Q:

Subject: Tax deductioin question

 

I have a question about job hunting deductions. If one is a medical malpractice lawyer looking to go into becoming a tax lawyer, would these deductions be allowed? I know job hunting deductions are allowed is in the same field but I’m unsure as to the exact meaning of that phrase.

  

Thank you for your help!

A:

That is an interesting twist on the long standing Catch 22 regarding the deductibility of both job hunting and education costs.  I have always considered the inability to deduct costs associated with entering a new profession to be idiotic and counter productive for a society that needs its citizens to be able to adapt to new market opportunities, such as the shift from a blue collar manufacturing economy to one more dependent on white collar service jobs.  However, we do still have to deal with this ridiculous restriction on real life tax returns.

I don’t have time to do a lot of specific research on this exact point, but I have a pretty comfortable gut feeling of how it should turn out.

Normally, cases where IRS disallows these kinds of deductions hinge on the person crossing the hurdle to enter an entirely new profession, often signified by a license.  I have seen cases where IRS wouldn’t allow a paralegal to deduct costs to study for the bar exam because they consider being a licensed attorney to be completely different for tax purposes from a paralegal doing the exact same kinds of things.  Likewise, IRS has been tough on CPA candidates trying to deduct their costs to study for the CPA exam, even though those individuals were already working in a CPA office,

However once you have crossed the threshold into a licensed profession, I don’t recall ever noticing any IRS hostility towards allowing full deductions for the job hunting and educational costs associated with changing one’s specialized area of practice. Doctors, lawyers and CPAs can all deduct their costs with learning and working in new specialized areas that still require the use of their existing licenses.

While you should have your own personal professional tax advisor take a loser look at the exact kinds of things you are trying to deduct, in a general sense, I would feel comfortable deducting education and job hunting costs associated with any kind of legal practice that will require your being a licensed attorney, even if it is in a completely different area of law than you were previously involved with.

As I often do, I plan to post this on my blog and will share any comments form other tax practitioner who may have a different take on this question; as well as from anyone who may want to confirm my opinions on this matter.

I hope this is of some help to you.  Good luck in the fun are of tax law.

Kerry Kerstetter

 

Q-1:

Kerry,

Thank you for your blog and dedication to updating often.  I am a subscriber and always look forward to your posts.

I am a young CPA going on my own soon and have a few questions regarding the accounting firm logistics.  I read on your blog that you use Intuit Lacerte, QuickBooks, Tax Coach, The Tax Book, and Thompson’s QuickFinder.

• I am thinking about going with Drake Software for the tax prep etc.  Do you have any knowledge or insight between Lacerte and Drake?
• What products do you purchase from The Tax Book and QuickFinder?  Do you purchase the complete package of both each year?
• Do you offer your clients Microsoft Accounting or Peachtree support, or do you strictly work with QuickBooks?
• Are you satisfied with Tax Coach?

With starting out, I am looking at the bottom line costs with these products.  However, I understand the value of some products and companies should not be determined by the cost.  As the old sang “You get what you pay for.”

Thank you for your insight.  Please feel free to add anything additional wisdom.

Thanks,

A-1:

Interesting timing on the Drake Software question.  I had just visited their website a few days ago and requested a sample copy of their 2006 program so that I can test it out.  It hasn’t arrived yet, but I am looking forward to testing it out after the October 15 crunch.

I have been using Lacerte since 1985, so switching is a big step.  However, problems with their 2006 programs, as well as huge price increases for 2007, have motivated me to look at alternatives.  Reading various articles and message boards, Drake seems to have a good reputation.

Since relocating here to the Ozarks almost 15 years ago, and down-sizing my workload from over 700 clients to about 100, I have stayed with Lacerte.  However, after some annoying problems with their customer service people, I did experiment with two other tax programs a number of years back, ATX and Bailey.  Both were very big mistakes that I very much hope aren’t repeated with Drake.  While less expensive in purchase price, both programs were much less sophisticated than Lacerte about adding new forms and schedules automatically when the need arises.  I’ve become very dependent on this; so if Drake doesn’t do as well as Lacerte, I will be sticking with Lacerte for another year.

