Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Archive for February 14th, 2009

Mutiple Corps

Posted by taxguru on February 14, 2009

Q-1:

Subject:  Small Business asking for a little help or direction.

Dear Kerry,

I came across your website while researching corporate tax information and was very impressed with the information and your desire to limit tax liability.

I was hoping you could offer a little help on my businesses.

Last year I purchased 3 small businesses from a single owner. The businesses sell very similar products, but are run as 3 separate corporations. 2 are “C” corps and 1 is a “S” corp. All located in Chicago, IL. Combined total annual sales of $2.8 million for all 3 companies.

I hired a new accounting firm to review my financials, do tax planning and file annual tax returns.

They are strongly recommending I change the 2 “C” corps into “S” corps. To avoid the future possibility of “double taxation” on dividend payments and keep things simple by changing all 3 companies to a true calendar fiscal year.

Historically over the last 10 years these businesses have never paid dividends. So I don’t see the benefit. The previous owner managed expenses across the 3 companies to avoid paying excessive taxes and never paid himself dividends just a nice salary.

After doing some research on line and reading your web site I feel like I have received some very bad advice. I believe I need to find a new accounting firm that has my best interests in mind. Also, with the new administration coming in January I think keeping my income as low as possible on my 1040 will be more important than ever.

I want to aggressively manage the businesses to limit my tax liability and I need a financial firm who thinks the same way.

Can you kindly offer some advice on how to proceed.

I would love for you to handle my financials or provide financial advice.

Any advice, direction or referral you can offer would be greatly appreciated. Do you know of a good professional tax advisor near Chicago?

Thank you in advance for your time and response.

Thanks and Best Regards,

 

A-1:

You are correct in recognizing the fact that your current accountant is not looking out for your best interests.  Unfortunately, there is no shortage of lazy short-sighted tax pros who try to force everyone into a one size fits all approach, often just using S corps.

As I have been preaching for decades, there are huge tax and liability saving opportunities by using multiple corps with different fiscal years.  The ability to smooth income out and even multiply certain tax breaks, such as Section 179, can save huge amounts of money in taxes. As I have explained countless times, the big fear of double taxation is crazy.  Any creative tax advisor worth his/her salt can find methods to shift income in ways that avoid the same money being taxed twice.

Using nothing but S corps for profitable businesses is completely counter-productive, especially in this environment.  That puts everything onto your 1040.  With the incoming administration in DC hyping the fact that they intend to soak people in the upper income levels, adding more income to your 1040 will just make you a more attractive and inviting target for more of your income to be confiscated and spread around. Unless you agree with that definition of being “Patriotic,” the goal for preserving more of your hard earned income should be to take steps to keep your 1040 income down as low as possible and slide under the radar of the Socialists who are now in charge of our lives.

I am still not at a point where I can accept any new clients; so you will need to keep looking for someone who will help you reduce your taxes instead of trying to structure things to make it easier on themselves, as it sounds like your current accountant is doing.  You may want to start with the tax pro who helped the previous owner of the businesses because it sounds like s/he understands how to work with multiple entities in a tax efficient manner.

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

 

Q-2:

Dear Kerry,
Thank you very much for your detailed response and advice. We are in agreement on the correct strategy for limiting taxable income for my businesses and on my 1040. I have begun a search for a new tax pro who will have my best interests in mind.
I greatly appreciate your comments.
Would it be possible to add my name to you waiting list of potential customers should you ever be ready for additional clients?
Please let me know.
Thanks again for your response.

 

A-2:

I will keep you posted if my workload ever allows me to accept any new clients.  I do have several names already on the waiting list; so I will be very selective as to the criteria any new clients must meet.

One of the most important factors will be that they are already up and running with proper accounting on QuickBooks for each of their entities.

Good luck.

 Kerry Kerstetter

 

 

Posted in corp | Comments Off on Mutiple Corps

Setting Up Corp

Posted by taxguru on February 14, 2009

Q:

Subject:  C or S corporation, no employees/partners

I am not sure if you reply to emails asking for additional advice, but I’ll give it a shot.
 
