With Friends Like These…

Although the people at the Post Office claim to be independent from the Federal government, they really aren’t. They are a quasi-governmental unit with monopoly powers that are blatantly illegal in the private sector. With their constant whining about losing money and raising their rates every six months, you would think that the various Federal agencies would help support each other. That is why I have always felt it strange that the IRS chooses to use other delivery services for its shipments. Back in the days before CD-ROMs and the Web, I used to order blank forms in bulk from IRS. They would always be shipped via UPS.

Last week, I ordered some free small business CD-ROMs from the IRS website and they arrived this morning via FedEx. My guess is that, just as before, the IRS doesn’t trust the USPS. Next time the Post Office bigwigs demand a rate increase, why can’t our rulers see that more Federal agencies use their service? It’s not like their standards are that high (close enough for government work, etc).

KMK

Can’t Afford It

Isn’t it interesting how our rulers in DC can never afford to let any of their subjects keep more of their own money (aka reduce taxes); but they sure can always afford to add new programs and spending plans to the Federal budget?

KMK

Plenty Of Crooks Left

While the country will most likely be better off with that slimy crooked Senator from the Sopranos’ home state bowing out, there are still hundreds of outright thieving skunks still on the ballots this November. That’s why it’s important to constantly remind everyone of how their accounting tricks in DC make anything even the most corrupt corporate CEO’s have done pale in comparison. While the most corporate accountants can fudge is in the millions or possibly billions, our rulers in DC have routinely played fast and loose with trillions of our dollars. When will any of them be paraded in front of cameras in handcuffs for their accounting frauds? Don’t hold your breath waiting for that to happen.

KMK

QuickFinders

For about the twentieth year in a row, I just ordered my 2003 editions of the QuickFinder books. They should be shipped out in mid-December. As I have discussed before, these are the absolute handiest reference books for anyone in the tax business. I refer to them several times each day. I’ve even decided to give the CD-ROM a try this year.

KMK

Loan Points

As I have said on many occasions, tax returns are more a work of creative art than cold calculating science. This is why a dozen different tax preparers can take the exact same data and come up with a dozen different looking tax returns, and all of them can be legally correct. There can be huge differences in the bottom line taxes. Which tax return is the “better” one depends on who you ask. The reason I have never taken part in those contests is because they almost always have someone from the IRS judging the results. Since my objective has always been to come up with the best tax returns for my clients, there is no way IRS would award me any prizes for coming up with the lowest possible tax numbers, when someone else can take the same facts and have a much higher tax.

One of the many areas in which there are variations in how to handle them on a tax return is loan origination costs, usually in the form of points, buy-downs or discounts. With the recently dropping mortgage interest rates, this is once again a timely topic. It was even the subject of Tom Herman’s tax column in the Wall Street Journal this week. Since he didn’t include the more beneficial way to deduct loan points, I felt the need to explain it once again.

Loan origination costs incurred for the purchase of a primary residence are fully deductible in the year the home is purchased. The following discussion deals with other kinds of mortgages.

It has long been a requirement to amortize loan points for residence refi’s and for the purchase of business & rental properties over the life of the loan. Most people assume this to mean the nominal life of the loan, such as the standard 15 or 30 year term of most mortgages.

Since almost nobody keeps a loan for its full term, using 15 or 30 years is not a realistic way to account for this. For at least the past 20 years, I have been amortizing those loan origination costs over the expected life of the loan. I usually ask the clients what their plans are for possible future sales or refi’s. If they don’t have any specific plans, I use the statistical average of five years, because most people will either sell or refi within five years.

What this allows us to do is to deduct one-fifth of the loan costs each year for five years, which works out to be a deduction that is six times as large as someone who amortizes over a 30 year life. For example, if you had paid $3,000 in loan points, the expected life method would give you a deduction of $600 per year for five years, while the nominal life method would allow only $100 per year to be deducted. Since the time value of money generally makes a deduction more beneficial sooner rather than later, this is in the best interest of the clients. If you were to use a 30 year expected life of the loan, you would get tiny deductions in the early years and then a big lump sum in the year the loan is paid off, usually five years out.

Since five years is an estimated life, we obviously have to eventually adjust to reality. If after five years, the clients still have the same loan, we just don’t claim anything in years six and on. What happens most often is that there is a sale or refi before the full five years, and we deduct the remaining un-amortized balance in that year.

I have had this method of amortizing questioned a few times by IRS during audits. Every single time, they agreed with my logic and allowed the expected life to be used. Never once has such a deduction been denied by IRS, and I have prepared thousands of 1040s using that method of amortization.

If you have already started an amortization schedule using 15 or 30 years, you are not stuck with it. While it is not usually enough of a difference to justify filing amended tax returns, you can do that. What I normally do when taking on new clients whose former preparers used the nominal life is to change the amortization period from that point on, as of the first tax return I am working on. Again, IRS has never once had any problems with that.

KMK