Tax Guru – Ker$tetter Letter

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Archive for February 12th, 2006

Alternative Fuels

Posted by taxguru on February 12, 2006

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S vs C Corps

Posted by taxguru on February 12, 2006

Q:

Subject: S-Corp-Vs C-Corp
 
Hi,

I was on your site and I would love to speak with you. Not one accountant or attorney In spoke with out here has said a C-corp is good  and that an S-corp is mandatory.

Why are these so-called educated minds not in alignment with your thinking?
Is it so hard to miss?

Sincerely,

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.  There is no such things a one size fits all. 

You must be misunderstanding something because there is no such thing as a mandatory S corp status.  In fact, shareholders have to sign and submit a formal election on Form 2553 to IRS to be treated as an S corp.  If it were mandatory, it would be the other way around.

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.

There are plenty of other tax pros who properly understand the differences between C and S corps.  Nothing on my web sites is unique to me.  It is all very common knowledge.

I wish I could be of more help to you; but I already have too many clients to take care of; so we are not accepting any new ones at this time and are still trimming back on the client load that we currently have.

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.

Good luck.

Kerry Kerstetter

 

Posted in Uncategorized | Comments Off on S vs C Corps

Quicken Tips

Posted by taxguru on February 12, 2006

Q-1:

Subject: Quicken Tips
 
Hi Kerry,
 
I came across your Quicken tips today and found it quite helpful.  I’ve been doing on-line banking for quite some time now and I’m a bit confused about managing multiple accounts.  We have several accounts at our bank (home chequing, home savings, child’s savings, 2 business acounts, a line of credit and a visa card) all with on-line banking.  It’s really handy being able to download all our transactions for each account into Quicken, but I’m running into problems when I try to use Categories/Transfer List since the transaction appears as a deposit in one account and a payment in the other account.
 
I figured out that using a Category doesn’t work since it looks like income when it really is just a transfer.  So I’ve tried using the Transfer List, but when I do this, it duplicates the entry in the other account.  I’m not sure the best way to handle this.  I’ve been using the Transfer List while in one account, then just deleting the one generated by the on-line banking in the other account, but I was wondering if you knew of a better way.  Any suggestions you have would be greatly appreciated.
 
Thanks,
 
PS  I hope this makes sense – I don’t have much of a background in this so I’m not too up on the lingo.  I’m also not sure if I’ve totally missed the boat on this.

A-1:

As I said in my online tips, transfers between bank accounts should not be posted to anything that will show up on the P&L, such as an Income or Expense category in Quicken. 

Ideally, only one entry needs to be made to reduce the balance in one account and increase the balance in the other.  If your online banking downloads the entries into each account’s register, you could very easily end up with duplicate entries for the transfers. 

You have a couple of ways to handle this.  You could just delete the duplicate entries.

Another way is to set up a new Bank Account in your chart of accounts called “Transfers.”  When posting transfers between actual bank accounts, have the offsetting side go to this new Transfers account.  You can train the online activity downloads from your bank accounts to use this account automatically.  If posted properly, the ending balance in the Transfers account should always be zero.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

Hi Again,
 
I liked your explanation of Cash Accounts.  I tried setting this up awhile back, but found I was very bad at keeping track of where the money was going.  My question is, what do you do in this situation to update your cash account to reflect the actual balance when you don’t know where some of it has gone.
 
Sorry if this is a totally silly question.
 
Thanks again,

A-2:

What I usually do is make a big adjusting entry as of the end of the year to bring the balance in line with reality, with the offset to something like Personal Supplies.  You should actually do this occasionally throughout the year, with the offsetting categories the closest to where you think the money was spent.  As long as you aren’t claiming a tax deduction for these expenditures, accuracy isn’t that crucial a matter.

I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank-you so much!!
 
 

Posted in Uncategorized | Comments Off on Quicken Tips

SUV & Sec. 179

Posted by taxguru on February 12, 2006

Q:

Subject: section 179

Hi,

I’m thinking of purchasing a new vehicle in 2006 (no SUV)

I’m self employed realtor.

Is there still a bonus depreciation (exta$) deductible on 2006 returns?  I think you can write off a lot in the first 3 years but I’m not sure.

Thanks

A:

You really should be discussing this with your own personal tax advisor.  If you are trying to operate as a professional Realtor without a professional tax advisor, you are asking for big trouble.  Buying a new vehicle just for tax breaks would be a big mistake.  Don’t make matters worse by trying to do this on your own.

I assume that you are looking at buying a lighter weight vehicle. The maximum Section 179 for a vehicle under 6,000 pounds is much lower than for one over 6,000 pounds.

