Q:

I  came across your website when looking for Tips on Quicken and there they were –

Can you answer a question possibly for me?  years ago I set up Quicken incorrectly and set it up literally by “Accounts” – meaning my various bank accounts !!!  since incorporating 2 years ago, now a nightmare for reports –

If I set up all the accounts correctly now, will I lose all the account info now already set up for years???

Thanks for any help you might send to this accounting-inept mind !!!

A:

I’m not really sure what you mean in regard to setting up your Quicken “By Accounts.” 

To clean things up properly, there are some very basic things you need to do.  First is to import all of your Quicken data into QuickBooks and use that program instead.  I have a lot of info on my website as to why QB is vastly superior.

Next, you should be coordinating your QB chart of accounts and reports with your professional tax preparer and what s/he uses for the business tax returns.  You should be able to modify the pre-existing accounts to the proper types, including merging redundant accounts, without losing any historical data.

Any accounting pro who has experience with QB should be able to help you do this.

Good luck.

Kerry Kerstetter

 

Q-1:

Subject: help 🙂

 

Hi

 

I am so happy I found your site. A bit too late to help me with 2005 taxes but live and learn. My husband and I have been incorporated in the state of Florida as an s-corp. since 1997. Our business subcontracts home framing crews to other builders (we have 4-5 crews depending on demand) we also have a cabinet shop that manufactures cabinets for builders and designers. In prior years after paying ourselves and the workers…tools etc. We would generally show a loss or a very small profit. In 2004 we had 34,000 profit that got tacked on to our taxes. Well, in 2005 109,000 got added to our 1040. We had income from W-2’s of 131,000. We use a payroll leasing company to run all our payroll and had paid 16483 in taxes on that income. When our accountant told us we owed 37000 something dollars on money we had not received we weren’t to happy. We did manage to put 8000 in an IRA before the filing deadline and reduced that to 34,000 something. We were not advised to do that we just were trying to reduce it anyway we could. I have at various times asked my accountant if now that we are making money wouldn’t it be best to switch to a regular c-corp and he always advises against it. We take home a salary and occasional bonuses which are all run through payroll. We have had to take a draw to pay the taxes!!!. Please if you have some time could you advise me where I should go for help. My husband has a friend who’s brother is a tax attorney and he was thinking of going to him. I would like to start looking into some retirement planning for the company…Roth ira.. etc but I don’t know if I should first change to a regular corp.

 

Thank you for your time in reading this

A-1:

It is very frustrating that so many so called tax pros have blinders on and consider S corps the perfect solution for everyone, without doing the analysis that is required to determine the best entity for a particular situation.  Everyone’s circumstances are unique.  I receive at least one email just like yours every single day.

It does sound as if you need to find a tax pro who is more open minded and not stuck in his/her ways.  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.

Something to keep in mind is that it’s not an all or nothing situation, where you have to run all of your business operations through one C corp or one S corp.  There are many reason to use multiple entities, and an experienced tax pro can help you with that. 

For example, if you’ve seen my article comparing C and S corps, you will know that employee benefits for owners are much more lucrative with C corps, including the ability to have an unlimited medical reimbursement plan.  This can get dangerous if you also have non-family employees; so a technique that has been around longer than I have, is to set up a separate corp with just the family members as employees that can offer them the lucrative benefits, while the non-family employees are employed by the other corp, which doesn’t offer the same expensive benefits.  Doctors have been doing this for decades, so as not to have to cover all of their staff.

Having both an S and a C corp also allows excellent opportunities for income smoothing, when the C corp has a fiscal year ending in a month other than December.

None of these ideas are new or very difficult.  An experienced tax advisor can help you save thousands of time his/her fee by utilizing the proper combination of entities for your situation.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

 

Thank you for your prompt reply. I will be shopping for a new tax preparer. Thank you also for the advise on multiple companies. We do have a corporation set-up that is in-active and never been used (we do pay the corp. fees each year). We were going to separate the cabinets from framing when we organized it but never did since separating the books at that time involved separate general liability, workers comp, and payroll. Also at that time we needed to have credit on our payables and most people want a few years history. I guess we should revisit that idea. If you at some later date think of someone in my area that is a good preparer please let me know. We are located in Pensacola, Florida. I will continue to visit your site. I hope one day soon to lower my taxes. One more question. Are there any good books on this subject that you could recommend?

