Q:

Subject: Starting a new business

 

Dear Kerry,

I am a wedding/event planner and I would like to open my own business in Florida.

I read your article about C vs. S corporation… how much of that would apply to my case?

I am not planning to have any employees (at least for the first 6-12 months) and, seen the nature of the business, I would not begin to take in high amounts for that same length of time… should I just begin as a sole proprietor?

I understand I will eventually need a CPA working with me but, at the moment, I do not know one I can fully trust to make the right decision for me. So I thought that, if I had your opinion, I could then have some ground to stand on when talking to or choosing  a CPA.

I hope you have a couple of minutes to spare on this matter. I understand you must receive a lot of emails and I greatly appreciate your time.

Sincerely,

A:

It’s not true that you will eventually need to work with a CPA.  You need to do that right now.  If you don’t get started on the right path from the very beginning, it may be too late for any tax pro to properly help you later on.

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin via this medium.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances.

Unfortunately, we don’t have anyone 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

 

Q:

Subject: long term capital gains

 

Gentlemen,

I have a question.  Lets say a person has adjusted gross income of $14,000.  Lets also say that he sold common stock and had a gain of $60,000. Long term gains.  Would he be taxed on this gain at the lower tax rate or would the gain jump him up to the higher rate and and the gain taxed at the higher rate?  Also would his adjusted gross income be increased causing him to pay the higher tax on this income also?

thank you for your answer.

A:

While the nominal rates for long term capital gains (5% and 15%) are lower than normal income tax rates, the actual effective rate on a gain can be much higher because of the dozens of penalties levied on people with higher AGI. 

This is especially bad for senior citizens who are forced to pay Federal income taxes on 85% of their Social Security benefits if their AGI, including capital gains, puts them in the “evil rich” category of $25,000 for a single person and $32,000 for a married couple. 

You personal professional tax advisor can assist you in more detail with how this would affect your particular situation.

Good luck.

Kerry Kerstetter

 

From Tom Briscoe

Q:

Subject: Your Realestate Blogs sale of home

Hi,

Sorry I could find no other way to post to your http://www.taxguru.org blogsite (i am new to blogging).

 

I started construction on a home for myself in 2004.  I was supposed to be taking over a local business that would serve as my income to afford this home.  The business venture fell through and I was unable to afford the home.  I put the home up for sale prior to its completion to make sure I could sell it a.s.a.p. so as not to get stuck with the conversion loan, and its costs.  I sold the completed house in March of 2005.

 

 Since I never occupied the home it was never my main home.  Is there a way to include all the interest paid on the construction loan to the homes basis?  I used to be an accountant and all costs associated with acquiring an asset were part of the cost of that asset.  This would include the interest on the construction loan, and the commission paid to the brokers on the construction loan.  Is this not the case?  According to an  IRS phone advisor, the interest isn’t included in the basis of the home.    

 

I had no income and paid no taxes in 2004 and the over $7,000.00 in interest payments were paid in 2004, is this expense just …lost because the IRS feels it’s not part of the cost of building the home and asset?

This just doesn’t sound right… The interest on the loan was a necessary expense to actually build the home and therefor a cost.  This is not the mortage interest, this is a construction cost.  Am I wrong… if so, is there anyway to recup this expense

A:

You have illustrated why it’s a waste of time to try to get tax advice from the IRS on the phone.  Half the time, they are completely wrong with their answers.  Even when they are correct, they will not stand behind what they tell you.  Any info they give you over the phone has as much weight against any future IRS dispute as getting the same info from the clerk at your local 7-11 store.

You should be working with a professional tax advisor who will stand behind his/her advice.

Any experienced tax pro will confirm that it is very proper to capitalize interest on construction loans as part of the cost basis of the property.  In fact, that is a very common IRS audit adjustment, where they reclassify interest payments from immediately deductible expense to a capitalized cost.  That approach increases your tax bite because you only recover your interest expense in later years, and possibly against long term capital gains, which are subject to a lower tax rate than ordinary deductible interest expenses.

There are other tips on how to increase your cost basis and reduce your gain, which I don’t have time to detail; but any experienced tax pro can help you with.

Good luck.

Kerry Kerstetter

Follow-Up:

Sir,

 

I sincerely thank you very much for your time and consideration in ansewering my question

 

 

From an alert reader:

Subject: Salvation Army Link

Kerry,

You have a great Web site that’s proven to be very useful to me in obtaining tax information.  I noticed on your Charity page that the link to the value of non-cash donations (Salvation Army Web site) is bad.  The correct address is: 

    www.satruck.com/ValueGuide.asp

Look forward to visiting your site often.

My Reply:

Thanks for that update.  I’ve updated the link on my website.

With the internet constantly changing, it’s a never-ending job keeping web links current; so I appreciate your noticing that outdated one for me.

Kerry Kerstetter

 

I always enjoy the weekly Politickles I receive via  email from F.R. Duplantier.  As always, he has an excellent one for this time of year.

YOURS, MINE & THE/IRS
Our bureaucracies do us disservice
When they try to coerce and unnerve us;
We must bring to an end
What no one can defend:
The Internal Revenue Service.

Also, check out his much longer Taxpayer’s Lament.

Q:

Subject: 401k Contributions (After-the-Fact)

 

Kerry,

 

I have just finished our tax return for 2005.  We owe $1,500 to the feds and $2,300 to the state (CA.).  I did notice (on our W2s) that both (my wife and I) are below the limit ($14,000) in our 401k contributions for the period.

Are we allowed to send these institutions additional funds in order to reduce our tax liability?  Or can we contribute to our IRA’s at our Bank in order to reduce our liability?

Please advise.

Regards,

A:

You should be working with a tax pro on matters such as this.

401k contributions are only allowed during the year in which you are being paid because they are intended to be made directly from your paychecks and reduce the taxable income for that particular year. The time to increase your 2005 contributions was before 12/31/05 through your employer’s payroll department.  Your 2005 W-2, where 401k contributions have their effects is locked in and you have to live with it.

Deductions for conventional IRAs are very small or nonexistent for people who have an employer sponsored retirement plan (including 401k) who are considered to be evil rich by our rulers in DC.  For 2005, the IRA deduction starts being phased out for couples when their Modified Adjusted Gross Income (MAGI) is $70,000 and is completely gone when MAGI reaches $80,000.  You didn’t say what your AGI is, but there’s a good chance that you are over those limits.

You also have the possible options of making nondeductible contributions to traditional or Roth IRAs; but neither of those would reduce your tax bills.

You can see more specific details in IRS’s Pub 590.

Good luck.

Kerry Kerstetter