you really should be working with a qualified tax pro who can ensure that each state's apportionment is calculated properly and that you are receiving the proper Other State tax credit on your home state tax return.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your help.  I certainly appreciate it.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/23/2006 12:19:00 PM Send this post:

Atlanta Man Helped Customers Falsely Claim They Are Exempt from Federal Taxes as Members of Purported Native American Tribe

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/22/2006 10:36:00 PM Send this post:

Q:

Subject: quicken

wonder if you could help me with something.  I am using quicken 2006 professional and my calendar is using february 26 and it is the 18th?  how do I change this date to reflect it using the present date?

 

thanks for any help you can offer ...it is also posting transactions on the 26th so this means to me some how the calendar think it is another day?

A:

My guess is it's one of two things causing this.

1.  Your computer's date is off and needs to be corrected.

2.  You have the box in the Options checked to "Complete Fields Using Previous Entries."   If your previous entry was dated 2/26/06, all future entries will start with that date, until you manually change it.  Then, that new date will become the default setting for future entries until it is manually changed again.

Remember that even if you accidentally enter the wrong date, you can always go back in and correct it.

Good luck.

Kerry Kerstetter

Follow-Up:

thans Kerry..you were right..doh!!!

thanks

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/22/2006 10:35:00 PM Send this post:

Tax cuts make money – Amazing to see this in the normally lefty US Today.

A Better Way to Tax – An endorsement of the FairTax plan from someone at MIT.

Feds Bust More Professional Tax Scammers

St. Paul Preparer Allegedly Claims False Head-of-Household Filing Status for Married Customers

Pure equity trust scams based in Tacoma

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 10:14:00 PM Send this post:

Q:

Subject: Section 179 of the Internal Revenue Code

 

Good Afternoon,

 

In regards to Section 179 of the Internal Revenue Code. I have a small computer repair company I need to purchase a larger truck to visit clients and move equipment. I would prefer to purchase an SUV as that would be more practical than a Van . My question is does the auto need to be new or can it be used.

Thank You

A:

It just has to be new to you; not brand new.

You can see the rules for Section 179, including the weights of SUVs, on my main website.

You really should be working directly with a tax pro who can help you tailor things to your unique circumstances.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 12:58:00 PM Send this post:

Q:

Subject: Kerry's Quicken Tips

 

Thanks very much for this free article! This is by far the best information I've found anywhere to use Quicken for rentals I am starting.  A point of confusion (from Quicken Forums) I'm still working on is:

 

Do I need 2 accounts for each property, a cost basis account and an expense account?

 

Or is a Cost Basis account per property sufficient, where principle payments and improvements are transferred to it from cash/credit card, and expense reports are generated from classes ?

 

An article in Quicken Forums has one splitting an improvement expense so it is transferred to cost basis account AND is categorized in the  cash/credit card account. I just don't know how relevant this is.

 

I'll gladly pay for this info. Thanks

A:

If you are going to properly account for your rental properties, you are in serious need of some training from a professional accountant because I can see that you are very unclear on how things work. 

I don't have time to give an entire lesson, but here are a few fundamentals that you will need to cover with your personal advisor.

There are basically two types of expenditure - those that affect the balance sheet and those that affect the income statement (P&L). 

Balance sheet payments are generally capital improvements that are set up as fixed assets and depreciated on your tax return, and payments of loan principal, which reduce the loan liability balance. 

Principal payments do not get transferred to the property's cost basis.  When you book the purchase of your property, you debit the fixed asset account for the full cost and credit the cash you paid and the full amount of the loan.

Income statement expenditures are operating expenses, including mortgage interest.  Because you need to have  a Schedule E for each property, it's best to set up a Class in your Quicken for each property that will coincide with the Schedule E columns when you run a  P&L with columns by Class.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 12:56:00 PM Send this post:

Q:

Subject: capital gains tax

 

Hello,

 

I am from Virginia and I have a property(condo) that I want to sell and have lived in for less than two years.  I only want to sell inorder to acquire a larger property for my family.  I have only gained 21,000 of value in my home and want to use that $ for closing costs and expenses.  I do not want to pay capital gains tax and am not sure what the regulations are.  Can you help me out or give me a place where I can get some information?  I have been getting confliction information from many different places.  I only have one primary residence.

