Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for May, 2008

Posted by taxguru on May 29, 2008

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Estate Planning Info

Posted by taxguru on May 28, 2008

Some useful and informative short articles from the latest Nolo Press email newsletter:

How Living Trusts Avoid Probate

Using Life Insurance to Provide for Your Kids

What You Can’t, or Shouldn’t, Do in Your Will

Making a No-Frills Will 

Tax-Saving AB Trusts

Using Joint Ownership to Avoid Probate

 

 

Posted in Estates | Comments Off on Estate Planning Info

Posted by taxguru on May 24, 2008

Posted in comix, PropertyTax | Comments Off on

Idiot Tax

Posted by taxguru on May 23, 2008

Over the years, many people have described lotteries as taxes on stupidity and taxes on people with no math skills. I still got a kick out of this scene from the most recent episode of Reaper, where Ray Wise as the Devil claims that he invented the lottery and has a familiar nickname for it.

http://content.screencast.com/bootstrap.swf

Posted in gambling, video | Comments Off on Idiot Tax

Rebate Confusion

Posted by taxguru on May 23, 2008

As I’ve pointed out on a few occasions, there is  a lot of confusion regarding the effect of the stimulus checks on the 2008 tax returns.  Not surprisingly, the IRS website has completely contradictory information regarding this, saying both that the rebate will be factored into the net tax on the 2008 1040 and also that it will have no effect whatsoever on the 1040’s bottom line.  Obviously, both those claims can’t be true.

It has been my contention from the beginning that this will be handled just as we had to do with the similar advance  rebate checks a few years ago.  People who did not receive their rebates via checks were able to have that amount credited on their 1040s so that they ended up receiving the same net benefit as those who receive actual checks.

I was browsing the latest H&R Block newsletter and saw that they have also come to the same conclusion as I have:

The tax rebate is an advance credit for 2008 and will be calculated on your 2008 return. Now this is important: you are receiving a portion of your 2008 credit EARLY and if you receive it once, you won’t receive it again when you file your 2008 return.

And, this is important too: if you’re due a higher tax rebate, you’ll get the remainder next year when you file. If you received a higher rebate than you should have, you DO NOT have to pay it back. So far, so good.

A tax rebate is not interest, it’s not income, it’s not a dividend. Pure and simple, and this is worth saying again, the tax rebate payment is an ADVANCE CREDIT for tax year 2008 and will be calculated on your 2008 return when you file in 2009.

 

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Evaluating Entity Types

Posted by taxguru on May 22, 2008

As I’ve explained countless times, there is no reference material in existence, on the web or off, that can substitute for the services of a good professional business advisor, who should analyze the pros and cons of the various business entity types in relation to the exact situation at hand.  However, some review of the basics beforehand can save a lot of expensive time with the professional.  I always feel bad about charging clients almost four dollars a minute for explaining the basic concepts of corporations and LLCs, that they can read about on their own. Before I meet with clients to discuss what kind of entity or entities makes sense for a particular situation, I strongly encourage them to read over the materials I have posted on my website.

I just came across some new reference materials on the basics of selecting a business entity from the Intuit company, MyCorporation, which can be downloaded for free.

WMV video “Selecting the Right Business Entity”  showing how to use a decision tree method of selecting an entity.  This is 29.5 minutes long and the file is 21.3 mb in size.

20 page PDF file “Guide to Forming Corporations & LLCs”   File size is 1.8 mb.

 

 

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Working with C and S Corps…

Posted by taxguru on May 21, 2008

Q-1:

Subject: business tax question

Hi,

Thank you for your article on sub s vs. c corp.  I am a licensed professional in healthcare and have a sub s.  I have a sub s, as years ago when I started it, my profession did not have a license in my state and my attorney at the time advised me to start this type of corp.  I do not remember the specifics.  Here we are 13 years later and several attorney and accountant later.  As I make another accountant change, I am advised to consider starting a c corp.  To keep my sub s to do my business so I do not have to change contracts etc.  To have the sub s provide management services for the c corp, which will really have the clients  have the c corp be profitable and the sub s operate at a loss.  This is a new way of thinking for me.  Is it legal?  It sounds a bit on the edge?

 

Thanks for responding.  Each new person seems to add something and it becomes very confusing.

 

A-1:

Using both an S and a C corp together has been a very useful tactic for decades for exercising more control over business owners’ taxable income.  Too many people make the mistake of thinking everything has to be all or nothing with everything run through a single entity. Depending on your unique situation, using an assortment of entities can result in huge tax savings, as well as better liability protection from nuisance lawsuits.

Working with a creative professional tax advisor who understands how to properly utilize multiple entities is essential, as is up to date accurate accounting because many of the income shifting decisions depend on knowing how much income you have at any point in time.

Good luck.

Kerry Kerstetter

Q-2:

Thank you for your reply.  Would you indulge me in another question or two?

Your reply certainly confirmed the advice of my new accountatnt.  But, I am still skeptical.  There are so many dishonest people, I am apprehensive!! These are my concersn or things I notice.