I have this all explained on my website.

but only a qualified tax pro will be able to give you more specific numbers for your situation.

Good luck.

Kerry Kerstetter

 

Posted in 179 | Comments Off on SUV & Sec. 179

Head of Household

Posted by taxguru on February 12, 2006

Q-1:

Subject: Tax question

Hi Kerry,

I am willing to pay for this advice, just please tell me how and how much.

My ex and I share custody of our 2 children exactly 50%.  Our divorce decree in 2004 states that we shall each claim one child as an exemption and shall each file as Head of Household. 

The IRS is disallowing my claim for HoH in 2003.  We were legally separated and meet all the other requirements. 

My question is:  if two parents have two children and each keep them exactly 50% of the time, can they each file as HoH?  How do you “prove” this to the IRS?

The IRS is asking for school records or medical records, which I don’t have.  Is there a precedent for this?

Thank you!

A-1:

What makes this a little more difficult than normal is the fact that you were still legally married as of 12/31/03.  Following are the rules for persons in your situation to qualify for HoH status, copied from page 4-7 of my QuickFinders book:

Considered unmarried. A married taxpayer can file as HOH if all of the following tests are met:
1) The taxpayer files a separate return.
2) The taxpayer paid more than half the cost of keeping up his or her home for the tax year.
3) A spouse did not live in the home during the last six months of the tax year. [Tax Court denied HOH status to a taxpayer whose spouse slept a single night in her home during the last six months of the year (Hopkins, TC Memo, 1992-326).]
4) The taxpayer’s home was the main home for more than half the year of his or her child or step-, adopted or foster child.
The child must be a dependent unless the child’s noncustodial parent is allowed the exemption under a decree, agreement or release of exemption. To qualify as a foster child, a child must be a member of the taxpayer™s household for the entire year.
5) The taxpayer is a U.S. citizen or resident during the entire year.

Keeping up a home. The cost of upkeep includes property tax, mortgage interest, rent, utilities, repairs, property insurance, food consumed on the premises and other household expenses.

Two unmarried taxpayers living with their own dependent children in a shared home may both qualify as HOH if they maintained separate households and each paid more than half the cost of his or her separate household (SCA 1998-041). Factors discussed in the memorandum that showed separate households include: the adults did not share a bedroom, each household had a separate phone, and the taxpayers gave gifts separately and made separate charitable contributions.

If you note, the rules specify “more than half the year.”  This means that claiming exactly 50% custody for each of you makes you both ineligible.  You may want to negotiate with your ex and decide which one of you would most benefit from claiming more than 50% custody for 2003 for at least one of the kids so that either you or she can benefit from the HoH filing status.  Changing the custody to something like 49/51 and 51/49 might allow you both to qualify for HoH.

Unfortunately, this is a very commonly misinterpreted technicality in the tax code, where the dividing point is designated as more than 50% and not exactly half. 

This is also not going to just be a problem for 2003.  Even when you are single, the language to qualify as Head of Household specifies more than 50%.  Whoever advised you that you could both claim the HoH with an exact 50/50 division of custody was not reading the tax rules properly.   You may want to revisit the entire agreement for your custody situation to see if you can work out a better plan than the screwed-up one you currently have.  

Having two kids should make the solution a lot easier than if there were only one.  While your own legal and tax advisor may come up with a better solution, I have often seen cases like this where each parent gets to claim that one of the kids was with him/her for more than half of the year.  That would make both parents eligible for the HoH.

I hope this helps.  As always, you should consult with a tax pro for more specific advice on how these and other tax rules affect your situation.

Good luck.

Kerry Kerstetter

 Q-2:

Thanks, Kerry.

I guess the real glitch is how you prove the >50%.  Using your recommendation of each kid being 51/49 and 49/51,

It could be a challenge because it looks like the only acceptable methods regarding the kids are:

 DOCUMENTS TO SUPPORT Head of household status

 1.   School records listing the qualifying person’s address as the same

 2.   Medical records listing the qualifying person’s address

 The kids’ records would need to be different.

A-2:

I don’t see how the school record addresses are as important as you and your ex coming up with a consistent record of the number of days each child lived in each home.  If you can coordinate the preparation of a kind of attendance record for each kid that you will both vouch for, and if that shows you each with one of the kids more than 182.5 days in your home during the year, you should be okay in terms of qualifying for the HoH status.

I’m assuming that you and your ex each pay the cost of maintaining your own separate homes, so there will be no problems covering that part of the HoH requirement.

Good luck.

Kerry Kerstetter

 

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