 

Thank you

A:

You should be working with a tax pro to ensure that you have properly accounted for the total cost basis of your home.  There is a good chance that you may have overlooked a lot of additional costs that will reduce your net gain.  Your net gain will also be reduced by your selling and closing costs.  Chances are that the actual potential taxable gain will be either nonexistent or so small as to not be worth a lot of worry.

I have a lot of info on home sales here on my main website.

If you do a Google search on my blog, you will also find dozens of posts discussing home sales.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/21/2006 12:53:00 PM Send this post:

From a CPA:

Subject: Death of A Partner

Dear Tax Guru...

Re your reply to the 2/14/06 Death of A Partner question:

 

       The person asking the question needs to  be made aware of the IRC Code 754 election that may apply in this situation.

My reply:

 That's a very good point. 

I will got some info on that posted soon.

Thanks for writing.

Kerry Kerstetter

 

Additional Info:

Proving again why no one reference book can be all things for all people, I compared the info included in both The TaxBook and the Small Business QuickFinder and have to give the nod to QF for including a lot more info on Section 754 than the brief summary in The TaxBook, such as the following quotes from the new QF Online Service, where they have the same content as in the books:

Optional Adjustment to Basis of Partnership Property (Section 754 Election)

Section 754 Election Because of differences between basis and FMV of assets in a partnership, inequities can result when partnership interests are sold or transferred.

Under a Section 754 election, the purchaser’s basis in partnership property is adjusted to reflect the purchase price and the partnership interest. This reduces negative tax effects when basis in acquired partnership property is less than the amount paid for the partnership interest.

Gain upon liquidation of a partner’s interest may occur from a Section 754 election. The election is used to remedy the negative tax consequence when an amount paid for a partnership interest is greater than the partnership’s basis in its assets. Since the election can increase the partner’s ability to deduct depreciation on partnership property, the gain upon liquidation of the partner’s interest may also be increased.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/20/2006 04:34:00 PM Send this post:

Q:

Dear Kerry:

Our corporation can purchase the 2006 Denali Pickup with the crew cab and short bed for $39,784.  No trade-in or down payment is involved.  The GVW is 7,000 lbs.

Please let me know as soon as possible if this vehicle would qualify for the full deduction or do we need something bigger?

A:

You’re not going to believe this one.  I checked the specs for that Denali on the GMC website and they show the short bed as being 69.2 inches long. The rules for deducting more than $25,000 for a vehicle specify that it:

“is equipped with a cargo area of at least 6 feet in interior length which is an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment”

Since six feet is 72 inches, the short bed is 2.8 inches too short to qualify for more than a $25,000 Section 179 deduction.

While the Standard Box is specified as being 78.7 inches long and the Long Box as 92.6 inches, neither seems to be available with the crew cab. 

I hope this helps you decide what vehicle to purchase. Remember that even if you can only claim $25,000 under Section 179, the remaining cost can be depreciated over the five year life of the vehicle.

Kerry

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/19/2006 02:58:00 PM Send this post:

Bush Says Mortgage Interest Deduction Safe – This will hold off the much anticipated burst in the real estate bubble a little while longer. 

Bridging the Gap Between Selling Your Home and Buying a New One

When Entrepreneurs Make a Decision to Hire

Using the Web to Buy a Home

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 10:20:00 PM Send this post:

Q:

Subject: 1040 Express Answers

Hello, I noticed you mentioned that you are using the CCH 1040 Express Answers book. I am considering this book. How does it compare to similar products, such as Quickfinder and The Tax Book?? I noticed in one of your posts that you couldn't find the updates page for the Express Book. I came across it doing a Yahoo search. I'm sure I can find it again, if you haven't found it by now. Any feedback greatly appreciated.

A:

Check out this post from last December.

Since I wrote that earlier piece, I have been using The TaxBook almost exclusively and have rarely had to open any of the QF books, which I did buy this year.  I have been most impressed with the table of contents it has on each tab page.  It's made finding things much more efficient. 

A few weeks ago, I finally received my copy of TMI's All States Edition of the TaxBook.  I was similarly impressed with how they set this book up and already consider it superior to the comparable book from QuickFinder.

If you are looking for just one book to work with, I heartily recommend The TaxBook.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry, so I gather from your post, that you would recommend The Tax Book over the CCH 1040 Express Book? I am trying to find just one book to have as a reference. Thanks for your reply.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 05:34:00 PM Send this post:

I just printed out my first 2005 extension form (Form 4868) for a client and was disappointed that nowhere does the version that Lacerte prints out say that this year’s first automatic extension is for six months. Knowing that this will create a lot of confusion, as well as a lot of anxiety around August 15, I used my Microsoft Publisher program to create a label that we will be sticking on each 4868 we prepare.

