Redleaf National Institute, which specializes in support for child care providers, has a very interesting look at the recent Speltz Tax Court case that I mentioned a few weeks ago, where it was accepted that family employees can be compensated in the form of tax free benefits in lieu of actual paychecks. This is written by Tom Copeland, the director of RNI, who successfully represented the clients against the IRS and in Tax Court.  

RNI has quite a few excellent tax related articles, such as this one on how to properly document the use of family employees, which is crucial for defending their deductions, including when they are only compensated with benefits.

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Q:

Subject: incorporating

I am sure this is your busy time of year but I have a couple of questions.

 

My sister and I are about to receive income from an invention or sale of a patent (probably just dreaming).

 

If we incorporate can we buy a property on a lake as a corp headquarter, stay there, have meetings there, and conduct other business (while enjoying the stay), all paid with corporate income?

 

I am retired and she has regular income.

 

Should I seek a financial advisor before doing anything and how expensive are such advisors?

A:

This is definitely something that you need to work with a competent professional tax advisor.  Whatever it costs will be tiny compared to the costs of screwing everything up by trying to do it all without proper counsel.

As with all tax issues, the burden of proving something is a legitimate tax deduction is on you.  If your corp buys a property, you will need to be able to prove that it is being used exclusively for corp business, or have some kind of reimbursement plan or W-2 income reporting policy for purely personal uses. 

You should also keep in mind that the cost of business real estate, except for land, has to be depreciated over several years, as long as 39 years.  Land can’t be depreciated at all. 

A very common mistake by business owners is thinking that all they have to do is deplete the business bank account and then there will be no taxes due.  For example, if your corp were to receive $950,000 in royalty income and then you spend every penny of that money on a nice place by the lake, you would still have a very large taxable income, and no cash available with which to pay it.

A good tax advisor can help you with this kind of thing, as well as the multitude of other issues that could cause unforeseen problems.

Good luck.

Kerry Kerstetter

 

Q:

Subject: The AMT Tax

Mr. Kerstetter, Thank you for your website.  As always it is informative and enjoyable.  I have a quick question about the AMT.  At what income level should a family begin to worry about this tax applying?  As a side note, I am most assuredly working with a professional. 

This question is driven by a conversation I had with a good friend I work with.  He is the controller here and he believes I am getting close to falling into this bracket.  I on the other hand don’t think I am anywhere close.  Is there a general number to look for?

Once again, thanks any help you may offer.

Respectfully,

A:

There is no really simple answer for that. 

It’s not to be funny that I constantly refer to the AMT as an insane tax.  The extremely convoluted way in which it is calculated, as well as the fact that the thresholds haven’t been

If you take a look at the actual AMT Form 6251  you can see that the tax could conceivably kick in for singles with AMTI of $40,250 and married couples with AMTI of $58,000.  This is actually another example of the marriage penalty built into our tax code.

As I said, it really requires a computer to calculate AMT correctly.  You will generally find that it hits you more when you have high Schedule A deductions.  When it shows up on a client’s tax return, I work with the client to see if we can find ways to legitimately move any of those deductions from Schedule A to an above the line schedule, such as C, E or F, where they are more effective in reducing both TI and AMTI.

Good luck.

Kerry Kerstetter