Many Americans Don’t Take Steps To Minimize Income-Tax Liability – This is what I have always been saying when so many people make the assumption that everyone tries to cheat on their taxes.  More often than not, people are too lazy, ignorant, naive or trusting to do things to reduce their taxes.  Many even intentionally overpay in attempts to keep IRS out of their hair.

Buy or Build A Business — Which Is Better for Beginners? – There are enough pros and cons to each approach to fill several books.  Neither should be attempted without competent professional tax counsel.

Weighing Independence And Big-Firm Advantages – There are obviously some benefits to working for a large company,.  However, every time I see a story about another big company reneging on its retirement or health care programs, I’m more confident that the only way to ensure our future is by doing it ourselves.  Relying on any company or government program to take care of our future can lead to nothing but disappointment.

Is There Still Profit to Be Made From Buying Fixer-Upper Homes?

Mortgage Muddle Puts U.S. Consumers at Risk – Not surprising that people sign up for mortgages without understanding the terms.  Too much fine print to be bothered with, which is why lenders toss in all kinds of sneaky provisions.

Claiming Parent As a Dependent

Phony IRS Refund Notification – Snopes.com looks at this phishing scam that has been circulating for the past few months.  If the IRS really wants some good PR, they’ll track down the scum-suckers behind these scams and publicly hang them by their short and curlies. It’s not too hard to track down celebrities at the Oscars.  Let’s see the IRS show off their investigative skills and  locate the scoundrels behind these phony emails.

Q:

Subject: Corporation S vs. C

 

Dear Mr. Kerry,

I would like to tell you that I  really enjoyed reading your web site, I think it’s very informative and knowledgable. It prompted me to do a research about the benefits of corporation C vs. S.  Both, my husband and I currently own a corporation S, and as you pointed out there are a few downsides of such entity. Passed on taxes are obviously some issue which affects us in two ways:

1. it inflates our income and that becomes an obstacle in applying for a student loan (I have 4 high school/college age children),

2. The taxes that we pay on 1040 are partially owed by the corporation. At the end, the corporation “owes” us some money and it always takes a lot of time to pay ourselves back ( not to mention that the due taxes are higher because of the tax brackets).

I’ve also  learned from your web site that as a corporation C we would be able to benefit more with the medical reimbursement plan. I am curious though, if being an officer of the corporation, I can provide myself with a different level of medical reimbursement, than for the other two employees of my company. I’m not trying to be cheap, I just can’t afford an extensive medical coverage for my employees yet. I  work on this issue with my CPA but she wasn’t sure if the reimbursement plan  can be different for officers and other employees.She also wasn’t sure if a part time employee is eligible for such benefit. So, I was wondering if you could provide some insights on this issue.

Also,  I was always wondering what is behind “royalty payments” that you mentioned on your web site.

I would really appreciate your comments on this issue. ( I’ve already consulted two tax lawyers, but sadly they weren’t very helpful)

Thank you in advance

A:

IRS is very strict regarding discrimination in regard to employee benefits.  This does mean that every eligible employee has to be allowed to have the exact same benefits as the top brass. 

There are several long used ways around this that any experienced tax pro should be able to help you with.  For example, I have seen countless doctors who don’t want to provide full benefits to all of their staff; so they set up a separate management corporation, which only employs the doctor and his/her family members.  The management corp has a generous benefit plan, while the other corp (with the non-family employees) doesn’t have such a plan. 

Another technique I have seen used is to only work with incorporated service providers.  Payments to corporations cannot be considered employee payroll because corporations are not human, a basic requirement for employees.

The employer can establish the eligibility thresholds for inclusion in the benefit plans, such as age, full time vs. part time and years of service.  These have to be reasonable and in compliance with your state’s labor laws.    

Royalty payments are similar to what franchisees pay to the main franchise HQ for the use of the company name and operating standards.  For example, if you set up a corporation and design its operating manual and provide it with certain key technology and customers, you can license the use of those to the corp.  The income would be reported on Schedule E of your 1040 and would not be subject to SE tax.  The amount or rate would need to be reasonable.  I have seen people use flat amounts per month or year, as well as percentages of gross revenues, which is more like conventional franchise agreements.

None of these concepts are new or out of the ordinary.  Any experienced tax pro should be able to help you set things up in the best manner for your situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Dear Mr. Kerry,

I just wanted to say thank you for your quick and detailed respond.  After many thoughts I decided to revoke my S status and I hope that in my situation I could benefit from this decision. I will continue using your resourcefull web site, where I can find great amount of practical knowledge. I know that you don’t accept any new clients but maybe in the future you will consider organizing some seminars?  I’m pretty sure it would be very popular and you’d have an audience from all over the country. Maybe one day?

Thank you again,

 

 

IRS Debunks Frivolous Arguments on Paying Taxes – IRS has finally abandoned their previous ostrich approach to tax protestor scams and is addressing them head on. This is a very welcome change in strategy for those of who have long been frustrated by their silence in the face of scam promoters who claimed that IRS silence equaled agreement.