 

Thanks again!

A-2:

Nolo Press has several good books on this kind of thing.

Kerry

 

Q:

Subject: Exchange Question

 

Hello,

 

I’m actually curious about guidelines in Oregon.  My parents use their home as a primary residence and as their place of business.  They have lived in the home for one year and now have some changes that may require them to sell it and relocate.  (My father was just diagnosed with depression.)  I am wondering if they would be able to sell it and not pay capital gain taxes for either of those reasons: using it for business or the health diagnosis.

 

Thank you so much!  Your website has been incredibly helpful.   

A:

Using the home for business won’t allow a tax free sale.

The medical condition, if unforeseen when the home was purchased,  would allow them to use the pro-rated exclusion of  $714.28 profit per day the home was owned and used as a primary residence.

I have this all explained on my website.

Your parents should definitely consult with their personal professional tax advisor to both calculate the actual potential gain and verify whether they would qualify for the pro-rated exclusion.

Good luck.  I hope this helps.

Kerry Kerstetter

 

(Click on image for full size)

Q:

Subject: question…I saw your site and thought you might be able to answer question…sorry to bother you!

I love your site. True entrepreneur—-ialism…:-)

 

Listen…hope you don’t mind the note here….but Quick Books support drives me out of my mind. Rather pluck my eyes out than call them or try to sift through the community…so I am taking a chance and going to ask you …if you mind..just delete…I am sure I will muddle through for another week or two in the dark…haha…

 

anyway..

 

I have made a couple of loans to another one of my own companies from my company. Seems quickbooks makes it easy to take a loan but not give one. I read your part on that….and setting a Shareholder Loan Liability account.

 

But not sure how to do it when I make a loan….pray tell…I am thinking this is an easy answer that is why I chanced asking you.

 

Can you help me with a response. I apologize for popping in!

 

With my Regards,

A:

I don’t think you would get any help from QuickBooks on this because it’s a basic accounting question, and nothing really to do with the software.

Setting up a loan payable or receivable is a simple task in QB.  What you should be doing is coordinating your QB chart of accounts with your professional tax preparer and what s/he uses for the business tax returns because loans between companies, as well as loans from shareholders, can have either debit or credit balances and be show in either the asset or liability sections of the balance sheet..  The critical thing is to periodically reconcile the balances between the different company QB files to ensure they are in synch with each other.

If you aren’t working with a professional tax preparer and are trying to do all of the tax returns on your own, you are crazy and will get yourself into serious trouble.

Good luck. I hope this helps.

Kerry Kerstetter

Follow-Up:

Yes..i have a CPA….but I am so grateful for your response. It helped me a lot! It helped me formulate what I was trying to ask…I am glad you understood so well….Thanks and Thanks!

I will go to that site on reforms….I am with you on that subject I think! (have not read it yet..thats why I say that:-)

With my Regards,

 

Q-1:

Subject: Tax question

Dear Sir,

I was wondering if there is any way I can reject some income. If for some reason, I don’t want $200 of income from a part time source, because this $200 cancels some other benefit of higher value, how can I reject this income. My part time employer has issued a W2 for this amount and given me a check. But I have not cashed this check as yet and will tear it up if needed.

One possibility is that they make a correction in their returns to the IRS when reporting their taxes collected. But if they are not willing to do this, what options do I have.

Thanks,

A-1:

It depends on when you received the paycheck.  Did you receive it in 2005 or 2006? 

Kerry Kerstetter

Q-2:

Kerry,

 

Thank you so much for this timely response. I received the first check in November 2005 but I lost it and so received another check (reissued/replacement) in February 2006.

 

The check is for $200 but the incremental taxes due to the loss of a deduction is over $200 and so I am trying to find if the tax laws or practice will in any way allow me to nullify this income. If there is no legal way I can forego this income I will file my returns on Monday. Do you think it is worth filing for an extension so I can further research this issue or have you come across similar issues earlier?

 

If there is any way I can help you please do not hesitate to contact me. Best and thank you once again for your timely response.

A-2:

You’re correct that the best thing to do right now is to file for an automatic six month extension.  Rushing to meet the April 17 deadline, while there are still questionable issues, is crazy.

