Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for May 18th, 2007

Incorporating increases IRS suspicion?

Posted by taxguru on May 18, 2007

Q:

Subject: S Corp. question

Hello:

I know you are not in California.  However, I was wondering if you could shed some light on a question.

I am an independent contractor (personal trainer), I have been filing a schedule C and paying city tax as well for the last 8 years.  I have grown my clientel where I personally earn +$150,000.  I think if I form an S Corp. I may be able to limit some of my tax liability.  For example, if I draw a $60,000 income, I can same on SS Tax, be only taxed (income wise) on the $60,000 and only pay a corporate profit tax on the remaining $90,000.

 

Does that seem correct to you?

 

I am just worried that the IRS will come back and say, “Hey, last year you made +$150,000 and now you’re claiming $60,000.  Where’s the rest?”  And I am afraid they won’t see the extra $90,000 as profit.

 

Any thoughts would be greatly appreciated.

 

Thanks,

 

A:

As long as you handle and report the corp and personal income and expenses properly, IRS shouldn’t have any problem with the fact that your business has gone through the normal transition from a Schedule C sole proprietorship to a corp.  I have worked with thousands of such businesses and I can’t recall one incident where IRS audited a tax return just because the taxpayer moved his/her business to a corp entity.  While there are obviously huge tax savings opportunities by using a corp, there are also other important reasons to do so, so IRS doesn’t automatically suspect a business owner of anything wrong just because s/he chooses to make that change.

Generally, in the first year or two, there is some overlap with ID numbers used on 1099s and other documents that could cause an IRS matching problem.  An experienced tax professional will know how to report these items in such a way as to avoid any actual problem with IRS and/or the State tax agency.

In regard to what particular steps you should be taking, there are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.

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

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

Kerry Kerstetter

 

 

Marketing Plan Pro

 

 

Posted in corp | Comments Off on Incorporating increases IRS suspicion?

Park Donations

Posted by taxguru on May 18, 2007

Q:

Subject: Botanical Garden Sec. 179

May I ask you 2 questions?

Would a person, or cooperation I’m soliciting  for donations in order to transform a parkway into a Botanical Garden be eligible for Sec. 179? If not is there another tax deduction for donations that I can remind them of  in my sales letter to them?

Thanks,

  
A:

Section 179 is not in any way applicable here.  That is only for companies that actually purchase business equipment that they own and use in their business activities.

In your case, if the group doing the rehab work is a qualified charity, the donors would be ale to claim payments as charitable contributions.

If the donors are going to be listed or publicized somewhere, a better way for them to claim their payments for this project would be as advertising and premonition expense.  That normally works out to provide a better tax savings than charitable donations do.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

 

 

Posted in 179, Deductions | Comments Off on Park Donations

Profiting from tax returns?

Posted by taxguru on May 18, 2007

Q:

Subject: a tax refund isn’t a profit

Hi Kerry,

In regards to the cartoon with the subtitle “A tax refund isn’t a profit…”, couldn’t it be argued that a tax refund is in fact a profit for those who qualify for the EIC?

Keep up the great work on the site!

Thanks,

 

A:

That is an excellent point.  While I was obviously echoing the cartoonist’s point that recovering taxes you had paid in during the previous year isn’t a net profit; the EIC welfare program does allow many people to receive thousands of dollars more than they originally paid in. 

Referring to the EIC as a profit from a tax return is actually a valid description, as anyone will understand who has finessed Schedule C expenses.  Often, going light on expenses results in a much higher net refund on the 1040 because of the ridiculous way by which EIC is calculated. 

Thanks for writing and pointing that out.

Kerry

 

 Business Plan Pro

 

 

Posted in EIC | Comments Off on Profiting from tax returns?