Tax Guru – Ker$tetter Letter

Q:

Subject: S corp vs C Corp – HELP

 

Hi Kerry,

 

Thank you for the information.  I had started working with an accountant last year that told me some of this information (about C corp vs S corp), but she was not a CPA and unfortunately she abandoned me during my incorporation (didn’t return phone calls).    She recommended I start as an C corp. I was a sole proprietor (chiropractic offices -2 ) and was being eaten alive by Self employment taxes and also owe a significant amount of back taxes that has been compounded since one bad year in 2001 during which I was out of my practice for a couple of months from surgery and recovery and during which ex- stopped paying child support.  Now I keep paying back taxes and never getting caught up with current taxes.

 

The accountant that abandoned me thought that the different fiscal years and the shifting of funds might help me get caught up.  My  new accountant didn’t see things this way and changed me to an S corp in November.  He had an entirely different rationale that had  more to do with the double taxation.  Frankly, I’m highly confused and not sure where to turn.   He also said I could pay myself dividends and avoid some of the self employment tax.

 

What is your role?  Would you be able to look over my situation and make recommendations?  and at what cost? 

 

Sincere thanks for any light you can shed

A:

It’s not quite right that your accountant can change your corp from a C to an S on his own.  You have to sign the 2553 to request that change. 

It sounds as if you do need some competent assistance with.  I wish I could help you; but I already have too many clients to take care of; so we are not accepting any new ones at this time.

Unfortunately, we don’t have anyone else 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. 

Good luck.

Kerry Kerstetter

 

Q:

Subject: section 121

 

Kerry, I saw your article on the internet and would value your opinion on the following situation.  I purchased land to build on 2 years ago.  I built the home and moved in 1 year ago.  My mail has always gone to a PO box.  Could I sell my home based on the land purchase, or does the date I turned on the power at the new residence start my 2 years?  (I did not sell a home in the previous 2 years)

Thank you for your time,

A:

The two years for qualifying for the Section 121 tax free exclusion begins when you both own it and occupy it as your primary residence.  Unless you were living on the lot prior to and during construction (tent, motorhome, etc?), this couldn’t be possible until you actually moved into the completed house.

Kerry Kerstetter

Follow-Up:

Thank you for your response.  I just may contact you again if my accountant doesn’t feel confident about these issues.  I appreciate your time.

 

 

Q:

Subject: depreciating donated property

Hi Kerry,

Thanks for sharing obscure versions of George Harrison’s  Taxman.

Hopefully this question will have a quick answer.  I’ll be brief.

Can a piece of real estate that is donated to a land trust be depreciated by the land trust over 27.5 years?  The property is one acre of lakefront property on Lake Ontario with a single family residence.  I’m attempting to calculate the real costs after taxes if the trust were to hold the property unoccupied.

Thank you for continuing to provide a valuable source of information.

A:

If it is trust that files 1041s, the building portion of the cost should be able to be depreciated during the time it is being used to generate income based on the value used for the transfer into the trust.  Obviously no depreciation could be claimed while it sits vacant unless a sincere effort is underway to lease it.

I’m glad you like the TaxMan songs.  Sherry found a new live version by Nickel Creek last week and I was thinking of posting it.

Kerry Kerstetter

 

The latest Intuit ProConnection newsletter had an announcement of their new free service to remove passwords from data files.  To use it, you need to upload your data file and provide your registration license number.  It currently only works with QB 2005 and older versions of the program.

I haven’t used it and probably won’t because I have been very happy with the speed with which I have been able to unlock QB passwords with the QuickBooks Key program from LostPassword.com.  I have used it several times when clients forgot to send me their passwords, which I usually don’t discover until 10 or 11 at night, when I’m working on their stuff.  Since there is no file uploading required; so it only takes a minute or so to unlock the files.  Unfortunately, they still haven’t updated their program for QB 2006, which more and more of my clients are using. 

I have added info on this new free service to the QuickBooks Resource page on my main website.

Q-1:

Subject: Question on sale of primary residence owned less than 2 years

We are possibly in a situation where we may sell our primary residence that was purchased Jan. 6th, 2005.  My wife (who was only applicant on the mortgage) is pregnant and has been forced to bed rest for a short period of time.  She is a physician although not necessarily the primary wage earner, but due to bed rest is unable to ‘moonlight’ which drops here gross monthly income by roughly $4500 per month.

 

Is this a qualifying circumstance to get a prorated discount on tax on sale?  We purchased the home for $540,000 and are looking to sell for between $750k and $825k.

 

Thank you in advance for your assistance.

 

Sincerely,

A-1:

While it may be possible to justify the use of the prorated exclusion based on your description, I would feel nervous about your use of the term “short period of time” for the disruption in your wife’s income flow.  That would be a harder case to make than a long term reduction in her income due to the need to take off from work for the pregnancy and the post natal time to raise the baby.  IRS could say that a short-term interruption in income could be dealt with without having to actually sell the home, while a longer term reduction would be a valid reason to sell.

You’ll need to go over your facts and circumstances with your personal professional tax advisor to see if s/he will feel comfortable with claiming the prorated exclusion.  If you do decide to claim it, attaching an explanation of the facts to your 1040 will make it slide though with less opposition from IRS.

Good luck.  I hope this helps.

Kerry Kerstetter

Q-2:

Thanks for the advice….By the way what is the tax rate on a sale of property owned from 12-24 months?

A-2:

That would be taxed as a long term capital gain, which is a nominal rate of 15% for the Federal.  The actual effective rate will be much higher due to the penalties applied to people with high AGI.

I have the 2006 Federal rates on my website.

State rates differ.

Kerry

 

From WSJ’s free Startup Journal

A look at some small business accounting programs, including my long time favorite.

A list of recommended reference books.

The Feds continue their long, slow crack-down on charlatans in the tax prep community, as well as the people stupid enough to use their services. 

North Carolina preparers using fake numbers

New Hampshire prepare of frivolous returns

Florida promoter of disabled access telephone tax scam