I just finished listening to this seven and a half minute long MP3 podcast from QuickBooks on the importance of  small business owners working with a professional accountant from day one, as well as some good tips on selecting the right one to work with. 

I am going to add a link to this podcast on my page dealing with selecting a tax advisor.

List of all QuickBooks small business podcasts. 

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2007 11:23:00 PM Send this post:

The bane of all tax prep offices, the shoebox clients.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2007 10:58:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/31/2007 07:58:00 PM Send this post:

Q:

Subject: Nickel Creek "Taxman"

 Hello Sir,

   Though I have never met you I have a tiny favor to ask of you. My dad saw an episode of "Austin City Limits" where Nickel Creek covered the song Taxman, and he loved it. That was back in 2002 and he has searched for a copy of it ever since, only to find nothing. However, I recently stumbled into your post and actually gasped in amazement, after five years of searching I finally found a copy. It couldn't have come at a better time since my dad's birthday is coming up. So I ask of you sir, please, please, please could you send me a copy of that song?

Thank you for your time,

   ( I am only 14 so please disregard any non formal mistakes in my letter. )

A:

That blog post includes a link to download the mp3 file of the song.

If you do search on my blog, you will find dozens of other versions of the TaxMan song by several other artists, with links for downloading.

I hope this helps you prepare for your dad's birthday.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 11:09:00 PM Send this post:

Q:

Subject: Quicken versus Quick Books

 

KMK:

 

I liked your comparison of Quicken vs QB on the webpage http://www.taxguru.org/qb/qbvsquicken.htm as I am considering that exact question now for a non-profit (daycare) company.  I have been doing books for a church on Quicken for a number of years and have found it satisfactory but I admit that I may not know what I'm missing.

 

I have a question about QB that maybe you can answer for me.  Can QB exchange files with an earlier edition of QB?  I know that the 2002 version of Quicken that I am available with will not do a "Save to an earlier version of Quicken."

 

Thanks for your time,

A:

QB data files have always been the same as Quicken's.  You can roll them forward to a newer version of the program, but can't roll them backwards to an older version.  Thus, you need to be careful of upgrading data files, because you can't go back after you've moved forward.

I hope this helps.

Good luck.

Kerry Kerstetter

Labels: QB

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 10:55:00 PM Send this post:

Q:

Subject: Suggestion

Hi there,

 

I have a site suggestion for your tax blog.  I'm currently promoting my "AMT" article. If you'd like to exchange links I'll be happy to add your link to my resource page.   I'm sure this will prove beneficial for both of us considering traffic, etc.

 

Thank you much,

Robert Valentine

A:

Robert:

Thanks for sharing your article on the AMT.  If you've read my blog, you should know that this insane tax is one of my top pet peeves and I appreciate any effort such as yours to further educate people on its stupidity.  The fact that its thresholds aren't adjusted annually for inflation like most other tax items, is just one indication of how far removed it is from reality and how incompetent our rulers in DC are at addressing this problem. 

I will be posting this on my blog, which should generate more visits to your site.

Thanks again for writing.

Kerry Kerstetter

Follow-Up:

Thanks, Kerry. I couldn't agree more...If you'd like to write back with your linking info i.e. desired title, description and linking URL. I'll be more than happy to link to your great resource. Hopefully I can give you some traffic as well.

 

Thanks again,

Rob

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 10:46:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/30/2007 10:30:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2007 05:04:00 PM Send this post:

Q:

Subject: Money for Car

 

Kerry, We have a grandson turning 16 next month and we want to help him get a car. Is there any way to give his Dad the money we want to spend and get a tax deduction? We do not want any ownership in the car but we have committed to help our son with the purchase of this car. We plan to give $12,000.00 as a gift to make this happen. I believe you told me at one time the limit was $10,000.00. If I have my facts correct we would have to make two gifts, one to our son and the other to his wife. If I have made myself clear please reply if not maybe we should talk.

Thanks for your help,

A:

It must have been a while since we last discussed the tax rules regarding gifting because the annual tax free limit hasn't been $10,000 for several years now.  It was increased to $11,000 a number of years ago, and is now at $12,000.