If Drake does look like a good program, two very important additional factors will be how well Drake is able to convert Lacerte data files.  Many of my clients have hundreds of deprecation items that would be a pain to have to manually reenter.  I am also hoping that Drake will toss in free copies of earlier year programs if I do buy their 2007, so that I can use them for the older returns I still have to do for clients.  Their website had no info on this, so I’m assuming I will need to discuss it with a sales rep.

For someone starting out, you don’t have the burden of having to convert hundred of clients form one system to another or having to unlearn how one system works and learn a completely different one, so you are in a better position to choose whatever program looks good to you without the entanglements I will have to endure if I choose to change.

Regarding the reference books, I have changed my purchase pattern over the years.  Since the mid 1980s, I used to always buy copies of all three QuickFinder books for myself and my staff members.  When the QF founders left to start their own company and produce TheTaxBook a few years ago, I bought both of their main books, as well as the three QB books. 

Last year, before the 2007 filing season, I bought both TaxBook editions (Deluxe and All States), as well as their CD-ROM.  However, I didn’t buy any of the physical QF books, opting instead for their online versions, subscribing to all of the titles they offer.  This has been very useful for me in my answering of client and blog questions by allowing me to copy and paste very easily.  Just last week, I noticed that they had added an online version of their tax Planning for Individuals book, so I subscribed to that. 

Until a few years ago, I was doing a lot of speeches and seminars, as well as meeting clients at their locations; so it was very handy to bring copies of the QB books with  me.  Now, I almost never leave my office, so I can rely more on computerized info.  However, I do like the ability and speed of being able to pull out a book and look something up.  I do refer to the TaxBooks several times a week, so I am planning to order them all again for the 2008 filing season, along with their CD-ROM, so that can copy & paste info from them.

I haven’t used the Tax Coach service as much as I would be if I were accepting new clients.  It is ideal and actually designed for showing prospective clients new tax savings techniques.  However, I have used it a dozen or so times to produce reports on various topics and I have been extremely impressed with the quality of its information and its presentation format.  I am big on time saving tools and am still holding firm in not hiring any employees after freeing myself from that burden in 1993; so a service like Tax Coach is a bargain in being able to whip out a very professional looking report in very little time.  Having an employee do the research and typing would cost me a lot more, besides the headaches of having to go back to babysitting employees.  Even with the recent price increase from $49 per month to $59, I still see it as a bargain.

Years ago, I tried to keep up with various accounting software, in addition to Quicken and QuickBooks.   Now, I simply do not even have enough time to keep up to date on all of the new versions of QuickBooks; so trying to learn anything else, such as the programs from Peachtree or Microsoft, would be impossible.  It is also a fact, just as PDF has become the standard format for electronic documents, and Microsoft Word for word processing, QuickBooks has become the most widely standard for small business accounting.  It has the largest  user base, making it easier to find assistance when hiring bookkeepers, than any other program; so I plan to continue to only support the use of QB.  If I had a large staff, I might consider having some of them specialize in the other accounting programs and work with clients using them; but as a one man show, I can only handle one brand.

I hope this helps you with your decisions as to which way to go.  I will most likely be posting some comments on the Drake test run to my blog.

Thanks for writing and good luck with your new tax practice.

Kerry Kerstetter

Follow-Up:

Kerry,

 

Wow! Thank you for the in-depth insight that you provided.  It has given me tools to think about and options to consider.

  

I am going to purchase the Drake pay-per-return option ($285) for the 2007 tax season, which gives me the full-version of all suites.  As a financial controller currently, I plan to “moonlight” this tax season and go from there.  I do not have any big clients yet, but a few small personal returns and my wife’s business return.  I did attend a Drake 4-hour seminar about the product and am impressed; however, I do not have the experience of a complex tax returns as you perform.  I think Drake is a good company with great values, so they should accommodate your requests to enable you to purchase & I think the conversion should be performed smoothly as they explained in the seminar.  I do look forward to your final analysis and opinion after you review the product & will see on your website when you post.  Drake also prides itself on the 11-second to answer with a live person when you call, so I would think any questions or negativity you could call to ensure.  In addition, if you are not certain after your review, I would find out the 2007 updates, as it seems quit a few enhancements from what was discussed at the seminar.  (I am rooting for you to like and convert to Drake because I have heard some negatism about Lacerte of late + the enormous price and price increases).

