Washington’s ‘War Against Winners’ – No surprise here. The Dims are hoping to take us in the wrong direction in regard to special capital gains tax rates. I’ve pretty well given up hope of Bush showing some guts and issuing the executive order that his father was too scared to do and allow the cost basis of assets sold to be adjusted for inflation; but it would be nice if he surprised us all by sticking it to the DemonRats.
Keep the Internet Tax-Free – Jack Kemp includes this quote from Ronald Reagan:
“The trouble with those on 'the left': if they see something move, they'll tax it, if it keeps moving, they'll regulate it, and if it stops moving, they'll subsidize it."
What is the difference between a leech and the IRS?
The leech stops sucking you dry after you’re dead.
From eBaum’s World (with appropriate modification)
Subject: Can An LLC Donate Money?
Love the blog, thanks for answering all of my questions thus far, I was just wondering if a business (specifically an LLC) could donate money and deduct it from its income? And not to fret, I'm on my way to getting an actual tax expert in my area, I just have to vet out a few contenders. :)
How an LLC deducts its charitable contributions depends on how the LLC is being reported and taxed, which is an extremely important decision you need to make with the assistance of your professional tax advisor.
If it's a single member LLC and you are reporting it on Schedule C, the contributions are shown on your Schedule A.
If it's a multi member LLC and you are reporting as a partnership on Form 1065, contributions are passed through to the members on their K-1s, where they end up on the members' Schedule As.
If it's being taxed as an S corp on 1120S, it's handled the same as with a 1065.
If it's taxed as a C corp, the contributions are deducted on the 1120 with the normal limit of only allowing a current deduction of 10% of that year's taxable income. Any excess is carried over to the next tax year.
As you can see, what you may have considered a simple question doesn't have a quick answer and illustrates the need for a good professional tax advisor before you set up an LLC.
Section 179 and Leasing
Subject: Section 179 relative to equipment leasing
Can the taxpayer benefit from the section 179 deductions if the equipment is financed?
Just reviewed your comments about equipment leases relative to operating leases
If equipment is actually purchased, how it is paid for (cash or loan) is irrelevant.
With leases, it's a little trickier. Capital leases (aka disguised purchases) can often qualify for Sec. 179, while operating leases don't.
I've covered this issue rather extensively on my Section 179 page.
Thanks Kerry,I did review your comments on operating leases.Very informative and useful to our customers!Thanks again,
Working On QB With Multiple Computers
Subject: transferring dataI use Quickbooks Pro 2005 and just got dsl at home. I have it on my work computer also and want to transfer data to my home computer via the internet. Can I transfer the data on the internet, I have been using pcAnywhere to transfer via phone line, but it takes forever. Thanks for any information.
I assume you are wanting to access your QB data from both your home and work computers. Trying to do that over the internet is going to be a slow and messy process. Even the official online QB service, which is designed for this kind of direct access, is much too slow for my tastes; one of my many complaints about the online service.
What you need to do is work with the QBW file directly on each computer. This will require that after each time you work in the file, from either computer, you backup the data into a compressed QBB file. There are several ways for you to do this and have access to the QBB file from both of your computers.
One way would be to backup the QBB file onto a portable storage medium, such as a CD-RW disc or thumb flash drive, which you can carry with you back and forth between home and work. You would then restore the data onto the computer you are using.
Another way, and the one we use with most of our clients, is to store the QBB file on an online storage service, such as XDrive or MyDocsOnline. You download a copy of the latest QBB file to the computer you are working on and restore it into your QB program and then work on it all you want. When you're done, you make a new QBB copy that you upload to your online storage. This gives you the speed of working on the file locally, with access to the data backup file from anywhere in the world.
These obviously aren't the only ways to work with a data file on multiple computers, but they are the ones that we have been using for several years.
Good luck. I hope this helps.
Unreimbursed LLC Expenses
Subject: Re: Partnership question - limited or general partner?
Another question for you, Kerry,
First off, I'm glad you survived tax season - congratulations.
