Tax Guru – Ker$tetter Letter

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Archive for January 1st, 2008

Posted by taxguru on January 1, 2008

Posted in Accounting, comix | Comments Off on

Working in multiple states

Posted by taxguru on January 1, 2008

Q-1:

Subject: Tax question and Help

HI:

I found your website after spending several hours researching my situation and looking for answers.

I am hoping you could point me in the right direction or give me suggestions of what my options are.

My husband and I currently provide safety programs to businesses.  We operate in three states – Washington, Oregon and California.  In 2008 right now we will make at least 500K if not $100-200K more.  The income breaks down as follows per state.  Washington – $250K, California – $200K and Oregon – $50K.  

We are currently incorporated as an s-corp in Oregon.  For the last three years we have had a large NOL from a previous business (sole prop) that we carried over, so we never really felt the potential high taxes from Oregon.  We tried our best to expense out all the other income from the other states, except Washington which has a gross B&O tax that was not that bad, but they don’t have personal income tax.  

But this year we are faced with a whole new ball game.  I have roughly figured out that our expenses will be about 30% of our gross profits.  Our business has no debt and our biggest expense is travel expenses as we go to clients to consult with them at their facilities.  We have a lot of personal debt, so leaving the money in the corporation is not an option if we go the route of a C.  But from what I can tell if we pull it out the wrong way, we then get hit with higher taxes.   Our biggest personal deduction is our mortgage interest of 60K and we have three kids.  To live personally we need approx $12,000 net each month.

We have gotten legal and accounting advice and all of the solutions seem to be way too much of a headache and the amount of work I am going to have to maintain a legal paper trail also seems overwhelming. We have been given suggestions of multiple LLC’s for each state, management corporations (c-corps), tax shelters, etc…… Go to Nevada, Wyoming, stay in your home state…………  HELP!!!!

To be honest we are the classic co-minglers, don’t keep good paperwork or annual corp meetings and have been lucky that we have not been audited.  My biggest is fear is that once we get everything reorganized that I will miss filings, will mess up on the dates, basically just not know all the in’s and out’s so i get into trouble and pay the price.  I need to get my house in order, but want to find the simplest way to do that and pay less tax from the feds to the states.


A-1:

I’m not sure what you’re expecting from me.  If you’re going to be working in multiple states and making that much money, there is no way to have a simple hassle-free life when it comes to taxes.  Tax complication comes with the territory.

When I was located in California, I had some clients who had businesses in all three left coast states; so I know what can be done to save huge amounts of state taxes by shifting as much of the profits into Washington as possible. 

You have similar opportunities to shuffle income around and save on your taxes.  What you will most likely need to do, besides working with a professional tax advisor who is experienced in multi-state businesses, is to have your own full or part time bookkeeper who can keep the QuickBooks files for each company as up to date as possible.  This is the only way you will be able to do a decent job of dealing with the tax issues that are unavoidable.  Trying to handle all of the bookkeeping tasks on your own, while conducting your actual business, is putting too much stress on you.  Since QuickBooks is the most widely used and easiest to learn accounting program in the country, you should hire someone with QB experience and synch up with a professional tax advisor who also works with QB.

Good luck.

Kerry Kerstetter

 
Q-2:

Thanks for responding, 

 

I have spent a great deal of time reading information online, books, etc…

And know there has to be a better way of doing business than we are structurally. 

 

I currently use QuickBooks for my one co-mingled account, etc….  I agree with you that hiring a bookkeeper to keep track of everything is the way to go.  

 

We have very low expenses compared to most businesses.  I probably write 10 checks or less a month for those expenses in all states of doing business. I have an online payroll service for the 2 employees that we do have in those other states. 

 

Having said all of this::::

I have been to several tax attorney’s, CPA’s, etc… Who seem to have answers wide and far from each other on what to do.  I have yet to find one who has given me a plan that will decrease my taxes in each state as well as tell me how to set things up and give me instructions so I can hire a bookkeeper to do the steps to keep my paper trail going.  

 

Do you know of anybody on the west coast that can help me with a plan of attack and tell me what structures to put in place in what state as well as tell me how we need to run the finances for each of those states and what expenses I should run in what state back and forth, etc .  I need detailed guidelines of how to move the money and expense it out legally.  

 

Thanks

 

A-2:

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. 

You should note that geographic location should not be the main criterion for selecting a tax pro.

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

Kerry Kerstetter


Follow-Up:

Thanks I will take a look at your list and go from there.

 

 

Posted in StateTaxes | Comments Off on Working in multiple states

Sec. 179 & Spouse’s Income

Posted by taxguru on January 1, 2008

Q-1:

Subject: Section 179 question

Hi Kerry,

 

I am not sure if this is appropriate for me to email you with a tax question.  Please excuse me if it is not.

 

My wife is a realtor and did not have an income this year.  We are planning to file jointly and deduct her expenses from our total income.  Is it possible to also use the section 179 to deduct/depreciate a vehicle we are getting for her business this year if she does not have an income?

 

Regards,

A-1:

I have covered this issue several times on my blog.

Basically, it is very possible that having other kinds of earned income on your joint 1040, such as amounts from your W-2, will make it possible to claim a Section 179 expense on your wife’s Schedule C.  You professional tax preparer’s tax software should make this calculation automatically.  It is not something that you want to try to compute on your own.

Good luck.  I hope this helped.  Your own personal professional tax advisor can give you more specific numbers for your unique situation.  If you are planning to prepare your wife’s real estate Schedule C by yourself, without professional assistance, you are crazy and will pay much more in extra taxes than the amount of fees you will save.

Kerry Kerstetter


Q-2:

Thank you.  I have ask this question to several cpa’s and getting conflicting answers including one that used to work for IRS that said “no”.  I guess I am still looking for a decent cpa.

A-2:

As I’ve frequently warned, ex IRS employees often make terrible tax advisors because they are not able to make the mental transition from interpreting the tax code in favor of more money for the government to interpreting things in favor of clients.

As a little more documentation of what I said, here is an excerpt from the current QuickFinder Depreciation Handbook:
 

Strategy: Business taxable income does not have to be generated by the business in which the Section 179 property is used to count toward the business taxable income limit. In fact, the trade or business in which the Section 179 property is used can generate a loss, as long as the taxpayer’s net business taxable income from all sources is positive.

Example: Jon has a sole proprietorship that has a $45,000 loss for 2006 before considering any Section 179 deduction. He also reports $150,000 of wages and $3,000 of Section 1245 depreciation recapture from a partnership interest. He is active in the partnership’s business. Jon’s aggregate business taxable income for the Section 179 taxable income limit is $108,000 ($150,000 plus $3,000 from the partnership minus $45,000 loss from the proprietorship). Jon can claim the full $108,000 Section 179 deduction in 2006 (assuming total qualifying property does not exceed $430,000) for Section 179 property placed in service for his Schedule C activity.

Joint return. If a joint return is filed, the taxable incomes (or loss) of both spouses are aggregated, even though the Section 179 deduction may be related to the activities of only one spouse.

Example: Sue and Bo file a joint return. Sue has Form W-2 income of $125,000 in 2006. Her husband, Bo, reports a $12,000 business loss from his proprietorship; their aggregate trade or business income for claiming a Section 179 deduction by Bo’s proprietorship is $113,000 ($125,000 – $12,000). Bo is entitled to claim up to $108,000 of Section 179 expense (assuming total qualifying property does not exceed $430,000) for eligible asset additions.

Good luck.

Kerry

 

TaxCoach Software: Finally! Plain-English Tax Planing That Builds Your Business!

 

Posted in 179 | Comments Off on Sec. 179 & Spouse’s Income