Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for December, 2006

S Corp Income + Sec.179

Posted by taxguru on December 31, 2006

Q-1:

Subject: S Corp. buisness income limit for section 179
 
Hi-
 
My husband is a sole shareholder of an S corp.  The S corp. is planning to purchase a SUV (< 6,000, < 14,000) to take the $25,000 section 179 deduction for 2006.  His W2 wage from this S corp. is $35,000.  How can he determine the taxable income of the S corp. to figure a business income limit?
 
My understanding of publication 946 is that he can add back his wage of $35,000 from this S corp. to figure a net income of the S corp.  Does this mean the S corp. can go up to net loss of $25,000?
 
Thank you very much in advance!

A-1:

You are correct that the wages paid by the S corp to your husband can be added back to the corp’s net income or loss in determining its income limit for purposes of Section 179 at the S corp level.

Section 179 expenses do not actually show up as a regular expense on the 1120S.  They are passed through to the shareholders separately and directly on their K-1s. 

This is the kind of thing that should be discussed with a professional tax advisor.  S corps are too complicated to try to do the tax work and planning without the assistance of professional tax advisors.  You are taking a very serious risk of screwing things up badly and incurring severe IRS penalties if you try to prepare your own 1120S and 1040.

I hope this helps.  Good luck.

Kerry Kerstetter


Q-2:

Thank you so much again for your prompt response.  I agree with you about the importance of hiring a qualified tax professional.  My husband and I are not happy with our current tax preparer’s qualification and considering hiring a new tax advisor for 2006.  For example, she used 1065 to file 2004 and 2005 returns for my husband’s single member LLC instead of 1040 schedule C.
 
I wonder if we could hire you to file our tax returns.
 
Thank you again for your great help.

A-2:

That is a little scary, for someone to be so unclear on the rules for single member LLCs.  A change is definitely required.

I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you at.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter


Follow-Up:

Hello Mr. Kerstetter-
 
We really wanted you to take us as your new client but I do understand your situation.  We live in Las Vegas, so I guess I could talk to the EA in Carson City  although we should not hire anyone just because they practice their business in the same state 🙂
 
Thanks for your time and information!

 

The best book on QuickBooks Premier Editions

 

Posted in 179 | Comments Off on S Corp Income + Sec.179

2007 Business Purchase

Posted by taxguru on December 31, 2006

Q:

Subject: Section 179 question

Hello Kerry,

I just came across your website and noted that you respond to questions posed to you via Email.  I too have such a question and hope you have a simple answer:

I was hoping to purchase a printing business for ~$60,000 before the end of 2006 and expense it under Section 179.  It appears, however, that the transaction will not complete prior to mid-January 2007.  Am I correct in understanding that I will not be able to take the Section 179 deduction for 2006?  Any workarounds?

Do appreciate your response.

Best regards and Happy Holidays.

A:

For your individual income taxes, you are correct that anything not purchased and placed into service until 2007 may not be expensed on your 2006 1040. 

You really need to be working directly with a tax professional because there are a lot of very important issues that need to be addressed, such as:

Only certain kinds of business assets may be expensed under Section 179.  Depending on how much of your purchase price is allocated to movable equipment, the full price may not be eligible.  Any costs allocated to such normal parts of a business purchase as real estate, inventory, leaseholds, goodwill and covenants not to compete, are not qualifying property for Section 179.

You should also discuss with a professional tax advisor the feasibility of using a corporation to buy and operate the business.  For example, a C corp could select a fiscal year that would actually allow the Section 179 deduction at an earlier time than waiting for your 2007 1040.

As I said, there are a lot of critical issues to consider; and trying to make such important decisions without the assistance of an experienced tax professional is tantamount to fiscal suicide before you even start your business operations.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,
 
I am impressed with your prompt response – to someone out of the blue! 
Thank you – and wish you a super successful 2007.
 
 

 

Posted in 179 | Comments Off on 2007 Business Purchase

Unoccupied Rental

Posted by taxguru on December 31, 2006


Q:

Subject: Question from Maryland:  Rental to Primary

Hi Kenny,

Hope you can find the time to help. 

