Tax Vampire

If Bush and the GOP can’t make any substantial permanent tax cuts in the near future, such as eliminating the ghoulish death tax for more than just one year, it won’t be pretty for taxpayers when the third Clinton term starts. It will, as always, be more work for those of us in the business of helping people legally avoid paying too many taxes.

Q:

Subject: starting corporation

Dear Kerry,

 

I love your site, I wish you wrote books too. So to my question. I have a roofing / construction business and from your site a C corporation looks best for me. Do you know of any books, other information sites anything where I can learn more about setting up my business to reduce taxes.  I have not been satisfied at all with my accountant or lawyer. I’ve talked to other accounts and lawyers but I can’t find a smart aggressive person to help, so I’m working to learn for myself all I can. If I was a little younger I’d consider this line of work, because there is definitely a need and demand out there. Any way if you know how I can learn more I’d appreciate it and if not thanks anyway for your site and opening my eyes to what’s out there.

 

Sincerely,

A:

I’m glad you found the information I have on my websites useful.  However, it is in no way intended to replace the services of a good tax advisor who understands how to utilize corporations and other techniques to minimize tax and liability problems.  While there are a lot of good books and articles available from Nolo Press on many of the mechanics of operating a small business in the most tax efficient manner, I really don’t know of any books anywhere that can take the place of an up to date person. 

The tax rules are simply too fluid for any book to have a very long shelf life.  In fact, this is the very reason that, in spite of my writing my newsletters over the past 25+ years, I have never felt comfortable with the concept of publishing a book on tax savings tips.  I have always worried about the information in my newsletters becoming obsolete soon after it is written.  With the length of time it takes to produce an actual book, I’ve felt that much of its content would be out-dated by the time it was available to readers.

It is hard enough for professional tax advisors to stay current on the latest laws and regulations.  Unless you intend to give up your construction business and become a full time tax pro, there is no way that you could possibly be successful at both. 

I understand your frustration at being unable to find a tax pro you feel is compatible with your tax savings goals.  I constantly rail against tax pros who seem to be more concerned with maximizing the government’s take than in helping their clients save money.  However, there are plenty of other tax pros out there who share my philosophy that it is our duty to do everything that is legally possible to help clients minimize their taxes.  I am positive that you will spend less time continuing your efforts to locate such an individual than you would trying to become a tax expert yourself.  If you haven’t already done so, please check out my tips for selecting a tax pro.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks for the reply, I’m not wanting to do my own taxes I was just wanting to get as much information as

possible so I’ll know enough to pick a good accountant.

I’m not thinking of switching professions either, I was just noting the possibilities a good tax accountant like yourself would have and how many people he could help. I majored in accounting in college many years ago but I didn’t realize how important it was then and not until after I had my own business. I think what I will do when I’m looking for a new accountant is have him go to your site and see if he’s on the same page as you.

Thanks again.

Reply:

Using the info on my site as a sort of barometer to measure the attitudes of other tax pros is a very good idea.  You would be amazed by how many people, including many tax pros, consider me to be evil and unpatriotic for teaching people how to legally pay in less taxes.  You would obviously want to stay as far away as possible from those folks and hold out for someone who understands that there is no sin in using the laws to help their clients reduce their tax burden.

Good luck.

Kerry Kerstetter

 

Q:

Subject: conversion-s corp to c corp

 

can you provide the statement required to be filed with the irs to do the conversion, or the publication where more info can be found?

Thanks

A #1:

You can find the requirements for terminating the S election on pages 2-3 of the 1120S instructions, which you can download from the IRS at: www.irs.gov/pub/irs-pdf/i1120s.pdf

Good luck.

Kerry Kerstetter

A #2:

I was browsing through my Tax Tools programs and saw that the Corresponder program has the following template for revoking the S election.  It’s short enough that I copied and pasted it here.

I hope this helps.

