Home Sellers Use Blogs To Market Their Properties – I passed this along to my dad, who may want to try it to sell his home in Rogers, Arkansas.

Toil in the Soil: Running A Garden-Related Biz – Excellent tax saving opportunities, as well as a perfect thing to do from a place like ours. 

High-Deductible Health Plans Join the Mix – Another look at HSAs.

Big Car, Big Tax Credit – New rates for buying hybrids.

I have written a lot about the continuing trend for tax preparation offices to farm out the actual work to less expensive firms in India.

Ohio CPA Dana Stahl, who told me he explicitly notifies his clients that all of their tax work is done in his offices here in the USA,  recently sent me this:

Subject: Myths of Outsourcing-FYI

Mr Guru – another viewpoint on outsourcing.  Haven’t changed my own prospective, but interesting nonetheless. 

DS, CPA

My Reply:

Dana:

That’s not exactly an unbiased source on outsourcing, considering that his company has been aggressively soliciting business to have their Indian staff prepare tax returns for USA accounting firms.  I still think it’s a stupid idea in regard to properly serving clients.

Kerry

It’s not just tax preparation work that is being outsourced to India, according to this post from TaxProf Paul Caron.  For just $15 an hour, this company in India will perform USA Federal tax and other legal research.  They have been soliciting work from law professors, and I’m sure will soon be making similar pitches to us in the private practitioner community.  

Q:

Subject: LLC and SECA

Kerry:

 

What I’ve always told my clients is that an LLC is a disregarded entity for tax purposes.  Therefore, a single-member LLC is taxed as a sole proprietorship (SECA-liable), and a multiple member LLC is taxed as a partnership (SECA-liable on net profits from business). 

 

The only way that an LLC can avoid SECA is to do an entity election change and be treated as a corporation or an S-corporation.  Even there, the “reasonable salary” (with FICA) requirements of the S-corp tangle you up.  On the C-corp side, you have the issue of dual-entity (LLC and individual) taxation.

 

As far as I know, this is mainstream tax advice.  Anything I’m missing?

A:

It isn’t as open and closed as you may think.  For LLCs that are reported on 1065s, there has long been a dispute as to whether or not the K-1 income is subject to SE tax. 

I don’t have time to list the full history of this issue; but I will give a short summary.  If you have the 2004 Small Business QuickFinder Handbook, there is a very good recap of the historical development of this controversy on page F-3.

Basically, there are some people who believe LLC members should be taxed the same as general partners of a regular partnership; with the net income subject to SE tax.  Other folks believe that LLC members should be treated like limited partners in a normal partnership; with no SE tax on the net K-1income.

IRS issued a proposed regulation in 1997 requiring SE tax for any member who was active in the LLC business for more than 500 hours during the year.  This has never been made official, which has given us the current status of having SE tax optional on LLC members.

There are currently some practitioners who are taking the approach of subjecting net income to SE tax for those members who actively participate in the business, while exempting the net income from SE tax for those members who are merely investors and not actively involved in the business’s day to day operations. This approach is also voluntary and not enforceable by law.

I hope this helps you better understand the environment we currently have in regard to this issue.

Thanks for writing.

Kerry Kerstetter

 

Users Blast Intuit’s Upgrade Fees – Some people aren’t happy that QuickBooks programs are orphaned after three years as a means of forcing them to buy newer versions.  Wait until users discover that the Basic version of the program (and the one I most often recommend people buy) has been dropped for 2006 and they have to pay twice as much for the Pro version.

IRS Warns Consumers of Possible Scams Relating to Hurricane Katrina Relief

Q:

Subject: Tax Question

 

If a sole surviving parent deeds his house to his child for one dollar before he passes away, doesn’t that house represent a short term capital gain of some sort to the child for the market value of that home at the time of transfer in excess of the one dollar paid? No trust was involved, and the transfer was individual to individual.

 

If a tax is due, who pays it and when is it due? If the donor is required to pay, but can’t because he transferred all his assets to that child, does the child pay? If not, who pays? I know of a situation like this where the donor did just that before checking into a VA retirement home and he is now broke. Did the child who was the recipient of the home for one dollar now get it without any tax consequences? If so, it seems like a loophole

 

Look forward to your response,

A:

The sale for one dollar was in actuality a gift of the house from the father to son.  This is tax free to the son and is required to be reported on a Gift Tax return (Form 709) by the father.  Unless the father had already used up his million dollar lifetime exclusion, there shouldn’t be any actual gift tax required to be paid.

The next issue is the cost basis of the home to the son.  With gifts such as this, the father’s cost basis transfers to the son.  If his wife had recently died, the cost basis will have been stepped up at the time of her death.  If they lived in a community property state, the entire cost basis was stepped up.  If they were in a non-community state, only the wife’s half is stepped up and added to the father’s cost for his half.

The only potential actual tax would come when the son sells the house, looking back to his cost basis.  Of course, if he lives in it for two years before selling it, he can exclude up to $250,000 of profit.

Any competent tax professional should be able to work with your client to make sure everything is being handled properly.  None of this is very complicated.

Kerry Kerstetter

Follow-Up Q:

Thanks Kerry!

I thought you could only gift up to $11,000 per year and any amount over that is a tax to the donor in that year.

A:

That $11,000 threshold is only for the requirement to file a Gift Tax return (Form 709).  For gifts over that during a calendar year, a 709 is required to be filed.  However, no tax is required to be paid if the donor chooses to use part or all of his million dollar lifetime tax free exclusion, which is available to everyone in addition to the $11,000 per year ($12,000 starting in 2006).

I have this all explained on my main website.

Kerry Kerstetter