TaxMamas TaxQuips: Tax Quips

Mileage and LLC

Eva Rosenberg — Thu, 31 May 2012 07:51:00 -0500

Today TaxMama® hears from Randal in the TaxQuips Forum with a sensible question. “I am an outside salesperson working as a sole proprietor, getting 1099s each year. My largest deduction is mileage. I earn less than $30k most years. If I setup an LLC to run my business through, will I lose my mileage deduction?”

Hi Randal,

As a single-owner LLC, you would probably end up reporting your business on your own Schedule C. So nothing really changes – unless you decide to file the business as a corporation – C or S.

Why do you want an LLC, anyway? Do you need one?

Bill Porter at PrideTaxPreparation.com points out that, in Minnesota, registering a LLC is easier than registering a DBA for a sole proprietorship, and costs about the same. We don’t have a minimum fee or anything like California does. Because of an LLC’s ability to potentially protect the personal assets, it’s a good choice in Minnesota.

That’s an interesting point. But there are two things to understand.

1) When you have an LLC, you are required to make decisions about how to treat the LLC for tax purposes. Here’s some information to help you, at the BizFilings site.

2) Establishing an LLC purely for protection from liability can be deceptive. When you are the only person working, it will be your actions that cause harm, or you are the only one who might mislead a customer. If so, when your company is sued, you will be sued personally, as well. The LLC won’t protect you.

So remember, you can find answers to all kinds of questions about LLCs and other tax issues, free. Where? Where else? At www.TaxMama.com.

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W2 plus 1099

Eva Rosenberg — Wed, 30 May 2012 03:15:00 -0500

Today TaxMama® hears from Paula in the TaxQuips Forum who is offended. “My employer in California wants me to purchase my own health insurance policy, then have me expense the cost each month. He would give me a 1099 for the additional income at the end of the year. Is this legal?”

Dear Paula,

Sorry, I don’t understand. If YOU are buying the policy, why is he giving you a 1099? A 1099 means that HE paid for something.

Besides, health insurance benefits don’t happen on 1099s, even if he pays for them.
The benefits are not taxable to you.

However, if he is having you pay for your premium through his company, since he can get a lower group rate than you can get on your own, your boss needs to set up a flexible spending plan or a premium only plan. ALL payroll services can do this for him.

What this does is, it lets you pay for your premiums out of your own wages. It reduces your taxable wages so you never pay IRS or state income taxes OR Social Security or Medicare on that amount each paycheck. (This saves him money on HIS share of the SS/Medi taxes as well as on his Workers Compensation insurance, too.)

Paychex can do this for him. He can call them at 888-681-3304 and they’ll take care of implementing this.

You don’t get ANY 1099s or other junk, your wages are simply lower on your W-2. I don’t know what’s going on in your boss’s office or if what he’s doing is illegal or just plain wrong. But he does need a better tax advisor.

And remember, you can find answers to all kinds of questions about employee compensation and other tax issues, free. Where? Where else? At www.TaxMama.com.

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OIC – Slashing Tax

Eva Rosenberg — Tue, 29 May 2012 07:59:00 -0500

Today TaxMama® hears from Sallie in the TaxQuips Forum who is puzzled. “I am trying to prepare an offer in compromise. When I go through the computations in the updated Form 656 package, the offer amount equals more than the tax they owe! I’m missing something. Please help.”

Hi Sallie,

What you’re saying is, that when you go through all the client’s assets, and their future earnings, they are worth more than the taxes they owe?

That means, according to IRS standards, they don’t qualify for the offer in compromise. It means they have enough assets and/or income coming in in the next few years to fully pay their taxes.

Instead, set them up on an installment agreement (IA). The IA doesn’t take assets into account, only current income and net cash flow. They may qualify for a low monthly installment payment based on their cash flow. Try that instead.

And remember, you can find answers to all kinds of questions about offers in compromise and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Adoption

Eva Rosenberg — Thu, 24 May 2012 08:20:00 -0500

Today TaxMama® hears from Hilde in the TaxQuips Forum with this question. “My son and daughter-in-law just adopted a special needs child from China. We know that there was a tax credit avail last year. Is there a tax credit for 2012? If yes, how much is the credit for? Some of the expenses were paid in 2011 and the remainder (about $10,000) was paid earlier this month. Can the money paid in 2011 for the adoption in 2012 be used when claiming the credit (if there is one, of course)?”

Hi Hilde,

Congratulations on the wonderful grandbaby!

Yes, there is still an adoption credit in 2012. However, it appears to be limited to $12,250 per child – and is non-refundable. In other words, it will reduce their tax liability to zero. But if their taxes are less than $12,250, they won’t get a refund for the difference.

If the child had been an American child, they could have used the refundable adoption provisions on their 2011 tax return. But because the child is not an American, they must wait until the adoption is finalized to claim the credit – in 2012. Alas.

