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Archive for August 25th, 2007

Sec. 179 For Leased Motorhome

Posted by taxguru on August 25, 2007

Q-1:

Subject: re: Section 179

I have a question regarding Section 179 that I seem to be struggling with on getting a straight answer (assuming one exists…)

My wife and I are going to purchase a motor home and would like to supplement financing by leasing it to a third party.
The question I have is, would this be applicable to Section 179 (expensing in 07′) if I purchase before the year end and issue it into service (available for rental)?

There seems to a lot of confusion on this particular topic.  I did find a case where the court ruled in favor of the tax payer, Robert D. Shirley, TC Memo 2004-188.
What is your opinion in this matter and has there been any further clarification by the IRS?

Thanks,

 

A-1:

I have discussed this very issue in a number of earlier blog posts.

Here is the applicable quote from the QuickFinder Depreciation Online Handbook:

Leased property. For noncorporate taxpayers, leased property is not eligible for Section 179 expense, unless:

1)    The taxpayer manufactures (or produces) the property to lease to others.

2)    The taxpayer purchases the property to lease to others and both the following tests are met:

  The term of the lease (including options to renew) is less than 50% of the property’s class life.

  For the first 12 months after the property is transferred to the lessee, the total business deductions on the property exceed 15% of the property’s rental income.

You really need to be working with an experienced professional tax advisor who can help you work out the most appropriate way to handle this, including what business entity makes the most sense for your unique circumstances.

Good luck.

Kerry Kerstetter

Q-2:

Kerry,

Thanks for the information.

One follow up question I have as I took your advice on talking to a tax advisor (have appnt. tomorrow).  However she brought up the point that I need to “recapture” any gains I have through the sale of the motor home.  I thought she meant that if I purchase the motor home for 100k and sell it for 80k, I essentially need to claim the 80k as gains on the subsequent filing.  Is this true?

I read (on your blog!) that I only need to claim the difference between the sale and book value…am I reading that right?

 

A-2:

It is always important to keep tabs on the adjusted cost basis (aka book value) of business assets so that you can know what any potential gain or loss would be triggered by its sale.

Basically, the book value is the original cost of the asset less the depreciation (including Sec. 179) claimed up to the point of sale.  In your case, if you expensed the entire cost of the motorhome, its book value is zero, which means the full amount of any sales price will be taxable at the 25% Federal depreciation tax rate, plus state tax if you are in a taxable state.

Your tax pro should also advise you of some other factors to consider. 

Even before a sale, there is a potential taxable partial recapture of the Section 179 if the asset’s business usage slips below 50% in the first five years after you place it into service.

If you are disposing of the motorhome in order to acquire a newer model, there will be no taxable recapture if you trade in your existing one on a new one costing at least as much as the old one is worth and you receive no cash or net relief of debt.

These are all extremely basic tax principles that any competent tax person should have no problem explaining to you.

Good luck.

Kerry Kerstetter

 

 

 

Posted in 179 | Comments Off on Sec. 179 For Leased Motorhome

Taxing IRA Investments

Posted by taxguru on August 25, 2007

Q:

Hi Kerry,

 

Can sold IRA asset profits be treated as long term capital gains for tax accounting if they are kept over the required time?(6months?)

 

I have sold quite a bit this year and would appreciate your advice.

 

Thanks….

 

A:

This is an issue that catches a lot people by surprise.  While sales of assets held for more than 12 months in your individual or living trust’s name qualify for the special lower long term capital gains tax rates, that is not the case for gains made by investments inside IRA and other retirement accounts.

Conventional IRAs, where you claim a deduction for contributions made to the accounts, are tax deferred arrangements.  When money is drawn out, and not rolled over into another retirement account, it is all subject to income tax as ordinary income regardless of how the money was invested inside the retirement account.  Income generated from bonds or other interest bearing investments is taxed the same way as profits made from stock trades.  So, keeping track of long term capital gains earned inside IRAs is not required for anything.

The other main kind of IRA, the non-deductible Roth, has the advantage of allowing completely tax free income from all of its investments, as long as the account has been held for at least five years.  Just like with conventional IRAs, there is no need to keep track of what kinds of earnings were generated inside the IRA because they all receive the same tax treatment.

As you may have read on my blog on several occasions, I am still very skeptical of the long term tax free status of Roth IRAs.  It is still my prediction that our rulers in DC will pull the same Switcheroo on Roths as they did with Social Security benefits, and force those they consider to be evil rich to pay tax on income receive from them.  FYI: Evil rich for SS recipients is any single person earning over $25,000 or married couple earning over $32,000 per year. 

I hope this answers your question.

Kerry

 

 

Netflix, Inc.