I am starting a marketing company in Ca. with no employees. (new babies, need money)
 
I do have a full time job, and this will be on the side.
 
>From your article a C corporation makes more sense for me.
 
But, I am scared of ticked off tigers, cobras, AK-47s, and the IRS.
 
Will I be asking for trouble if my company makes no money, and I decide to end the corporation in a year or so?
 
Does my separate tax return get red-tagged if I start a corporation that does/does not make money?
 
Thank you in advance for your time.

 

A:

You really need to be working with an experienced professional tax advisor to set up the best strategy for your unique situation.

A corp that only has losses doesn’t really attract a lot of dangerous attention from IRS; so that really isn’t a concern here.  However, there are some other more important issues that you need to evaluate.

For example, I am wondering why you are so anxious to jump into the cost and hassle of setting up a corp right now.  Most small businesses start off as Schedule C sole proprietorships and then evolve into a corp entity as they become more profitable.

Sole proprietorships cost nothing to set up or dissolve; unlike corps in Calif, which have a $800 minimum annual tax.  Losses from Schedule C can also be used to offset other income on your 1040. While losses from S corps can be used to offset other 1040 income, C corp losses can’t do that.

Please consult with a tax pro before you take that expensive leap into a corp.

Good luck.

Kerry Kerstetter

 

Follow-Up:

Thank you so much for taking the time to answer my email Mr. Kerstetter, especially in these holiday times. I have taken your advice, and will be seeing a tax pro. ASAP to seek some advice in these matters.

 

 

 

Posted in corp | Comments Off on Setting Up Corp

Deducting Bad Debts

Posted by taxguru on February 14, 2009

Q:

Subject:  declaring bad loans

Hi
 
we have made some loans guaranteed by mortgages. However these are in different countries.
 
The amounts are quite large. Basically I have lost the money and the individuals are nowhere to be found. We are speaking in the hundred of thousands of dollars. the loans were securied by foreign real estate. The foreign country is Lebanon and in a semi state of war or civil unrest so it is hard to foreclose as well.
 
How can I take a deduction on my taxes. I have not declared the interest income.  I am thining of filing a 1040 X for last year and declaring the interest income. Have not filed 2007 taxes this year and am getting ready to do so. I want to take a the bad loan deduction in 2008
 
Do not want the deduction to trigger an audit.
 
can you help.

 

A:

You need to be working with an experienced professional tax advisor to make sure you do things properly here.

Interest income that has accrued on the notes but hasn’t been received does not need to be reported as income on your 1040.  However, if you did receive actual interest payments, those should be reported for the years in which they were received.  If that is the case, you should file amended Federal and State income tax returns to correct that situation.   You will have to pay the additional taxes plus interest, but IRS and most states will waive late penalties if you voluntarily disclose the under-reported income rather than wait for them to catch you.

Writing off investments as uncollectible and worthless can trigger an IRS audit if the tax return doesn’t include a lot of attached documentation as to why you have concluded that 2008 is the appropriate year it became completely worthless and how you calculated your unrecovered adjusted basis.  IRS loves to disallow bad debt deductions for either being claimed too early or too late.  A good tax pro can help you document the proper year to claim the loss.  A good tax pro can also ensure that you are claiming the proper amount.  A common mistake people make is to try and claim a bad debt loss for accrued but unpaid interest. That is not allowed.

Good luck.  I hope this helps.

Kerry Kerstetter

 

 

Posted in Deductions | Comments Off on Deducting Bad Debts

Closing Biz After Sec. 179

Posted by taxguru on February 14, 2009

Q:

Subject: section 179 question

If I have taken section 179 expense deduction in 2006 and 2007 and have had to close my business in 2008 will I have to claim these deductions from these years as income in 2008?

Another question if you could please give me advice.  I installed new carpet, laminate flooring and countertops/cabinets in my leased office in 2008 could these items be considered section 179 expenses or are they items that could be classfied as building repairs or would I have to depreciate them and over how many years?