 

Since I am just starting, I will purchase the Tax Books and CDRom as you suggested.  In the future, I will click on your Tax Coach link on your website to sign up.

  

I look forward to your blog entries daily.  Keep up the great blogging!

UPDATE – I held off posting this until I had a chance to test drive the Drake program, which I have done.  This is what I sent the Drake saleswoman.

I did receive the conversion program that you sent me.  Unfortunately, I was not able to get it to work on any 2005 or 2006 Lacerte files.  I tried all kinds of variations on the settings and file locations and it wouldn’t work.

I did however set up a new 1065 client and input their 2006 info.  It seemed to go fine; but I just didn’t feel that your program was able to pick up as many things automatically as Lacerte does.  A number of years back, I bought the ATX programs and learned the hard way how many things Lacerte did automatically that were manual entries in ATX that I overlooked on more occasions than I was happy with.

I have therefor decided to stick with Lacerte for the 2007 tax year returns, even though I am not happy about their big jump in REP fees. 

I do need to say that the decision on which tax prep software to use is very different from the perspective of a longtime user of a competing brand than it would be for someone just starting out with professional software of this kind or who is forced to make a change due to the discontinuation of previously used programs, as has been the case for many tax pros.  While in my younger days, I used to make fun of old fogies who resisted change, I find myself in that exact same position.  The older I get, the less comfortable I feel in switching from programs I know very well to ones that require a new learning curve. 

I hope you understand my situation and I appreciate your assistance in allowing me to test drive the Drake software.

Kerry Kerstetter

Her Response:

Kerry,

    I do not understand why the conversion did not work.  Maybe next spring we can try it together.  As far as calculating info…the only advantage Lacerte has now over Drake is on oil and gas returns.  Lacerte does calculate depletion and Drake does not.  I hope you will evaluate our program again next year.

My Reply:

I would like to take another look at it before the next filing season.  I’m also hoping to hear from any other long time Lacerte users who switched to Drake and who are wiling to share their experiences.

Thanks for the help.  Good luck with the coming filing season.

Kerry Kerstetter

Q:

Subject: Question re OinC

 

Mr Guru – have a situation with IRS to run by you.  One of my tax clients is working on an Offer in Compromise (OinC) on back payroll taxes he owed thru his prior business.  The IRS just sent him a letter saying, based on his 2007 pay stubs, he should have approx $5,305 in FIT w/h.  They demanded that he make an immediate est tax payment of $3,979 and another one of $1,326 in January “in order to proceed with an evaluation of your OinC”.  In looking back at his 2006 1040, he had a tax liability of $1,784 with gross income of $48,000, but a rather large alimony AGI deduction of $25,000 and Sch A deductions of $6,077.  The client expects the same for 2007.

 

When I did his 2006 1040, I advised him to stop FIT w/h, for it looked like he had enough w/h at that point to cover his 2007 taxes.  Therefore, can IRS make this kind of demand that he make est tax payments?

 

Let me know,

A:

I’m sorry about the delay.  The main computer I use for email has been crashing a lot.

As you know, part of the OIC process is convincing the IRS that, in exchange for compromising on past tax debts, the TaxPayer promises to be a good boy in the future and never have similar delinquency problems.  This means staying current on all new taxes.

Also, as you well know, IRS has no burden of proving the accuracy of their claims.  We have to provide suitable documentation to rebut any claim, no matter how idiotic, an IRS employee makes.

That appears to be the case here.  The IRS employee is estimating your client’s taxes for the year based on nothing more than pay stubs; ignoring any of the other deductions and losses that will be reducing the actual taxable income well below the gross pay figure.