I have some basic info on Gift Taxes on my website.  

Basically, you and your wife can each gift your son, grandson, or anyone, up to $12,000 during each calendar year without having to file any gift tax returns or use up any of your one million dollar per person lifetime gifting exclusion. 

However, the way gifts work for income tax purposes is that they are not considered taxable income to the recipient, nor are they deductible by the giver on his/her income tax return.  In taxes, there has to be a sort of balance between deductions and income.  In other words, the only way for you to claim an income tax deduction would be for your grandson to claim the same amount as taxable income.  If the recipient isn't willing to pick it up as taxable income, the giver can't claim an income tax deduction.

The Gift Tax is actually part of the Estate (aka Inheritance, aka Death) Tax system because one of its main benefits is to reduce the size of a person's estate, ideally bringing it down below the tax free threshold.

One other clarification of a common misconception surrounding gifts of this nature.  They can only come from humans and be given to humans. Corporations and other artificial entities are not subject to estate or gift taxes, so they can't make the kind of large gifts you are contemplating.  Thus, any gifts would have to be made from your personal accounts and not out of your corporation.

I hope this isn't too confusing.  Let us know if you would like to set up a phone appointment to discuss this in more detail or explore other options.

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/29/2007 11:49:00 AM Send this post:

(Click on image for full size)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/28/2007 11:05:00 PM Send this post:

A Taxing Time for the Bush Legacy
“Does he really want to be the second Bush to have his name associated with general tax increases on the American people?”

 Double Whammy: the Taxation of Social Security Benefits – One of the Clinton-Gore team’s proudest moments, retroactively raising the taxes on seasoned citizens.  Remember that the original promise under Social Security was that all of the benefits would be completely tax free.  Any similar tax free promise (Roth IRAs, for example) should be considered just as reliable

DemonRats Bringing Back 'Death Tax' – That headline says it all.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/28/2007 03:58:00 PM Send this post:

Q:

Subject: Regarding your article

 

Mr. Kerstetter,

 

I realize you must be extremely busy, and I hope to take as little of your time as possible.  Thank you in advance for whatever small amount of time you may have to share with me.

 

Regarding your article (http://taxguru.org/corps/scorp.htm), I wonder if you might point me to more information on the following section:

“Double Taxation

The biggest fear of c-corporations has to do with double taxation, where after-tax earnings are distributed to shareholders as non-deductible dividends. This is rarely a problem with small corporations because there are plenty of ways to pull money out of the corp in a manner that is deductible, and thus only taxed once.

    Compensation - wages or consulting income
    Interest Payments
    Lease Payments
    Royalty Payments
    Contributions to Retirement Accounts”

Specifically, I’m looking for background on the following questions:

1)     What size corporation is a “small” one?

2)     Are wages and consulting income treated differently?

3)     Are there interest, lease, and/or royalty payments that may be payable to the owners of a corporation so as to avoid the double taxation?

Any information/direction you can provide in these areas will be greatly appreciated; I’m willing to do the research, but I don’t know where to look.

Thanks once again for your time!

A:

You can find a lot of info on these subjects in the QuickFinder books, as well as The TaxBook from TMI.

I have also been impressed with the coverage of these topics in the TaxCoach Software reports.

Good luck.  I hope this helps.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/27/2007 01:19:00 PM Send this post:

(Click on pic for full size image)

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/26/2007 09:57:00 AM Send this post:

'Structured Sales' Aim to Ease Tax Bite, but Returns Are Slim – Similar to installment sales for spreading the tax bite out over several years.

Why Middle Age May Be Healthy for Your Wallet – Do we become more financially savvy after we reach our 50s?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 09:30:00 PM Send this post:

Q:

Subject: SECTION 179 QUESTION / PARTNERSHIP

 

I'm not quite sure how to post a question to your blog, so email was the best way I could find.  I have a 2 person LLC taxed as a partnership.  I have W2 income from a previous job in 2006 of $85,000.  The LLC's profit for the year is $10,000.  The capital account of each of the 2 members is $41,000.  I have equipment that I bought for this LLC during 2006 worth $84,000 that I would like expense using section 179.  Is the section 179 expensing limited to my $10,000 in business profit or can I pass it through to my W2 (married filing jointly) to offset the W2 income of $85,000.

