Tax Tips Blog

Fellow readers,

I am sorry that I have not had the time to update this blog regularly. I have decided the best thing for both myself and my readers is to provide you with the following new tax resources:

Read the past posts, questions and answers to my tax tips blog via this search engine:

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Use this drop down box of frequently asked tax questions and their answers:

provide a weekly tax tip:

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Thank you all and best wishes,

Gina

I’m sorry I haven’t posted, things are real busy this time of year.  I wanted to make sure everyone saw this YouTube video, made by Joe The Plumber.  He is on a mission to abolish the IRS and needs your help to do it.  He charges $0.99 a vote (vote at IRSvote.com) so he can make sure all votes are verifiable, but right now he’s giving away a T-Shirt free if you vote.

Kristy writes: Ms. Gina

Mike asks: My name is Michael and am in need of some help. The company i work for just proposed switching me from a W2 to a 1099. I currently earn 24k a year gross salary but they want to cut my pay to what i make net and have me as 1099. They tell me it would be the same money im making now, i asked them what happens when i have to pay out taxes at the end of the year and their answer is i can claim all my food and gas expenses to counter me having to pay out taxes in addition to an office in my parents home. Please advise if this is possible or even a good idea, i really would appreciate your help.

My reply:Hello Mike!

Your employer does not get to decide if they can pay you as a W-2 employee or a 1099 contractor. The law determines your classification. I wrote an article about this, which you can find here: http://glgcpa.com/blog/2006/08/06/employee-or-independent-contractor/

If you want the IRS to inform your employer as to whether or not they should be issuing you a W-2 or 1099 then complete Form SS-8 (PDF), Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

You didn’t tell me what kind of work you do or why all your food or gas would be considered a legitimate business expense, but food is rarely 100% deductible. Valid, substantiated meals are usually deductible at 50% of the amount spent. Gas is deductible based on the percentage of business use of your vehicle, assuming the business use has been properly documented. For gas to be 100% deductible you would not be able to drive your vehicle for any personal reasons (like going to the grocery store), nor would you be able to drive to or from work.

In addition contractors need to pay self-employment taxes, this includes the employee part (which you’re having withheld now) and the employer part (which your employer is paying now). Thus, it appears that your company is trying to pull a fast one on you.

Best wishes,
Gina

Kelly writes:Hi! Ok…so I applied for a State Tax ID in June online. I lost the form I needed to send in to get my permit. So I never sold anything or charged tax I got a quarterly form to fole and threw it away :0 I then got a form with a fee and penelty with an amount due of 1100. That form was I guess due paid in full by 12/22 or another 10% fee would be added. I did not send that in either. (my lack of reading fine print is killing me). Now I have another quarter form due. I have still not recieved my permit or sold anything…can I fight having to pay the fees and penelties? By the way I am in the state of Texas.

My reply:Kelly,

I’m sorry to hear about your frustrations with the State of Texas. Usually the sales tax permit is automatically issued when you apply online, so I’m sure the State of Texas believes you received that.

Even if you do not owe sales tax you are required to complete the form otherwise you will be subject to a “Failure to File” penalty. In addition, if you do not complete the form in a timely manner you will be subject to a “late filing” penalty.

If you actually never collected any sales tax then most, if not all, of your penalties may be able to be removed if you simply complete their form and send it in with a letter of explanation.

Best wishes,
Gina

Follow up:Thank you for your help and quick response. I did talk to them and I have telafiled that quarter and ALL fees were removed. =) I also asked where to get another signature form to file, and I was given the website. I will now be aboe to get the permit and start to sale. Thanks again for your time and help!
Kelly

Jeremy writes: Hi Gina,

I read through your blog and I wasn’t able to find the answer to my question, so I thought I’d send an email. Thanks in advance.

Some background: I’m 25 now and I bought a property in 2005 for $195,000 as my primary residence but soon after moved across the country. I turned the property into a rental since the market was so terrible and I could not easily sell it. Each month, I take a large loss between the costs of the property and the rental income. So I’m back to renting it out. My mortgage balance is around $168,000 and is a 30 year fixed at 5.875%. At this point in the amortization schedule, I’m paying around $215 towards principal and around $820 towards interest. In terms of market value, if you use Zillow as an example, we’re looking at around $155,000 (but my gut says maybe less).

