Q-1:

Subject: Sec. 179

 

Dear TaxGuru,

 

My husband and I have two sole proprietorships that is offset by his regular job salary.  One is a farm that does not make money, but keeps vets and blacksmiths busy and the other is a new classic car business.  We purchased a Ford F350 truck with crew cab that weighs 13000 lbs for the purpose of both businesses.

 

Does this truck qualify for the full purchase price of $47,000 to be written off in one year under the Sec. 179 2005 rules.  The truck was modifed to handle a gooseneck horse trailer, but also serves to pull a car trailer for restoration projects.

 

I am thinking that if the full amount can be written off, I should put it under the farm as farms are recognized as not money makers.  However, do I have the option of splitting the truck's cost between the two companies.  Expenses are greater that profits for the car business as it takes a long time to restore the cars, find them, etc.  The farm could show a very modest profit ($1,000 or so) if I do not use all allowable deductions.

 

What is your suggestions, recognizing that I should consult a tax pro.

 

Thank you.

A-1:

Check out this post from last month.

Any deductions for the truck would have to be allocated to the various business schedules that you are using, based on miles driven.

If you are actually using the same facilities and equipment for both your farming and car operations, you should consult with a tax pro as to the feasibility of combining them on the same business schedule with your 1040.  It makes things a lot easier than having to split everything up.  That's what I have been doing here for the past 12 years we have been living on this ranch for pretty much all sorts of different kinds of income (including sales of animals, hay, timber, jewelry and ceramics), except for my CPA work.  IRS has never had any problems with that.  

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

 

Thank you for your quick response.  It sounds as though I should put the truck on the car business where the miles are at this time.  This would prevent me from reporting the mileage deduction, so do I need to show business miles in order to support the truck?

 

I wanted to confirm that my Ford F350 Crew Cab with a normal bed that a sheet of 4x8 plywood can fit into qualifies in 2005 for the full deduction of $47K?

 

Thanks again.

A-2:

As you noted earlier, you really need to be working on matters such as this with a tax pro so that you don't screw things up on your own.

One of the most basic requirements for the Section 179 deduction is that the asset be placed into service before the end of the tax year.  For vehicles, this means that it must be driven for business reasons.

You will need to get the specs for the truck you are looking at and compare them with the dimensions as specified in the tax law for qualifying for the larger deduction.  In the post that I sent you earlier, the defining point was the length of the truck bed.  I researched that specific case because it was for a long-time client who actually paid me for that time. I do not have time to do this for you; especially right now, as we close in on the April 17 crunch date. 

I would be very careful of relying on the dealer's claim that the vehicle meets the specs for Section 179.  I have seen dozens of cases where they will say anything the customer wants to hear just to make the sale, and the buyers are left holding the bag later on when they discover that the vehicle in fact didn't meet the requirements, most often for the 6,000 pound weight threshold; but the bed length is also a key factor.  Needless to say, car dealers aren't exactly known for standing behind their tax opinions when push comes to shove.  You would be much safer working with a tax pro who can make reliable determinations.

Good luck.  I hope this helps.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2006 11:19:00 AM Send this post:

Q:

Subject: S corp vs C Corp - HELP

 

Hi Kerry,

 

Thank you for the information.  I had started working with an accountant last year that told me some of this information (about C corp vs S corp), but she was not a CPA and unfortunately she abandoned me during my incorporation (didn't return phone calls).    She recommended I start as an C corp. I was a sole proprietor (chiropractic offices -2 ) and was being eaten alive by Self employment taxes and also owe a significant amount of back taxes that has been compounded since one bad year in 2001 during which I was out of my practice for a couple of months from surgery and recovery and during which ex- stopped paying child support.  Now I keep paying back taxes and never getting caught up with current taxes.

 

The accountant that abandoned me thought that the different fiscal years and the shifting of funds might help me get caught up.  My  new accountant didn't see things this way and changed me to an S corp in November.  He had an entirely different rationale that had  more to do with the double taxation.  Frankly, I'm highly confused and not sure where to turn.   He also said I could pay myself dividends and avoid some of the self employment tax.

 

What is your role?  Would you be able to look over my situation and make recommendations?  and at what cost? 

 

Sincere thanks for any light you can shed

A:

It's not quite right that your accountant can change your corp from a C to an S on his own.  You have to sign the 2553 to request that change. 

