Q:

Subject:  C Corp questions

 

Hi,

 

I found your website while researching the following:

 

LLC filing as C-corp question

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Could you please give me some feedback on the best way to handle the following?

1. 2005 1120 was filed showing consulting fees as an expense. The consulting fees were actually paid to the sole shareholder. There is no payroll set up for the corp. How should this be handled on the shareholders return? Any changes for the corp return?

2. Sole shareholder personally owns the truck which is used 100% for this C-Corp. Mileage has previously been claimed on this vehicle in a prior year (before corp) as unreimbursed business expense. How would it be handled now that it is totally used for corp business? Could the C-corp lease the vehicle from him?

3. Home-Office deduction for C-corp? Would it be best to lease the office space to the corp?

Any suggestions are greatly appreciated!

A:

There are far too many options to consider and possible scenarios that can be used to achieve your goals for me to even begin giving you specific advice via this medium.  There are pros and cons to each of the various options you mentioned, as well as dozens you didn’t.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. In fact, you were crazy to set up your corp without the advice of a qualified tax pro because s/he could have steered you in the best direction for some things that cannot be changed, such as the fiscal year.

I wish I could help; but I already have too many clients to take care of properly; so we are still trimming back on the difficult clients and are not accepting any new ones at this time. 

Unfortunately, we don’t have anyone specific to whom we could refer you. I did recently post some names and links for some like-minded tax pros around the country.

If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you at.

In regard to the consulting payments made by your corporation to you, you need to report them on Schedule C of your 1040, which, after any related expenses you may have paid personally (+ home office, etc), will be subject to the 15.3% self employment tax.  A good tax advisor can help you find other ways to draw money out of your corp that aren’t subject to SE tax.

Amending things to reclassify those payments as W-2 wages would be a very costly mistake, subjecting you and your corp to a lot of penalties with both IRS and your state tax agency; so it would be most prudent to continue with the way those payments have already been classified, as non-employee compensation (1099-MISC) consulting.

I wish I could be of more assistance; and I wish you the best of luck.  

Kerry Kerstetter

 

From the November issue of Practical Accountant:

What’s Different About Holistic Financial Planning?

Work with Clients To Prevent Fraud

10 mistakes that made flipping a flop – Learning from other persons’ mistakes is a much better way to learn what not to do than making them yourself/. This guy’s venture into get rich quick real estate investing is a textbook case in how to really screw things up. 

Find what your mutual fund fees really are – They’re as sneaky as our rulers in DC are at hiding the true costs.

Figuring IRA Withdrawals When Your Beneficiary Dies, and Essential IRA Records – From Gail Buckner

Corporations vs. LLCs – From Nolo

Q:

Subject: tax exclusion

 

Dear Sir;

 

I am retiring in the Spring and will be moving my legal residence from a condo in Alexandria to our summer home in Michigan.  If I sell the condo I can exercise the $250K cap gains exclusion to cover the $200K cap gains which I expect when I sell the condo.  However I would like to keep the condo, because our children and their families live in the DC area and use it for a winter home.  Can I claim the exclusion if  sell the house to an obliging entity and repurchase it after a week or so (for the same price)??  I realize that I may incur expenses such as transfer fees, etc.  The advantage to me is that after a few years I may sell the condo and move  into a seniors complex.

 

Thank you for your help,

 
A:

 I am not aware of any restriction on repurchasing a residence on which you had claimed the exclusion.  However, doing so as quickly as you intend may open you up for some problems with IRS.  An ironic aspect to the tax laws in this country is the fact that while many of them are clearly intended to motivate behavior, if IRS suspects that the only reason you do something is for the tax benefits, they have the power to nullify it. 

How long to wait before repurchasing the home and avoid IRS accusations of tax motivated behavior is a judgment call that you should discuss with your own personal professional tax advisor.  As background info, a similar situation is with what are called “wash sales” where stocks are sold at a loss and then repurchased.  The tax code has a specific time frame of 30 days before and after the loss sale in which a reacquisition nullifies the ability to deduct the loss. 

The home sale isn’t to trigger deductible losses but is obviously being done so you can start the two year clock for the sale of your new home since only one tax free exclusion can be claimed within a two year period.  Whether an aggressive IRS auditor would try to toss out the tax free exclusion on the first home sale is impossible to predict; but is going to be harder to defend, the less time there is between sale and repurchase.

If the two year clock angle isn’t your motivation for wanting to sell and repurchase the home, you should discuss with your tax advisor holding onto the Alexandria condo and selling it within three years of your moving out.

As additional info to consider, besides the transfer and other related closing costs on the sale and repurchase, you are likely to trigger a reassessment in the home’s property tax valuation, bumping those up.

I obviously don’t have enough info to be able to definitively say whether your plan makes sense or not; but your personal tax advisor should be able to better help you with that thought process.

Good luck.

Kerry Kerstetter

 
Follow-Up:

 Kerry,

Thank you very much for you prompt answer to my question, and since sale/repurchase is not clearly restricted I will pursue it further. As you well know, I must, by law, move my residency to Michigan when I live there most of the year, as will be the case after full retirement..  I have already been investigated by Michigan IRS about not paying MI Income tax and found to be in compliance, since I could show I had worked and lived in VA for more than half of each year.  This was triggered by two addresses and my wife’s residence which is MI, where she lives for 8 month of the year, votes, banks and pays income tax.

The “two year clock angle” is not my motivation.  We will probably keep our home on Lake Superior until we have one foot, maybe both, in the grave. So your suggestion about selling the Alexandria home in three years is an interesting angle, thanks.  However we will probably like to winter in Alexandria area for some time, since both our children (with families) live in the DC area and our son uses the condo often since it is 5 miles from his work whereas his home is 40 miles from work.

Thank you very much for your response,

 

Using Retirement Money Now On a Vacation Home Can Pay Off