The service company in which my husband holds a partnership (medical services) is set up as an LLC.
law states the following with regard to service LLCs: Maryland
§ 4A-301.1. Liability for negligence in rendering professional services.
(a) Individual liability.-
(1) An individual who renders a professional service in this State as an employee of a domestic or foreign limited liability company is liable for a negligent or wrongful act or omission in which the individual personally participated to the same extent as if the individual rendered the service as a sole practitioner.
(2) An individual who renders a professional service in this State as an employee of a domestic or foreign limited liability company is not liable for a negligent or wrongful act or omission of another employee or member of the limited liability company unless the employee is negligent in appointing, supervising, or cooperating with the other employee or member.
(b) Company liability.- A domestic or foreign limited liability company whose employees perform professional services within the scope of their employment or within the scope of the employees' apparent authority to act for the limited liability company is liable to the same extent as its employees.
(c) Liability no greater than in nonprofessional company.- The personal liability of a member of a domestic or foreign limited liability company that provides professional services is no greater in any respect than the liability of a member of a limited liability company which is not engaged in rendering professional services.
I am familiar with Treasury's temporary regulation 1.469-5T, and it seems as though if the state of incorporation allows for limited liability for the member, the member is passive and limited partner, even if he/she fails the test for passive activities. I couldn't find any ruling/regulation with regard to the professional service industry though, except that if you provided a professional service you CANNOT be considered a limited partner. Seems to be contradictory.
The issue is the unreimbursed partnership expenses incurred throughout last year. General partners get to deduct UPE from the Social Security Wages listed on the K-1 to figure out the Medicare tax. Limited partners, according to the directions on the SE, seem to not have that ability.
So the question is - is he a limited partner for IRS purposes or a general partner? It's a small difference, but hey - every little bit helps! Thanks,
The application of SE tax to LLC income has long been an issue of debate among tax pros, and one I have written about several times over the past few years.
Because of the lack of an explicit law on this matter, there is no cut and dried answer that will satisfy everyone. Some people take the approach that no LLC income is subject to SE tax, while others apply it to all of the LLC net income. A common compromise position is to treat it similarly to the comparable issue with S corps. Under this approach, the member's income that is directly attributable as compensation for services rendered would be subject to SE tax, while the net income that is a result of being an investor in the business would not be.
This issue obviously needs to be settled for your husband's treatment of his share of the LLC income first before addressing the appropriate way to handle his unreimbursed expenses. If he is reporting SE income from the LLC and those expenses can be connected by him to the generation of that income, he can deduct them against that SE income when calculating the actual SE tax. Likewise, if none of the LLC income is being reported as subject to SE tax, none of the related expenses would be usable in calculating the SE tax. Similarly, if he is using the compromise approach I mentioned above, any unreimbursed expenses that are connected to his non-SE investor income could also not be used to offset the SE income.
I hope this helps you understand how murky this issue is. This is obviously something that you need to work on with your own personal professional tax advisor.
Thanks Kerry!The way we have the (as of today, still unfiled but extended) tax returns calculated now, his income is subject to SE tax. He fails two of the passive/limited partner tests - the 500 hour test and the personal services test, so we didn't even consider the idea that his guaranteed payments were exempt from SE tax.The confusion lies (and the tax advisor is confused as well) with the directions for Form SE, which states that general partners only may deduct the unreimbursed partnership expenses (UPE) from the social security wages in box 15 of the K-1. Limited partners do not that get, though perhaps they're left off because limited partners generally do not pay SE tax on guaranteed payments. The 1065, which was prepared by another firm, however, identifies my husband as a 'limited' partner. That also has not yet been filed, and should probably then be corrected before it is, so that we can deduct the legitimate UPE from the SECA wage base to calculate the SE tax.I'll take what you responded as confirmation of the way that we were thinking - since all of his income (guaranteed payments) is subject to SE tax, then he can legitimately deduct unreimbursed partnership expenses from his income on the SE form.Thanks again for your help.Regards,
This is a perfect illustration of why there is so much confusion around the proper tax treatment of this relatively new form of business entity, the LLC, which is basically a hybrid of partnerships and corporations.