Feds Bust More Crooked Tax Pros:

Southern Cal. Firm Alleged to Claim Phony Home Mortgage Deductions

Ohio promoter of idiotic “Document Decoding” scam

Over the past decades, I’ve amassed quite a collection of different versions of various musical artists performing George Harrison’s classic (and still very timely) TaxMan song, some of which I have posted on this blog.

Thanks to Andy Roth of Club For Growth for finding this slow soul version by Junior Parker, which he found via the Soul Sides website. I just downloaded it and added it my collection.

Would Donald Trump have change for a one billion dollar bill?  Who would be stupid enough to believe that such things actually exist?

Suit: H&R Block Swindled Customers With Retirement Account – Just one more example of Block getting into legal trouble by straying from their core business.

Feds bust Wichita-Based Father and Dallas-Based Daughter who Allegedly Claim Bogus Deductions as tax preparers

IRS Debt Collection Contractor Has Questionable Legal History – And who’s surprised by this?

From WSJ:

Swapping Mixed-Use Properties: Can Capital Gains Be Deferred?

Tackling Tax Questions About Vacation Homes

Tax Flubs Vacation-Home Owners Make When Selling Their Houses

St. Paul Man Prepared Fraudulent Returns for African-Immigrant Customers; Second St. Paul Return Preparer Enjoined By Federal Judge This Month

Q:

Subject: clients and billing

Hi,

I am a CPA in CA and was searching on the internet regarding billing rates and came across your letter re fees and services.  Did you really send this to your clients and how did they respond.  How many did you lose?

 

Just curious as I need to raise my rates and trying to figure out how to do it.

 

Thanks for you time.

A:

If you’re referring to the Client Guide, we have been sending the most recent version to clients for several years.  We now include it with each year’s organizer.

It isn’t announcing anything new, except when we raise our rates every few years.  The main purpose is to lay out how we work so that nobody can claim that we didn’t tell them. 

Back when we were taking on new clients, we did send it to them so they could see what they were getting themselves in for.  We wanted to weed out up front the clients who wanted someone they could call or drop in on without advance warning because we have never allowed that.

In regard to losing any clients over rate increases, I don’t recall that happening.  They recognize that they are paying for our knowledge and not just for filling in forms.  As our knowledge and experience grow, its value increases as well.  While I may sound egotistical here, I have always believed that any client who was too stupid to recognize that fact, I don’t want to waste my time on.  There are plenty of clients out there who look at us CPAs as just clerks who fill in forms.  I won’t work with people who hold that attitude.

From the very beginning, I would never quote fees or play the games with potential clients who were obviously basing their decision strictly on price.  Such people can’t be loyal and will leave you for someone cheaper at the first opportunity. I have seen plenty of other CPAs make this critical mistake.  If your goal is to match the fees of big assembly line outfits (H&R Block, Jackson Hewitt, Liberty, et al), you will never be respected for your unique skill set.  There is an unflattering  term for that method of setting fees (whore’s market).

If you are good at what you do, and have expanded your knowledge and skills, you shouldn’t have any problem convincing your clients that you are worth more money that you were in previous years.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

 Hi,

Thanks for taking time out of your busy day to respond to my e-mail.  My husband has been on my case for years that my fees are to low.  I have been trying hard to raise them, but I guess I just lack the confidence…e-mails and information that you have provided help me to see the light…I have been a CPA for 20 years and consider myself good…so I definitely should be charging more….

 

Thanks again….

 

 

A less graphic metaphor than most people use to describe what IRS does.

Q:

Subject: Question for the blog site

 

How does anyone find time to do this stuff? Anyway I’ll try out a question on you.

On 31 Dec 05, I was terminated from my position at a major telecommunications company. I was given a severance package that provided me to be paid at my old salary for approximately 10 months this year, payable bi-weekly as normal. This allowed me to get involved with a startup company I had always wanted to try  – at zero salary for at least the next several months.

Since my former employer is no longer taking out my 401K deduction, my life insurance deduction, my flex pay deduction etc, I was anticipating a larger cash flow from my severance check. On receiving my first severance paycheck, I found to my dismay that my old HR department was now taking out THREE times as much for Federal income tax. The explanation from the company was that the IRS requires this since they assume I have another new job that pays similar in addition to the severance! This will cost me cash flow of approximately $12,000 this year until I can get a refund in ’07.

This sounds pretty fishy to me though I wouldn’t put it pass the IRS. Do you have any knowledge of such a requirement or is this perhaps an example of a corporation bureaucracy ineptitude instead of government bureaucracy ineptitude?

Thanks for any info.

A:

That is just one method of calculating withholding on out of the ordinary payroll checks.  

Depending on how your relationship is with the payroll department, there is a lot of flexibility in how the withholdings are calculated.

I have seen cases where the former employee submits a written request to the former employer stating that he is aware of his tax situation and is making a formal request that the taxes either be taken out based on the standard withholding table at a certain number of W-4 exemptions, or at a certain specified percentage.  You should work with your personal tax advisor to figure what would be appropriate for your situation.

It really shouldn’t matter to the former employer how much money is taken out for income taxes because any shortfall will be your responsibility when you file your 1040

Good luck.

Kerry Kerstetter

Follow-Up:

Much obliged Kerry…thanks very much for the reply…didn’t really expect one ….I would think you would get tons of mail after the WSJ mention.

All the best man.