 

Thanks,

A:

This is the kind of thing that you need to be discussing with your personal professional tax advisor because it can basically play out two different ways, depending on a key factor that wasn't very clear in your email.

If the equipment was purchased by the LLC and set up on its books, any Section 179 deduction would be limited by the LLC's income before even showing up on the K-1s for the owners.

If you purchased the equipment in your personal name to be used on behalf of the LLC, you would be entitled to a much higher Section 179 deduction based on your other W-2 earned income and the other owner would receive no part of that deduction, unless it's your wife.

If maximum deduction was important, how to purchase the equipment should actually have been discussed with your personal professional tax advisor before buying it. 

If, as it seems, you have been trying to navigate your way through the operation of an LLC without benefit of the guidance of a professional tax advisor, you need to start working with one immediately.

Good luck.

Kerry Kerstetter

Labels: 179

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 05:55:00 PM Send this post:

Q:

Subject: Self-Directed IRA

Hi Kerry,

I came across your blog as I was researching self-directed IRA facilitators. The company I'm taking a look at is Guidant Financial and I'm wondering if you have an opinion on how they compare to Benetrends or SD Cooper?

Thank you,

A:

I'm sorry but I don't know anything about that company.

I'm sure a Google search would turn up complaints, if there any unhappy customers out there.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 05:48:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/24/2007 02:39:00 PM Send this post:

Q:

Subject: copy of 2004 federal income taxes

 

Dear Kerry,  I would like to know if there is any possible way of me getting a copy of my 2004 Federal income taxes. I need these documents for a court case and I can not find my copies. I would appreciate if you could email me and tell me any information that may help me to obtain these records.   Thanks in advance for any advice that you may be able to provide.                

A:

I'm assuming you didn't use a professional preparer for your 2004 1040, because you could always get a copy from him/her.

IRS has two forms that can be used to get either a transcript of the numbers from your tax return (4506-T) or an actual copy of the return (4506).  The transcript is free, while the copy is $39.

You can download these forms from the IRS website:

          4506–T

          4506

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 11:18:00 PM Send this post:

From A Reader:

Subject: WSJ's bad advice

Kerry,

You posted a link to a WSJ article basically telling people not to buy a house in most instances.

Much of what it said was just wrong.

For one thing, even if you assume 4% growth, we're talking about 4% of the total value.

So, if you put 10% down, in a year you've had a 40% roi (less the interest paid during that year).  I have yet to see that in any of my stocks.

The author also completely missed the aspect of control.  Homeowners don't have to wait for the super to fix something and if they've got a fixed rate mortgage they don't have to worry about rents raising (taxes, but not rent).  Homeowners will also never get a note saying "I don't like you anymore.  You have 60 days to leave."

You can also refinance to take advantage of lower rates.

 

Is home ownership a free ticket to cushy retirement?  Of course not.  But it's also not the doom of wasted opportunity the author paints (even the author admits you can walk away with a quarter million in cash if you move from a high market to a low one).

My Reply:

Those are very good points. 

The principle of leverage in an appreciating market has always been the main reason I have always been a big fan of real estate investments.

The issue of control and not being at the mercy of a landlord is also very near and dear to me, and why I have never felt comfortable renting a home.

Thanks for writing. 

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 11:14:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 05:55:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 01:51:00 PM Send this post:

Q:

Subject: Older client sells home and retains right to live in it until death or abandoned

I have an older client who sold her home to her neighbor below fair market value because she retained the right to live in it rent free until she died or abandoned the property (nursing home for example).  We are now trying to see if she can take the $250K exclusion on the sale.  It was arms length in that the buyer paid less and can't take possession until a future unknown event.  The neighbor went through a regular escrow. 