Now, the reason for my email: my parents have a HELOC available at prime minus .50% (currently looking at a 2.75% interest rate). They’ve offered to lend me the remaining principal balance to pay off my existing mortgage and start paying down the money I’d borrow on the HELOC. I would cover the interest each month and begin paying the principal down. This could basically flip the interest-to-principal payment ratio that I have currently on my 30 year fixed. Their HELOC is currently interest-only payments until 2014 (with no penalty on payments to principal). After 2014, it converts to P&I payments.

I’d like to look at the scenario not taking into account the whole “borrowing money from family can be a no-no” angle.

* My parents don’t need access to the money they’d be lending me.
* I’d be able to pay the principal amount down much faster by having the interest rate at 2.75% currently (I know it floats, but do you see rates being raised any time soon?). Even if it’s raised to 5.75%, I’d still be ahead. Plus, PMI would be erased at $100 a month.
* Would I definitely lose the mortgage interest deduction (because I would still be paying interest on a loan)? Because the money I’m paying back is still an expense on the rental, would I be able to deduct the costs?
* Without doing anything above, if I sold the rental for whatever I could get, I would have to come to the closing with cash to cover the difference in the mortgage and other closing costs. If I paid off the existing mortgage with the HELOC, after selling the rental, I could pay back a significant chunk with whatever proceeds I get. Then I can continue paying off the difference to my parents.
* I am recently engaged and would like to be able to buy a house to start a family in. At my current income level, having the rental costs and another house is not feasible. Therefore, regardless of using the HELOC, I’m picturing the rental to have a limited time span.

I’m not sure what the best route to take is for a tax strategy around using the HELOC and then selling the property at a loss. I’m actually sure not what to do! In running the numbers from a month to month, it seems to financially make sense. (Although the floating interest rate could be a risk.)

Is there any tax strategy I should be thinking about in this situation? In general, what do you think about my situation? If you have any thoughts or ideas, I would love to hear them. I really appreciate your time.

Thanks very much,
Jeremy

My reply:Hi Jeremy, thanks for visiting.

Out of curiosity, where is this property located? Aside from that you lost me a bit…this is what I got out of what you said above…

* Purchased a primary residence in 2005 for $195,000
* Soon after (we’ll say 2006) you converted the property to a rental
* Now (2008) you’re losing money on the rental, so you want to rent it again? This was the confusing part - but it doesn’t really matter to answer your questions below (I don’t think anyway - I’m assuming it’s still a rental).

I’m not a mortgage lender/broker/banker, BUT I do know that HELOCs have very specific rules (not sure what all of them are) and if you don’t follow them the loan becomes immediately due. So you may want to make sure everything is alright with their loan before you do anything you later regret.

If for some reason you can’t pay your parents back, your parents may lose their home.

You would have to draw up papers with your parents, where your parents are like the “mortgage company”. You would be paying your parents back on a set schedule. The payments would be divided between mortgage interest and principal. The mortgage interest you would be paying them would be deductible for you on your property AND taxable to them as interest income.

In addition, most likely they will NOT get to deduct the interest on their HELOC, certainly not as mortgage interest, but possibly as business or investment interest expense depending on how their tax professional views the situation and loan documents between the two of you.

If you sell the rental at a loss, depending on several other factors such as….how long you’ve been renting vs. had it as a personal residence…whether or not you ever took the home office deduction…your adjusted gross income in the year of sale, etc. - your loss may become deductible. Losses on a personal residence are never deductible.

It’s hard for me to say what would be best in this situation, because from where I stand the relationship you have with everyone involved (your parents and your fiance) as well as your own comfort level is much more important than the tax consequences you would face. Notice I didn’t say “tax benefit”, because when there exists a tax benefit that usually means you lost a lot of money - so in my eyes, “tax benefit” is a misnomer.