It sounds as if you do need some competent assistance with.  I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

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

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2006 11:10:00 AM Send this post:

Q:

Subject: section 121

 

Kerry, I saw your article on the internet and would value your opinion on the following situation.  I purchased land to build on 2 years ago.  I built the home and moved in 1 year ago.  My mail has always gone to a PO box.  Could I sell my home based on the land purchase, or does the date I turned on the power at the new residence start my 2 years?  (I did not sell a home in the previous 2 years)

Thank you for your time,

A:

The two years for qualifying for the Section 121 tax free exclusion begins when you both own it and occupy it as your primary residence.  Unless you were living on the lot prior to and during construction (tent, motorhome, etc?), this couldn't be possible until you actually moved into the completed house.

Kerry Kerstetter

Follow-Up:

Thank you for your response.  I just may contact you again if my accountant doesn't feel confident about these issues.  I appreciate your time.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2006 11:04:00 AM Send this post:

Q:

Subject: depreciating donated property

Hi Kerry,

Thanks for sharing obscure versions of George Harrison's  Taxman.

Hopefully this question will have a quick answer.  I'll be brief.

Can a piece of real estate that is donated to a land trust be depreciated by the land trust over 27.5 years?  The property is one acre of lakefront property on Lake Ontario with a single family residence.  I'm attempting to calculate the real costs after taxes if the trust were to hold the property unoccupied.

Thank you for continuing to provide a valuable source of information.

A:

If it is trust that files 1041s, the building portion of the cost should be able to be depreciated during the time it is being used to generate income based on the value used for the transfer into the trust.  Obviously no depreciation could be claimed while it sits vacant unless a sincere effort is underway to lease it.

I'm glad you like the TaxMan songs.  Sherry found a new live version by Nickel Creek last week and I was thinking of posting it.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2006 10:57:00 AM Send this post:

The latest Intuit ProConnection newsletter had an announcement of their new free service to remove passwords from data files.  To use it, you need to upload your data file and provide your registration license number.  It currently only works with QB 2005 and older versions of the program.

I haven’t used it and probably won't because I have been very happy with the speed with which I have been able to unlock QB passwords with the QuickBooks Key program from LostPassword.com.  I have used it several times when clients forgot to send me their passwords, which I usually don’t discover until 10 or 11 at night, when I’m working on their stuff.  Since there is no file uploading required; so it only takes a minute or so to unlock the files.  Unfortunately, they still haven’t updated their program for QB 2006, which more and more of my clients are using. 

I have added info on this new free service to the QuickBooks Resource page on my main website.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2006 02:39:00 PM Send this post:

Q-1:

Subject: Question on sale of primary residence owned less than 2 years

We are possibly in a situation where we may sell our primary residence that was purchased Jan. 6th, 2005.  My wife (who was only applicant on the mortgage) is pregnant and has been forced to bed rest for a short period of time.  She is a physician although not necessarily the primary wage earner, but due to bed rest is unable to 'moonlight' which drops here gross monthly income by roughly $4500 per month.

 

Is this a qualifying circumstance to get a prorated discount on tax on sale?  We purchased the home for $540,000 and are looking to sell for between $750k and $825k.

 

Thank you in advance for your assistance.

 

Sincerely,

A-1:

While it may be possible to justify the use of the prorated exclusion based on your description, I would feel nervous about your use of the term "short period of time" for the disruption in your wife's income flow.  That would be a harder case to make than a long term reduction in her income due to the need to take off from work for the pregnancy and the post natal time to raise the baby.  IRS could say that a short-term interruption in income could be dealt with without having to actually sell the home, while a longer term reduction would be a valid reason to sell.

You'll need to go over your facts and circumstances with your personal professional tax advisor to see if s/he will feel comfortable with claiming the prorated exclusion.  If you do decide to claim it, attaching an explanation of the facts to your 1040 will make it slide though with less opposition from IRS.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

Thanks for the advice....By the way what is the tax rate on a sale of property owned from 12-24 months?

A-2:

That would be taxed as a long term capital gain, which is a nominal rate of 15% for the Federal.  The actual effective rate will be much higher due to the penalties applied to people with high AGI.

I have the 2006 Federal rates on my website.

State rates differ.

Kerry

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2006 11:15:00 AM Send this post:

From WSJ’s free Startup Journal

A look at some small business accounting programs, including my long time favorite.

A list of recommended reference books.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/28/2006 02:02:00 PM Send this post:

The Feds continue their long, slow crack-down on charlatans in the tax prep community, as well as the people stupid enough to use their services. 