My feeling is that the "discount" was an arms length transaction with a lot of give and take before a price and terms were agreed on.  The tax person is saying that since she did not sell her entire interest (retained a right to live there) that the entire gain is capital gain.

Thoughts?  I have been doing research and have not found anything on point.  Most retained life interest data refers to 706 preparation.

Mahalo,

A:

As long as her neighbor wasn't related to her, it seems that she can utilize the Section 121 exclusion, as described in IRS's own Pub 523.   

Sale of remainder interest.   Subject to the other rules in this publication, you can choose to exclude gain from the sale of a remainder interest in your home. If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately.

Exception for sales to related persons.   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Related persons include your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.). Related persons also include certain corporations, partnerships, trusts, and exempt organizations."

The sale that you described sounds exactly like the normal definition of a remainder interest, so it should be eligible for the exclusion, as long as the neighbor wasn't a relative.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank you for your quick reply. 

Thanks Again

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/22/2007 12:11:00 PM Send this post:

Q-1:

Subject: Fiduciary - Estates & Trusts

 

If a trust return 1041 has a total   of only $10,000.00 in taxable interest for the year, can the trust pass on a proportion of the tax obligation via k-1 to the beneficiaries, and show the remaining income for that same year on the 1041?  For example, show $8000.00 income on the trust return and show $2000.00 on the k-1's to the beneficiaries.

 

thanks

A-1:

The governing documents for the trust should either specify how the income is to be allocated and distributed or at least empower a designated person (usually the trustee) to make those decisions during the lifetime of the trust. 

Kerry Kerstetter

Q-2:

guess I was more concerned if the IRS would allow part of the income each year to be listed on the trust return and the rest of the income for that same year, and its tax obligation, be put on k-1's to the beneficiaries

thanks for your comments

A-2:

You can technically enter the income any way you want in regard to how much is passed through via K-1s and how much is taxed at the trust level.  However, if IRS were to ever question the methodology of the allocations, via a direct audit of the 1041 or more likely, a 1040 audit that reaches back to the 1041, you would have to provide the auditor with documentation (the trust's governing documents) that the allocation was properly authorized and not just done arbitrarily.  If there is no such documentation, the auditor will be able to reclassify the income allocation to whichever method results in the highest taxes for the government, plus penalties and interest.

I hope this clarifies how this matter should be addressed.

Good luck.

Kerry Kerstetter

Follow-Up:

thanks you are very good at your work.  best to you

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/21/2007 12:24:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/19/2007 10:35:00 PM Send this post:

Republicans Warn of Tax Hikes Ahead – With so many of Bush’s tax cuts expiring in the next few years, we are looking at some huge tax increases just from our rulers continuing to sit on their hands and failing to act on extending them; or better still, making them permanent. Hillary is literally chomping at the bit to be in command and responsible for even bigger tax hikes than the humongous ones the Clinton-Gore team retroactively forced on us back in 1993. 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2007 11:45:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2007 05:29:00 PM Send this post:

Q:

Subject:  Permission to print your web page on corporations

 

I would like to recommend your web site C vs S Corporations in a brochure about starting a business. Your site is very well written and easily understandable.

 

My intent is to print the pages out and included in a handbook but of course I will not recommend such without your permission.

 

Allow me to thank you advance for your consideration.

 

Sincerely

A:

As long as you mention where you found it, such as the URL to my blog or website, feel free to print and distribute anything you find.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks,  I'd wouldn't do it without mentioning you! That is the only way I know how to play.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/18/2007 04:31:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/17/2007 07:39:00 PM Send this post:

Q:

Subject: Question

My Mom wants to gift me and my brother $100,000 each.  Her entire estate is worth approximately $300,000. 

Question:  Can she do this with paying a gift tax ? 

Question:  Will we have to pay any taxes.

Question:  I assume the 5 year time period will have to pass before this money is considered no longer her asset??

Thank you,

A:

It sounds as if your mom is trying to do some impoverishment planning to qualify for Medicaid and/or other programs that penalize people with too much net worth.  This is an actual specialty with some attorneys and financial planners, so she really needs to work out such a strategy with a professional experienced in this area, including the specific look-back rules for her state.

