Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Archive for April 14th, 2007

Posted by taxguru on April 14, 2007

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Posted by taxguru on April 14, 2007

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Future tax auditors?

Posted by taxguru on April 14, 2007

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Don’t forget to claim IRS "Freebie"

Posted by taxguru on April 14, 2007

The standard refundable credit is $30 for Single taxpayers and $40 for Married Couples. I’m assuming that most tax software programs are like our Lacerte and are automatically claiming this; but according to IRS, many of those folks doing their returns by hand are forgetting to enter it.

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Corp & Home Office

Posted by taxguru on April 14, 2007

Q:

Subject: Thank you
 
Thank you for your great article. We were about to from an S corp because all professionals we meet advised us so. After reading your article, we changed our mind. My wife has an online business with gross income arround 70000 a year. It is basically a one man’s side job and we use our home as office. If we form a C Corp, do we still get the benefit of home office deduction such as mortgate, house repaire/maintanence, utility, etc? Perhaps, we can even use a more aggressive formula to take the benefit? It would be great if you could mention this in your article.
 
Regards,

 

A:

Leasing a home office to a C corp has long been a very easy way to pull money out of the corp without having to pay any of the payroll taxes that would be required for salaries and avoid the double taxation of dividends.

Any experienced tax pro who understands the power of using C corps can help you set up a good strategy to minimize your taxes via this and the several other similar techniques.

Good luck.

Kerry Kerstetter

 

 

 

 

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Sect 179 & Partnerships

Posted by taxguru on April 14, 2007

Q-1:

Subject: Section 179 Deductions

Tax Guru:

My partner and I each have a Section 179 depreciation deduction of 57,000 on our K1’s. The business had an ordinary loss of 7,500 for TY2006.  My wife and I have ordinary income of $125,000 for 2006.  Can I deduct the 57,000 on my tax return? 

A-1:

It sounds as if you tried to prepare your own 1065 because the size of that Section 179 in relation to the net income seems out of whack.  Unless you have properly addressed the Section 179 limit at the 1065 level, which does include adding back some things, such as guaranteed payments to partners, there is a good chance that the K-1 info is wrong.  You need to have a professional tax preparer bless that 1065 before you try to use its items on your 1040s. 

Assuming the $125,000 you mentioned was Earned Income (not from investments and capital gains), and the 1065 was prepared properly, you should be able to use the full amount of the pass-through Sec. 179 on your 1040.

Again, you need to have a professional tax preparer work on your 1040 as well.  If you try to do it all on your own. you are almost guaranteed to screw things up and get yourselves into trouble with IRS.

Good luck.

Kerry Kerstetter

Q-2:

Kerry: 
 
I may have confused you a little regarding my information. My wife and I have W-2 income from full time jobs.  I am a partner in an LLC which is a contracting company.  We purchased 8 new vehicles this year and our K-1 was prepared by a CPA (not mine).  The purchase of the vehicles has balooned our 179 deduction.  My question was posed because my accountant indicated that I could only use the 179 deduction to offset earnings in the LLC not against ordinary income. 

A-2:

Technically, any Section 179 you have can be used against any earned income on your 1040, even that from occupations other than those that produced the Sec. 179.

However, I am still concerned that the LLC’s 1065 may have been prepared incorrectly.  If it had been calculated properly, all of your pass through items should net out to zero, with your share of the Section 179 offsetting your share of the company’s net income and your guaranteed payments.  You really shouldn’t have a case where the other net income from the LLC wasn’t enough to soak up all of the Sec 179.

If the 1065 was prepared by hand, that points to your problem.  Most professional quality tax prep software wouldn’t allow too high of a Sec 179 to be taken for the year.  You should have your personal accountant review the LLC’s 1065 to see why the Sec. 179 expense is so much higher than your share of other income passed through.  I’m guessing that the LLC’s CPA screwed up and the 1065 will need to be amended.

This will obviously also affect the tax situation for your LLC’s co-owner; so neither of you should send in your 1040s until this is straightened out.

Another word of warning.  Because of the rise in the use of LLCs and S corps, IRS is paying much closer attention to what figures owners report on their 1040s.  So if you were to report an erroneously high pass-through Sec. 179 on your 1040, I would put the odds as very god that your entire 1040 would be pulled for an IRS audit.

Please let me know what your personal accountant finds when he reviews the 1065.

Kerry Kerstetter

 

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