North Carolina preparers using fake numbers

New Hampshire prepare of frivolous returns

Florida promoter of disabled access telephone tax scam

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/27/2006 10:57:00 PM Send this post:

Q:

Subject: Zero Coupon Treasury Receipt

 

I received the proceeds from an expired instrument purchased at Merrill Lynch, in November, which I reinvested in a 6-month CD with ING.  This was (is) listed in my name for the benefit of my grandson.  I never received any 1099s over the 15 years of its run, and I don’t know if I should declare this as income on my FED and State tax returns.

Any advice most gratefully received,

A:

It sounds as if you are referring to a US Treasury Bill that was purchased at a discount.  If so, you had the option of either reporting a pro-rata portion of the interest as it accrued each year, or waiting until you cash it in and report the difference between what you received and what you pad for it as interest income on your Federal Schedule B.  It would be tax free for state income tax purposes.

While there are some opportunities to avoid tax on some of the income by using it to pay for certain kinds of  education expenses, it doesn't sound like that applied to you.

You personal professional tax advisor can assist you in more detail with this.

Good luck.

Kerry 

Follow-Up:

Thank you so much for your assistance!  I spent two hours yesterday pouring over Pub. 550 and other IRS ppgs. becoming more and more confused. (My algebra is VERY rusty).

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/27/2006 08:06:00 PM Send this post:

Q:

Subject: Condo

Kerry,

I purchased a condo in 2005 at a sheriff's sale as an investment.  I sold it early in 2006 for a profit.  I did not live in the condo at all (I already own a primary residence).  My understanding is the gain would be treated as a short term capital gain subject to the 25% tax rate.  I would like to verify something my CPA told me.  As part of the purchase, I paid off the former owner's delinquent real estate taxes (about $6,000).  According to my CPA, this amount cannot be deducted as the IRS only lets you deduct real estate taxes for the time the property is owned.  Is this correct, or is this something that is equivalent to an "investment expense" I could put on my Schedule A, subject to the 2% of AGE floor?  Or could I add that amount to my basis to offset my gain on my 2006 taxes?

I did not do many upgrades or "capital improvements" to the property - mostly just painted, cleaned the carpets, etc.  My understanding is this is also not deductible on my 2005 return and also does not reduce my gain on my 2006 return (i.e. it does not change my basis).  Is that correct?  Just looking for a check on my CPA.  Thank you for your help and for the great site.

A:

You seem to be misunderstanding several key points here.

First, there is no special 25% Federal rate for short term capital gains.  Those are taxed the same as ordinary income, which has nominal rates up to 35%, plus the implicit rates of the phase-outs due to high AGI.

When you buy a property for back property taxes that had accrued under the prior ownership, it has always been the proper thing to add the taxes to your cost basis of the property, which will reduce your gain when it is sold. 

The costs you put into the property, including paint and cleaning, should also be added to the property's cost basis.

These are all very basic concepts that any competent tax pro should understand.  If your CPA doesn't, you may need to find one who is  more experienced with this kind of thing if you will be doing more of it in the future.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2006 08:35:00 PM Send this post:

Q:

Subject: Thank you

Hello,

My name is … and I own a few small companies, I have sought to incorporate and have read quite a few of Robert Kiosaki’s books on business. They all lean to becoming a C corp but every CPa I have talked to have tried to veer me towards a S Corp.

I have stuck to my guns on the issue and have read as many books on taxes as I could on the issue and have believed that the C corp was right for me. Thanks to you I now have the backing of a professional CPA. It is a shame that there are not more of you out there.

Thanks again

A:

I'm glad you found my info useful.  You should keep in mind that there is no one size fits all arrangement that works for everyone.  In fact, for most people who have multiple businesses, the best overall strategy is often a combination of different types of business entity, including C corps, S corps, LLCs, partnerships, trusts and  sole proprietorships.

Working with a professional tax advisor who has experience with this kind of thing is a must when you are involved with so many businesses.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2006 06:56:00 PM Send this post:

Q:

Subject: Primary Residence Questions

My husband and I where recently gifted a home valued at $700K.  I just learned that unless I create a permanent residency status, I would have to pay a huge tax burden upon the sale of the home.

I do understand that if I where a primary resident in the home together we can take a $500 credit and taxes would occur on everything over $500K

My question is can I live in a secondary rental, and still create a primary residence on this home.

MY documentation is needed to constitute a permanent residence.

I still want my mail to come to my secondary rental.

A:

While I do have an explanation of the rules for residence sales on my website, this is the kind of thing you really need to discuss in detail with your own personal tax professional.

