Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

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Archive for August, 2009

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Reporting S Corp Activity

Posted by taxguru on August 31, 2009

Q:
Subject: 1040/ S corp question
I saw your website and think it is great… but I have one question.
I have a 1-person Massachusetts S corp (I own all shares and there are no other employees) and have filed a separate return for it in past years.
Question: Can I include this S corp on my personal return, or do I have to file it separately?
Thank you!
A:

If I understand your question correctly, you want to skip filing an 1120S for your corp and just report all of its activity directly on your 1040.

If that’s your inquiry, this is another perfect example of the pitfalls of trying to set up and operate a corp without the assistance of professional advisors.

A corp is required to file its own income tax return; so you may not skip the 1120S and just include its activity directly on your 1040. You must file an 1120S and then include the K-1 info on your 1040.

Some pre-planning with an experienced professional tax advisor could have saved you a lot of hassles.

If you had wanted to avoid having to file another income tax return, you could have set up a single member LLC instead of an S corp. That would enable you to report all of your business activity on a Schedule C with your 1040.

However, that could very well be more expensive for you because the net income from the Schedule C would have been subject to the 15.3 self employment tax. Net K-1 income from an S corp is not subject to the SE tax.

Depending on the size of your profits, the cost of having to prepare another income tax return could be a tiny fraction of the SE tax you are saving.

I don’t mean to insult you here, but it is clear that you are out of your depth in attempting to properly handle the tax matters for your S corp. Whether you have been preparing the K-1s properly, especially in regard to items that are required to be reported separately, is extremely doubtful. You need to start working with a professional tax advisor ASAP to clean up your past mistakes and ensure that you don’t make any more.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thanks for your feedback. I appreciate your thoughts and information.



Posted in corp | Comments Off on Reporting S Corp Activity

Inmates running the asylum

Posted by taxguru on August 28, 2009

It’s bad enough that the person in charge of the IRS, Treasury Secretary Timothy Geithner, is an acknowledged tax cheat who claims not to understand how to use TurboTax.

Now, Charlie Rangel, the Chairman of the House Ways & Means committee, which writes all of the tax laws, has been discovered to be hiding even more income and assets than were previously disclosed. Just a few of the current news stories, courtesy of Drudge:

The Absent-Minded Chairman. Charlie Rangel wins the personal lottery.

OOPS! CHARLIE FORGOT THIS $1M HOUSE. REALTY BITES TAX-THEM-NOT-ME RANGEL

Stop embarrassing us, Mr. Rangel. Resign

Even the most casual observer of DC hypocrisy knows that if Rangel were a member of the GOP and not the party of the JackAss, he would have been forced to resign long ago. Legal, ethical, and moral standards simply do not apply to the Dims.

Not that I’ve ever had much respect for the bozos in power in DC; but this kind of example should make it tougher for average people to continue to bend over and allow the DemonRats to fiscally rape us.

Posted in Crooks, Rangel | Comments Off on Inmates running the asylum

Loose lips…

Posted by taxguru on August 27, 2009

It’s long been an item of common sense that if you are hiding from the tax authorities or cheating on your taxes, the worst thing you could do would be to tell people about it. Eventually, that info will reach the tax authorities. This article explains how some State tax agencies are catching idiots who brag about themselves on such web services as FaceBook and MySpace.

Thanks to Stephen Spruielli at NRO for this.


Posted in Morons | Comments Off on Loose lips…

Deducting Rental Losses

Posted by taxguru on August 27, 2009

Q:

Subject: Rental property

Dear Kerry Kerstetter,

One of your clients is our friend and realtor. We are thinking about investing in rental property for tax purposes and later to use as a retirement source once the properties are paid for.
She told me that you have helped her so much regarding taxes. She suggested I should contact you to ask the following question.

If you are in the 35% tax bracket- do you get a better tax break by having the rental property under our names or by setting up a corporation to manage the rentals. We just want to be sure there will be a tax benefit by obtaining rental property and we have been given different advise and are not sure which is correct. She said you would know the answer to this question.

Thank you for your time.

A:

You are going to need to work with your own personal professional tax advisor on this matter because there is no easy cut and dried answer.

For example, it depends on what occupations you and your husband have. If either one of you qualifies as a Real Estate Professional (REP), you will be able to deduct your net rental losses against your other kinds of income, with no limit.

However, if neither of you qualifies as an REP, your net rental losses will be treated as nondeductible passive activity losses and will have to be deferred until future years when you have some passive activity profits, such as from the sales of rental properties.

I can tell this by the fact that you claim to be in the 35% Federal tax bracket, which means your Taxable Income is well over $300,000. The passive activity restriction phases out any rental loss deduction if your Adjusted Gross Income exceeds $150,000.

