Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Archive for February 5th, 2006

Ready For Club Fed

Posted by taxguru on February 5, 2006

For quite some time now, this whole Richard Hatch tax evasion scheme has seemed as if he wanted to be sent to prison. Nobody in his right mind could possible expect him not to be caught for leaving off over a million dollars of income that most of the country saw him win.

For a gay man who likes parading around naked in front of strangers, it must be some kind of paradise to be locked up with hundreds of other men.

Posted in Uncategorized | Comments Off on Ready For Club Fed

Reinvesting 1031 Proceeds

Posted by taxguru on February 5, 2006

Q:

Subject: Exchange Question
 

My brother and I own a house as investment property together.  We purchased it for $60,000.00 about 5 years ago.  We are now thinking about selling it for $160,000.00 and replacing it with a house or condominium in the $100,000.00 to $140,000.00 price range.  Do we have to pay any capital gain tax in this transaction?  My accountant told me that we would have to pay capital gain tax on the $40,000.00 we use to pay off the mortgage unless we replace the property with property for $160,000.00 or more.  Is this true? Thank you for your advice.

A:

That’s not exactly right.

Basically, to have a completely tax deferred exchange, you need to acquire new property or properties that cost at least as much as the net selling price of your old one.  The net selling price would be the gross price less the selling costs.  I call that the target replacement price.

Whatever you under-reinvest, or miss the target replacement price by, will generally be subject to taxation.  In your example, assuming you have no selling costs, a $100,000 replacement property would put you $60,000 short of your target.  This would mean $60,000 would be taxable; not just $40,000.

Another twist to consider.  The gain that will be subject to tax will be the most expensive portion, which is normally the depreciation recapture.

If you don’t want to pay taxes on the $60,000, you and your brother may want to consider acquiring one or more additional properties as part of this 1031 exchange costing at least $60,000.

This is a relatively simplistic way to look at it.  There are a few more twists in terms of the cash in and out, as well as the amount of debts on both the old and new properties that will affect the exact amount of taxable gain; but the concept is fairly straight forward and I hope clear to you.

As you hopefully know, you must use the services of a neutral third party exchange facilitator to prepare the proper documents and hold the cash proceeds.  You can’t just sell your old property and take the money to reinvest on your own.  You can see all of the rules for properly handling a 1031 exchange at www.tfec.com 

Good luck.

Kerry Kerstetter

 

Posted in 1031 | Comments Off on Reinvesting 1031 Proceeds

Software For Trusts

Posted by taxguru on February 5, 2006

Q:

Subject: 1041 software

Hello,
I am individual who is trustee for my three adult children’s trusts of $250,000 each inherited from my father. I just ran into your Web site and hope that your software would be what I need to prepare their tax forms. All the money is invested with a broker and I plan to distribute the income to them. Please let me know if your product would be good for me and put me on a mailing list to let me know when it is available.
Thanks.

A:

I’m confused by your inquiry.  We don’t sell software.

If you are referring to the QuickBooks programs, which you can buy via some referral links on our websites, that is the best program for keeping the books for trusts, as well as anything where there is money involved.  Most of my clients who have trusts use it and then send me their data discs to use in preparing the 1041s.

QuickBooks can prepare basic 1099 and W-2 forms; but not the 1041 or other income tax forms.  While I use the very expensive top of the line Lacerte programs to prepare all kinds of income tax returns, including 1041s, there are other less expensive products out there, if you plan to prepare them yourself.  A web search should locate those programs.

Kerry Kerstetter

 

Posted in Uncategorized | Comments Off on Software For Trusts

Gift Or Loan?

Posted by taxguru on February 5, 2006

Q:

Subject: Gift Tax Question
 
Thank you for the important information. 
 
If I am giving a child a loan between them and ourselves, expecting them to pay us back in a timely fashion, and if I have already given them the max of $11,000, that is not considered gift tax is it?  Does this amount, maybe around $5,000, need to be reported on our income tax as something?  Thank you for your input. 

 

A:

Loans and gifts are two completely different things.  A gift has no requirement to be repaid. 

A loan has no dollar limit and the repayment terms are negotiable between you and your child.  Loans are not taxable deductible by you or taxable income to the borrower.  The only thing you will need to report on your tax return is the interest income you receive.

A loan can be reclassified as a gift if you forgive all or part of the balance. 