There are a number of issues that you will need to discuss with your personal tax advisor, including the following.

Cost Basis - When you receive a gift, your cost basis in the item is the same as it was for the person who gave it to you (donor).  This should be documented on the Gift Tax Return (Form 709) that the donor filed with IRS.  You should get that figure because that will be crucial in calculating your potential gain when you sell the home.

In regard to qualifying for a full $500,000 of tax free profit, you and your husband will need to live in it as your sole primary residence for at least 24 months out of the 60 months before you sell it.  It cannot be a part-time residence or one of two primary residences.  One primary residence per person is all IRS will recognize as legitimate.

As with all tax matters, the burden of proving that you actually did use the home as your primary residence rests with you.  In the rare case that IRS questions your right to use the Section 121 exclusion, you will need to be able to provide an adequate amount  of documentation of this fact.  Such documentation can include such things as your voter registration, residential property tax exemptions (if applicable in your area), as well as use of that address for your normal mail.   Since any such IRS challenge wouldn't happen until a year or two after you have reported the sale on your 1040, you should hold onto the documentation until the coast is clear for any IRS challenges (generally three years after filing your 1040).

Your personal tax pro can give you more customized advice for your situation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2006 06:52:00 PM Send this post:

Q:

Subject: Question 4 Guru

 

Kerry,

 

Your site is very informative and I extend many thanks. 

Would you have the time to field a question?

 

I am considering purchasing a SUV ($30K) & tools ($12K) for the company (S-corp) in year 2006, all of which would be have 100% business use.

I would like to make a sec 179 election for $37k ($25k+$12k).

What would be the impact of selling the SUV in '07, '08 for:

$20k?

$15K?

$10k?

 

Please advise,

A:

If you are serious about running a business properly and staying out of trouble, you should be working directly with a professional tax advisor who can help you with basic concepts such as this.

If you expense the full cost of an asset via depreciation or Section 179, your adjusted cost basis (aka book value) becomes zero.  If you ever sell that asset at any time for more than zero, the full amount is taxable gain (aka depreciation recapture). 

If you didn't expense the full cost, whatever is left is your adjusted cost basis and any gain is the excess of the sales price over that amount.

There is no taxable gain if the asset is traded in on a new like kind asset.

I have covered this issue in several previous posts, such as:

November 2004

February 2005

October 2004

Again, any competent tax pro can help you with this kind of thing

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

 

I have a CPA who I is competent.  However, I am concerned with 2 things 1) asset protection and 2) tax liability.  I am interested in obtaining a second opinion and would be willing to pay for it.  Would you consider fielding questions for hire?

 

Please advise,

My Reply:

If your CPA couldn't answer those very basic questions you sent me earlier, you really should be looking for another tax pro.

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

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2006 06:39:00 PM Send this post:

Gas tax on miles, not gallons, tested in Oregon – Vehicles are too fuel efficient. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2006 05:47:00 PM Send this post:

Q:

Subject: S VS C

 

Hello Mr. Kerstetter,

 

…I am an Optometrist in Miami slightly confused on which Corp is better.  I am not sure if you answer personal questions but thought I would try.

 

By your comments it seems that a C is better but most Optometrist have a S.  I put my yearly income on about 130-150K and want to make sure I'm not paying the government more than I should. 

 

You mention that a C has a 15% tax bracket for 50K vs being taxed on the S corp total earning as sole owner .  My only concern is that a C corp is taxed twice and don't know which one would be better.  What are considered royalty payments that are not taxed twice?  Also, I would be setting up a 401K but I'm limited to how much I can put in.  Would I be able to put my wife as an employee even though she is not doing anything for the corp and start her on a 401K? Can I put money away in a term life insurance to prevent double tax or any tax?

 

I hope that you may have some simple solutions for me.

  

Thank You

A:

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

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

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

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

It does look as if you are confused over the issue of double taxation.  This only happens when income that has been taxed at the C corp level is taken out by the shareholders as dividends.  Since dividends are not tax deductible by the corp, and are taxable on the shareholder's 1040, it is being taxed twice.  The solution to this is to only take money out in ways that are deductible by the corp.  In fact, I advise my clients to banish the word dividends from their vocabulary.  A good tax advisor should have no problem helping you use a C corp in the best manner to avoid any double taxation.  It is not difficult at all.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2006 11:44:00 AM Send this post:

Q:

Subject: Corp Tax Question

Can / Are principle payments made to shareholders who have loaned money to an S Corp considered / accepted by the IRS as a "cost of doing business" and therefore included along with other cost (material, wages etc.)?