My wife and I purchased a home in December 2005 with the intent of using it as an investment rental property.  We tried , unsuccessfully, for about 3 months to find a tenant.  During this time, we made repairs to the property.  After about 3 months, we received an unsolicited offer from a buyer to purchase our PRIMARY residence.  The offer was simply too good to refuse.  We sold our PRIMARY and moved into the investment property.  The investment property was only an investment property for 3 months.  Can I deduct my expenses this year for depreciation and repairs made to the property during that 3 month period?

Thanks a bunch!

A:

This is the kind of issue you really need to work on with your personal professional tax advisor because it involves a lot of judgment calls, including taking into account your other rental experience.

For example, if this is the only rental property you would be reporting on your 1040, I would be much more hesitant to claim anything as a rental expense than if you already had dozens of other rental properties.

First off, you always need to keep in the back of your mind the fact that the burden of proving that you are entitled to each specific deduction is 100% on you and you need to be ready to defend your position if IRS were to challenge it. 

In a more general sense, you should be able to deduct the direct costs of specifically trying to rent the home, such as ads you paid for. 

On the other hand, repairs and capital improvements that you ended up using personally would be very difficult to justify deducting as rental expenses.

Similarly, claiming depreciation would also be inappropriate.

Again, your personal professional tax advisor should be able to address each specific expense more intelligently in relation to your circumstances.

Good luck.

Kerry Kerstetter

 

Follow-Up:

Kerry,
Thanks so much for the fast answer!
 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in Uncategorized | Comments Off on Unoccupied Rental

Posted by taxguru on December 30, 2006

Last-Minute Tax Gifts From Congress – From Gail Buckner

 

Slim financial books offer (mostly) wise advice – Some book reviews from Lynn O’Shaughnessy.   I’ve added all six of these books to my Amazon store.

 

Posted in Uncategorized | Comments Off on

Deductions for football fans?

Posted by taxguru on December 30, 2006

Posted in Uncategorized | Comments Off on Deductions for football fans?

Is IRS training us for the afterlife?

Posted by taxguru on December 28, 2006

Posted in Uncategorized | Comments Off on Is IRS training us for the afterlife?

Posted by taxguru on December 27, 2006

The Payroll Tax Trap. Will Bush’s legacy be a huge new burden on the most productive Americans? – For anyone who has been putting off the use of corporations and other techniques to save on payroll taxes, you only have yourself to blame when those taxes eat up an even larger share of your income.

 

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No business is immune from IRS hassles…

Posted by taxguru on December 25, 2006

Posted in Uncategorized | Comments Off on No business is immune from IRS hassles…

SUV Weight Rules Haven’t Changed

Posted by taxguru on December 24, 2006

 

Q:

Subject: Section 179
 
I read your article which states that as of Oct 2004, the maximum amount that can be claimed for SUV’s weighing between 6,000 and 14,000 pounds is $25,000. Has this law changed for 2006? I’m hearing conflicting stories that the vehicle has to weigh no less than 14,000 pounds in order to take the deduction of $25,000.
 
Can you please clarify?

A:

That particular provision has not changed and is still in effect for as long as Section 179 is.

Kerry Kerstetter

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in 179 | Comments Off on SUV Weight Rules Haven’t Changed

Starting A Corp In the PRC

Posted by taxguru on December 24, 2006

 

Q:

Subject: CA Corporation filing fees
 
Hi Kerry,
 
Could you please elaborate a little on your statement below since I am reading on the CA. Secretary of State website that the CA filing fee is $100.
 
What I have found is that it is much easier to just set up a brand new virgin corporation, especially in states like Arkansas and Missouri where it only costs $50 in filing fees.  In states like California, where the filing fees are in the thousands, this strategy is a bit more expensive and needs to be evaluated a little more closely.
 
Thanks

 

A:

It’s been a few years since I’ve been involved in setting up a new Calif corp; but it used to be required that new corps submit non-refundable payments for their first and last minimum taxes along with the paperwork filing fee.  That was an additional $1,600 up front cost, which other states that don’t have minimum taxes don’t require.

A tax pro who is more current on the costs of setting up a new Calif corp can give you more specifics for the actual cost nowadays.

I hope this helps.

Kerry Kerstetter

 

 

 

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