To refute that erroneous ASSumption, I would prepare a pro-forma 2007 1040, using your 2006 software if you haven’t yet received your 2007 programs, and submit that in addition to a letter from you explaining that your client’s current level of withholding is more than enough to cover his 2007 tax obligations.  That should be more than adequate documentation to get the IRS employee to back down from the request for your client to send in more money for 2007.

If appropriate for your OIC claim, I would also make the point in my cover letter that intentionally paying in too much in taxes for the current year will deplete his cash reserves that would otherwise be available to pay off the past year taxes being negotiated as part of this OIC.

Good luck.  I hope this helps.

Kerry

Follow-Up:

Mr Guru – my client sent in the responses & told IRS that he didn’t have to pay the amounts so dictated, referring them to his 2006 1040.  So, we’ll see what IRS does next.  Should they come back & demand he pay in as they said, we’ll do the proforma as you suggested.

 

Thanks for getting back on this. 

 

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Q:

Subject: S to C conversion

Dear Kerry,

 

on your web site you mention that a conversion from S to C Corp. status requires a formal request with the IRS.  Is there a form for that?  Or how else is it done?

 

Thank you for your advice.

 

Best regards

A:

There is no official IRS form to revoke the S corporation election of the same kind that is used to elect it in the first place.

The corporation and shareholders holding more than 50% need to submit a properly prepared Statement of Revocation.

This isn’t a do it yourself task and should only be handled by an experienced professional tax advisor, who should also be part of the decision process as to whether revoking the S election is the most appropriate strategy for your particular situation. 

As I’ve mentioned on several occasions, after revoking an S election, there is a five year minimum waiting period before that corp can file for a new S corp election.  I have also frequently mentioned that, depending on your reasons for wanting to terminate the corp’s S status, it is often a more efficient approach to just set up a brand new C corp that isn’t going to be locked into having to use a 12/31 fiscal year end, as a form S corp will be.

Good luck.

Kerry Kerstetter

Q:

Subject: Tax question

 

Mr Guru – I’ve heard from 2 other CPA’s plus my Paychex Representative that, after Jan 1, IRS is going to hold payroll preparers, be they CPAs or whoever, responsible for unpaid 941 taxes.  Have you heard anything along these lines?  How can IRS do that in the first place?  Let me know what you know.  

 

Thanks,

A:

I haven’t heard about that payroll tax change and can’t find any mention of it on the IRS website.  You should ask those other folks for some documentation of this change.

Kerry

Q:

Subject: Depreciation on web site enhancements and portal additions

We are an HMO with website for “E-Health”, designed to enable employees, clients, brokers, practitioners, etc to access info on claims, broker checks, practitioner info/update etc.  We have previously expensed costs associated with this site, to the tune of 800K.  

 

We are now expanding, adding portals, new software, accessibility, info expansion, in the amount of 1.2 million, using third-party vendors. Is there any part of this that can be capitalized?  (Can we change horses in midstream)?

 

Additionally, we have a contract vendor on-site.  We pay them a monthly fee for maintaining all our applications.  All this is expensed as consulting.  If we use folks from this contract pool to develop, train, implement this project, we can’t very well capitalize these costs.  But if we have a special “project contract” with this vendor, for a certain cost, etc., wouldn’t we be able to capitalize this labor?

 

Thanks for your help–our object is to capitalize as much as possible.  If there is a good place to go (besides you!) to get answers, please let me know.  I’ve downloaded every IRS publication I can find on depreciation already and haven’t found an answer.

A:

I don’t mean to cop out on this kind of issue; but there is no place to go to help decide how to properly handle the capitalization of start-up costs.  There are several ways in which it can be handled.  That kind of decision requires a lot of analysis of your past, current and future circumstances by an experienced professional tax and accounting advisor. This is in no way something you can do on your own.

Frankly, I find it shocking that you would invest two million dollars in a business start-up without the assistance of tax and accounting professionals from the very beginning.  That is extremely reckless and dangerous on so many fronts.  If that was all your own personal money being used, I guess you will be learning some expensive lessons.  However, if you are using money from outside investors, operating without competent tax and accounting professionals, you are exposing yourself to lawsuits by the investors for fiduciary negligence.