Your personal professional tax advisor should be able to give you more useful information based on your unique situation.

Good luck.

Kerry Kerstetter

 

Posted in Uncategorized | Comments Off on Gift Or Loan?

Corporate Confusion

Posted by taxguru on February 5, 2006

Q:

Subject: What is your opinion?
 
I have been trying to read up on the best way for our business to go, so I would like your opinion.

We have a poultry and cattle farm.  We have asked a lawyer and our accountant.  The lawyer says s-corp to avoid double taxation and our accountant says c-corp; there won’t be much profit after all of our deductions and if there was we could buy something at the end of the year and do section 179.  The accountant also says we are not providing a service for the public and the IRS will not recognize us as a s-corp.

Since we are just getting into this, we really want to go the right way to begin with.  What do you think?

Thanks,

A:

There’s no way I can say what would be the appropriate format for you to use.  Only someone who has closely reviewed your current and future situation can do that.

I do find it very unnerving if the quote from your accountant is accurate.  S corps do not have to be service oriented.  S/he may be confusing it with a PSC (personal service corp) because many farms are set up as S corps.

Make sure your lawyer has reviewed the many tax saving opportunities of C corps and isn’t just focusing on the perceived double taxation issue to the exclusion of all of those other areas, as far too many lawyers do.

It sounds as if you  may need to consult with a tax pro who better understands how corporations function.

Good luck.

Kerry Kerstetter

 

Posted in 179 | Comments Off on Corporate Confusion

Employee vs Independent Contractor

Posted by taxguru on February 5, 2006

Q:

Subject: Tax Advice
 
Kerry,

I do taxes for individuals, but not for businesses.  A friend of the family approached me about doing taxes for his business but I am referring him on to someone who can help him.  For my own personal knowledge and because he is a family friend, I have a couple questions on his situation.  He has not filed his business taxes for several years.  In addition, he paid his employees as contractors (but did not issue 1099’s) even though I believe they would be considered employees under the IRS’s 20 step test.  As this goes back several years, it is difficult to rectify the situation just by issuing 1099’s and hoping the IRS doesn’t audit.  Will he have difficulty finding a preparer (i.e. does the preparer have liability if he prepares the taxes for those years knowing the workers should have been classified as employees)?  Any suggestions on how he should proceed?

Thank you for your help.

A:

While every tax pro has his/her own approach to handling cases such as your friend’s, there shouldn’t be a problem finding one to take this on.  Over the past 30 years, I have worked on several cases just like this.  Most tax pros who are looking to expand their practice would be glad to have a big multi-year project.  The most critical issue is to bring the income tax returns up to date. 

In those cases, we decided the best approach was to keep the worker classifications as they were for the past-due returns.  Going back and filing very late 1099s or worse, changing the status to W-2, has far too much potential for opening a very messy and expensive can of worms with IRS and the State tax agencies.  I always warned the clients that they were on shaky ground with the status, and that IRS and/or the state could try to change it.  Luckily, they never did.  They were just glad to receive the delinquent income tax returns.

For future payments to workers, we made sure the clients were treating their workers properly in accordance with the rules.  This sometimes meant setting them up as W-2 employees or having them sign independent contractor agreements.  In some cases, the client insisted that any workers themselves be incorporated in order to prevent any possibility of being classified as a W-2 employee.

I hope this helps. 

Kerry Kerstetter

 

Posted in Uncategorized | Comments Off on Employee vs Independent Contractor

Sec 179 New Or Used

Posted by taxguru on February 5, 2006

Q:

Subject: section 179
 
i am very confused on section 179. does the purchase have to be on NEW or can USED equipment qualify?

A:

It just has to be new to you.  It’s all explained on my website.

Kerry Kerstetter

 

Posted in 179 | Comments Off on Sec 179 New Or Used

Health Insurance

Posted by taxguru on February 5, 2006

Q:

Subject: Tax Question
 
What are the rules governing health insurance premiums for the single shareholder of an S Corp who is also an employee?  Is it considered taxable income on the W-2?

A:

Any person owning more than 2% of the S corp stock must report the health insurance premiums as taxable wages on his/her W-2. 

As I’ve mentioned countless times, that is not the case for shareholders of C corps.

Your personal tax advisor can give you more detailed assistance with this.

Kerry Kerstetter

 

Posted in Uncategorized | Comments Off on Health Insurance