Kerry Kerstetter

Page 1:

Statement to Revoke Sub chapter S Election (IRC Section 1362(d))

To:  Internal Revenue Service
        

Re:  [Client: Taxpayer & Spouse name(s)/Company Name]
[Client: Street address, Apt/Ste/PMB #, plus line 2 (if any)]
        [Client: City, State  Zip]
        ID: [Client: Taxpayer’s SSN/Company FEIN]

The above mentioned company hereby revokes its election under IRC Section 1362(a) in accordance with IRC Code Section 1362(d).  As of  , there are shares of issued and outstanding shares of stock in [Client: Taxpayer & Spouse name(s)/Company Name].  Attached are signed consents by all shareholders holding more than one-half of the issued and outstanding stock in [Client: Taxpayer & Spouse name(s)/Company Name].

[Client: Taxpayer & Spouse name(s)/Company Name]

By: ____________________________
             (Title)

Date: _____________________

Page 2:

Attachment of Shareholders to Statement of Consent to Subchapter S Revocation

The undersigned shareholders in accordance with IRC Section 1362(d) hereby consent to the revocation by the [Client: Taxpayer & Spouse name(s)/Company Name], ID# [Client: Taxpayer’s SSN/Company FEIN] of its election under IRC Section 1362(a).  Such revocation is effective .

By:  _____________________________________    ___________________
            Date
        
        
        ID:

By:  _____________________________________    ___________________
            Date
        
        
        ID:

By:  _____________________________________    ___________________
            Date
        
        
        ID:

At the time of this revocation, the issued and outstanding shares of the  [Client: Taxpayer & Spouse name(s)/Company Name] are held as follows:

            
            
            

 

 

Q:

Subject: Primary Residence Sales: Partial Exclusion

Can I move without paying capital gains taxes?

It’s been 12 long months of putting up with my house and I’m sick and tired of living in my current home. Moving would relieve my stress and improve my health, but I couldn’t afford to move if I had to pay capital gains taxes.

You state in your website that a pro-rated exclusion is available “if the move was made due to health, work, or other unforeseen circumstances. Health reasons can cover a multitude of situations, including just being sick of living there.”

However, the IRS issued a precautionary note: A sale “that is merely beneficial to the general health or well-being of an individual is not a sale … by reason of health.” Further, the IRS regulations stipulate that a preference for a different residence or an improvement in financial condition would not qualify.

What can I do?  Thank you for helping.

A:

You are correct that the health reason needs to be more specific than just feeling better to qualify for the pro-rated tax free exclusion.

However, if you think hard and creatively enough, it shouldn’t be very difficult to come up with an actual health reason.  Factors such as allergies (to things on your property or from the neighbors) and access  (inability to handle stairs) occur very often. 

Safety issues, such as new dangers in the neighborhood with speeding cars or homicidal neighbors, would be examples of justifiable health matters. 

You just need to be able to prove, in the unlikely case that IRS even asks about it, that the situation either changed after you moved in, or you were unaware of it before starting to reside there.  As with all tax matters, the burden of proving the case lies with you and not with IRS. 

Good luck.

Kerry Kerstetter

 

Q:

Hello,

        I was looking up information on taxes of real estate and came across your website.
I have yet to find an answer to my question and I was hoping that you may be able to assist me.

I recently bought my place of residence and for $290K
I have decided to sell it for $325K and purchase another place for $100K

I have owned my current place for 6 months and it is my primary residence and I am selling it to buy another primary residence.

Am I subject to pay any tax since I am moving from a primary residence to a primary residence and my gain us under $250K? (I am single so I am only allowed the $250K and not the $500K).

If I am subject to the tax since I have not lived their for at least two years can I prorate the time I have been there (the 6 months, meaning 25%)

therefore allowing me $62.5K of tax relief (which would still allow me to not pay the taxes)?
Or am I subject to all the taxes?

Any information you can provide would be greatly appreciated.

Regards,

A:

You neglected to include a very crucial bit of information; why you are moving.

If it is due to a health, employment or other major unexpected development, you may be able to qualify for the pro-rated exclusion.

You can see more details at www.taxguru.org/re/primary.htm

Follow-up Q:

Hello Kerry,

        I am moving for personal reasons, nothing to do with the information listed below.  I feel that this new property is a better investment for the future.

Given this information does that allow for any tax relief?

Regards,

A:

Then you will have a short term capital gain that will be subject to ordinary income tax rates.