However, all the expenses they incurred, in 2011 and 2012, can be used.

Is there still an extra provision for special needs children? Yes, you can claim the full amount of $12,250 without having to have spent that much. There is a phase-out of the credit if their income is too high – see the details in the post.

IRS has nothing published about the rules for 2012. And the rules may yet change before the year is out. The most recent information is in IRS Revenue Procedure 2011-52. Of course, it may have changed since then.

And remember, you can find answers to all kinds of questions about adoptions and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Mileage Method

Eva Rosenberg — Wed, 23 May 2012 08:01:00 -0500

Today TaxMama® hears from Walter in the TaxQuips Forum with a most astute question. “Is there a limit to how many miles of standard mileage auto/truck expense a self-employed taxpayer can take on their Schedule C for a given year? The portion of the business standard mileage rate treated as depreciation is on average about .21 – .23 per mile. So if a self-employed individual drives his/her vehicle about 30,000 miles a year for 5 years they would have taken approximately $30,000 – $35,000 in equivalent depreciation expense. How does one account for taking continuing standard mileage rate for a vehicle that has had excess business mileage taken in prior years?”

Dear Walter,

That’s one of the most insightful questions ever. And it’s one that tax professionals themselves rarely ever ask. Well done.

Rita Lewis our Enrolled Agent at http://DollarsSense.com in Connecticut provides the answer.

The depreciation component of the Standard Mileage Rate is used only for purposes of calculating gain or loss if the vehicle is sold, or calculating depreciation when switching from the standard mileage rate (SMR) to the actual expense method. So, it does not prevent the taxpayer from continuing to use the full business SMR to figure a deduction even after the car is considered fully depreciated. (These notes came from The Tax Book.)

And remember, you can find answers to all kinds of questions about auto expenses and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Bookkeeping

Eva Rosenberg — Tue, 22 May 2012 07:54:00 -0500

Today TaxMama® hears from Mary in the TaxQuips Forum who remembers. “During one of the registered tax return preparer (RTRP) presentations on May 15, or 17th, the instructor mentioned getting clients familiar with bookkeeping software. Several names were mentioned. Can you give me the name of the software?”

Dear Mary,

All business owners really should understand how to do bookkeeping, if they are handling their own records. Most just pick up some software and hope it will do things correctly for them, without their ever having to learn the rules of accounting. That doesn’t quite happen.

The same rules apply to tax professionals who do bookkeeping and business tax returns. It is incumbent upon all such professionals to learn exactly how balance sheets and profit and loss statements work – and how to make entries into a bookkeeping system so the resulting information is not gibberish. Rather, to make the information meaningful to the business owner.

All too often, I have seen records, even from bookkeepers being paid as much as $50 an hour, that are shocking. Loan payments are booked as expenses. Owners’ deposits into their own business show up as income. When the business owner does this kind of thing, I can understand it. But when a bookkeeper or tax pro does? That is malpractice.

So, to learn bookkeeping – here are three suggestions:

BeanCounter.com – free, fun, easy to understand courses on bookkeeping.

QuickBooksPro Advisor – They provide software, courses, certifications and REFERRALS!

American Institute of Professional Bookkeepers – Certification, training, potential referrals.

And remember, you can find answers to all kinds of questions about bookkeeping and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Self Employment and Canada

Eva Rosenberg — Mon, 21 May 2012 08:16:00 -0500

Today TaxMama® hears from Tony in the TaxQuips Forum with this question. “I have a friend / client who had self employment income in both US and Canada. He has already filed in Canada and is asking me to use the same income amount declared there, here in the US. He now owes the Canadian Government $5,000.00. Any advice on how to handle this will be appreciated.”

Dear Tony,

If he is a US taxpayer, and files a regular US resident tax return (Form 1040), then that’s just what you do. You file a regular tax return. You report all his world-wide income.

Then, you can use Form 1116 to take a tax credit for the taxes paid to Canada. Or you can take the Canadian taxes as a tax deduction on Schedule A. (Note: Check with your state laws. They might also accept the Canadian taxes as a state tax deduction.)

If your friend lived in Canada for more than 330 days out of 365, he might be entitled to the Foreign Earned Income Exclusion (Form 2555). But I don’t get the impression that this was the situation. If he was living in Canada, and is entitled to the FEIE, he would still be subject to the self-employment taxes.

Naturally, if I were working with such a client, I’d be getting a lot more information about the nature of his work – and where the work was done. Then I would check the Canadian tax treaties to see if there are any provisions to take into account.

If this is more complicated, you need to provide more information. Otherwise, it’s pretty straightforward.

