With all of the recent discussion of the increased number of people being hit with the insane AMT, there has been hope that our imperial rulers in DC will finally do something to alleviate that mess. As Herman Cain points out in this article, that’s not likely to happen because, no matter how unfair and insane the tax is, our rulers will not let go willingly of any source of money for them to spend.

This is exactly like the case of another hot topic on which I have been ranting for decades, the Marriage Penalty built into the tax code. While it isn’t as bad now as it used to be (especially before the new home sale rules), it is still an expensive part of the tax system for dual income couples. While our rulers have given lip service to caring about this injustice, they have refused to actually do anything about it for the simple reason that “they can’t afford it.”

Money for our rulers to spend is just more important than morality or fairness, which is why we shouldn’t get out our hopes too high for an actual repeal of the AMT or the Estate (aka Inheritance or Death) tax, another immoral tax that is justified mainly because of the money it provides to DC, as well as its supporters’ Marxist love of wealth redistribution.

Q:

Subject: Re: Tax Accountant for C-corporation

 

Kerry,

 

Thank you very much for your advice. I will contact one of the accountants on the list that you mentioned.

 

I have been asking many people in my same situation, which type of corporation they have opened, and ALL of them say S-Corp. I opened a C-Corp because I didn’t know any better when I did it, but am planning on changng to S-Corp.

 

In that article, you mention how a C-Corp is better, but do you think an S-Corp is better in my situation. I will be doing technical consulting.. and will be the only employee in my corporation. The people I mentioned earlier, who opened an S-Corp, are all in my situation and say that with an S-Corp you will pay Way less tax. Also, fica, state, and other taxes will be much less as well (One mentioned that with S-Corp fica tax will be 7.5% while 14.5% with C-Corp). Just FYI, my annual income will be approx. $250K.

 

I don’t mean to take up too much of your time, but just wanted to ask your opinion because of your expert knowledge in the subject matter.

 

Please let me know at your earliest convenience.

 

Thanks!

A:

It is impossible for me, or anyone else, to give you a proper answer as to what the best entity would be for your particular unique circumstances without asking you dozens of very personal and probing questions. Anyone who pops a one size fits all answer off without an interrogation is dangerous and should be avoided at all costs.

Comparing your situation to anyone else’s is crazy and can only lead to big problems.  There is nobody else in the universe who has the exact same situation as you do; so what may be appropriate for someone else is irrelevant. 

It is also very likely that the other people with whom you discuss this are actually doing the wrong things for their unique circumstances because they tried to set things up on their own without proper professional assistance.  You would then have a classic case of the blind leading the blind.

Whoever told you that FICA taxes are less with S than C corps is obviously clueless as to how things work.  Payroll taxes are exactly the same for wages paid by either kind of corp.

Work directly with a tax pro.

Good luck. 

Kerry Kerstetter

Q:

Kerry,
 
I have perhaps stupid question – should I keep hardcopies / printouts of any invoices I generate from Quick Books and electronic invoices I receive for the stuff I buy in the corp? I don’t do that at this point – I just make sure I have backup copies of my computer data. Is this enough?

Thanks

A:

One trend among tax pro offices is to operate as “paperless” by scanning in documents and keeping digital versions of them that can be printed out for or sent to IRS or anyone else who may request to see them. 

If you feel that you could produce those kinds of records from your digital info, there’s no need to keep the hard copies.

From a practical perspective, the invoices you generate for your customers are not something that an IRS auditor would ask for.  They only care about money received via accounting for every penny deposited into bank accounts.  I can’t recall any of them ever asking to see invoices that were sent to a client’s customers in order to generate income. 

It’s quite different for expenses.  Auditors do demand to see invoices for items purchased and deducted as expenses or set up as depreciable assets.

Kerry

Q:

Subject: HELOC Tax Deductible?

 

Would the interest on the HELOC be tax deductible if I pull equity (about $47K) from my primary home and use that money to pay down my rental property or investment property?

 

Thank you,

A:

There are a number of possible ways in which the interest on that loan could be deductible on your tax returns. 

For example, if you haven’t already exceeded the $100,000 limit on equity debt, the new interest could be claimed on Schedule A as personal residence mortgage interest.  It would not be deductible for AMT purposes.

Under the interest tracing concept, interest on any loan proceeds put into your rental properties could be deducted on the rental Schedule E.  This could yield a better tax savings than using Schedule A because it could reduce your AGI, which triggers a lot of other tax savings items.

Under the same interest tracing concept, loan proceeds put into investment property would enable the interest on that portion of the loan to be claimed on Schedule A as Investment Interest, subject to its annual deductible limits.

Your personal professional tax advisor should be able to help you deduct the interest in the most efficient manner.

Good luck.

Kerry Kerstetter