Using a C Corp sometimes makes sense because it is allowed to deduct rental losses up to the amount of other income. However, there is a downside to owning real estate in C corps because they don’t have the same special low long term capital gains tax rates that individuals can use.

A strategy that may be able to give you the best of both worlds is to own the property individually and lease it to your C corp, which can then operate it as a rental.

Your C corp would need to have net income from other operations in order to be able to claim the rental losses. If you don’t already have a C corp, even without the rental property issue, one could be used to shift some of your 1040 income so that you aren’t in such a high tax bracket. I have a lot of info on using corps on my website.

Your own personal professional tax advisor should be able to help you come up with the best strategy for your particular situation.

Good luck.

Kerry Kerstetter

Follow-Up:

Thank you so much for your response. If you should ever take new clients please keep us in mind. This information was very helpful and I will look at your website.

Sincerely,


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


Posted in corp, Rentals | Comments Off on Deducting Rental Losses

Posted by taxguru on August 25, 2009

Taxes too high? You ain’t seen nothing yet. – A quick look at many of the very expensive tax increases on the horizon for just about everyone. As always, this means much more work for those of us in the business of helping clients minimize their taxes.

Posted in TaxHikes | Comments Off on

Back to Basics?

Posted by taxguru on August 21, 2009

Posted in Accounting, comix | Comments Off on Back to Basics?

2009 California Tax Rates

Posted by taxguru on August 20, 2009

Unlike the Federal tax rates, which have their annual inflation adjustments announced before the tax year starts, the geniuses in my former home state wait until the year is half over to do those calculations.

Spidell has just released a handy two-page pdf with the new 2009 inflation adjusted rates, credits and deductions for personal income taxes.

Posted in StateTaxes | Comments Off on 2009 California Tax Rates

Recording Mileage

Posted by taxguru on August 20, 2009

While keeping track of financial matters is relatively easy with QuickBooks, logging a year’s worth of trips in order to document business usage of a vehicle is a much more laborious task.
I don’t have an iPhone and have no plans to get one; but as a life-long gadget freak, I have been intrigued by the growing list of applications being developed for it. In the latest Intuit newsletter, I just saw an ad for this app called Tap2Track Mileage that is supposed to use the iPhone’s GPS capability to keep a log of vehicle trips that can produce an Excel spreadsheet that will be very useful at tax time.
This reminded me of a much more complicated gadget that was available in the mid 1980s for logging vehicle miles. That contraption required installing magnets onto the vehicle’s drive shaft to record mileage on a device inside the vehicle, producing a paper listing of miles driven for business, medical and charitable purposes. If I remember correctly, that product sold for around $500; much more than the $3.99 this new app sells for.

I would be very interested in hearing from anyone who uses this new app as to how accurate and convenient it is in real life usage.

Posted in gadgets, Vehicles | Comments Off on Recording Mileage

Naming A Corp

Posted by taxguru on August 13, 2009

Q:

Subject: c corporation question

I am utilizing the information that you provide as a guideline to set up my C Corporation. Are you saying to use Corporation or Inc., etc. in the name? It sounded like you are saying to avoid these words.

Thanks very much.

A:

Regarding the selection of a name for a corp, you seem to be misunderstanding the point I was trying to make.

I have never had any problem with the use of a corp signifier in the official name, such as Corporation, Inc, or Ltd. In fact, most states require one of these to be used as part of their chartering.

What I have long seen as a bad choice was to have the owners’ personal names as part of the corp name. Too often, people just put Inc or Corp after their own names.

One of the many benefits of working with a corp entity is the ability to have more privacy and anonymity than you would have by using your own personal name. As we all know, in this day and age there are fewer and fewer aspects of our personal and business lives that we can keep private. This is why I have aways liked the idea of using a generic non-descriptive name for the official corp filing. I have seen people use a few initials, parts of their kids’ or grandkids’ names and even completely made-up words for their official corp names. It doesn’t matter that nobody can understand the meaning of the corp name. It’s nobody else’s business.

Even with the generic non-descriptive official corp name, you can still also lock in some DBAs to show to the public if that would be helpful for conducting your business operations. Behind the scenes tasks, such as buying and selling properties and filing tax returns, would be under the generic official corp name. This makes snooping on your confidential affairs more difficult with Google and other tools at everyone’s disposal nowadays.

I hope this helps you better understand my feelings on naming corporations.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,
I am sorry. I did misunderstand. Thanks so much for the clarification. I look forward to working with you in the future.




Posted in corp | Comments Off on Naming A Corp

Posted by taxguru on August 10, 2009

Posted in comix, taxes | Comments Off on

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