TaxMamas TaxQuips: Tax Quips

Today TaxMama® hears from someone offline with this distressing observation. “A client for whom we do payroll has an entire team of high-powered accountants and attorneys. They got together and reviewed our client’s several business entities and decided to close a certain company as of the end of 2012. However, none of the experts bothered to look at the activities in this entity. This is where the payroll and benefit plans for all the owners and employees were set up for all the companies.” [art by www.hikingartist.com] Dear Friends, Eeeek! It’s got to be really embarrassing when a bookkeeper catches the errors of a team of experts. But it does happen. TaxMama always tells you to turn to your experienced tax professionals for guidance before making any major financial moves. Today, I want to remind those experts to include the folks who do the day-to-day work in your planning discussions – about any decision. In other words, not just accounting and taxes – but marketing, product development, customer service, etc. All too often, the folks in the trenches are overlooked. But they have the direct experience with the product, customer and the routine procedures. Please look at the whole picture and understand what pensions, contracts, trademarks, patents and other intangibles are in place before closing entities – or making other major decisions. And remember, you can find answers to all kinds of questions about business decisions and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Eliezer in the TaxQuips Forum with this interesting question. “Many non-profit organizations run raffles with great prizes. Sometimes the raffle tickets can get pricey (>$100) and the entrants want to deduct these amounts as charitable contributions to the non-profit organization. Assuming the entrant did not have any winnings, is there any situation in which these are a valid deduction? Does it matter if there is “no purchase required”? Or that the raffle has a limited (or unlimited) number of tickets sold? Or if it is called a sweepstakes rather than a raffle? Would love to help taxpayers find a legit way.” Dear Eliezer, Let’s see. When you pay $100 for a raffle ticket, how is that different from paying $100 for lottery tickets? You have an opportunity to win a prize. You can deduct the lottery costs up to the amount of your winnings. Otherwise, no deduction. So….the only way I can see the cost of those tickets as a deduction, is to have the buyer donate the tickets back to charity – at the time of purchase (not after having lost). Let’s use this as today’s TaxQuip and see if anyone else has any ideas. And remember, you can find answers to all kinds of questions about charitable contributions and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from CotoPop in the TaxQuips Forum with a good question. “A client purchases a high end car in January, 2010 ($52,000). It is only used for personal purposes in 2010 and 2011. In January 2012 client starts a new business and uses the car 80% for business. Client is going to use “actual expenses ” for calculating the auto expense. When calculating depreciation should he use the original purchase price or the FMV at the time converted the vehicle to business use ? Dear CotoPop, You’re right. There are two values involved. When you put an asset to use for business purposes, the value you use for depreciation is the LOWER of cost or Fair Market Value. So…you look up the value of the car in the month it was put to business use. You can use the Kelly Blue Book site or Edmunds...or any other place that shows similar cars. Print out the information and specify which number you’re using and why. For instance, if there are several similar models for sale, you might use the average of all those prices. Or you might select the price of just one of the vehicles – because it has an identical configuration and similar mileage. That’s why I say, in the notes you put in your file, specify WHY you’ve selected that value. Note: Do not use Sec 179 depreciation. You can only use that in the year of purchase. And remember, you can find answers to all kinds of questions about converting personal assets to business use and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Eliezer in the Tax Quips Forum with this question. “A client owes the IRS about $200 from 2011 taxes. He filed on extension and they sent him a notice for his balance due including penalty and interest, which is due Dec 10. I tried counseling him to pay what he could afford by April 15. Couldn’t do it.  By Oct 15.  No dice. Dec 10 is around the corner and he says he still can’t/won’t pay all of it. His attitude: What’s the worst that could happen? What are they gonna do to me? Are they going to throw me in jail for $200? If not, I’ll pay some of it and let them send me another bill. How would you respond?”  Dear Eliezer, We get so involved with our clients and want to help keep them out of trouble, often with great intensity. But your client is right.  It’s his life and his problem. So what IS the worst than can happen, if he pays a little bit at a time? Penalties and interest will accrue – and he’ll just have to pay more. But my question is – why is $200 so much of a hardship for an adult? Is he living on Social Security? Disabled? Destitute? Very, very poor? Or just a very bad money manager? Perhaps this is where you might be able to help him? Is he interested in having you teach him money management? Or should he be calling Dave Ramsey? To which, Susan Holtgrefe, EA in PA at http://erietaxprep.com/   responds by quoting Dave Ramsey – twice:  “That stupid saying “What you don’t know can’t hurt you” is ridiculous. What you don’t know can kill you. If you don’t know that tractor trailer trucks hurt when hitting you, then you can play in the middle of the interstate with no fear – but that doesn’t mean you won’t get killed.”  ― Dave Ramsey, Financial Peace Revisited “Stupid is not illegal.” ― Dave Ramsey And remember, you can find answers to all kinds of questions about bad decisions and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]