That’s still no guarantee that everyone will actually read the date, as I’ve noted with how many clients overlook the extended dates printed on the other extension forms.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 04:49:00 PM Send this post:

From a reader in Iraq with a USMC email address:

Subject: Your web site

find your references to the filthy rich disgusting.

 Furthermore, if we had a decent tax scheme (VAT) we could do without most of you deadweights and lawyers and hope you found real work.  Talk about a filthy line of work…..

My Reply:

You obviously haven't read much of my stuff because your anger at the tax system is very misdirected by blaming me.  I have long been a very outspoken and active member of the fight to repeal the 16th Amendment and eliminate the entire income tax system.  I actually worked in the 1996 & 2000 Libertarian Party presidential candidate Harry Browne's campaigns, which included a plank in his platform to eliminate the income tax entirely.  I was on some radio interviews with him expressing my 100% support for this objective.

I have been in this business for over 30 years and long ago recognized that it is well beyond any kind of repair, which is why I have also long been a supporter of the FairTax movement to replace the income tax with a national sales tax.

Far from being scared at losing a lucrative income stream, I would like nothing better than to be able to use my skills and knowledge for other tasks than helping people battle the IRS.

In regard to your problems with the filthy rich, I'm not sure what you mean.  You may have the same misconceptions as I addressed in several posts over the years, such as this one.

Thanks for writing.

Kerry Kerstetter

Follow-Up:

I  may have jumped the gun and apologize.  I was looking for 2005 tax schedules and your page came up on Google - all I saw were references to the filthy rich and no tax schedules....

I would love to see a flat user-based tax, and to see Congress go home part of the year with less taxes to spend, or tax laws to write.  The abolishment of the IRS would be a great side benefit.  I read long ago the tome, To Harass Our People by the Idaho representative who later was incarcerated for his cajones to take on the IRS.....

Mea Culpa and hang in there-

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/18/2006 03:05:00 PM Send this post:

Q:

Subject: Sale of a Timeshare at a loss

Kerry, how do you treat the sale of a two week timeshare unit purchased in 2001 and sold in 2005 at a loss on your 1040 Federal Tax Return and also on your state tax (CA)?  Can you deduct the loss on Schedule D? I have received a Form 1099S.  The instruction there tells you that if the real estate is not your main home you must report it on Form 4797, and/or Schedule D (Form 1040).  CONFUSED!  Can you help, please.  Thank you. 

A:

The sale price definitely needs to be reported in order to match up with the 1099–S amount.  To leave it off completely will allow IRS and FTB to assume it to be 100% profit.

Which schedule you will need to use, as well as whether the loss is deductible, depend on how you have been using the timeshare. 

If you have been using the timeshare as a business property, and depreciating it accordingly on your business schedule, the sale will be reported on Form 4797 and the net loss, after accounting for depreciation recapture, will be deductible on Page 1 of your 1040.

If the timeshare was only used as a personal second or vacation residence, the sale needs to be shown on Schedule D, but the loss is not deductible or available to be used to offset other capital gains.  There has long been a double standard in the tax code making gains on the sale of personal use property potentially taxable, while denying any loss deductions for personal use property.

With other kinds of real estate, a case could possibly be made that it was acquired for investment purposes, making a loss deductible.  Since it has long been widely known that timeshares are the worst possible investment, with zero chance of resale profit, that wouldn't fly in your case.

These have long been the rules.  Any competent professional tax advisor should be able to work with you on this.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for responding so quickly to my query re how to report the sale of a timeshare unit at a loss.  I very much appreciate it and the answer you provided. 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 06:38:00 PM Send this post:

It seems that not many people are paying attention to a key new feature in the QuickBooks 2006 programs.  Twice in the past week, bookkeepers for clients have sent me QuickBooks 2006 data files in the much larger QBB format instead of the much smaller QBM format.  Here is one message that I wrote back to one of the bookkeepers.

I downloaded the file and will look it over and give my comments.

With QB 2006, please use the new Make Portable Company File feature to create a much smaller sized file (QBM) than you get when you make a QBB backup.  With this file, the QBM is only  3.3 mb, while the QBB you sent was 24 mb.  This will save us all a lot of upload and download time.