You should then find yourself a good professional tax preparer who can take a look at your 2005 info and see if there is a way around the problem you claim to have.  While the situation you describe is entirely possible, there are also usually ways around it by moving things around on your tax return.

If it is determined that the $200 of income will actually cost you more than $200 in extra taxes, and you did in fact lose the check during 2005, there is a way to give yourself another year’s grace.  You could show the full W-2 amount on the appropriate line on your 1040 so that IRS doesn’t assume that you overlooked it.  You could then deduct the $200 down in the Adjustments To Gross income section, attaching an explanation of the lost check and repayment in 2006.

On your 2006 1040, you would then have to report that $200 as W-2 income.  However, you have plenty of time to spend the money before 12/31/06 on something that is deductible and will effectively cancel out that income, such as depositing it into an IRA or donating it to charity. 

You should obviously work with your professional tax advisor to see what is the best way to go.

Good luck.

Kerry Kerstetter

Q-3:

Kerry,

 

Thank you so much for this quick reply once again. This is potentially a solution! I should have been more detailed when I asked you the question.

 

Both me and my wife are Indian students and so I use the 1040 NR. In the India-US tax treaty we can count our spouses as dependents and get the second deduction of $3200 per head.

 

It was my wife who received the $200 in November 2005, lost the check and received a reissued check in March 2006. This is all her income for the year and so she will have zero taxes if she files separately.

 

Since we (non residents) don’t have the option of filing as married filing jointly in the 1040 NR, I will have to file my taxes separately but could claim the $3200 as an additional deduction of my spouse (tax treaty benefit).

 

My understanding is that if my spouse files another return I may not be able to get the second deduction of $3200. The additional taxes due to losing this deduction is much higher than than the $200 income my spouse will have to report.

 

Could we follow your idea and file the $200 as income for her as 2006 income on a separate 1040NR. For 2005 could we claim no income and I file a return with her as my dependent?

 

Thanks again for the quick reply. If I can be of any help please do not hesitate to contact me.

A-3:

Now you’ve gotten beyond my level of expertise.  I haven’t prepared a 1040NR since my days in the Bay Area so I don’t want to steer you in the wrong direction. 

Yours is a perfect example of why you should work with a tax pro who is familiar with 1040NRs rather than try to stumble through it on your own.

Good luck.

Kerry

Follow-Up:

Kerry,

 

Thank you once again. I really appreciate your time. I have filed for an extension and will research this deeper with a professional. Please feel free to contact me if I can help in any way.

 

Best,

 

 

Q-1:

Subject: Advice on inheritance law

I am looking for a tax form number that has to do with estate and inheritance law.

 

I know I have a $2mm lifetime exemption, meaning that my heirs can inherit up to $2million dollars from me and not pay inheritance taxes on it when I die.

 

Let say I want to give my child $500,000 now and have it count as part of my $2,000,000.00 therefore reducing the amount that can be sheltered to $1,500,000 at the time of my death.  Also this shelters my child from paying gift taxes even though it’s above the annual gift limit of $12,000.00.

 

What is the tax form number and where is my understanding wrong?

 

Thanks

A-1:

While it is good that you are trying to educate yourself on matters such as this, you are venturing into dangerous territory if you think you can set up an estate or gifting plan without the counsel of experienced professionals.

I have a very brief summary of the estate tax rates and exclusion amounts on my website.  As you can see, it changes every year, making it necessary to constantly revise estate and gifting plans.

You do have some basic misunderstandings of how these taxes work.  First is the fact that they are not levied on the recipient.  Gift taxes are payable by the giver and are tax free to the recipient.  Estate taxes are payable from the decedent’s estate, with the remaining assets distributed tax free to the heirs, except for some kinds of assets, such as pre-tax retirement accounts.

There are many twists that can screw up an amateur gifting plan.  First is the fact that, while the lifetime gift tax exclusion used to be the same as the estate tax exclusion, that is no longer the case.  The lifetime gift tax exclusion is only one million dollars, half of the estate tax exclusion.

The process of gifting can be tricky, depending on what kinds of actual assets are being transferred.  While after-tax cash is easy to value, it’s more tenuous with other kinds of assets.  There is also the issue of how the asset’s current market value compares to its cost basis.