She also needs to consult with a qualified professional tax advisor who can explain the mechanics of making such large gifts in regard to gift tax returns and how this will affect her future exclusion from estate taxes. 

In regard to you and your brother, there will be no taxes required on the receipt of the gifts.  What you do with the gifts could create tax issues, that you and your brother need to discuss with your own professional tax advisors. 

If those gifts are made via money, documenting the transactions will be simple.  If you are being transferred assets, such as real estate, you will need to determine your mom's cost basis in those assets, because that will now become your costs basis in the event of a future sale of those items.  A good tax advisor can help with this.

While you are not required to report the receipt of gifts on your income tax returns, you may want to attach a note to your return describing the gift, especially if you use some of the money in ways that show up as large deductions on your tax returns, such as donations or business expenses.  Without an explanation of the tax free source of the funds, IRS could suspect you of under-reporting taxable income and launch an excruciating examination of all of your finances.  I have seen its happen, so t's not mere alarmist fantasy.

I have some basic info on Gift Taxes on my website, which you should look over before meeting with a professional tax advisor.

Good luck.  I hope this helps. 

Kerry Kerstetter

Follow-Up:

Kerry,

Thank you so much for your response.  I just wanted to make sure we were not doing anything illegal.  We will take your advise and contact a

professional.

Kind regards,

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/16/2007 02:44:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/16/2007 01:24:00 PM Send this post:

From the free WSJ:

How to Trim Taxes as You Age

 

Your Home Isn't the Nest Egg That You May Think It Is

 

Patents on Tax-Related Ideas Stir Worry – Includes a link to IRS’s 31 page 2007 Tax Hints.

 

H-P's Pension Switch Signals End to Era Of Cozy Retirements

 

Can Friends Be Strong Business Partners? – They’ll soon be ex-friends.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/15/2007 03:53:00 AM Send this post:

Typical Tax-Time Trip-Ups – From Forbes

Franchises Versus Nonfranchised Businesses – From the free WSJ

Traditional or Roth? Which IRA Are You Eligible For? – From Gail Buckner

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 02:39:00 PM Send this post:

Q:

Subject: Exchange Question

 

Hello,

 

I was never informed by my Realtor of this 1031 rule. Now, after the exchange, I was just notified by my accountant that I owe a large amount of money. Has anyone won lawsuits against Realtors for mistakes made by not even mentioning that I should contact a tax specialist when asked if we are doing everything correctly in this transaction?

 

Thanks,

A:

That's a very interesting question because in all of my speeches and seminars to Realtors over the past decades, I have always made a big point of stressing that if they ever smell any possibility of a 1031 exchange being relevant with a client's property, they should advise that client to consult with his/her personal professional tax advisor to see if in fact the deal should be structured as a 1031. 

It is not the Realtor's job to actually advise on the feasibility of a 1031 for a particular client because that is well outside their area of expertise and responsibility, and they couldn't possibly have enough specific information to render a competent analysis. 

I always warn Realtors that if a client were to learn after the fact about 1031s, and that subject was not mentioned, s/he could try to sue the Realtor for the taxes that had to be paid.  Many Realtors accused me of being an alarmist by discussing this possibility; but I assured them that it was based on real life situations that I have seen, as well as calls and emails such as yours. 

I am not a big believer in litigation for every little thing that happens; so only you can decide if it's worth it to you.  Over the past 30 years, I have seen instances where Realtors have been sued for this kind of alleged negligence.  The results have been all across the board.  In some cases, the judges awarded nothing because they believed that the taxes would have been due some time anyway and that the clients were at fault for not being smart enough to consult with their own tax advisors before selling a highly appreciated property.  In some cases, Realtors were required to reimburse clients for some or all of the taxes they had to pay because Section 1031 wasn't used.  In other cases, there were out of court settlements for compromised amounts. 