What you need to do is work with a tax pro to make sure you are reporting the proper amount as profit, which will entail a good accounting for your total cost basis of the home.  Make sure to include the cost of all improvements you have done to it, as well as any other items, such as furniture and appliances, that you will be leaving behind.  You also want to keep good tabs on the selling costs, including any that you spend on your own, such as trying to sell it yourself.

Good luck.

Kerry Kerstetter

Reply:

Hello,

        Thank you for your assistance, though not the answer I was hoping for I appreciate all your help.

Regards,

 

I’m still waiting for that contract from Fox News.

As I’ve mentioned on several occasions, one of the main reasons I don’t like the stock market for investing is that it puts you on an emotional roller coaster with its constant gyrations.

From Worth1000.com

Q:

Subject: Your article on S corporations

Hello:

I wanted to thank you for your article on S versus C corporations.

I am currently taking an on-line class on Federal Taxation and Management. One of our issues is S versus C corps.

Your article helped me in many ways.

Thank you again,

A:

I’m glad that it was useful for you.

Good luck in your class.

Kerry Kerstetter

 

Q:

Subject: QuickBooks Pro 2005 vs. 2004

Kerry, Sounds like you’re very knowledgeable about QuickBooks and Quicken.  I’m in the process or purchasing a system for my new small business.  I am looking at Quicken 2005 Premier Home & Business vs. QuickBooks Premier Editions 2005.  In reading an article you wrote (December 28, 2003 – QuickBooks vs. Quicken) it sounds like QuickBooks has become a better product for small businesses.  But, I’ve seen some very low rating and horror stories about QuickBooks Pro 2005 version.  In your opinion would it be better to purchase the QuickBooks Pro 2004 instead?  Thanks,

A:

Normally, I would be quick to advise always buying the most current version of QuickBooks in order to take advantage of the newest features, as well as to give you the most time before the program is abandoned by Intuit, which happens every three years.

That isn’t the case with the 2005 program.  I have heard and seen a lot of non-specific buzz around the internet about QB 2005 being buggy and problematic.  I have been having problems with it, as well.

Because our clients use a wide variety of versions of QuickBooks, I have long had to keep several versions installed on my main computer in order to keep their data files intact and compatible with their programs.  I had never had any problems working with any of the versions of QB until the 2005 program was released and I started working with it back in October 2004. 

I have been having the following problems with both the regular QB 2005 and Enterprise Solutions versions.  What happens is that out of the blue, I can’t even open the program.  After spending several hours on the phone with QB tech support the first time this happened, the only solution we could come up with has been to uninstall the programs and reinstall them.  This has allowed me to run the 2005 programs for a few weeks until they conk out again.  Tech support has been useless in regard to any better solution.  To say that this is a pain in the butt is a huge understatement. 

I chalked the problem up to my running so many different versions of QB on my main computer.  The other two computers on which we have the 2005 Enterprise Solutions QB program installed haven’t had this problem, which has been handy by allowing me access to our personal and corp data files.   
 
I have been running the QB 2004 programs since they were released in October 2003, and have yet to have a single problem with them.  I use the 2004 program at least a few times each week, as I work with client files. 

Unfortunately, I can’t roll our data backwards to the 2004 program; so I am stuck using the 2005 until October of this year, when the hopefully more reliable 2006 programs are released. 

For your situation, I would advise obtaining a copy of the 2004 program.  It should be much less expensive than the 2005, and possibly free if you can get a copy from someone who has moved on to the 2005.  Down the road, you will always be able to roll your data over into the 2006 or 2007 program, after you have been assured that it is safe to do so.

I hope this helps.  You were wise to check on this before just buying the newest program.

Good luck.

Kerry Kerstetter

Follow-Up:

Thanks Kerry,

You comments are greatly appreciated and I am going forward with QuickBooks 2004.  I would be interested in reading any comments you may have on the web when the 2006 version comes out.  Until then thank you

very much for your advice.

Reply:

I’m glad to be of assistance. 

You should check in every so often with the QuickBooks section of my main website to keep up on new info and resources for QB users. 

As soon as we get DSL hooked up here, I will also be posting some short instructional videos.

Good luck with QB 2004.

Kerry Kerstetter