This new accountant, John Anderson, does not market himself as a CPA.  His business card says CEO of his consulting company.  When I asked if he was a CPA, he said yes.  I checked AZ licensing, but he is not.  I confronted him and he said he had a PA license.  I checked PA and it expired in ’86.  Is that a big deal?  If you have the info and knowledge, I guess you do not need a license to give advice and or prepare taxes.  I am feeling like his answers are not necessarily honest.  Further, he asked for POA to be able to sign to get c corp and do other things for the company.  I am reluctant to give him that power.  Is that usual?  Finally, he mentioned that under the c corp we could in some way deduct our life insurance premiums.  He discussed the keyman policy or by/sell.  It makes sense to me, but my bother in law who sells life ins in TX is adamant that you cannot deduct life insurance. So, I am confused and apprehensive.

Thanks for your time.

A-2:

Anyone you work with should be completely open and honest about the status of his/her licensing.  I’m confused as to which PA you are referring to.  Do you mean licensed as a CPA in Pennsylvania or licensed as a Public Accountant, which is a designation similar to CPA that is rarely seen any more?

While CPAs, attorneys and EAs (enrolled Agents) are automatically eligible to prepare tax returns, each state has its own rules regarding the special licensing of others.

Asking for a power of attorney up front to submit incorporation papers on your behalf does sound very unusual and is not something I have ever requested from any clients, nor would I advise you to do.  While the amount of personal involvement you choose to have in the business transactions is up to you, I would be very careful of delegating too many things to other people.  There are too many things that could go wrong.

There are so many varieties of life insurance policies and ways in which to handle them that there is no easy answer in regard to the deductibility of premiums or whether company paid premiums are taxable as income to the beneficiaries.  There are ways by which to have the ownership of the policy vested in a special trust or in the employer’s name that may be useful.  You need to work with an experienced advisor to see if there is a way to structure things so as to accomplish your specific goals.

No offense to your brother in law, but the claim that life insurance premiums are never deductible is wrong.  There are various occasions when they are.  For example, one that I encounter quite often is when a lender requires a life insurance policy as a condition of making a loan.  For decades, I have been showing those premiums as deductions on client tax returns, with descriptions that they are required by the lenders. IRS has never had any problems with any of them.

I hope this helps.

Good luck.

Kerry Kerstetter

 

TaxCoach Software: Are you giving your clients what they really want?

 

Posted in corp | Comments Off on Working with C and S Corps…

Tax free home sale?

Posted by taxguru on May 21, 2008

Q:

Subject:  Buying a new home, 2 tax questions

1)      is the sale of my current home a tax-exempt event?  Were in our 40s and are moving to a larger house (if any of that affects the answer)

2)      at closing, the sellers will bring prop taxes up to date (a little over a years worth of taxes).  Shortly after that, spring 08 taxes will be due and paid by us.  Do we get to deduct that property tax payment on Schedule A?  Do the taxes they gave us at closing to get current count as income or offset the prop tax payment?

Thx

A:

Whether any or all of the gain on your home sale is taxable will depend on a number of factors that you need to review with your own personal professional tax advisor.

To get yourself up to speed on the rules, you should check out this article on the rules for home sales

You will see that both your age and your plans to buy a new home are completely irrelevant to the taxability issue.

Settlement statements from both property purchases and sales are filled with tax deductible items, such as loan costs and property taxes.  This is why any good professional tax advisor will request that you supply him/her with copies of those statements.  S/he will know who to report the prorated taxes.

I hope this helps.  Good luck.

Kerry Kerstetter

Follow-Up:

Thx for the quick response!

 

Posted in 121 | Comments Off on Tax free home sale?

Deducting website costs…

Posted by taxguru on May 21, 2008

Q:

Subject:  Deducting Website Expenses

What is the accepted protocol among CPA’s for deducting the costs of building, updating, and maintaining a website and is there a difference beteween the costs of an ecommerce vs. a branding site?

 

Thanks,

A:

There is no universal answer for this because too many variables need to be taken into account.

Your own personal professional tax advisor should be considering such things as how much the design of the website cost, when it started generating income, and how long it will be before it needs another expensive overhaul, in order to determine whether it makes more sense to immediately expense the costs or amortize them over the expected useful life of the design.

That would only apply to the up-front design cost.  Monthly maintenance costs, including hosting services, would be expensed as paid or incurred, depending on whether you are on the Cash or Accrual tax basis.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for the info.

 

Business Plan Pro

 

Posted in Deductions | Comments Off on Deducting website costs…

How assets paid for irrelevant to Section 179

Posted by taxguru on May 21, 2008

Q:

Kerry if I finance the tractor will I still. Get same write off.

A:

Both the Section 179 expensing and depreciation deductions have nothing to do with how the new asset is financed.  It is the exact same deduction whether you pay cash or take out a loan.

The only difference will be no interest expense deduction for a cash purchase.

Kerry

 

Netflix, Inc.

 

Posted in 179 | Comments Off on How assets paid for irrelevant to Section 179