Today TaxMama® hears from Sue in the Tax Quips Forum with this issue. “My parents are both unemployed and lived with me all year. My dad did receive unemployment, but it was about $3,300 for the entire year – my mom did not receive any unemployment. My younger sisters also lived with me – they are 13 and 17. I provided their support – I paid the mortgage (I own the home), paid for food, bills etc. Would I be able to claim my parents and my sisters on my 2012 tax return?” Dear Sue, You get an answer from Susan Holtgrefe, EA in PA at http://erietaxprep.com/ . She says: Dependents come in two flavors, qualifying child and qualifying relative. Looks like you have two of each. You may not be as familiar with the rules for qualifying relatives, there are four basic tests that must be meet; 1. They can’t be a qualifying child. You didn’t mention if your parents are permanently and totally disabled so we can safely assume they are too old to be a ‘child’. 2. Member of household or relationship test. This is met by someone if they either live with you all year (even if not related to you) or by being one of the listed relatives who don’t have to live with you, such as parents. This means that if you decide to provide your parents with their own apartment they might still be your dependents. 3. Gross income test. Your parents cannot have received more than $3700 each. This includes just about anything that isn’t exempted from tax such as unemployment. So if your Dad had received $400 more in income then he would not pass this test. (You could still possibly claim your Mom) 4. Support test. Last you have to provide more than 1/2 of their support. Do count food, part of the house and utilities, medical, transportation, recreation, etc. Also, be mindful that the various tax credits have important differences about who qualifies for the credit. Don’t assume that just because your sisters are your dependents that they automatically qualify for anything else. The fun is in the details. TaxMama adds that there is a “support worksheet” in IRS Publication 17 that you may want to fill out for your own tax files for 2012. Fill one out for each dependent and just put it in your own files. Don’t send it with the tax return.   Incidentally, you can also claim a head of household filing status. And remember, you can find answers to all kinds of questions about dependents and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® wants to talk about business-related gift-giving for the holidays . Dear Family, We just got the most fabulous gift box from a friend. Wow! How exciting. And no doubt, you’re gearing up to give holiday gifts to your friends and clients, too. So, let’s look at the tax implications, for a minute. Basically, forget about getting a deduction for your business gifts. Business deductions for gifts are limited to $25 per person, per YEAR! Not per holiday, or per event. (Sorry, I don’t make the rules. Neither does the IRS. Congress writes the laws and they haven’t changed this one in my lifetime.) By now, you’ve probably already spent that on each of your business associates earlier in the year. Of course, you do get to separately add in the cost of the shipping and wrapping and engraving. The rest of the cost? A non-deductible business expense. Can’t show it on your tax return. (It’s an adjustment on Schedule M-1 on the partnership or corporate returns.) You could always get imprinted business gifts. There’s barely enough time to do that. But, even then, you’re looking at an item costing $4 or less, imprinted with your business name or logo. Hmmm…not much for a whole year’s worth of patronage. So, whatever you decide to get them, it should be for one of three reasons: 1)    You really care about the person and want to see the happiness the gift brings. 2)    You want to thank them for being so good to you this past year. 3)    Or you’re looking to impress them for business reasons, to get more money out of them next year. Whatever you do, get them whatever you want or is appropriate, and don’t worry about writing it off. And remember, you can find answers to all kinds of questions about business gifts and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Excel in the TaxQuips Forum with an interesting question. He asks how to write off his travel. You can read my answer to him in the TaxQuips Forum. But what I’d like to do today is to provide more general tips about how be a legitimate travel writer – for tax purposes. Dear Family,  This is a time of year when we do a lot of traveling. Whether to see family, or to take much-needed vacations. Some people, feeling the wanderlust, start yearning to take more trips – and to have the IRS pick up the tab. How can you go about this? 1) Learn how get paid for writing travel articles – and how much you’re apt to earn. Consider taking a class on how to write travel articles. Another class on how to write, period. And another course or book on how to sell your articles – the Writers Market book is essential. Or – do a lot of reading on the topics 2) Learn how to set up your own travel website to either support your published articles, or to generate income from the site itself. This could generate even more revenue than selling your articles. (See my discussion with Excel) 3) Set up a travel and business budget so your overall costs are always less than your revenues. By always showing a profit, you’re less subject to the very restrictive IRS hobby loss rules.  (See my ItsAWAHMThing blog.) 4) Build up your travel gradually. But write consistently. Do this sensibly, and in a few years, you may just find yourself making a full-time living at it, like Rick Steves or Huell Howser. Naturally, once you’ve established yourself, you can start arranging for sponsors to help underwrite your trips by writing for them, or reviewing their products and services along the way. And remember, you can find answers to all kinds of questions about turning dreams into businesses and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Tax455 in the TaxQuips Forum with this question. “If I earned $50k through eBay buying and selling phones, and $12k was profit, should I get a business license or incorporate for tax purposes? I did not hit the 200 transactions so I’m not sure if eBay will send me a tax form. What’s the best way for me proceed for the tax year?” Dear Tax455, Incorporating now, or getting a business license now, will not have any effect on the business you ran before taking those steps. It’s too late. You will need to report your income on Schedule C. Go back and do your bookkeeping in detail for the year, to record all the appropriate business deductions. Depending on your income from other sources, this profit won’t generate a big tax for you. But it will generate self-employment taxes of 13.3%, regardless of other itemized deductions or reductions in taxable income. I don’t know why eBay shut you down. They don’t generally do that unless there are a great many complaints. But, if you’re still running your business for next year, I do encourage you to sit down with a good tax pro and do some planning for NEXT year. And remember, you can find answers to all kinds of questions about business structure and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from BlueSage in the TaxQuips Forum with this question. “Is it better to declare 20 children and then store the tax one would pay in an investment account, and use that money to pay taxes at year end? Or is it better to declare the right amount of children, pay as you go, and maybe get a refund? Dear Blue, That’s a good question. In the 1980s, when interest rates on bank accounts were typically 5% + a free toaster, and money market accounts were paying 20%, I would have said – yes, keep the money invested and pay it later. Today, when banks and money market accounts are paying about one tenth of a percent to 1% and typical rates of returns on investment accounts tend to be 2% – 3%, I would say – use the correct number of dependents and try to break even or to owe a hundred dollars or so. And remember, you can find answers to all kinds of questions about dependents, exemptions and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

While we’re waiting for the TaxQuips Forum to go back up, today TaxMama® wants to discuss what to do when you get an IRS audit notice. Dear Family, One of the scariest letters you can get is an IRS audit notice. Sometimes, people simply don’t deal with it. What happens if you ignore the audit notice, praying it will go away? It doesn’t. IRS disallows all your deductions – and perhaps your dependents. You end up with a great big balance due. Here are three simple steps to follow. Step 1. Read the audit notice, slowly. The notice will tell you which year is under audit (generally IRS only audits one year at a time.); what forms or schedules IRS wants to examine (For instance, Schedule A – Itemized Deductions; or Schedule C – Business Profit and Loss); and provide a list of records or documents the IRS wants to see. It will show the audit date, providing contact information (by mail or phone) for the person or group in charge of your audit. Step 2. Figure out where the audit is taking place – and if you should change the location. Will it be a mail-in audit? (IRS calls those ‘correspondence audits’.) Must you go to an IRS office (office audit)? Or is someone coming out to your home or place of business (field audit)? Step 3. Can you do this alone, or do you need help? When there are just a few issues under examination, you should be able to pull the records, copy them, and send them off to the IRS. If this is a field audit, you definitely need a tax pro! You want your tax pro to help you prepare, and to be by your side when the IRS shows up. When IRS is looking at certain concepts, you need expert guidance. It can be in the form of advice and hand-holding. Better yet, have your tax pro handle things for you: Is your business really a hobby? (losses for too many years) Did you report all your income? (living beyond your means) Do you really have an office in home? (there’s another business or job location) Are those really your children? (someone else claimed them.) Your job or business expenses are over $20,000 – are they personal expenses? Still feeling nervous? Read about your rights and watch a series of videos. IRS put together a video about a small business audit. Perhaps seeing how it all works will make it easier. And remember, you can find answers to all kinds of questions about audit notices and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® wants to have a little fun while I am waiting for all my emails to download. During our Thanksgiving vacation, I had time to do some reading. Let me introduce you to Diane Kelly, a CPA and writer – and her very interesting protagonist, Tara Holloway, a rather feisty IRS Special Agent. Dear Family, Early this year, my Kindle offerings introduced me to Death, Taxes and a French Manicure. Great title. Couldn’t resist. Couldn’t put it down. So, during this holiday, I decided to load my Kindle with her next book. Death, Taxes and a Skinny, No-Whip Latte. I don’t know quite how true-to-life the story is about the day-to-day life of an IRS Special Agent. But, we get to join her a very long stake-out (one I would have cut short quite a bit earlier, by checking in with a postmaster much sooner), and on some rather harrowing adventures. She tries to nab someone who’s not just a big-time tax cheat; but a murder and rather brutal loan shark. Despite giving a squeaky clean appearance on paper, she finds the key to nabbing him and putting him and his minions