I realize this isn’t the kind of response you were expecting; but anything else would be irresponsible.

Good luck.

Kerry Kerstetter

As always, the latest Intuit Pro Connection newsletter has some interesting articles.

Home Foreclosures Trigger Tax Headaches

IRS Revises Circular 230 Rules

Entity Comparison Chart

Accountant Incorporation Guide (24 pages PDF)

Look for New Twists to Year-End Capital Gain Planning

There are also some QuickBooks related references, which I have posted on my QuickBooks Tips blog.

From a reader:

Subject: An End to the Beach House Loophole?

Kerry-

Didn’t know if you had seen this, as always anything helping, not punishing, the “rich” is a loophole.  Chuck Rangel’s grand scheme may have pushed this off your radar.

An End to the Beach House Loophole?

My Response:

Thanks for pointing this out.  I hadn’t seen it. 

However, while I have long believed that there should be zero tax on all capital gains, it is long overdue that our rulers in DC go after “evil rich” folks who have been following our tips to exploit the tax free residence sale rule by converting rentals and vacation home into primary residences.  I’m actually amazed that it’s taken them this long, over ten years, to attack this popular and very legal tax savings trick. 

If they do succeed in plugging up this loophole, we’ll have to figure other ways around the tax bite, such as more uses of Section 1031 exchanges.

The Tax Game never ends, as long as the rules are constantly being changed.

Thanks again for sharing that article.

Kerry

 

Q:

Subject: Buying a business

 

Hello,

I hope you can help me.  I am in the process of buying a small retail business for sale in Massachusetts.  The broker gave me the owners schedule c from 2006.  The owner has 2 locations under the same name. They are a sole prop.  The form shows a loss of $154,000.  They claim it is due to a one time write off of old inventory.  They said you are allowed to do this if you are selling or closing a business.  Is this true?  If so, where is it shown on the schedule c tax return? 

 

Thanks for any help!

A:

You are venturing into extremely dangerous territory if you are trying to evaluate any business purchase without the assistance of your own personal professional tax and accounting advisor.  There are so many ways in which you can be screwed over, it would take me hours to list them.  In fact, I have always advised people to insert into any agreement regarding the potential sale or purchase of a business that it is contingent on the approval of the person’s legal, tax and accounting advisors.  This escape clause gives you an easy way to back out of any deal that doesn’t feel right to you or appear to be completely kosher to any of your advisors.

In the case you mentioned, they seller is not being exactly truthful.  It is standard practice to adjust inventory values down on the books and tax returns to the lower of their actual cost or their current market value at the end of any tax year; not just when the business is going to be sold.  Any such adjustment will be reflected in the Cost of Goods Sold section of the Schedule C.  These adjustments should have been made at the end of each tax year and not in one big giant write-down as it appears to be from your description.

In regard to what you should be looking at in order to properly evaluate a business’s history, the Schedule C is just the start.  As your personal professional advisor will explain, you need to also see other more reliable records as well, such as Sales Tax and Payroll reports, as well as bank statements and QuickBooks or other accounting detailed records.  It should be approached in a similar manner as an IRS auditor would use to examine the business’s finances.  Any business seller who refuses to allow you to see those records and will only provide you with a possibly phony Schedule C is not to be trusted and you should never do any kind of business with.

Again, a good professional tax and accounting advisor should be hired to review the records of any potential business purchase. Even if s/he advises against making the purchase, that is money very well spent.  It is much cheaper to pay an accountant $500 or $1,000 now to warn you away from a dangerous purchase, than to lose the $100,000 or more that a hasty uninformed purchase would inevitably result in.

Good luck.  I hope this helps.

Kerry Kerstetter

Some interesting articles from the latest Intuit newsletter:

New Tax Preparer Penalty Standards on Hold

Year-End Strategies Can Boost Clients’ IRA Benefits

IRS Issues New Rulings on Home Sale Exclusion

What’s New in QuickBooks 2008