 

Posted in Retire | Comments Off on Taxing IRA Investments

Double Counted Dependent Child

Posted by taxguru on August 25, 2007

Q:

Mr Guru – hope you don’t mind my picking your brains on this matter.  I have a couple who divorced early in the decade with a dependent child  Father was to claim child in odd years and Mother in even years.  In 2006, I prepped Mother’s 2005 return, who instructed me to claim the child regardless that this was an odd year.  Now, Father (who had some long-standing tax problems) wants to finally file his 2005 1040 & claim child.  Ethically, do I need to notify Mother that I’m filing Father’s 1040 claiming child?  Should I automatically file a 2005 1040X for Mother taking off the child?  Or just let me IRS notify them both?  Any ideas?

 

A:

That kind of every other year arrangement is increasingly common with divorced parents, so this kind of thing does pop up frequently.

As you most likely already have experienced, IRS is very efficient at catching attempts to claim the same child more than once and they will generally allow the first parent’s return to have the exemption and deny the second parent’s.

This brings you to your point; how to remedy the problem.  While there may be a number of ways to correct the situation, here are some ideas. 

Technically, in the IRS’s eyes, they don’t have to honor the agreement between the parents and will leave it up to them to hash it out between themselves to equalize the situation.  While the short-changed parent could notify IRS of the inappropriate dependent claim and try to trigger some IRS pressure on his ex, I have found that IRS really isn’t very concerned about this kind of thing and will most likely do nothing.  This leaves a civil lawsuit as the remedy for the short-changed parent to enforce his rights under the divorce agreement, most likely in Small Claims Court. 

I wouldn’t just go ahead and prepare the 1040X without getting an agreement from the mother that she will indeed file it with IRS and pay you for doing that work.  Otherwise, you have wasted your time for nothing.

If the mother agrees to filing a 1040X to remove the child, that’s fine and sets the stage for the father to later file his proper 1040.

However, I have seen a number of occasions where the first parent didn’t want to rock the boat with IRS by filing a 1040X and instead agreed to reimburse the other parent directly for the difference in the taxes with and without the child.  In those kinds of cases, you can prepare draft returns both ways to document the difference in Federal and State taxes, and the mother would then write a check for that amount to the father, plus the additional costs for you to do those calculations, since it was her fault in improperly claiming the child. 

Obviously, who bears these additional costs is negotiable between the three of you.  If you want to accept some responsibility for the screw-up on the mother’s 1040, and do the extra work for free, that’s your call to make.

Obviously, there’s no cut and dried answer; but I hope this gives you some ideas to work with.

Good luck.

Kerry

Follow-Up:

Mr Guru – thanx for your input, as always.  I’ll take it from here.

 

Business Plan Pro

 

 

Posted in Kids | Comments Off on Double Counted Dependent Child

Progressive Tax Rates

Posted by taxguru on August 25, 2007

Q:

Subject: Tax Question and Great Thanks!

 

Let me first say Thank You for your taxguru.org site and your blog. I have been reading the material several times over to get it to sink. Of course, I am consulting my two knowledgeable colleagues and reading IRS doc/online resources to augment your articles.

 

Currently I am an IT consultant but I want to be my own business and try to make my own fortune. The problem is, when I want to learn something new I attack it hard. This means I am in serious study mode right now. Okay , onto the question..:)

 

Question

I have a question regading the following verbiage taken from this link

“A C corporation has its own progressive tax rate structure, ranging from 15% on the first $50,000 of net income, to as much as 39%.   My philosophy is to look at the overall tax picture for individuals and their companies by smoothing income over the personal (1040) and corporate (1120) tax returns.   For 2000, a married couple’s 15% tax bracket ends at $43,850 of taxable income.  It then jumps to 28%, almost double the rate.  However, if you consider that the couple’s C corporation has its own $50,000 15% bracket, their overall combined 15% bracket has more than doubled to $93,850.   That alone can save several thousands of dollars per year in income taxes.”

 

What is some good study material to get some practical examples for dividing my income from my business (when I start it) and my personal income to keep me in the lowest possible tax bracket for both?

 

In regards to the very first sentence, why would the tax rate be “flexible” and range from15% to 39%? Why isn’t a static figure? Where can I read more to understand this? Or did you mean that the maximum

 

I actually have two more questions but on a different topic but I’ll save that for a future correspondence if there is one. I sincerely appreciate any information/advice you can offer.

 

Thank you,

 

A:

One of the basic fundamental aspects of the income tax system in this country has long been the use of “progressive” tax rates, which penalize those who earn more money by taking a larger percentage of their income away from them.  You can see the current tax rate schedules on my website:

Individuals   

C Corps   

If we had just one single flat tax rate, there wouldn’t be as much opportunity for tax savings by the income smoothing strategies I mentioned on my website.  Unfortunately, the pervasive “hate the rich” mentality in this country will never allow such a change. 

Studying issues like this and discussing them with colleagues can only take you so far in understanding how to best maneuver within the tax system.  You need to be working with an experienced professional tax advisor who can help you apply these and other strategies to your particular circumstances.  There is no one size fits all solution to proper tax planning.  What may be a good plan for a colleague could very well end up costing you a lot of needless additional taxes because such things as family members (spouses and kids) and personal likes and dislikes can have huge impacts on any tax saving plans.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

 

Posted in Commies | Comments Off on Progressive Tax Rates