Thanks for your insight

A:

The fact that you would ask a stranger such a question is a perfect illustration of how dangerous it is for anyone to try to run a corporation without competent accounting assistance. 

This is basic accounting and nothing tricky.  Principal payments on loans are balance sheet entries, which do not affect the profit and loss.  Interest payments are deductible as an expense.

Another issue that you need to consider is that all payments being expensed on the corporate books will need to be reported as income by the recipients. 

Get with an accountant ASAP before you go any further down the wrong road with your corporation.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2006 11:40:00 AM Send this post:

Q-1:

Subject: Section 179 deduction for "USED" SUV over 6000 lbs.

 

I have received information from my tax consultant who is not as versed in the business tax laws as I wish. I have just started my own consulting company and need to replace my old 1990 Jeep with something a bit more practicle for doing buisiness. I cannot afford a new $45,000 SUV (over 6000 lbs I know!) but would like to buy a clean SUV that's got a couple of years on it for a lot less. Your webpage news says as long as the SUV would be new to me it would qualify for the Section 179 deduction. I intend to buy something under the $25,000 mark and over 6,000 lbs. Would I be able to do a 100% writeoff this 2006 tax year???? This issue of a used vehicle qualifying has not been completely or clearly answered anywhere I can find on line and I need to go buy something shortly. I really need your "yes" or "no" on this one.

Thank you,

A-1:

I'm not sure why you're so confused.  The Section 179 deduction never required the asset to be brand new.  Some other kinds of first year bonus depreciation did have such a requirement; but Sec. 179 never did.

Assuming you buy an SUV weighing more than 6,000 pounds, you would then need to multiply its cost by the business usage percentage based on miles driven during 2006 to figure how much you can claim under Sec. 179, up to the $25,000 limit for SUVs.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

Wow, that is about the fastest response I've ever had to ANY e-mail!!

Your answer makes it clear, used is okay. Too bad I can't wait until Dec 30th and use the vehicle 100% for work. I estimate I'll be using it about 60-70% for business. That's pretty simple math. What is this about a "bonus 30% deduction"??

A-2:

The bonus depreciation is no longer available.  When it was, it only applied to brand new business assets; so a used SUV wouldn't qualify.

It sounds like you really need to be working with a professional tax advisor to address issues such as these rather than floundering around on your own.  Taxes are too messy and complicated to try to handle on your own.

Good luck.

Kerry Kerstetter

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2006 11:35:00 AM Send this post:

Q:

Subject: Sale of residence

 

I appreciate the information found on your website, and would like your advice on the facts and circumstances surrounding a sale of residence.

A client of mine had leased a home between 2001 and 2004, then purchased the home in 2004 because of its private wooded surroundings and park-like back yard.  In mid 2005, a neighbor of there's offered to purchase every home on the street.  His intent was to subdivide the land and fit new homes on the existing parcels...

My client turned the first offer down, but when approached a second time, the investor stated that the rest of the neighbors had already agreed to sell, and if they did not sell to him, they would end up with new construction surrounding there property that would diminish the quality of the surroundings.  My client eventually sold, and purchased a similar property elsewhere.

I would greatly appreciate your advice on qualifying this as an unforeseen circumstance.

Thank you,

A:

The key requirement for using the pro-rated exclusion is that something unanticipated happened after the home was purchased that materially changed the living conditions in the house for its owner and other occupants.  If IRS were to question the application of the exclusion, the homeowner would have to be able to convince them that, if he had known ahead of time what the change would be, he wouldn't have bought the place.

In your client's case, the change from a home with no big construction projects around it to one that is surrounded by construction is a material enough change to alter the living conditions enough to warrant a move.  Construction sites are noisy (making sleep difficult) and dangerous, especially if your client has young children. 

It seems that the only real burden your client would have is being able to convince IRS (in the unlikely event of a challenge) that he had no advance knowledge of the developer's plans for his neighborhood and it only came to light after he had taken ownership of the home.  If that's the case, he should have no problem qualifying for the pro-rated tax free exclusion.

Good luck.  I hope this helps.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2006 11:29:00 AM Send this post:

Q:

Subject:  Class Action Settlement - IRA qualified?

 

Kerry -

 

I recently received a payment from a prior employer as a consequence of a class action discrimination suit. The payment had deductions made for Social Security, Medicare, Federal and State income taxes. This strongly suggest to me that the payment is being treated as "back wages."