I am not an attorney, but my understanding of the current trend in regard to this kind of issue is that, since 1031s have been around for so long now, it is becoming more difficult to convince a court that an experienced real estate investor has never heard of it.  You would most likely have a better case of winning if you can convince the court that you are not a frequent real estate seller and are not very knowledgeable in tax saving strategies.  If it is true that you have just now learned about 1031 exchanges for the first time, that must be the case. 

There is no way to know how your case would turn out.  You will need to discuss the merits of your case with an attorney and/or the managing broker in the office of your listing Realtor.

Good luck.

Kerry Kerstetter

Labels: 1031

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 02:11:00 PM Send this post:

From a Reader:

Subject: Child support as a form of income tax

 

[Please post the following with no email address]

 

Attitude aside, MarianContrarian has a legitimate point about children being entitled to some lifestyle component of child support.  The amount is subject to political tug-of-war, but the principle is thoroughly established by now.  At the percentages typically assessed these days, this rule has the effect of turning child support into an 18-year stream of alimony for upper income fathers paying support.  (There are essentially no custodial fathers who have high-income ex-wives and who did not waive child support in order to win custody.)

 

Agree or disagree with the wisdom of this system, those are the facts. What should interest a tax guru is that the computation of child support strongly resembles an income tax system.

 

In the case you cited, a payer of child support was assessed a flat percentage of AGI.  You claim that this was not fair if the income was on paper rather than in cash.  I respectfully disagree on that point. If one has control of the Sub-S corporation, one can control the timing of distributions, delaying them until child support is no longer due at all.  That would be a huge loophole.  If you are going to have an income-based assessment, it must be based on economic income, meaning change in net worth.  AGI is a reasonable, albeit imperfect, proxy for economic income.

 

In an attempt to be more fair, some states assess child support as a percentage of after-tax income rather than AGI.  Take a moment to think about that.  Do you see the problem?  Neither did I at first.

 

Congress generally gives you a tax break in recognition of an expense that has some socially redeeming value.  Medical expenses, mortgage interest, local taxes, whatever.  The more breaks you get, the more expenses you had, and... the more child support you pay!  Under a child support system based on after-tax income, someone with a $3000 per month mortgage can pay $500 more child support than someone with a fully paid-off house.  That's an absurd and indefensible result.  For this reason, the most structurally fair of the current systems are based on AGI, not after-tax income.

 

For political reasons, the assessment percentages have been set quite high.  In a nutshell, parents of modest income are very reasonably assessed a high percentage in order to provide proper support, meaning money that will actually be needed to support the child.  Because voters tend to believe that more child support is always better, politicians then extend similar percentages all the way up to about 95th percentile incomes.  Above about the 80th percentile, child support begins to exceed 100% of total cost, allowing the recipient to spend or pocket the excess.

 

Solutions?  I have none that are politically feasible.  We need to realize that for every payer above the 80th percentile there are probably ten recipients who are getting nothing because the father is in jail, unemployed, or otherwise not paying.  So it's like when your mother asked you to clean your plate because people were starving in Africa: Be happy overpaying your child support because others are paying nothing.

 

If there is any common ground to be found on the contentious subject of child support, it is in improving its structural fairness.  I believe that every state should switch to guidelines based on gross income, not after-tax income.  And ideally the upper-income payers should not be overcharged because lower-income payers are underpaying. The problem is that whenever any change to child support laws are considered, a political death match ensues between advocates of higher vs. lower overall support levels.  Politicians hate that, so they leave the current system in place, defective or not.

My Reply:

Thanks for your comments.  I can see that the issue of child support is a complicated mess and is not something I want to spend any more time debating.   We can leave that to the family law specialists.  However, my gut feeling is still that requiring a parent to fork over a certain percentage of his/her AGI in non-deductible child support, regardless of the actual costs of raising the kids, is not fair.  Just as with the tax system, it may be the law to do things that way; but it's still not fair.

The original context of my comments was to contrast the financial effects of S versus C corps.  Your comment that S corp distributions can be controlled is flat out wrong.  You are missing the point and are making a good illustration of how little understanding there is about how S corps function. 