Even in a limited partnership, one person had to stick his/her neck out and be a general partner, which made him/her personally liable for all of the business's debts. With an LLC, all of the members can be limited in regard to personal liability for the company's debts. In essence, nobody is a general partner and everyone is technically a limited partner.
However, when any of the members take out guaranteed payments, which the LLC deducts as an operating expense, those payments would be treated the same by the member on his 1040 as would guaranteed payments received from a normal partnership, and be subject to SE tax. Likewise, his unreimbursed expenses used to generate that income would be deductible on his 1040 in exactly the same manner as if he were in a normal partnership, reducing Schedule E and SE income.
The debatable issue regarding SE tax has to do with the K-1 pass-through income, which is the company's net profit after deducting guaranteed payments.
It's confusing, but you and your personal professional tax advisors should be able to sort it out for your situation.
Tax Relief Benefits Smaller Companies – WebCPA’s summary of the recently passed tax law.
New TaxMan Recording
As loyal readers know, I’m a fan of collecting as many different versions of George Harrison’s classic TaxMan song as I happen to come across. Well, I accidentally found a new one, recorded on 5/5/07 at a benefit concert at OSU in Corvallis, Oregon.
I just happened to be browsing the newest additions to the Live Music Archive and saw this concert called The Dark Side of Abbey Road. It was a live performance combining the songs from two classic rock albums; the Beatles’ Abbey Road and Pink Floyd’s Dark Side of the Moon.
After downloading it and starting to play it here in my office, the third track, which is only entitled Encore, had the unmistakable sound of TaxMan; and sure enough, after a lot of teasing, the song was performed in full.
The entire concert is excellent, so I encourage any Beatles and Pink Floyd fans to download all of it. You can’t beat the price. It’s free.
IRS has been asked to consider mid-year increase to standard mileage rate – I’m surprised it’s taken this long for someone to request an updating of the per mile rate. Whether IRS changes the rate or not, it’s a reminder of how important it is to keep track of actual operating costs for each vehicle for the year. As with just about everything financial, this is very easily done with QuickBooks.
No Change in the IRS Interest Rates for the Third Quarter of 2007 - Still at 8.0%. I've updated this on my Quick Reference page.
2008 drop in capital gains rate won't be for everyone - But this special tax break should be part of most tax plans being undertaken for the next several months.Handy little rate schedule:
Republicans Introduce Bill to Extend Tax Cuts – Now the question is if they can survive the onslaught of anti tax cut rhetoric, such as from the DemonRat presidential wannabes.
Why so many people have lousy records...
As I'm sure all professional accountants can empathize with, one of the most frustrating things when working with clients' books, even those who use QuickBooks, is their over-use of Miscellaneous categories to describe their transactions, in spite of my specific repeated warnings against doing that.
Countdown to a Whopper Tax Increase – The clock is ticking on the soon to expire tax cuts. Do our GOP leaders have the guts to extend them?
Skirting Gifting Limits
Subject: Question about gifting
I understand the $12,000 limit for individual gifting, but I have a scenario I would like your opinion.
What if parents want to gift equal amounts of money to their 2 grown children; both are married, but one has 2 children, the other no children? So for Family A (with 2 kids) the maximum gift is $96,000 while for Couple B (no kids) the maximum gift is $48,000. Now can Family A gift Couple B $24,000 so that each child has received $72,000 from the parents without any tax consequences?
You wouldn't believe how often that kind of re-gifting scheme comes up when people ponder ways in which to "out-smart" the annual tax free gifting limits.
It's not allowed and would be considered fraud if IRS were to discover it. A true bona-fide gift can't have any conditions on it, especially that the money be given to someone else.
If you want to stay under the annual limits, there are a number of ways in which to accomplish the kind of equal distribution that you are desiring.
The simplest is to merely wait until the beginning of the next calendar year, when there is a new $12,000 per donor per donee limit available, and gift the childless couple the additional money.
A common technique used to get the cash into the childless couple's hands now, without exceeding the limit, is to loan them the extra amount now and then forgive that debt in future years as gifts in those years.
There are also a few types of transfers that aren't considered gifts subject to these limits. The most common types are payments for medical and education purposes. Depending on the circumstances involved here, if the parents were to pay for the childless couple's college tuition and/or medical care, those amounts can be in addition to the $48,000 of direct cash payments.
As you can see, it can get tricky; so the services of a good professional tax advisor would be advisable.
Good luck. I hope this helps.
Thank you for your answer. Your reply broke the tie. My CPA says the same thing as you did.
My father's CPA says there is nothing wrong with the "scheme." He says after you gift the money, the person receiving the money then makes his/her own gift to the 3rd party and he/she is allowed to. But I think that the spirit of the gift limits, and the intentions of the gifting is what is at issue.
Don(’t Infl)ate Gifts to Charity! – Good look at the tighter rules for donating non-cash items to charity, from Gail Buckner.
IRS Research Program
Heads up for another one of IRS’s random selections of individual tax returns for an in-depth examination in order to update their top secret DIF scoring program to select the tax returns with the highest likelihood of cheating.
According to this announcement from IRS, this go-around should be less burdensome than their previous such studies, with much fewer returns being selected than had been used in the past; 13,000 lucky taxpayers instead of the more common 45,000.
I understand how this may be a necessary evil of the tax system; but one aspect of it still reeks of unfairness. Those folks lucky enough to be among the 13,000 randomly selected to assist IRS in this study will still have to personally bear the full cost of going through the audit process, which can easily run into several thousands of dollars in professional fees, to say nothing of any additional taxes that may be assessed as a result.
I realize that it’s crazy to expect IRS to consider fairness in the equation; but it would dramatically increase any goodwill they ever expect to have if they would reimburse taxpayers for the costs incurred while assisting in an IRS research project. It just seems proper that the party benefiting from the study should bear the expenses of conducting it.
Using Real Estate to Build Your Retirement Portfolio – Using self directed IRAs to invest in real estate can be a much more reliable method of amassing wealth than gambling on the stock market.
DemonRats Seek Formula To Blunt AMT - In their typical Marxist fashion, their solution is to hit the evil rich with even more punitive taxes. Remember that, once accepted as a valid technique, the breaking point for when this surtax applies can always be lowered. The 10% millionaire surtax in the 1993 Clinton-Gore tax increase actually kicked in at $250,000; so the definition of evil rich is entirely flexible and subject to the whims of our crazy imperial rulers in DC.
Wesley Snipes Plays Race Card – The fact that he was an idiot to buy into an already disproven tax protestor scam has nothing to do with the IRS’s prosecution of him for tax fraud? Can you say “grasping at straws” on his way to the clink for being as much of a moron as Richard Hatch?
Some handy summaries of the recently passed tax law:
From TheTaxBook (links to two pdf files)
The Perils of Holding Real Estate in a Corporation – Besides the never-ending question of what type of business entity is appropriate for a particular business activity, another important issue is how to hold title to business and investment assets. While, as with practically every aspect of taxes, there is no one size fits all answer to this, there is one key way in which to frame the question. Is the asset expected to increase or decline in value, because the real differences crop up with assets that will be sold at a gain.
Congress Closes 'Kiddie Tax' Loophole – A good look at another tax law change in the recently signed Iraq war funding bill. Income shifting strategies may need to be revised.
Tough Choice: Your Retirement Lifestyle or ... Your House? – Reverse mortgages might allow both.
Bill to ban tax breaks for crime-related acts stalls – Interesting issue. Should crooks who report their illegal income be allowed to deduct their operating expenses in the same manner as a legit company?
How desperate is the PRC government for money? How about resorting to stealing unclaimed assets rather than looking for the actual owners?
Some interesting articles in the WSJ free real estate journal:
Buying a Retirement Home Decades Before You Retire – There are many different ways to do this; so consulting your personal professional tax advisor is a must.
Owning a Vacation House Can Raise Your Tax Load – You need to be careful of properly handling tax filing obligations for any state in which you own property and/or earn any income.