 

My question is this. Can I make an IRA contribution based upon the monies received in this settlement? I am presently retired and do not have earned income with which I might otherwise qualify for an IRA contribution.

A:

It certainly sounds as if they will be reporting the income on a W-2, which will make it eligible to be treated as earned income for IRA purposes.

You didn't specify your age.  If you are or will be over 70.5 during this year, you will not be allowed to contribute a traditional deductible IRA; but a Roth IRA is still possible.

Your personal professional tax advisor will be able to provide you with more specifics for your particular situation.

Good luck.
 
Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2006 11:23:00 AM Send this post:

Q:

Subject: Tax Question RE: liquidation of LLC to c-corp

 

Hello Mr. Kerstetter, we have researched the web and the print world and found your most helpful and valuable information. Thank you for your contributions to the web. We have a few questions that we are having a difficult time finding answers to, and would like to ask you if you'll allow us. In our work, we've found we get what you pay for, so we are willing to pay for your advice. Let us know what arrangements need to be made for payment.

 

A multi-member LLC has liquidated it's assets and each member is to receive distribution of the proceeds. If the member has not yet taken possession of the proceeds, how can the member direct the proceeds to invest in a c-corporation without receiving the proceeds directly?

 

Thank you for your time.

A:

You definitely need to be working with a tax pro on matters such as this.  In fact, you should have been working with one from before you even set up your LLC.

As you describe the situation, it might be too late to do anything to reduce your taxes, depending on how you had elected to report the LLC income. 

If it has been taxed as a partnership or S corp, the gains from liquidating the assets are a done deal and are to be passed on to the members via their K-1s, whether they take any cash out or not.  That is the main principle of pass-through entities.

If your LLC has been taxed as a C corp, there may possibly be ways to transfer the assets to a new C corp tax free.  It could be relatively complicated.

It would have been a much better idea to work with a tax pro before liquidating the LLC's assets because there would have been more options available.  By waiting until now to consider the tax problems, it may be too late. 

If you have been operating your LLC for all of this time without the benefit of professional tax assistance, you have probably learned an expensive lesson. 

As it says below, we are too swamped with client work to be able to take on any new ones.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/25/2006 11:19:00 AM Send this post:

Sale of Data by Tax Preparers Draws Protests – This is a ridiculous idea and is just one more aspect of your relationship with your tax preparer that you will need to keep on top of. 

As I mentioned in my earlier discussions of tax prep offices outsourcing their actual work to outfits in India, it wouldn’t be a bad marketing tactic for USA tax prep firms to explicitly guarantee to their clients that their highly confidential data will not be released to anyone without the express written consent of the client. It used to be implicitly understood that such was automatically the case for CPA firms; but things have obviously changed.

As I hope everyone has noticed, I don’t like to waste time repeating what others have already written so well; so check out the excellent coverage of this issue by:

 Joe Kristan of Roth & Company

 Professor James Maule

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/23/2006 06:04:00 PM Send this post:

Q:

Subject: Section 179 deduction

 

Mr. Kerstetter, In your opinion, can I use my salary (wages, salaries, tips) that I earn from a separate company to meet the Business Income Limit for taking the Section 179 deduction? My situation is:

 

I work for separate Company A and I earned $120,000 in 2005.  My wife and I opened a small business (LLC) partnership (Company B) in May of 2005.  My wife purchased $60,000 of new equipment to be used 100% in the new business and we were going to depreciate the $60,000 over time but we want to take a Section 179 deduction for the entire amount of $60,000 for the tax year of 2005.  Even without using the one time deduction, the new business did not show a profit for 2005 and if fact, in had a small loss.  My wife and I had no income from the new Company B, however, I had my salary from the separate Company A.

 

As I interpret the IRS regs I may use my salary to pass the “Business Income Limit” and I feel I can take the $60,000 deduction, even tho the new business did not show a profit, because my Taxable Income of $120,000 is more than the 179 deduction.

 

Do you agree?

 

Thank you very much.

A:

You really should be working with a competent professional tax advisor with something like this. 

From the way you described the situation, you may have screwed yourself out of the larger Sec. 179 deduction.  It hinges on who actually bought the equipment.

If you and/or your wife had bought the equipment in your own personal name and set it up on Schedule C or E of your 1040, you would be able to use your W-2 income to justify a Section 179 deduction for the full $60,000 cost.

