Congressman Wants Internet Sales Taxes Permanently Banned

Q-1:

Subject: Thank you from San Diego

 

My Dad has been in the hospital at age 87 for 3 months now, having already had some Dementia, and about a month ago, my mother had a nervous breakdown, partly from the guilt of dumping all the financial stuff onto me (120 miles away).  Dad never wanted to let me help and learn, Mom never DID learn, but now, luckily I have a flexible tennis teaching career and can start to learn.

I think one of the biggest shocks was discovering from our meeting with the accountants that they file 5 tax returns, and chose not to dissolve a corporation (C?) that was formed only to handle the sale of my father’s business 2 or 3 years ago. This is so far out of my league.

I very much appreciate your website on S and C Corporations, and I have also found some online articles on LLCs, since Mom and Dad have two of them for their two rental properties.

It could very well be that the accountants are not overdoing it with Mom and Dad, since you write about “smoothing” out income by using corporate entities.

Are there any books, etc. that I can get, or more websites for me to learn? I was considering an 11-week course (3 hours/wk) at Univ. Calif. San Diego’s Extension School, called “Taxation of Business Entities,” but that might be overkill for me.

Very appreciatively,

A-1:

You or whoever is in charge of the finances shouldn’t have to guess why your accountants do things a certain way.  Ask them and they should be able to explain their rationale.

In regard to education, it depends on what your goal is.  Do you want to be a professional internal accountant, independent bookkeeper or tax preparer; or do you just want to learn for learning sake?

Kerry Kerstetter

Q-2:

Thanks very much, Kerry, for your help.  I just want to learn for learning sake, so that I can better ascertain excessive versus excellent work by

accountants, lawyers, etc.  You are correct that I should just ask accountants their rationale.

        You are sure contributing well to the world with all that you do.

Thanks from all of us! 

A-2:

While most accountants and attorneys do generally have good reasons for originally setting things up, it is very easy to just let things go on as is while circumstances change.  Having them reevaluate everything every five years or so, or after major developments (deaths, marriages, divorces, etc)  would be a wise move to see if any modifications need to be made.

If you don’t need any actual degrees or formal credentials, sitting through a college course that is most likely several years behind the times would be a big waste of time.  You would be better off buying and reading the reference books that we tax pros use, such as The TaxBook and the QuickFinder ones, as I mentioned in this recent post.

There are also several companies that provide both self study and live one and two day seminars on tax and accounting topics, such as the company I taught for several years ago, Gear-Up. They would be much more up to date and a much better value for your time than a long drawn out college class.

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

You are a very kind, generous person, Kerry.  The information you have given me is invaluable (“priceless!”), and I cannot thank you enough.  I will

follow all of your advice, including going to the websites below.  A seminar would be good, too. 

 

Q-1:

Subject: Extension dates

I should probably try to send in all our own extensions for 2005 to keep from asking you folks to do more and more for us.  But I will have to ask you or Kerry to send me a list of due dates for both personal and corporate ones to be sure I get them in on time. I didn’t find them on taxguru.org when I searched there.

A-1:

Corporate income tax returns (both C & S) or extensions are due two and a half months after the end of the corp’s tax year.  For calendar years, which all S corps must use, this means the extension is due March 15.

The corp extension is Form 7004 and gives an automatic six months.  If you do want to do it yourself, you can download the form from IRS.

 It should be mailed to the same IRS service center as shown on the instruction cover letter that was with your previous year’s tax return.

Good luck.  I hope this helps.

Kerry

Q-2:

Kerry,

Yes, the info you sent on extension due dates helps a bunch.

Does the IRS see any difference between extensions filed by individual or corporate taxpayers themselves and extensions filed on behalf of the taxpayer by their tax preparer? 

It “seems” like extensions filed by a professional tax preparer might carry more weight with them somehow? But this might be a misperception or really a completely non-issue with them.

Thanks for your insight.

A-2:

I have never heard of or noticed any difference in IRS attitude between when people send in their own self-prepared extensions or if it’s done by a tax pro.  Extension forms are just entered into the IRS computer and aren’t really scrutinized very closely by IRS. 

While it may sound self serving, that is definitely not the case with actual tax returns.  Because they are so complicated, IRS does look more closely at self prepared returns, especially those done by hand, because there is a much higher probability of an error than with a tax pro’s computer prepared return. 

Kerry

Follow-Up:

Kerry,

Thanks for your views on self-filed extensions being okay. I definitely understand the need to have YOU do our actual returns– especially since we have set-up a corporation.

I feel sure I can follow your directions to file our extensions for 2005 and will send you a copy of each. 

 

 

From a client who recently moved and is having some difficulty locating a new bookkeeper:

Hi Kerry,  I contacted…who can do the Quick Books software, but likes to use “Creative Solutions Write Up for Windows”. Please let me know what you think…I thought we might change over  with the next year’s taxes.  Thanks,

My Reply:

If you want me to continue to work on your taxes, you will need to keep your data on QuickBooks.  Years ago, I did try to work with a variety of different accounting programs that clients and their bookkeepers were using, including some from PeachTree and Creative Solutions. It became a total mess tying to keep up with all of those different programs.  It was also a mess when they would send me printouts of their general ledger and then I had to manually write up adjusting journal entries to make their books match the tax returns.

