Q:

Subject: COBRA Premium Deductions

 

Hi,

I’m an owner/employee of a c-corp (the only owner/employee), and I’m currently paying COBRA premiums to a previous employer for health insurance continuation.  I’d like to write this off as a fringe benefit from the c-corp to the employee (me).  I’m not sure if I can do this, I have researched ths HSA, and have found that I’d be able to use the HSA’s fed-tax-free funds to reimburse myself for COBRA premiums, but I’d rather not open the HSA, plus it’s capped at $5450 for the family in 2006.

Is there another way that the c-corp can reimburse me for the COBRA premiums w/o me being taxed on the personal side?  Also, I realize I can write off the COBRA premiums on the personal side subject to above the 7.5% of AGI garbage, but that’s peanuts.  If not, what a kick in the shorts, I’m unable to secure my own health insurance, or else I know I could write those premiums off, so the IRS adds insult to injury?  Hmmm, unable to get your own health insurance, and using COBRA?  IRS says:  Sorry, can’t deduct that, if you were healthy though…you could deduct normal health insurance premiums!!!

On another topic, I am using an income shifting technique between personal tax year-end and the c-corp tax year end.  And this helps me out quite a bit for this year due to the first year of incorporation and stretching it beyond my 12/31 personal tax year-end, but in what ways can I use the corporations $$$$ to pay me for services that will not be included as income to me?

Thanks.

A:

As I constantly warn, these are not the kinds of things you should be doing on your own.  You need to work with an experienced professional tax advisor for such matters as shifting income between fiscal years and shifting it between the corp and your 1040 with the lowest overall tax hit.  There are far too many variables to take into account for me to even suggest what would be the most appropriate for your unique situation.

In regard to the medical expenses, the answer is quite easy. When you draw up your corporate resolution establishing the medical benefit plan, include the fact that the COBRA premiums will be included as one of the covered types of costs. 

It would be best to then have the actual premium payments made with corporate checks so that no money goes into your personal account.  If that’s not possible for some reason, and you have to pay the premiums out of personal funds, you can have the corp reimburse you for it.  It will then be critical to properly document that the money was spent for that purpose.  My personal preference is to post the reimbursement to the same expense account in your personal QuickBooks file as the underlying payment was posted to so that it nets out.  However, some accountants prefer to post these in a different manner, so you need to coordinate this with your own personal professional tax advisor. 

Good luck.  I hope this helps.

Kerry Kerstetter

Follow-Up:

Thank you for the advice on the COBRA payments, and thanks for such a quick response.  I am working with an accountant at this time, but he mainly deals with s-corporations.  I was looking for a bit more color on some of the scenarios you presented here regarding income-shifting: http://taxguru.org/corps/scorp.htm , but I do understand your disclaimer regarding unique situations, etc.

Thanks again, your web site, and your blog are very insightful…BUT, of course not a substitute for the real deal, my very own tax professional 😉

The information you present, provides me with ideas and talking points when it comes time to meet with the professionals, so thanks again for your efforts.

My Reply:

That is a bit scary, to be working with a tax pro who is a one trick pony.  In this day and age, effective tax, asset protection and wealth management planning require a good understanding of the interplay between several kinds of entities, such as trusts, FLPs, LLCs, S corps and C corps, in addition to the standard 1040 Schedules C, E & F.  Any tax pro worth his/her salt needs to know those kinds of things or else it is impossible to provide decent service to clients.

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

Good luck.

Kerry Kerstetter

 

Q:

Subject: Quickbooks question

Hi,

 

I found your email addresss on your webpage of Quickbooks tips, and have a question that maybe you can answer for me. 

I’ve just started a new job at a church, doing their daily bookkeeping.  They use Quickbooks, mainly only for checkbook and payroll.   There’s a report that they use for their monthly business meetings that they have set up in Excel, and I’m hoping to be able to set up or modify a Quickbooks report that will give them what they need instead.

  

Currently what happens is this: they print a payroll summary and a  P&L for the previous month, check the checkbook balance at previous month-end, and print the detail out of another account, then combine all of these (adding and subtracting accounts) into the Excel spreadsheet.  The main problem they seem to have with not just using the P&L from Quickbooks is that it separates out income and expenses, instead of just showing a current balance for each of those accounts. For example, contributions/re-imbursements come in during the month for mission trips, cds, church activities, etc., and then those have to be subtracted from the expense accounts for whatever particular fund was reimbursed to be shown on their report — the expense shown on the report reflects what was spent AFTER the re-imbursements to that account. 

