Tax Guru – Ker$tetter Letter

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

Q:

Subject: Residency Test?

TaxGuru,

Firstly, thanks so much for providing and maintaining your blog, I have learned much from it, as I’m sure countless other people have. Secondly, I was hoping you could help me with a question I have…

This year is the first time I will be filing taxes. I am from Memphis, TN and went to college in New York. I was a student in NY until I graduated in June of 2006, and then I was home (in Memphis) for three months, and then started my first job in NY in September until now. My license is from TN, and as far as I know my “official” address is in TN, but I work in NY, and I have bills coming to my apt in NY.

My question is as follows: Where am I resident of? Which state taxes do I file? What rules/tests does the IRS have regarding this?

Lastly, and on a different note (this one may be a little more difficult for you to answer), I wanted (well, my father wanted) to know since I was in school for a little bit more than half the year, can he claim me as a dependent? As far as I can tell, I pass the “qualifying child” tests. What would be the ramifications of this? And if he claims me as a dependant, am I required to file taxes? If not, should I anyway (I think im owed a refund.)

Thanks in advance for your time and effort!

All the best,

A:

You really need to be working with a professional tax preparer.

If you worked in NY, which it looks like you did, you will need to file a part year resident return with the State of NY.  While you may have a TN license, it sounds as if you have taken up official residency in NY.  NY is one of the most aggressive states in the country at establishing tax jurisdiction over anyone possibly connected to that state.  Working and living there makes you a taxable New Yorker and there’s no way you are going to escape that obligation.

You and your father need to do some number crunching to see if he paid for more than half of your living costs during the full year of 2006 in order to claim you as his dependent.  If he does that,. you will not be able to claim a personal exemption for yourself, which could cause you to owe some tax money.  Either way, you need to file both Federal and State tax returns.

Again, a professional tax advisor, who can look at the actual numbers (possibly your father’s tax preparer), can give better advice on how to handle your 2006 tax returns.

Good luck.

Kerry Kerstetter