You can download the actual Gift Tax (709) and Estate (aka Death or Inheritance) Tax (706) forms and their instructions from the IRS.gov website.  Glance over them and you should realize that you are in over your head without the services of a qualified tax pro.

Good luck.

Kerry Kerstetter

Q-2:

Dear Kerry,

Thank you for your kind response.
First, I wholeheartedly agree with you that when I get ready to act, I will only do so with the aid of an experienced estate attorney. Not just an attorney, but one who deals heavily in estate planning.  Yet, at the same time, I also know that there is still the conflict of interest on the part of someone is both advising me on a course of action AND selling me a product to allow that course of action. 

For example, an attorney has a conflict of interest when advising a client on whether to go the route of a will or an AB Trust.  The trust is more costly for the client up front, but often the fees upon executing the trust at the time of death are much, much lower, possibly even nonexistent.  The cost of a will is minimal, but the cost to probate the will and settle the estate is often quite high.  The AARP says that probating a will and settling the estate often costs 5% of the estate value.

So even a most trusted advisor has a conflict of interest.  And as altruistic as a person can be, the conflict remains.  So it’s my job to educate myself so I can intelligently listen and ask questions.

Here’s the actual situation I am investigating.

My wife owns 10% of a family business that may soon be sold for $40,000,000.  Her portion will be about $4,000,000.  Since the company was worth $0 when she acquired her piece of the company, the entire $4mm is taxable at long term capital gains rate of 15% or $600,000.  That’s a huge hunk of cash to just hand over without exploring other options.

Here’s the option I’m investigating, and here’s where my thinking and knowledge are suspect.
Let’s say that on September 1, my wife dies and leaves me all of her estate.
1.  I would then receive her 10% ownership at current market value or step up in value.
2.  Say on September 30, I sold the 10% at current market value, which has not changed since September 1.  In my understanding, I would not owe any capital gains taxes since I inherited them at the same value that I sold them.

Of course, in this scenario, I owe inheritance taxes on the excess $2mm dollars above the life time exemption. At the rate of about 47% or so.

My question is this, could my wife take advantage of that $2mm lifetime exemption NOW?  Could she give me the $2mm of her company NOW and completely use up her lifetime exemption?  If so, I would now own 5% of the business, I would “inherit” it while she is alive, sell it and owe no long term captial gains since I receive step up in value.

It appears that this could work from an estate side, but now the gifting rules appear to be different.  So I don’t think this could work.

If you have the time to comment on this situation or strategy I’d appreciate your input. If not, I understand and appreciate your earlier advice just the same.

A-2:

You have some good points; but are also still working under some misconceptions that would be cleared up if you were to work with an estate planning pro ASAP.

You are absolutely right that there are tons of conflicts of interest in the estate planning arena, especially with insurance salespeople who conveniently steer you into high commission policies and investments.

It is true that, for most people, probate costs are much higher than are actual estate taxes; especially when a living trust is not used.  Trusts do cost some money up front; but that is usually a tiny fraction of the savings down the road.

To address your issue with your wife, and if she were to die before you, you should know that on the 706, there is an unlimited (no maximum amount) deduction from the taxable estate for assets left to a surviving spouse.  This means that there is no estate tax actually payable after the first spouse’s death if everything passes to you.

This means that the full estate tax burden falls on your estate, after you pass on.  For large estates, this creates another issue.  If your wife’s 706 were to just pass everything to you, and then you die shortly after (in a few years), the total exclusion for the accumulated  estate would be just two million dollars, rather than the four million dollars two people should be able to claim.  What good estate planing attorneys do in situations like this is to make sure the first spouse to die utilizes her full exclusion by having two million dollars (or whatever the current amount is) worth of assets transfer into a spousal bypass trust at her death.  The trust will file income tax returns and generally pass its income through to the surviving spouse or whoever the designated beneficiaries are.  This means that two million dollars of wealth has been exempted from the estate tax.

Then, when you pass on, your estate will be able to claim its own two million dollar exemption.  If you have remarried in the meantime, you can set up a new spousal bypass trust, and so on.

You also seemed to miss my earlier point that the lifetime gift tax exclusion is only one million dollars, not two.

You and your wife really should start working with an estate planning pro right away to clear up these issues.

Good luck.

Kerry Kerstetter