under lock and key. And keeps us laughing and cringing along the way. That second book was such a page-turner, I finished it much too quickly, so…I downloaded the next book, Death, Taxes and Extra-Hold Hairspray. Besides, you get to know the characters – and want to know what happens next. In this one, her weird and super-tough boss with the 1960s beehive hairdo, coated in super-glue-type hairspray starts to lose her hair, while undergoing chemo. There’s a special poignancy to this story. While she tries to help her boss maintain her dignity, Tara and partner are off to bust the Republic of Texas, a militant separatist group purporting to operate its own sovereign nation – and the minister of a mega-church (much like the Crystal Cathedral – only in Birmingham). Death, Taxes and a Sequined Clutch revolves around a very funny revenge on a love-em-and-leave-em CPA, while trying to prove a client that her former CPA firm had audited was engaged in financial hanky-panky. Tara helps the SEC investigate some instant millionaire computer geeks who just launched an IPO (initial public offering) and sold off their stock. What’s wrong with this picture, even though the audit is squeaky clean? Then I ordered Death, Taxes, and Peach Sangria – which won’t be released until the end of January. I can hardly wait! The legal issues and obstacles presented in each of the stories make the books very interesting. But the harrowing adventures and the writer’s sense of humor make it impossible to put the books down. And remember, you can find answers to all kinds of questions about tax-related fiction and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Shar in the TaxQuips Forum, with this observation. “If you start an LLC and elect to have it be taxed as a C-Corp, does this election require you to follow all the ongoing requirements of your state for maintaining a C-Corp (corporate minutes, complete set of books, etc.)? Or can you continue following the much easier requirements for maintaining and running an LLC? If so, this setup might be the best of both worlds – getting all the benefits of C Corp, such as all the fringe benefits for the owner; while, at the same time, taking advantage of the relative ease of running an LLC.” Dear Shar, Yes, that’s an excellent point. And the very reason many people select the LLC entity before electing to file their tax returns as C Corps. However, over the years I have found that if you do not keep minutes and maintain good records about corporate/LLC decisions, you’re at a disadvantage in an audit. As to not keeping books? That’s one of the more irresponsible concepts of all! However, even when you don’t maintain all the corporate niceties, you are protected from having the veil of the ‘corporation’ pierced in an audit, since it’s not a corporation. And remember, you can find answers to all kinds of questions about LLCs and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from John in the TaxQuips Forum, with this quick question. “Can a new marijuana business in CO and WA declare business deductions on a federal tax return?” Good question John. Clearly, they can on the state return. But since marijuana is illegal on a federal scale? Typically the IRS does not permit deductions on illegal income. Do some searching of the Tax Court cases to see if anything has come before them. Well, I did some searching. While I was answering, Lori Thompson, EA of KTJTax.com was also looking up the same information – and we both conclude – based on Tax Court cases, under IRC Section 280E, you may not deduct expenses related to trafficking of a controlled substance. And remember, you can find answers to all kinds of questions about marijuana and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Matt in the TaxQuips Forum, who asks a common type of question. “I would like to know if an LLC can also be an S Corporation and what the tax advantages would be?” Hi Matt, Yes, an LLC can elect to file as an S Corp. There are a series of articles I wrote for BizFilings.com that will answer some of your questions: What is the Best Entity for Your Business? The Non-Profit as a Business Model Tax Issues Regarding Copyrights and Trademarks Business Licenses You Need and Trust Now That You Have an LLC, it’s Time to Make Tax Decisions The entire Chapter 3 of Small Business Taxes Made Easy is about the pros and cons of each type of entity – and gives you tips on how to select one. But, if you are forming an entity of any kind and starting a business, this will be your livelihood for years to come. Don’t you think it is to your advantage to consult with a tax professional in-depth to help make the right decisions? Doing the planning up front will save you a fortune in taxes – and revisions – in the long run. And a good tax advisor probably has the contacts and expertise to help you increase your profits, as well. And remember, you can find answers to all kinds of questions about choosing the right business entity and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .

Today TaxMama® hears from Mike in the TaxQuips Forum, who asks a logical question. “I sell collectible cards in NC. I collect sales tax on new product (such as a new pack of 15 cards). The question is, if I buy a single card from someone who just bought that pack of 15 new cards from me; and I collected sales tax from the customer on the purchase of the 15 cards, do I have to collect sales tax again when I sell that single card to another customer?”   Yes Mike. Every time you make a sale, you collect sales tax. In your mind, treat it as buying new merchandise. OR – don’t sell him that particular card in the first place? And remember, you can find answers to all kinds of questions about sales taxes and other tax and business issues, free. Where? Where else? At www.TaxMama.com. [Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!] Please post all Comments and Replies in the new TaxQuips Forum .