Q:

I sold my primary residence after living in it for more that 2 years.  I made a profit of about 100,000.  I did not use the profit to buy my new house.  I just put it in the bank.  Do I have to pay taxes on the profit. 

 

Thanks.

A:

It’s all explained here.

Your personal professional tax advisor can explain any part that is confusing.

Kerry Kerstetter

 

Q:

Subject: extension question

 

Dear Kerry,

 

We have filed for an extension, and need to send in an estimated payment of what we think we owe for 2005.  Since we have not yet met with our accountant we are not confident about whether we have over or under estimated?  Should we be concerned about this one way or another?  I know if we underpay we are charged interest on the difference.  What if we overpay?   Do we get this money back?  If we overpay by alot, is this an issue?

 

Thanks

A:

It’s generally better to overpay, which is why I round up when doing the rough calculations for clients’ extensions.

Any overpaid amount showing on the actual 1040 can either be applied to your 2006 1040 or refunded to you in a check.  There won’t be any interest paid to you, but for most people, the peace of mind not worrying about underpayment penalties more than compensates.

Your personal professional tax advisor should be able to explain this to you.

Good luck.

Kerry Kerstetter

 

Q:

Subject: A take on the S-Corporation salary question

 

I was thinking about the terms “capital intensive” and “service” as applied to partnerships, and came up with this:

 

S-Corp 1: substantially all corporate revenue is derived from services performed by employee-shareholders. I am assuming here that S-Corp 1 doesn’t make significant profit from billing for the services of non-shareholder employees. This might be a consultancy or architectural firm.

 

S-Corp 2: substantially all corporate revenue is derived from the use of capital (borrowed or contributed by the shareholders). A real estate or mortgage lending firm might be good examples.

 

When considering reasonable salaries for employee-shareholders, I would think that gross revenues being equal, S-Corporation 1 should pay much higher salaries than S-Corporation 2. Do you think this analysis is a reasonable position to take?

A:

That is a good way to look at the issue, and is actually what the “reasonable salary” consideration is all about.  IRS wants to make sure that income that results from the personal services of the company’s owners is reported as earned income and hit with all of the additional payroll taxes that those are subject to. 

As you know, even when you have a very logical method of determining an appropriate amount of W-2 compensation, that is no guarantee that IRS in their insatiable lust for money, won’t try to increase that amount and make you fight them to use your figures.

As I’ve mentioned several times in my blog, this is also the exact same debate over LLC K-1 income being subject to the 15.3% SE tax or not.  Fortunately, IRS hasn’t been as aggressive in reclassifying LLC income as they have been with S corps, because they don’t have as much legal support for doing so with LLCs.

Kerry Kerstetter