I commented on this new feature on my website shortly after the new program was released:

Backing Up Data Files
The regular QBB backup file doesn't shrink the size as much as it used to. It used to go to about one-fifth the size of the full QBW file. The first file I worked with had a QBW of 25.4mb and a QBB of 17.0mb

They do have a new type of backup, called a Portable Company File, that you access through the File menu. It makes a file ending in QBM. With the data file I previously mentioned, it was only 3.2mb in size.

When you create a QBX Accountant's Review copy, it was the exact same size as the QBM file.

I had also updated the instructions for sending me QB files to include this new QB 2006 feature. 

Thanks for your help.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 05:23:00 PM Send this post:

Q-1:

Subject: blog question

 

I invested in a startup S corp about four years ago.  So far there has been no income and there is still hope of getting a lucrative government contract

sometime in the future.  The company has incurred lots of expenses in trying to get it going but the tax form, K-1 shows no losses.  The accountant says

they are capitalizing everything as start up costs.  Can they take a more aggressive posture and under what circumstances? I know my loss is limited to my investment.

A-1:

There is a quite a bit of flexibility in deciding which exact costs are capitalized as pre-operations start-up costs, to be amortized in future years, and currently deductible operating costs.  All of the shareholders should consult with the corp's tax accountant to establish a policy that you can all agree on for handling the different kinds of expenditures.

I just consulted my favorite reference, TMI's The TaxBook, and it has a good summary of the rule that allows S corps to elect to deduct up to $5,000 of organizational costs plus $5,000 of start-up costs, with the excess amortized over 180 months.  The actual statement (on page 24-10) shows that these deductions are to be reduced dollar for dollar by the amount total start-up or organizational costs exceed $50,000.  You and your fellow shareholders should check with the corp tax accountant to see if this would apply in your case.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,  Thanks for your response.  To clarify, this business depends on getting a government contract.  Most of the dollars have been spent on

consultants and paperwork to get the contract.  These would seem to be operating costs rather than organization costs.  Could the shareholders

agree on writing these off before getting the contract?

A-2:

There is some flexibility in regard to what costs have to be capitalized and held off to be amortized against future income.  However, there are fewer options with this when you aren't producing any income at all.  If you were making a lot of small sales while building up for the big payoff from the anticipated government contract bonanza, you would have a better rationale for deducting more as current operating costs than would be the case if the only money your business is ever expecting to ear is that future contract. 

You should all coordinate with your professional tax advisor on how you all feel comfortable in booking the various kinds of expenditures you have.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for your advice.  Unfortunately you seem to agree with the company's tax preparer.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 11:26:00 AM Send this post:

Q:

Subject: Recapture

Hello,

I happened upon your website and was interested in what you said about the recapture tax rates.  I wanted to know one more thing on that subject:

Using a rental property as the subject for discussion, is the recapture tax rate on the amount recaptured from depreciation still 25%?  Or do we use the Long Term Cap Gains rate of 15%?

Where is that written in the IRS Tax code?

Thanks for your time

A:

Depreciation recapture has been around for decades and is accepted as part of the tax benefit concept.  Basically, if depreciation expense has been allowed or allowable to reduce your ordinary income tax, its recapture should also be subject to ordinary income taxes.

With one basic exception, all depreciation recapture is reported on Form 4797 and is subject to ordinary income tax rates.  The one main exception is straight line depreciation on Section 1250 property, which includes most kinds of real estate, which has a special federal recapture rate of 25%.  If accelerated depreciation was used, the excess over what the straight line method would have been is taxed as ordinary income.

In the sale of a rental property, it is often the case that depreciation recapture on the structure (Sec. 1250 property) is taxed at the 25% rate, while depreciation on other separately identified assets, such as appliances and fixtures (Section 1245 property) are taxed at the normally higher ordinary income tax rates.

The special 15% long term capital gain tax rate only applies to any gain remaining after accounting for the depreciation recapture.

Your personal professional tax advisor can better assess how these rules will work in your case.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thanks so much for your useful info.  It was quite helpful to me.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/17/2006 11:02:00 AM Send this post:

A comparison of three do-it-yourself tax prep programs: TaxCut, TurboTax, TaxAct.– As with all postings on such programs, I must add my warning that these programs epitomize the term GIGO (garbage in, garbage out).