I can’t find a report in Quickbooks that will show the funds in this way.  Any ideas?

 

Any help or suggestions would be greatly appreciated.

A:

Too many people take the unnecessary extra step of sending QB reports out to Excel to produce reports that can be prepared directly from within QB.

The odds of finding a preset report in QB that will fit your needs exactly are slim.  However, it shouldn’t take too much adjusting, filtering and fine-tuning of a basic transaction report to arrive at what you need.  Once you have it the way you need it, memorize the report and you can then fire it up with one click.

I don’t have to time to walk you through the fine-tuning steps you will need to design your report.  One thing you may want to take a look at is how reimbursements are posted into QB in order to give you the best info.  For example, you can produce different kinds of reports if the reimbursements are posted back into the original expense accounts versus having the reimbursements posted to their own separate income or contra-expense accounts.

I’m sure if you can get the church’s governing board members to specify exactly what they want to be able to see in a monthly report, you should be able to tweak the QB reports to get just what they need.

Good luck.

Kerry Kerstetter

 

From an attorney on the Left Coast:

Subject: Comment to July 11 post

 

Kerry,

 

I read your post from July 11.

 

As you probably also know, half of the population over the age of 85 has some form of dementia.

If the questioner takes mom’s money and buys a home in his or her name alone, without getting legal advice, there is a good chance that CA law will consider this elder abuse.

It is a crime and he or she may go to jail.

 

Not only does the questioner need competent tax counsel, but also legal advice to make sure that if this is really what mom wants, the child will not be challenged by the other children.

Otherwise, this is going to look very opertunistic and self-service on the part of the questioner, and may create many undesireable consequences.

 

I enjoy reading your blog, and think you do an excellent job of helping people understand the tax law.

Keep up the good work.

My Reply:

Those are very important points that anyone dealing with an issue such as that person was should address with the assistance of a good estate planning attorney.  As I constantly say in my speeches and seminars, Hollywood has yet to properly capture the real life insanity of heirs and wannabe heirs fighting over an estate, with everyone believing that they were short-changed out of their rightful share.

Your note also reinforces how important it is for people dealing with issues such as this to have a team of advisors, including individuals experienced with taxation and estate planning, to ensure that nothing crucial is overlooked when designing and setting up estate plans.

If you don’t mind, I would be glad to include your name and a link to your website when I post this to my blog.  However, I have noticed that many attorneys who write me prefer anonymity; so I can keep your name out if you prefer.

Thanks for writing and adding those important additional points.

Kerry Kerstetter

Follow-Up:

(Nothing yet.)

 

Hybrid Vehicle Tax Breaks Set to Dwindle This Fall – A lot of people aren’t aware that there is a limit on the number of vehicles for which the special credit is allowed.  First come, first served.  Gina Gwozdz has a good look at how the special hybrid credit works on her blog.

The Complexities of Converting IRAs – From Gail Buckner, including info from IRA expert Ed Slott. 

Avoiding the hot potato: Cash in like-kind exchanges – From Accounting Today

Q:

Subject: Questions on S & C Corps

I found your blog and web site trying to find via Google an answer to the following:

An S Corp business owner wants to establish a benefit plan for employees that have at least X years of service, and that benefit plan is available only to C Corps. 

 1.  Can the S Corp owner establish a C Corp and use it to provide the benefit assuming all employees of the S Corp that qualify with X years of service are included?

 2.  If Yes to #1, could the S corp simply pay the C Corp for the premium cost of the benefit so that the C Corp’s income and expenses net to $0, with no tax liability?

 3.  If No to #1, as there any other way to accomplish the desired result and still allow the bulk of the business and taxable income to be in the S Corp?

4.  Can a C Corp own an S Corp?

 5.  Can an S Corp own a C Corp?

 THANKS in advance if you can help me.

A:

There are ways in which you can use multiple corporations to achieve the desired benefit coverage.  Unfortunately,
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.

You will need to work directly with an experienced tax pro who can analyze your unique circumstances. I wish I could help; but I already have too many clients to take care of; 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 to whom we could refer you. If you haven’t already done so, you should check out my tips on how to select the right tax preparer for you. 

As a CPA yourself, it would be an excellent investment for you to acquire one of the excellent reference books on corporations from QuickFinders and/or TMI so that you can better familiarize yourself with the basic rules, such as who can own shares in each type of corp and what kinds of benefits each type of entity is eligible to offer its principals.  I have links to both companies’ sites on my blog.

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

Kerry Kerstetter

 

I have a hunch this may have been a student’s homework question, but I gave a brief answer anyways.

Q:

Subject: allowable corporate expenses

Hello,

I was wondering if you know where I could find information on “allowable corporate expenses.” I’ve looked everywhere and can’t seem to find anything.

 

Thank you,

A:

There is no such thing as an all inclusive list of allowable corporate expenses, if that’s what you are looking for.

The general definition of an allowable corporate expense would be anything that is spent in the pursuit of the company’s business goals, which normally would include earning a profit.

If you’re not sure about something in particular, you should consult with your professional tax advisor to see if s/he thinks it would be proper.

I hope this helps.

Good luck.

Kerry Kerstetter

 

I recently received this from a new tax blogger:

Subject: Clients

Good Afternoon Mr. Kerstetter,

 

    I have frequently visited your blog and noticed the wonderful support you gave to Gina in her endeavor to start her tax practice.  In fact,  those discussions led me to start my own blog http:\\colbycpa.blogspot.com.  I was hoping to get some of your wisdom for my particular case.  I am a senior accountant with a traditional firm in Virginia and have  always has a gift for IT related tasks whether they be hardware or software based. I am the network administrator in my office, have been certified in Quick Books and  I am currently working on the Microsoft Small Business Accounting certification.  I have performed a handful of network, server and workstation installations for existing clients in addition to some Quick Books and ComputerEase consulting.  So I have gotten some IT related engagements with existing clients under my belt. As far as the partners at my firm are concerned it is a no brainer for me to go and try to get these types of engagements – especially since I have earned the CITP designation.  In fact, they are pretty much putting that challenge on my shoulders.  I have ideas about the type of IT services I want to offer but I don’t know much about rain making to bring in new clients under the tech umbrella to hopefully back into the traditional services for which I have 7 years experience.  Politically speaking I was told that since I am tech savvy that I would be the best fit for this role, so I think its pretty open.  I was told this would be a great avenue to make partner.  I am feeling a pretty fair amount of self imposed pressure to perform and bring in the clients which leads me to the venue.  How do I build a client base.  I have always heard that cold calls and direct mailings don’ t produce.  I have thought about professional organizations but the partners here pretty much have all of them shored up from BNI to Rotary.  I expect when I find a way of reaching prospects to face some rejection and fall on my face until I learn the ropes –  I think I can handle that.  It is getting to the prospects that is my biggest hurdle. I set up a blog figuring if I could get a buzz that would help as you suggested to Gina.  Any assistance or advice you could provide me would be very much appreciated! 

 

Sincerely,

 

Jim

My reply:

Jim:

I’m glad to see that Gina’s experience has inspired you to start your own blog.  That was my goal in posting it.  As many news stories over the past few weeks have discussed, the tax and accounting blogging community has a very long ways to go to catch up with the legal profession in both number of blogs and percentage of professionals who are blogging.

In spite of all the seminars and books that claim otherwise, nobody has the magic formula for quickly creating a customer base.  I can only base my opinions on what I have seen actually work with clients, as well as how I like to select new providers of products and services.

For example, when I am shopping for a new product or service, I like to use the web, normally starting with Google searches.  That puts me in control over what I look at.  Cold call info, whether via snail mail, telephone or email spam, means nothing to me and is a waste of time and money by those sending it.

As I said to Gina, the info on your blog and other related websites will do more than anything else I can think of to let potential clients see what you know and what kind of projects you are experienced with.  This obviously means that you need to attract readers for your blog.

Your new blog is a good start.  Just as I told Gina, you should set up an RSS feed to enable people to subscribe to it.  That’s pretty much the only way I read blogs any more because I can cover hundreds of blogs with very little effort. 

The other suggestion is to be sure to include personalized stories of projects you have worked on and how you have helped clients solve problems.  The answering of questions will also enable you to show off your knowledge and experience for potential clients. 

Good luck.  Let me know if there is anything else I can do to help you as you continue your journey into the blogosphere.

Kerry Kerstetter

 

Anything that reduces their power over our lives is hated by the Dims, especially allowing people to keep a higher percentage of their own money, even if it does increase overall revenues.