With an  S corp, the shareholders have to recognize their share of the corp's income regardless of whether or not any money is actually taken out of the corp.  That was the real life problem that my client had encountered. With a C corp, there is a lot more control over how much of the corp income ever reaches the shareholders' 1040s, if any.  There is no such ability with an S corp, which is something that many people fail to realize when they sign and submit the S election form to IRS.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 02:01:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/14/2007 11:50:00 AM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/13/2007 10:19:00 PM Send this post:

This version of a simplified tax return comes around every year. This latest is from Debt Proof Living.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/13/2007 04:06:00 PM Send this post:

IRS has announced that their interest rates for the quarter from April 1 through June 30, 2007 will remain the same as they currently are.

• eight (8) percent for overpayments [seven (7) percent in the case of a corporation];
• eight (8) percent for underpayments;
• ten (10) percent for large corporate underpayments; and
• five and one-half (5.5) percent for the portion of a corporate overpayment exceeding $10,000

I have updated this on my Quick Reference page.

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/13/2007 03:11:00 PM Send this post:

Q:

Subject: selecting a tax professional

 

Kerry,

 I take exception to your statement, "This means you need to work with a tax pro who will spend the time necessary to properly understand your situation and not just do your return as fast as possible, as is the case with the big assembly line franchise operations (H&R Block, Jackson Hewitt, Liberty Tax, etc)."  As with all groups you have bad apples, but there are those in this group that employ EA's and CPA's that are competent tax advisers.  I'd suggest sticking to your "selecting a tax professional" article. Find someone with the right qualifications and experience.  The sign on the door might surprise you.

A:

I'm sorry you were offended by my comments.  I have nothing against tax pros who work for the big franchise operations.  In fact, I had hired a number of Block alumni to work for me in my offices in the SF Bay Area over the decades and was quite happy with the quality of their work once I trained them in my way of doing things.

However, you must realize that the work environment is different in a high end CPA office, where we spend as long as it takes to properly address the client's tax matters versus a store-front office that handles walk-in traffic and measures its productivity in number of returns prepared.  While I admit there are exceptions, most such offices do operate in an assembly line style that can't possibly allow enough time for the kind of thorough work that more complicated clients require. 

If your office is an exception to that assembly line style that many people (not just me by any means) perceive of the big tax prep franchises, you should have a good marketing edge by pointing that fact out in your advertising.  As it is, most of those chains are more focused on emphasizing how fast they can prepare returns rather than how thorough they are in helping clients minimize their taxes.

I hope this helps you better understand the context of my comment.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2007 11:00:00 PM Send this post:

Q:

Subject: Sales of business

Hi Kerry,

 

If we sold a business (C-corp) for $220k without realizing gain or loss.  $200K is for inventory & $20k is for goodwill. 

 

Which form should we use to report the sale?  On form 4797, there's no section to report the sale of inventory of $200k.

 

Pls help us.  We're filing form 1120-A.

 

Thank you very much for your assistance & wish you have a wonderful weekend.

A:

You need to be working directly with an experienced professional tax advisor because there are numerous critical aspects to this that you haven't addressed and are obviously confused about. 

First is the issue of what was sold.  Did you sell your stock in the corporation to someone else?  If so, you need to properly calculate your cost basis in that stock and then report it on Schedule D or Form 4797 with your 1040.  If you are selling at a loss, you need to determine if it qualifies for the expanded loss deduction under Section 1244.  Was the full payment received in the year of sale or is it being spread out over a number of years?

On the other hand, do you still own the corp and it sold off its assets?  That's reported on the 1120 and will also be affected by whether or not the full sales price was received in the sale year. 

There is no way you can properly handle this on your own.  You actually should have consulted with a tax pro prior to the sale.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2007 10:56:00 PM Send this post:

Q:

Subject: Form 1040 & Other Estate Related Spreadsheets

 

Kerry,

 

I have browsed your 1040 Tax spreadsheet many years with interest.  I have recently been given the responsibility of preparing tax forms as an executor of an estate.  I have tried to find an EXCEL spreadsheet fhat addresses Form 1041, Depreciation, and other related forms and schedules.  Do you have any or know where I might look?  Any place I might get  assistance with questions regarding estate related taxes.  Every one seem to skirt the subject and tells me I need to consult a Tax Specialist or Lawyer.  That may be my only source.  How about it? 