However, if the LLC actually bought the equipment, the income limit for Sec. 179 is first applied at the LLC's 1065 level.  If there is no net profit, no Sec. 179 can be deducted on this year's tax return.

A tax pro may find something else after thoroughly analyzing the facts here; but it looks like you may be learning an expensive lesson by not consulting with a tax pro prior to purchasing that equipment.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you for you opinion on this.  Appreciate you taking the time to get back me.

R/

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/23/2006 12:17:00 PM Send this post:

Q:

Subject: home rental by my own business

For years I have leased the garage portion of my personal home to my partnership for the purpose of storage.  The garage is approx. 25 percent of the total square footage.

I have taken 25 percent of my mortgage payments and utilities as business deductions.

Now I would like to know if it is  legal to lease my entire home to my business, and then sublease it back from my business, so that my business can deduct the usual deductions for for rental property?

The home is presently titled in my name.  I am hoping that I do not have to get a new title for the house, in the businesses name, to do this.

If yes, are there any federal taxes at the sale of the property?

Could you please email the answer in case I can't find it on your web site.

Thank you very much.

A:

There are ways to do this, most often by transferring the home to a corp.

You should really give this plan some deep thought, along with some in depth consultations with your personal professional tax advisor.  Most of the people I have seen do this later regret it when they discover that the home no longer qualifies for the Section 121 tax free exclusion of up to $500,000 of profit.  That exclusion is not available for rental property or for property owned by anyone other than an individual.  More often than not, that tax free gain more than offsets the "lost deductions" from not being able to claim the home as full rental.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2006 10:29:00 PM Send this post:

Q:

Subject: C Corporation

 

Hi Kerry,

 

Thank you for the excellent advice.  I've met with at least 30 attorneys and CPAs to discuss setting up a corporation.  Most tell me to start an S corp..and some an LLC...none of them understand the benefits of the C corp.  Is there an an Accountant you recommend to people who write you?  I would love to work with someone who just know what they are talking about!

 

Thanks for your help.

A:

C corps aren't always the proper approach; but it is amazing how many tax pros don't even properly consider how they can be of use.

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

Unfortunately, we don't have anyone 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.

I'm sorry I couldn't be more help.

Good luck.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2006 10:24:00 PM Send this post:

Q:

Subject: Business miles/Home office

Kerry,

Having an ongoing discussion on a message board regarding deductible business miles/home office.

For a self-employed taxpayer, with his home being his principal place of business. Does TP have to meet the rules for business use of the home to be able to deduct business miles? In the TaxBook Deluxe, page 5-13, it talks about Business use of home tax advantages. Seems to imply that if you can't qualify for business use of the home, then you can't deduct business miles, say from home to client A, etc. Am I reading that wrong? I thought a TP could deduct miles if his home was his primary place of business, from the minute TP leaves the driveway, say to pickup supplies or visit client A, etc. If some on the message board are correct, then say the TP uses the home office even 1% of the time (not exclusive) for personal purposes, then no deduction for business miles. Any feedback appreciated. Thanks.

A:

I checked out some of the messages in that discussion and saw the variety of opinions expressed there.

While having a space in the home that meets the exclusive use test for home office deduction would be perfect support for the premise of zero nondeductible commuting miles, I don't believe it to be a deal killer if the space is not exclusive. 

There are plenty of people who don't have space in their homes that can be devoted 100% of the time to their businesses, but do run everything from their homes, such as on the kitchen or dining room tables.  In those cases, where they truly don't have another office to drive to, all of their miles would be deductible in the exact same manner as for someone who has an 8829 compliant office.

As always, the burden of proving the legitimacy of this lies with the taxpayer; so attaching a statement to the 1040 explaining the situation would be a wise move to head off any IRS suspicion.

I hope this helps.

Kerry Kerstetter

Follow-Up:

Kerry,

 

Yes, a big help. I very much appreciate your responding.

 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/21/2006 08:28:00 PM Send this post:

Fight building over Calif’s ReadyReturn tax-filing program – Anyone crazy enough to allow the FTB to prepare their tax returns for them deserves what they get.  Can anyone say “conflict of interest?” 

Making the Most of Capital Gains

Business Owners Beware

Private Debt Collection May Be on Hold Until GAO Settles Bid Complaint – In trouble before they even start doing anything.

Feds bust Seattle scammer for setting up bogus offshore corporations

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/21/2006 08:14:00 PM Send this post:

Q:

Subject: Section 179 Deduction

"Qualifying Property

 Generally, the types of business equipment that qualify for this expensing election are the same kind that qualified for the now-defunct Investment Tax Credit. Most movable assets qualify.  Permanent structures do not qualify.  Business vehicles with a gross vehicle weight over 6,000 pounds qualify for the full Sec. 179, while lighter vehicles have a much lower dollar limit." 