Best wishes,
Gina

Abner writes:I’ve seen a number of website with donation buttons asking readers if
they like the site to help support it by donating.

If I were to use such a thing on my site, are there any IRS reporting considerations involved in doing so? Will those donations count as reportable income?

Thanks for your time.

Best,
–Abner

My reply:Hello Abner, thanks for visiting.

Yes, if you receive donations (or any income) you will need to report the monies received on your tax return. Depending on various other things, such as whether or not you’re a non-profit, the reporting requirements differ.

Best wishes,
Gina

Once again I have about 10 extra 2009 Mileage & Expense Log Calendars, which I will mail to the first 10 people in the U.S. who would like one, just email me your name and address.

In addition to being a 2009 calendar this book has space to record your business, charitable and medical miles for 2009. Proper documentation is necessary in order to claim your miles on your tax return.

Vincent writes:Thanks for your article, “Deduct Home Phone, Internet, Cell Phone“, but I was also hoping you would have told us *where* to deduct these qualified phone, modem, ISP, etc. charges. I never know if they should be counted as office expenses, utilities, fees, or something else. Also, as for keeping a log of business-related phone calls, wouldn’t the monthly statement from the phone carrier suffice, at least for most of the information, especially if it were annotated in such a way to exclude personal calls, with the assumption that everything remaining was business related? Certainly we don’t have to keep such logs for phone use in the corporate arena, even in small businesses (or do we??).

My reply:Thanks for your comment and thanks for reading my blog.

Where you deduct your expenses depends on which forms you are required to complete. If you’re a sole proprietor completing Schedule C, then you’d deduct it as part of your list of “other deductions”.

If your monthly statement from your phone carrier says WHO you called and WHAT THE BUSINESS PURPOSE OF THE CALL WAS, then yes, it will suffice, but most phone companies don’t know that information, which is why you need to keep your own log.

Until they change the law, which they’ve been working on, everyone who uses a cell phone must abide by these rules. It doesn’t matter if you’re a corporation or sole proprietor. The same goes for laptop use. The general rule of thumb is, “Anything that can easily be taken home to use needs a log”.

Best wishes,
Gina

Tina writes:
I am considering transferring my previous home to a S-Corporation and renting it.  However I am a bit confused about the S corporation. From what I understand:
1) I will first contribute towards the capital of S corporation (assume $30000 - ie 10%).
2) Using this money as downpayment (10%), the S corporation will get a loan from the bank and will buy the house from me personally.
3) Now with $300,000 which I will get from the S corporation, I can buy my new home.
4) The S corporation will rent my old home and deduct against the rental income- repairs, the property tax, the interest on loan  (loan of $300,000), depreciation on home.
5) Any excess if remaining will be passed to me.
6) I will have a wholly owned home of 300,000.

Please correct me if I have interpreted the above wrongly.

What is the advantage of this plan (of forming a S coporation) as compared to showing rental income on Schedule C.  Can’t I get the same deduction for my old home on Schedule C.  Also itemize the interest on  new home loan on her personal return.

Thanks and looking forward to your advice.
Regards.

My reply: The advantage of having the S-Corporation purchase the home instead of just transferring the home from a personal residence to a rental property is the step-up in basis.

When you transfer a home from a personal residence to a rental property (Schedule E of Form 1040) the basis in your rental home is the lower of cost or market.  So if your home is worth more today than when you purchased it and you transfer your home from your personal residence to a rental property, the basis to be depreciated as a rental home is your original cost because that would be less than what it is worth today.  If your basis is less then you get less depreciation.  Less depreciation means more current taxable income, which means more current taxes.

An S-Corporation is a separate entity from yourself.  If the S-Corporation purchases the home, the S-Corporation must purchase the home at Fair Market Value.  Thus, if the home has increased in value the S-Corporation will have a higher basis (cost) for the rental property.  This higher cost will translate into higher depreciation, which translates into less taxable income, which translates into less taxes.

The theory of your numbered steps appears to be correct; however you numbers may need adjusting, especially in today’s market.

Best wishes,

Gina