 

Any spreadsheets for rental property management (inherited)?  I keep reading that Schedule E and other forms are made easier by using spreadsheets.  They must be out there somewhere?

 

Thanks for any help!

A:

I'm not sure what spreadsheets you are referring to because I don't use any Excel sheets for tax return work. 

The absolute best way to prepare records for any kind of tax return is with everything entered into QuickBooks, with a Class set up for each schedule that does allow you to produce spreadsheet-like income statements with columns by Class. 

I have seen people try to set up Excel spreadsheets to do accounting; but they are much more work and much less reliable than what QB does automatically.  This is in addition to the fact that most home-made spreadsheets use very unreliable single entry accounting methods rather than proper good old double entry accounting that QB does automatically. 

Since you've never prepared a 1041 for this estate, you are taking an unnecessary risk by attempting to do this on your own.  There are too many variables to work with, starting with the choice of the estate's fiscal year, for you to tackle this on your own.  As executor of the estate, you will be personally liable for any screw-ups you make; so the wisest move would be to use the services of a tax pro who has experience with 1041s to reduce your potential personal liability.

Any professional fees related to the settlement of the estate, including yours as executor, can be paid from the estate's assets and deducted on the estate's tax returns.  If you have to buy a copy of QB for this task, that cost would also be deductible by the estate.

These may not be the kinds of answer you were looking for; but they are the best I can provide.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/10/2007 10:48:00 PM Send this post:

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2007 08:57:00 PM Send this post:

It’s no coincidence that the states with the lowest tax rates are leading the U.S. in employment growth. – How many State rulers ignore this extremely simple fact of life?

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/09/2007 10:14:00 AM Send this post:

Q:

Subject: Got a few questions...

 

Hey Tax Guru,

 

I am a business owner, that likes to have and understanding of all that goes on within my business.  I'm not the kind of owner who is willing to just do something because of the advice that someone's gives me...I really want to understand the reasons why.  I'm not sure my accountant likes that, I think that he would rather just lean on him, and be dependant on him to make those decisions...which I resist, because I want to understand and be responsible for the decisions that effect my business .

 

Anyway, I have been a dba for the last 7 years, and have recently formed "C" business structure.  Now I'm in unchartered waters because I don't know how I can best take advantage of this structure to directly benefit me and my immediate family.

 

I have a friend who has a company that does the same, and he is receiving conflicting advice from his lawyers and his Accountant as to whether he should be "s" or "c".  (He has formed it as "s" for now)

 

Anyway...Is there a book or someone who could advise us on what is the best structure to use?  So many conflicting voices, so many conflicting ideas.....just need some clarification!

 

If you got the time to advise where to turn...it would be very helpful.  Email or per phone...doesn't matter to me.  

 

Thanks for the time.

A:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.  While books can explain how various types of business entities function, no book is a substitute for the expertise of an experienced tax pro.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances.  Such a tax pro should thoroughly explain the justifications for any decision that affects you, such as the use of a C or S corp.  If s/he can't properly defend any such decision, that is a sign that you need to be working with someone else.  Similarly, any tax pro who reaches a conclusion as to the best entity for you without asking you dozens of very probing and personal questions should be avoided.  Such decisions must be custom tailored to the situation and not taken off the rack as a one size fits all solution.

While your friend obviously needs the same kind of assistance in straightening out his business plans, you should not base your business strategies on what may be proper for him.  While his business may be similar to yours, there are too many other factors that need to be considered which can't possibly be exactly the same, such as family and other personal issues.

Jumping into a new corporation without knowing what you were getting yourself into was a very reckless and foolish thing to do.  However, if you get competent professional assistance ASAP, any damage should be minimal.

I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don't have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven't already done so, you should check out my tips on how to select the right tax preparer for you. 

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

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 3/08/2007 02:26:00 PM Send this post: