Posted by taxguru on November 29, 2007
Flat tax for middle class – I wouldn’t hold my breath waiting for this type of change, especially if the Dims retake the White House. They will never give up their beloved Marxist “progressive” tax rates that screw over the evil rich. Remember that Middle Class and Evil Rich are subjectively defined by those in power.
Posted in FlatTax | Comments Off on
Posted by taxguru on November 28, 2007
Q:
Subject: Exchange QuestionMy wife and I live in the front house. When does the rental back house cease becoming a 1031? Does not receiving rent make it no longer a 1031(for how long)? Is there a statute of limitations for it to qualify as exempt? I don’t want to pay a capital gain tax on it when I sell this 2on1 Calif. property.Tx,
A:
This is the kind of thing you really need to be handling with a professional tax advisor to ensure that you are doing things properly.
From your very short description, it sounds like you have what’s called a mixed use property; part residential and part rental. For IRS purposes, it is treated the same as two separate properties, with the personal residence portion of interest and property taxes deducted on your Schedule A and the expenses for the rental portion on Schedule E. The actual allocation of joint expenses may not be 50/50 if the two halves of the property are not equal in size and/or value. An experienced tax pro can help you come up with an appropriate allocation between the two halves. The cost basis of the property also needs to be allocated between the personal residence and rental portions, with deprecation claimed on the rental portion, which will reduce its cost basis (aka book value).
In regard to the treatment of a sale of the property, the portion of the sales price that is allocated to your primary residence will be treated as a Section 121 possibly tax free sale, as I have explained on my website.
The portion of the sales price allocated to the rental half will not be eligible for the tax free exclusion, and will need to be set up as a Section 1031 exchange if the taxable gain warrants it.
If I’m reading into your question properly, and you are asking how long it will be until the rental portion of the property can become eligible for the tax free Section 121 treatment, the answer is never, as long as it is being rented. If the tenants leave and you convert the rental part to be an extension of your own primary residence, the clock can start on the personal use test, which is generally two years.
You didn’t say how you acquired this current property. As an added twist, if you acquired it via a 1031 exchange, you will have had to own it for at least a full five years prior to its sale in order to be able to utilize the Sec. 121 tax free exclusion. Again, an experienced tax pro can assist you with this rule.
I hope I hit on your situation. Working directly with a professional tax advisor will result in more usable numbers for your precise situation than the generalities I have to use.
Good luck.
Kerry Kerstetter
Posted in 1031, humor, realty | Comments Off on Selling mixed use property
Posted by taxguru on November 28, 2007
Q:
If you don’t mind me asking, if you had to do it all over again, would you still go the route of the CPA? I have often thought it more lucrative to do a law degree than the CPA. But, my heart and my god given skills are more directed towards the CPA than a Law degree and, after all, money isn’t everything (as you are well aware based on your move from California to Arkansas.
Anyways, sorry to talk your ear off. You are kind of like the Michael Jordan of CPAs, so I certainly enjoy speaking with you and listening to an advice you may have for a budding CPA.
Sincerely,
A:
You really should do what you feel most passionate about so that your career doesn’t become the kind of drudgery that most people who are W-2 wage slaves find themselves in.
As you may or may not know, I entered college with a major of Political Science, with the intention of going on to law school and then possibly into politics. I accidentally ended up in a class called Accounting For Non-Business Majors just because at that time Freshmen registered last and that was the only class I could find to take along with the first Poli-Sci class. It was eye opening for me and it clicked as nothing has ever before.
Looking back those 30+ years, I was indeed fortunate to have found myself in that class and I would not change my career to anything else.
Looking forward, it is obvious that there will never be a shortage of work for accountants, whether in taxes or management accounting. Tax laws are changing daily and will never reach the level of simplicity that we all wish for. Our rulers will never allow that to happen. The levels of record keeping and reporting to so many different constituencies continues to grow almost exponentially, with new laws, such as The Sarbanes-Oxley Act, mandating more accounting details.
I don’t know the numbers, but it seems that there are far too many lawyers already out there. There are so many that they have to run all kinds of ambulance chasing style TV ads to recruit clients. I have had attorneys as clients who openly expressed envy at the fact that my clientele is forced by law to use my services each year, while theirs only showed up for special situations.
I obviously don’t have the crystal ball answer you may be looking for; but I hope this helps in your career path.
Good luck.
Kerry
Posted in cpa | Comments Off on Which has better career potential?
Posted by taxguru on November 28, 2007
They just announced that, for the first quarter of 2008, their rate will drop to 7.0% from the current rate of 8.0% that has been in effect since July 1, 2006.
Posted in IRS | Comments Off on IRS Drops Interest Rate
Posted by taxguru on November 27, 2007
Posted in comix, IRS | Comments Off on How far will IRS go to collect money?
Posted by taxguru on November 27, 2007
IRS has officially released what it will allow for 2008 tax returns:
Beginning Jan. 1, 2008, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:
- 50.5 cents per mile for business miles driven;
- 19 cents per mile driven for medical or moving purposes; and
- 14 cents per mile driven in service of charitable organizations.
As always, the official IRS statisticians are hip to the fact that vehicles being used for medical or charitable endeavors magically burn less fuel and suffer less wear and tear than they do when used for crass money making ventures. This disparity has never made sense in the past, and with the largest gap ever in these new rates, it continues to baffle me.
Posted in IRS, Vehicles | Comments Off on 2008 IRS Standard Mileage Rates
Posted by taxguru on November 24, 2007
Q:
Kerry:For an S Corp purchasing as automobile in 2006, used more than 50% for business, is there a limitation on 179 deduction?Thanks
A:
There are several limits on Section 179 expenses for cars purchased by an S corp; both at the corp level and at the shareholder’s 1040 level.
The amount of the potential Section 179 deduction will also depend on the car’s weight. If it’s under 6,000 pounds, the maximum deduction is a tiny fraction of the amount possible for a vehicle weighing more than that much.
I have some general info on Section 179 on my website; but you really need to go over any plans in regard to how it would work out for your particular situation with your personal professional tax advisor. S/he may even find that the deduction could be higher by purchasing the vehicle in your own personal name, especially if the S corp is generating large net losses.
Good luck. I hope this helps.
Kerry Kerstetter
Posted in 179, Vehicles | Comments Off on S Corp & Vehicle Sec. 179
Posted by taxguru on November 24, 2007
Posted in Accounting, comix | Comments Off on Cooking license?
Posted by taxguru on November 21, 2007
Q:
Subject: Question re OinCMr 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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Posted in Uncategorized | Comments Off on Countering IRS ASSumptions…
Posted by taxguru on November 21, 2007
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
Posted in Uncategorized | Comments Off on Revoking S election…
Tax Guru - Ker$tetter Letter 