And remember, you can find answers to all kinds of questions about international tax matters and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Tax On Used Car

Eva Rosenberg — Thu, 17 May 2012 07:48:00 -0500

Today TaxMama® hears from Blake in the TaxQuips Forum who is upset. “I bought a used car last December for $8,000. The car was owned by an individual who apparently had a business bank account where he deposited the money. The bill of sale just says his name on it, no company. How can the state of Georgia charge me $700 in taxes plus a $115 penalty on a car I bought from an individual? I don’t have the coins laying around for this kind of “surprise” expense. I was fully under the impression the car was bought from an individual and so were the two witnesses who were there when bill of sale was written up.”

Dear Blake

I don’t think this has anything to do with whether the seller was a business or an individual. It has more to do with your registering the car and transferring title to you.

I don’t know specifically about GA, but in most states any purchase of a vehicle triggers either a sales tax (if a dealer sells it) or a use tax (if a private party sells it). When the dealer sells a big ticket item like a car, he collects it from the buyer and sends it to the state. When a private party sells the car, the buyer needs to pay the state himself.

You could certainly try to get the penalties waived. Try talking to the Georgia Taxpayers Advocate office and see if they can help you. Clearly, you didn’t understand that you were responsible. Let’s face it, there are so many tax laws on the books, how is an average citizen supposed to know them all?

You won’t get the taxes waived, but good luck trying to get the penalties waived. Sometimes, asking nicely, politely and patiently, government officials will go out of their way to help you.

And remember, you can find answers to all kinds of questions about use tax issues and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Gift from Father

Eva Rosenberg — Wed, 16 May 2012 08:12:00 -0500

Today TaxMama® hears from Ada in the TaxQuips Forum with a deceptively difficult question. “My father is a non-resident alien with a non-business U.S. checking account that he opened over 15 years ago. He wants to give me and another sibling (both resident US citizens) the money from that account (split equally to about $20k each). What are the reporting requirements and tax liabilities for him, my sibling and myself?

Dear Ada,

I asked Roger B. Adams, EA, our resident international tax expert, to research this for you. After researching this Mr. Adams’ has determined the following:

According to IRC sec. 2501(a) and Reg Sec. 25.2501-1 a nonresident alien donor is subject to gift tax on the transfer of real or tangible property situated in the US. The question is whether or not a bank account is “tangible” property and the answer seems to be, NO it is not. Cash, on the other hand, is tangible property.

Gifts are not taxable to you since they are not considered income. So you and your sibling are not liable to pay tax on the gift. It seems your father’s best option is to transfer his interest in the account to both of you. Thereafter, you would do with the money as you wished.

Ada responds that the bank won’t allow them to be added to the account. Since they must open a new account, wouldn’t this end up costing Father gift taxes?

TaxMama has way around this problem. Do open the new accounts, if you must. However, set up the new accounts in your FATHER’S name, with you and your sister as co-signers. That way, it’s his account. You’ve now been added to the account – not given cash. You can each use the cash in the account under whatever agreement you sibling and your father decide.

And remember, you can find answers to all kinds of questions about non-resident alien tax issues and other tax issues, free. Where? Where else? At www.TaxMama.com.

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Homebuyer Credit Repayment

Eva Rosenberg — Tue, 15 May 2012 03:00:00 -0500

Today TaxMama® hears from Kelly in the TaxQuips Forum who cares about her friend. “A friend’s home will soon be going into foreclosure. He’s owned the home for 2.5 years and we’re trying to figure out if he’ll have to repay the $8,000 tax credit he received as a first time homebuyer. I’ve read that if the house sells and there’s no gain you’ll owe nothing. If the home is in foreclosure how is a gain calculated? Would it be of any benefit to try to do a short sale on the home versus the foreclosure? He’s planning to file for bankruptcy as well. I’m just wondering if there’s any legal way around the $8,000 repayment?”

Hi Kelly,

Good question.

Let’s see – to avoid paying back the Homebuyers Credit, you must live in the place for three years. So, one of the nice things about filing bankruptcy is – you can stay in your house for quite a while longer. If the BK can keep him in the house until the three years are up

1) No worries about repaying $8,000.
2) Free rent for as long as the BK continues.

However, if they don’t stay in the house for three years and end up owing the repayment, the bankruptcy will not help them since the tax return won’t even have been filed yet.

When it comes to selling and short sales, you need to be SURE there is no profit. Remember, you have two things happening when you run short sales, foreclosure or just signing over the property with a deed in lieu of foreclosure.

1) You have the sale – which may be the amount of the loan, or it may include some accrued interest, depending on whether the lender has modified the loan and added interest at the end. That might result in a profit. The profit would mean that some or all of the $8,000 might have to be repaid.
2) You have cancellation of debt income – (perhaps not, if it’s the original loan) which is subject to ordinary taxation.

Back to the Homebuyers Credit. If the house is sold at a loss, or with no profit at all, there won’t be a repayment of the tax credit. More details -

And remember, you can find answers to all kinds of questions about repaying the homebuyers tax credit and other tax issues, free. Where? Where else? At www.TaxMama.com.

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