If a lighter-than-6000 pound vehicle does not qualify for the full Sec. 179, then how much do they qualify for?  Or where can I find that answer?

Thanks!

A:

From the QuickFinder Depreciation handbook:

For 2005, the Sec 179 limit was:
     $2,960 for passenger vehicles under 6,000 pounds
     $3,260 for trucks and vans under 6,000 pounds
     $8,880 for electric vehicles

The 2006 limits haven't been announced yet.  They will most likely be the same as for 2005, or even lower, which happened between 2003 and 2004.

Kerry Kerstetter

Follow-Up:

Kerry, thanks!

 

 

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/21/2006 12:31:00 PM Send this post:

Feds bust Idaho promoter of Corporation Sole Scam – And IRS will be in touch with the 400 people who were stupid enough to pay him thousands of dollars for this ridiculous scheme.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/20/2006 10:56:00 PM Send this post:

The mystical date of April 15th has become so synonymous with “Tax Day” in this country that they are interchangable.  I have been seeing all kinds of people, including tax scholars and pros, say that 2005 tax returns are due on April 15 this year.  That is not true.

Ever since I have been in this business, IRS has had a policy of automatically extending tax filing deadlines if the statutory one falls on a weekend or a holiday.  Since April 15, 2006 is a Saturday, the normal deadline to file either the 1040 or the extension (4868) is on Monday, April 17. 

For some states in the eastern part of the country, they celebrate Patriots’ Day on the third Monday of April, which just happens to be April 17 this year.  This moves their tax deadline to Tuesday, April 18.  The affected states are: Maine, Massachusetts, New Hampshire, New York and Vermont.

This may seem like a minor technicality to some people. However, any tax pro can relate to the experience of having hundreds of clients panicking at not having their 1040 or 4868 done by April 15, when there are actually two or three more days until the actual deadline.  That extra breathing room is extremely valuable in the pressure cooker world of tax preparation.  

Also, one more reminder that the Form 4868 extension that you file by April 17 is for six months, moving the 2005 1040 deadline to October 16, 2006 because October 15 is a Sunday.  Even though we are including an explicit statement of this fact on the 4868s we are preparing, I’m sure we will be receiving a ton of panicky calls from clients around August 15 assuming that is the deadline.  Old habits do die hard. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/20/2006 11:08:00 AM Send this post:

As I’ve pointed out for decades, the higher the adjusted gross income on your 1040, the more likely IRS will be to hassle you.  This is in addition to the fact that our rulers also have you in their cross-hairs by phasing out deductions, exemptions and credits for those they consider to be evil rich, as defined by high AGI. 

IRS Audits Increase By 21 Percent

IRS also says the number of audits of high-income taxpayers - defined as those with income of  $100,000 or more - reached 219,208, the highest figure in 10 years.

What to do about this? 

You can utilize income smoothing techniques, such as with C corporations, in order to keep your 1040’s AGI from reaching into the higher profile levels.   

You should make sure your books are in good shape and can support everything shown on your tax returns.  The best way to to do this is to have all of your records entered properly into QuickBooks.  Audits I have handled where the clients had their stuff in QB were completed very quickly and successfully.  Those for shoe-box clients drag on for years, costing huge amounts in fees and ultimately taxes. 

Work with a qualified tax professional. It is too dangerous to swim in the IRS shark infested waters alone. 

You also have the option to do nothing special to protect yourself from IRS hassles.  Some refer to that as the “ostrich” or “it can’t happen to me” approach.  These are often the same people whose retirement planning consists of buying lottery tickets.

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/19/2006 05:07:00 PM Send this post:

Q:

Subject: Exchange Question

Hello,

 

 I own with another family member (50/50) some open land that is being developed.

 

When it sells I expect cap. gains of about 250k.  If there is a mortgage lein against the property does that loan reduce the net cap. gains?  is the loan a cost?

 

or do I pay off the bank and then the IRS

 

otherwise would do an exchange or TIC

 

Thank you,

A:

You and the co-owner of that property are looking at some huge tax bills if you don't start working with a professional tax advisor to work out the best plan for your circumstances.

Paying off loans against the property will have no affect on the taxable gain.  Debt relief is considered the same as receiving cash in the eyes of the IRS.

If you are