It has been going much more smoothly since we migrated everyone over to QuickBooks, where I can check out and adjust their data details at the same time I am working on the tax returns.  I do have all of the QB programs, from 1999 through the most recent 2006, installed on my computer; so clients don’t have to upgrade every year if they don’t want to.

As I constantly have to remind people, using QuickBooks isn’t for my benefit. It is the most widely used accounting program in the country, and has become the standard for small businesses.  This means that it is much easier to share data with more people and to find bookkeepers who can work on it.  There are several million QB users around the country. I don’t know the size of Creative Solutions’ user base; but I’m sure it is a small fraction of QB’s.  This means that if you convert your stuff to that program, you will have a harder time finding people to work with it. 

It’s your call. If you find it more convenient to work with local tax and bookkeeping people, I understand and will have no hard feelings if you want to switch.  However, if you want me to continue to work on your tax returns, your data must be on QuickBooks.

I don’t mean to be difficult with this; but it is based on too many hassles trying to coordinate other accounting programs that I don’t want to have to repeat.

Let me know if you have any questions. 

Kerry

Follow-Up:

Hi Kerry,  No problem…Quick Books it is.  They said they could use Quick Books if you required it.  I will probably interview them shortly for bookkeeping only as I am happy with our relationship.  I will wait until we have filed the current return and then talk to you again before making  any changes with …  Many thanks for your help on this.  

 

Pitfalls People May Face When Buying a Franchise

More tax scammers busted by the Feds:

Vegas promoters of bogus trusts

Michigan preparers who inflated deductions

U.S. Agency Alleges Internet Ponzi Scheme – Why does this surprise anyone for a company promising a 44% return every 12 days?

H&R Block Sues Self Over Tax Snafu – Satire that some attorney is probably trying to turn into reality. Local franchisees would have a case against the Block HQ for the loss of revenue caused by this public screw-up.

Reach Retirement Goals – Tips from Gail Buckner

Feds Bust More Tax Scammers

Ohio preparer using fake deductions.

Houston preparer using fake deductions for Bosnian immigrants

Nashville preparers using fake businesses to deduct personal expenses.

Q:

Kerry:
I am trying to find a good tax resource to use for my tax/financial planning firm.  Are Kleinrock’s resources as good as CCH or Thomson?  In particular, I am looking at the Total Kleinrock Office for $600.  CCH is trying to get me to subscribe to one of their research packages, but they appear to be much more expensive.  I wonder is the additional cost justified to go with one of the other companies (CCH, Thomson)?

Thank you for any feedback you could provide.

A:

I actually subscribed to the TKO service for the past few years, but let it lapse a few months ago because I realized that I almost never used it and couldn’t see spending another $750 (including postage for monthly CDs). 

The QuickFinder books have been plenty for me, and this year, the new TaxBook has been a great resource tool.  When I need to look up an actual IRC section, I visit one of the free online sources that have it.

I hope this helps.

Kerry Kerstetter

 

Q-1:

Subject: C Corps

Dear Kerry

I read your post and article concerning the comparison between S and C corps. Once you have paid 15% tax on the profits in the C corp, how do you get the money out without paying tax a second time?

Assume my business profit is $90k a year before my salary. I pay myself $40k a year and leave $50k in the C Corp. We both pay 15% and the C corp now has $42.5k sitting in the bank. I am not understanding how I could use that money (e.g. to invest, buy a house, pay rent, buy a tv or go on a holiday) without having to pay tax again at my personal rate or as a dividend. Can you provide some more insight?

Secondly, you talk about managing income and timing the tax year. If the C corp is operating the business, how does paying it for rent or marketing end up as a deduction on my tax return? As I understand it, the only building I would be renting is my personal residence and as I don’t run the business myself, I have nothing to market / advertise. I can see how it could pay me a consulting fee or a royalty fee, but how do I shift money back to it?

Many thanks in advance for your time,

A-1:

There are several very easy ways to shift income back and forth between a C corp and its owners in ways that are deductible by the payer and income that is only taxed once by the recipient. The key is to be consistent on both sets of books in regard to how each payment is categorized.

You can rent other items to the corp besides your home office. Other business assets, such as vehicles, furniture, computers and other equipment, are frequently leased to a corp.

You need to be working with a qualified professional tax advisor who can help you set this up. You also need to have good up to date books for both your personal and corp finances in order to know how much money needs to be shifted.

One misconception you may have is that the corp account needs to be zeroed out at any time. That isn’t necessary. Corporations have the potential to live on forever; so you may want to leave some assets in it when you pass it your heirs.

This really requires working with a tax pro who can properly analyze your unique situation.

Good luck.

Kerry Kerstetter

Q-2:

Hi Kerry

Thanks for your reply and answers. Do your recommendations still apply for personal service corporations or are the majority of the benefits removed
due to the higher tax rate?

Many thanks,

A-2:

Many of the benefits with a PSC are the same as for a regular C corp. Obviously, the income smoothing to utilize the lower C corp tax rates isn’t possible.

What many people who are in the PSC professions do is set up a generic C corp to provide business management type services to their other business entities and the generic corp can then utilize the regular C corp tax brackets.

Any experienced tax pro can help you do this. It’s not very difficult to do.

Good luck.

Kerry Kerstetter