Snipes Trial on Track – His Race Card tactic to delay his tax fraud trial continues to fail.
Archive for January, 2008
Posted by taxguru on January 7, 2008
From The Late Show’s Top Ten Signs You’re at a Lame New Year’s Eve Party:
#4: A minute after midnight, everyone starts doing their taxes
Posted in humor | Comments Off on
Depreciating converted property
Posted by taxguru on January 5, 2008
Q:
Subject: Depreciation Question
Hi Guru, Have been reading you for a long time but never have seen a question like this. From 1999 to 2006, I ran a B&B and depreciated the business portion of my property as a commercial business. On Jan 1, 2007, I converted this property to a single family rental. Do I use the residential depreciation schedule this year? Also, would I continue to use the old basis or create a new basis when the property was converted. The property has appreciated almost double in value from 1999 to 2006.Thanks for your advice and hopefully this might be helpful to some other loyal readersThanks
A:
If you have been reading my stuff for any length of time, you should know that you need to be working directly with a professional tax advisor to ensure that you do things properly.
This is a perfect example of a very common way in which people accidentally commit tax fraud; by setting up assets converted from personal to business use at a much higher cost basis than is appropriate. The tax law is very specific in the fact that converted assets are to be set up at the lower of their original cost or their current fair market value as of the date of conversion. Under no circumstances could you increase the depreciable value above what your actual cost was. To do so would essentially be giving you tax deductions on values to which you are not entitled.
That is the case for assets converted from purely personal usage to a new business usage. In your case, you were already using the property in a business, so you have no justification whatsoever for modifying the cost basis for depreciation purposes in its new use. You need to keep track of the original cost, along with the deprecation you had already claimed.
If you were depreciating the structure over the 39 years required for nonresidential real estate, you can change the appropriate life to the 27.5 years used for residential rental property as of the date of the new use. Again, you should have an experienced professional tax preparer do those calculations for you.
I hope this isn’t too confusing and properly stresses how dangerous it is for you to continue to try to negotiate the treacherous tax waters on your own.
Good luck.
Kerry Kerstetter
Follow-Up:
Thanks!! I appreciate your swift reply
Posted in Rentals | Comments Off on Depreciating converted property
Section 179 Inflation Adjustments
Posted by taxguru on January 5, 2008
Q:
Subject: Section 179
Hello Kerry,
Thank you for your informative insight onto this project.
I do have one question for you. Just as the limit has been adjusted for inflation as it has increased from $100,000 to $128,000, the phase out of Section 179 has been adjusted by the same percentage. So it would seem to me that the phase out should have increased by 28% above the original $400,000. If that is correct, the phase out should occur after $512,000 and not $510,000. Would that not be correct?
Thanks,
A:
The Section 179 did not jump 28% at any one time. It took several years to reach the current level of $128,000 in annual increases, plus a new law that was passed last year that increased the base before COLAs from $100,000 to $125,000. There was never a COLA of 28% because that calculation is based on the annual inflation rate, which hasn’t been anywhere close to 28% since the days of Jimmy Carter.
You can see the recent historical and projected future Section 179 limits on my website.
At the bottom of the page, check out the historical phase-out points.As with almost all of the annual inflation adjustments in the tax code, they are rounded to the nearest $1,000 for the Section 179 expensing limit, and the nearest $10,000 for the beginning of the phase-out. This is why, when looked at over a five year period, as you are doing here, the cumulative percentage adjustments can be slightly different.
I hope this helps you better understand how the maximum Section 179 grew a cumulative 28% from $100,000 in 2003 to the $128,000 we have now in 2008, while the phase-out threshold only grew 27.5% over that same time period. It was the annual rounding.
Kerry Kerstetter
Follow-Up:
Hi Kerry,I realize that the changes have occurred over a number of years, but I was unaware that the phase-out is rounded to the nearest $10,000. That would explain why the limit is now $510,000 and not $512,000.Thanks for the clarification.
Posted in 179 | Comments Off on Section 179 Inflation Adjustments
Arkansas Section 179 Limits
Posted by taxguru on January 5, 2008
Our State rulers in Little Rock made an attempt to conform to the much higher available Federal allowance for Section 179 expensing. They seemed to have accomplished that for a few months, until our DC Rulers increased the maximum in the middle of 2007. This means we now have another difference between the IRS and DFA levels. However, the difference is now much smaller than it had been in past years.
This is from the most recent DFA newsletter:
SECTION 179
IncreaseAct 613 of 2007 adopted IRC Section 179 as in effect on January 1, 2007. At that time the maximum amount to be claimed was $112,000. This amount will be adjusted for inflation for the year 2008. In May 2007, Congress enacted an increase to $125,000. Arkansas has not adopted this increase.
For all purchases that qualify for Section 179 that were made after January 1, 2007, the maximum amount to be deducted for a calendar year tax return or any fiscal year tax return is $112,000, regardless of the fiscal year’s beginning date.
The investment limitation that was adopted is $450,000 and the maximum limitation is reduced dollar for dollar by the cost of qualified property placed in service during the tax year over the investment limitation. This will be adjusted for inflation for the year 2008. The code section 179 deduction is reduced to zero when the investment limitation reaches $562,000 (450,000 + 112,000).
Part of Section 179 dealing with the expensing cap on sport utility vehicles limitation of $25,000 was also adopted in this Act.
Posted in 179 | Comments Off on Arkansas Section 179 Limits
Dim plans for our paychecks…
Posted by taxguru on January 4, 2008
Posted in comix, Dims | Comments Off on Dim plans for our paychecks…
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
Tax Guru - Ker$tetter Letter 