Thanks,

 

A:

You need to be working with an experienced professional tax advisor to make sure you do things properly here.

Basically, if you claimed Section 179 for business equipment on previous tax returns, the adjusted cost basis of those assets is zero.  This means that anything you receive for them in a sale is going to be taxable gain; technically a recapture of the previously deducted Section 179.

If you just shut down the business and don’t sell off the assets, there will still be a smaller taxable recapture because their business usage has fallen below 50%.  Your personal professional tax advisor should have tax software that will calculate that recapture amount.

There are various ways in which your leasehold improvements can be expensed and/or depreciated.  Your personal professional tax advisor should be able to use the method most appropriate and beneficial for your unique situation.

I hope this helps.

Good luck.

Kerry Kerstetter

 

 

Posted in 179 | Comments Off on Closing Biz After Sec. 179

Prorated Home Sale Exclusion

Posted by taxguru on February 14, 2009

Q:

Subject: Home Sale Gain Exclusion

Situation:
5 years ago, was laid off in Minnesota and had to settle for a California job.
Commuted every 2 weeks for 1 year then moved family to a rental.
Wife and children lived in MN home every time children not in school (about 3 months per year), nevertheless total days is well shy of 730.

Kept a car registered in MN, voted in MN, kept MN drivers licenses, bank account in MN while trying unsuccessfully to transition to a job back in Minnesota.  Even had several in-person interviews in MN over the years.

Finally gave up & sold in Minnesota; just closed.  We expected to exclude 50K of gain.

Can we
A) Exclude the gain because our beloved MN home was our primary residence defined by that we never bought anything else and always considered & treated it as “our home”.
B) Exclude the gain because the wife was always staying there… it may be shy of 730 days but there is no way to audit that.
C) Exclude the gain because I was forced to sell due to a job situation and we used it as a primary residence for 1 year, 50% of the 2 year standard, and all we need to exclude is $25K apiece.
D) SOL

Thanks!

 

A:

You need to be working with an experienced professional tax advisor to make sure you do things properly here.

It looks like you should be able to qualify for the prorated tax free exclusion based on your change in employment.  Since your gain is only 10% of the total possible Section l21 exclusion of $500,000, there shouldn’t be a problem in excluding the full amount of your profit.
However, your personal professional tax advisor will be better able to evaluate the details of your situation and decide if that is the case.

Good luck.

Kerry Kerstetter

 

 

 

Posted in 121 | Comments Off on Prorated Home Sale Exclusion

Refundable Tax Credits

Posted by taxguru on February 14, 2009

Q:

hey i was looking at your tax website and have a quick question…
 
hopefully you can give me a non-committal answer without alot of research.
 
have you ever heard of a situation where someone with no income can qualify for a tx refund, even though theyve paid nothing in?
 
for example an unwed mother living with her parents: she hasn’t worked, yet wouldnt she qualify for some type of credits taking care of a newborn? and if so, those credits applied to her tax liability, but no actual liability as there was no income, does that soemhow turn into a credit & subsequent refund?
 
any suggestions would be appreciated, even if its just steering us where to research further. Again, not looking for legal tax advice, I’ve just never heard of someone getting a tax refund without paying any taxes in through the year.

 

A:

While you are correct that most tax credits are non-refundable, meaning they can zero out the taxes, but not create an actual refund to tax return filers, there are an increasing number of actual refundable credits that allow people to receive money even if they hadn’t paid anything in.  The largest is the Earned Income Credit (EIC), often generating refunds  of thousands of dollars in “free” money for the filers.

If our new President gets his way, there will be even more of those kind  of credits, which some people are calling welfare.

Most of these credits don’t apply to people who are being claimed s dependents on someone else’s return, so your friend probably wouldn’t qualify for a refund if her parents are showing her and/or her child as dependents.  However, it wouldn’t hurt to have a professional tax advisor look at her particular situation to see if filing a 1040 makes sense.

I hope this helps.

Kerry Kerstetter

 

 

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

 

Posted in Credits | Comments Off on Refundable Tax Credits