Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for May, 2005

Garbage In, Garbage Out

Posted by taxguru on May 30, 2005

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Investing Via Hindsight

Posted by taxguru on May 30, 2005

How some so-called investment experts make themselves look good.

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Sell or Rent

Posted by taxguru on May 28, 2005

The June issue of the online Journal of Accountancy also has an interesting look by Philip Witmer and Claudia Kelley at the decision process of whether it makes more financial sense to rent out a former residence or just sell it.  The authors have even included a fairly detailed Excel spreadsheet to help quantify the projections. 

I doubt if I will be using it much because it relies too heavily for my comfort on assumptions of such unknowable factors as future interest and appreciation rates.  Anyone who claims to have a crystal ball that can accurately predict such things should be avoided like the plague. 

What’s much more important in this kind of decision is whether you can stomach being a landlord and avoid getting a tenant who uses the movie Pacific Heights as his game-plan to steal property, as we had back in the Bay Area.

This article is still quite useful because they do address that point, as well as the very critical aspect of  losing the ability to use the Section 121 tax free sale rule after having been out of the home for three years.  They do mention that a Section 1031 like kind tax deferred exchange would most likely be a good move in those cases.

 

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Posted by taxguru on May 28, 2005

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Corporate Tax Rates

Posted by taxguru on May 28, 2005

Q:

Subject: your site
 
Hey great site- very informative. Thanks!

I had a quick question though if you don’t mind. I was looking at the c-corp tax rates and was curious if I was reading it right. Do the rates go up AND down? Why?

Thanks again!

 

A:

While the last bracket appears to be a reduction, a flat tax of 35% effectively eliminates all of the tax savings from the lower rate brackets.

I have updated the schedule on my web site to make this more clear.

I hope this helps you understand the tax rates. Thanks for writing.

Kerry Kerstetter 

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Deductions For Rental Properties

Posted by taxguru on May 28, 2005

Q:

Subject: Your Service

I have a couple of questions about Section 179 and therefore I would like to engage your services; how do I do that.
 
My questions are:
In a rental property I own, I put in a new washer and dryer.  Is that a 179 item and if so specifically where do I make the entries on the tax return?
 
I manage my own rental and obviously actively participate and I am interested in understanding the “up to $25,000 in losses”  Part of what I am trying to determine is can any of the rental loss offset regular income?
 
I would appreciate hearing from you as soon as possible.

 

A:

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. In fact, we are actually still cutting back on clients, trying to find the right balance of workload, so that I’m not so backlogged with projects.  I have no idea how long that will take.

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.

Both of your questions are very simple and any experienced tax pro should be able to help you with them. 

As is included under the heading of “Nonqualifying Property” for Section 179 on my website is “Property used in connection with furnishing lodging.”  Thus the washer and dryer may not be expensed, but must be depreciated over their appropriate class lives.

The issue of active participation in a rental property has been around since 1986; so any qualified tax pro should be able to discuss whether or not your personal involvement is enough to qualify for the $25,000 net deductible rental loss.

Good luck.

Kerry Kerstetter

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Selecting the Right Type of Corp

Posted by taxguru on May 28, 2005

Q:

Subject: C vs. S Corporation
 
Hi Kerry,

I’m a new (solo) owner of an internet software business (c-corporation in Delaware), and was wondering if you could tell me if it’s more advantageous to be a s-corporation? I’ve read your online article about c vs. s corps and decided to go with the c-corp, but recently a CPA/APC told me that i’d be better off as a s-corporation?

Thanks for your advice,

 

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.

As I mentioned in my article on C vs S corps, too many advisors do rush into S corps without thinking things through as completely as they should.  If your CPA is this way, you should check with another one who can take more of a long range perspective.

Good luck.

Kerry Kerstetter

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Posting Credit Card Receipts

Posted by taxguru on May 28, 2005

Q:

Your website is very helpful. Thank you!!
 
I am using quicken home and bu. 05.  Recently, our business (a small co. offering professional services) started taking credit cards.  The credit card company automatically credits our bank account with the amount of the credit card purchase less the charge for doing the transaction. 
 
Before we started taking credit cards, I just recorded the client income as deposits in the quicken checkbook.  Should I now just record the net amount as a deposit?  This would not give me a record of what the person actually paid.
 
Any help you can give me in this matter would be appreciated.

 

A:

It’s very easy.  You need to enter the deposits as split entries on more than one line for each.

You post the full amount to your income account and then on the next line have a negative entry that goes to the “Credit Card Charge” expense account.  

This is the exact same way paychecks are supposed to be entered; starting with the gross pay and showing each of the withholding amounts on a separate line, to arrive at the net amount deposited.

Good luck.  I hope this helps.  Your personal tax and accounting advisor can show you in more detail if you need more explanation.

Kerry Kerstetter

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Tax & Accounting Blogs

Posted by taxguru on May 28, 2005

Thanks to Joe Kristan of Roth & Co for the heads-up on the AICPA’s new article about existing tax and accounting blogs, as well as some excellent tips for people who may want to start their own.  They have links to several new blogs that I wasn’t aware of.  It’s good to see that more accountants are jumping into the blogosphere and utilizing this very effective marketing and communication technology.  

 

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Posted by taxguru on May 23, 2005

Senators propose repeal of tax trap for middle class – Are we actually going to see the end of the insane AMT? I wouldn’t hold my breath; but it’s good that our rulers are at least discussing how unfair it has become. 

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