Static tax scoring at the Treasury Department may soon be a thing of the past – The fact that our rulers have relied on the concept that changes in tax policy have no effect on taxpayer behavior for so many decades is the big scandal that nobody on the Left wants to address. 

 Everson Says IRS Could Collect Up to $100 Billion More Per Year – If they were only given more power and money.  Can anyone say “biased tax gap analysis?”

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 10:15:00 PM Send this post:

Q:

Subject: question for blog

 

Kerry:

 

Someone (my girlfriend) had the poor sense  to work in a start-up and the start-up fails (all within the tax year) and the business is closed and the  owner (who registered with the IRS via an EIN) did not report/deposit all withholdings (this is probable as there is no W-2 to be had) :

 

I know how to file her tax return using the last paystub and the appropriate IRS self reporting form in lieu of a W-2; but my question is will she be liable for payroll and withholding taxes deducted but not remitted by this so-called fiduciary/agent  employer (if of course all wages were not appropriately reported/deposited)

A:

Unless your girlfriend was in a position within the company to have some control over the payment of bills, she shouldn't have any problem with IRS.  It is the responsible parties within the company, those who chose to use the money for other things than paying IRS, who will receive the wrath of the IRS and be hit with major penalties.  IRS considers those people to be thieves, who stole the employees' tax money, and will act very aggressively to recover it from them.  The powerless employees whose money was stolen will not be penalized, and will receive the same credits with the government as if the full amount of the taxes had been forwarded to IRS.

If your GF did have any power over the company checkbook, she should retain the services of an attorney and work on negotiating the scope of her liability with IRS.

If she attaches Form 4852 (Substitute For W-2) and includes an explanation of what happened and how her figures were determined, she shouldn't have any problem and her 1040 will be processed just as if she had her actual W-2. 

Kerry Kerstetter

 Follow-up:

Thanks Kerry

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 11:47:00 AM Send this post:

Employer-Reimbursed Medical Benefits Excludable by Employee, Deductible by Employer; Burden of Proof Shifted to IRS – I have long worked with small business owners and explained many of the lucrative tax benefits of hiring their own kids and spouses, such as employee benefits, including medical costs and education assistance which are deductible on the business schedule, but not income to the family employees.  This case is a good example of how that works, including a common misconception that I have had to fight with IRS over on a number of occasions, that benefits can be in lieu of actual wages.

The amounts paid to the husband, which were in lieu of compensation, were reasonable because they were substantially less than the wife would have had to pay someone else to perform the same duties.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 11:28:00 AM Send this post:

Tools That May Make Tax Time Easier for Property Owners – While this article from the WSJ speaks highly of the Quicken Rental Property Manager program, I am still adamant that QuickBooks is a much better double entry accounting system for keeping track of all kinds of business activity, especially rentals.  I prepare hundreds of tax returns a year for clients who use the Class function in QB to easily get a P&L for each separate property, making it a very easy task for me to enter the details into Schedule E and Form 8825.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/15/2006 10:59:00 AM Send this post:

IRS Updates Tax Gap Estimates - No surprise here because IRS had earlier told us to expect a new SWAG from them. It's also not surprising that so many others are swallowing these figures as gospel, such as TaxAnalysts.  The fact that these higher tax gap calculations are being used to justify more money and power for IRS couldn’t possibly have influenced their measurement of something that is inherently impossible to measure with any precision, could they?

Feds bust father & daughter tax preparers in Wichita for claiming bogus deductions on their clients’ returns.

Despite Federal Tax Credits, Solar Power Isn't for Tightwads

Even with the new federal credit, it often takes 20 or more years to recoup the initial investment through energy-bill savings.

Taking Inventory of Your Home To Get Adequate Insurance – Dealing with insurance adjusters can often be worse than IRS auditors.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 10:36:00 PM Send this post:

Q:

Subject: Illinois State Taxes

 

Kerry Kerstetter: We are considering moving to Illinois and I find their residential real estate taxes are double ours in KS. Is there a site or resource that has a net, bottom line analysis of all state's total taxes, so one can compare them to determine the most expensive/least expensive? Thanks! 

A:

Check the following that I found via a quick Google search

http://www.stateline.org/live/ViewPage.action?siteNodeId=136&languageId=1&contentId=28297

http://www.taxadmin.org/fta/rate/tax_stru.html

http://www.taxfoundation.org/publications/show/335.html

http://www.retirementliving.com/RLtaxes.html


Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/14/2006 12:00:00 PM Send this post: