Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for July 5th, 2004

Tax Advisors Are Different

Posted by taxguru on July 5, 2004

As I’ve always warned, there are big differences between professional tax advisors in regard to how much effort they will put into helping their clients minimize taxes.

This email I recently received is a good example of just that point:

I recently purchased a drug store (c-corp) and the transaction proceeded as a sale of stock, rather than sale of assets. The previous owner wanted double the asking price to execute an asset sale because of the double tax implications. Now, my dilema is that my tax advisor tells me that I can not write off any of the interest of the note and can not count the note payments as business expense—which was a surprise to me. My note payments are approx. $8,000 per month and were to be my primary way to cut my corp. taxes on gains. Also, my tax advisor has recently advised that I should restructure my corporation as an s-corp. which I thought was a good idea until I read your website–now I am confused. Basically, the previous owner utilized income shifting to wipe out all corporate gains by paying himself rent and other strategies. The tax advisor is not comfortable with this tactic and says that I can gain the same benefit by changing to s-corp status and pay myself dividends to wipe out gains. Sounded good originally, but i see your points also. I am new to the “game” and could use some pointers on these subjects—-would be glad to pay a consulting fee for your ideas. I value the ideas of folks at the top of their profession and am willing to pay for it. Let me know what I need to do to “pick your brain”. I am confused and need to find a way to get these note payments to help me in some fashion.

My reply:

From the way you described things, it sounds as if the previous owner had a better tax advisor than you have, in terms of keeping your taxes to a minimum. As I have explained in several places, using an S corp for a profitable business can more than double the taxes as opposed to a C corp.

Of the loan payments you are making for the purchase of the stock, there is no way to deduct the principal portion. That is your capital investment in the stock and will be part of your cost basis for when you eventually sell the stock or give it to someone else (i.e. kids).

There are a number of ways in which the interest portion of the payments could be deductible on Schedule A or E of your 1040, depending on the kinds of income it generates for you (salary, lease, royalties, etc.).

I wish I could be of more help, but you will need to work on a good strategy for your situation with another tax pro. We are currently too overloaded with work and are unable to take on any new clients. If I were you, I would check with the previous owner’s CPA. It sounds as if he is more in synch with my methods of developing a useful strategy to minimize taxes.

Good luck.

Kerry Kerstetter

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Posted by taxguru on July 5, 2004

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Posted by taxguru on July 5, 2004

Experts examine value of buying a hybrid car – Thanks to AutoBlog for this article on the dollars & cents of buying the new fangled type of vehicles.

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Posted by taxguru on July 5, 2004

Home makeover not as free as it seems – Thanks to TaxProf Paul Caron for this new story on the tax problems awaiting the fortunate families receiving free extreme home makeovers from ABC TV.

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