EJW CPA, LLC

EJW CPA, LLC Tax planning should have an ROI.

09/16/2024

“Every day the economy generates thousands of sales, loans, gifts, purchases, leases, wills, and the like, which suggest the possibility of tax problems for somebody. Our economy is “tax relevant” in almost every detail.” [1]

The above quote just says that taxes are pervasive, a part of almost every transaction be it sales tax, income tax, property tax, etc.

When you combine that with the understanding that all tax planning stems from a lack of neutrality in the tax system (differences in treatment for entity type, income type, marginal rate, etc.), you see that all these transactions have potential planning opportunities.

Since a business managers’ job is selecting transactions that increase firm value, it stands to reason that tax management and tax planning are highly relevant.

So how might a transaction or exchange be adjusted?
1) Entities – certain entities receive favorable treatment for certain transactions, like partnerships getting basis for the bank loan, which paid for most of the tax benefits like depreciation and mortgage interest deduction.

2) Jurisdiction – this is the legal right to deprive one of property (money); naturally Texas with no income tax would be preferrable to a tax laden state like California or Ohio (California will tax you if you breathe).

3) Character – ordinary income and capital gains rate income are the two basic types of income, with attributes such as passive adding to complexity. Shifting between types is a common exercise.

4) Risk – certain tax planning is riskier than others, and result in a lower expected value or benefit. Identifying and mitigating risk can increase the value of that alternative, even if the numbers on the tax return didn’t change.

5) Timing – knowing when to defer or accelerate, income or deductions, is critical for acting consistent with the time value of money, a dollar today is worth more than a dollar tomorrow. And this can be influenced by timing deduction and income. [2]

Reach out an ask how this might apply to you, be it me or you existing accounting team.

You can spend your money better than the government can; don't leave it on the table.

[1] United States v. Bisceglia, 420 U.S. 141, 154 (1975)
[2] Principles of Taxation for Business and Investment Planning. 2020 Ed. Jones, M. Sally, et al. McGraw-Hill Ed.

09/08/2024

Sec 121 Exclusion

I’ve read that no other asset class is given greater preference by the tax code than real estate.

One such preference is the Sec. 121 - Exclusion of Gain from Sale of Principal Residence.

Assuming conditions are met, a taxpayer can exclude $250,000 from a sale or exchange of their principal residence. In the case of married couples filing joint returns, it is doubled to $500,000. You can repeat after two years, with no limit.

Basically, if within five years prior to the sales date, you:
1) owned the property,
2) used the property as your principal residence,
3) for an aggregate of 2 or more years (within the 5-year period),
then you will have met the basic conditions.

It can of course get more technical with deaths, divorces, or safe harbor forgiveness, but no need here.

For Real Estate Agents and Their Clients

Mention this and show your clients how the return on their home just went up.

The exclusion means more cash in their pocket at close. They may choose to buy more home or not.

Either way, you made sure they had the information to act in their best interest.

09/02/2024

Real estate agents operating as independent contractors can deduct amounts where employees may not. This benefit comes with obligations where left unmet may be costly.
The following are key points from a real estate agent’s failure to meet various standards. Remember that tax planning can be structuring affairs to achieve benefits other structures can’t. The agent, as an independent contractor, had access to tax benefits employees didn’t. However, any tax planning became mute when those benefits were stripped away.

1) Substantiation: the agent asserted a home office of regular and exclusive use. She in turn claimed deductions for the cost of rent (to her sister). Zero proof of rental agreement or related payments meant zero rental deductions.

2) The taxpayer’s home office, which she proved on paper and with photos, fell flat. The taxpayer did not establish regular and exclusive use, so deductions did not follow. This ultimately turned her home office from deductible to non-deductible.

3) Cell phone and utilities were a no-go on several fronts:
a. She provided a Verizon bill but no proof of payment via receipts, credit card statements, etc.
b. While you know your cell phone gets business use, absence of some credible distinction between business and personal could lead to all personal use and no deduction, as it did with her.

4) Business miles may have occurred, but for tax purposes they got no credit
a. Certain deductions provide no room for error when challenged. One of those is especially valuable to real estate agents - vehicle expenses. The vehicle didn’t change, but the cost did, increasing with every deduction disallowed.

Collateral Damage:
1) As deductions went down income went up, to the point the agent had to file a tax return she originally thought exempted.
2) The change in taxable income now created a tax liability that was not paid when due. Enter failure to pay penalties.
3) Miles from a home office to other business location may be deductible. The removal of the home office also removed previously deducted.
The net effect was to make her real estate efforts less profitable. To achieve the original return on investment whether time, money, etc., now requires more effort. The legitimacy of her business was never questioned. Instead, its scope was reduced, which in turn reduced the amount of cash returned.
Tax planning arises from differences in treatment. There is an intentional attempt to create inequalities that are entirely legal.
If you have questions reach out.

09/01/2024

Is QuickBooks enough to prove entitlement to a deduction?

It may not be. Books and records to the IRS may be different than assumed.

One taxpayer found out books and records meant not only the QuickBooks summaries, but also the hardcopies underlying them, such as, invoices and receipts.

Unfortunately, they had the QuickBooks, but not the supporting documentation.

The price was a disallowance of roughly $230,000 in losses and deductions.

Moving Forward:
1) Deduction proof - recognize QuickBooks and other electronic accounting records are not sufficient to prevail against a challenge.
2) Source documents - support the summaries with details from source documents generated from operations, such as:
a. Cancelled checks
b. Third-party financials like bank registers
c. Receipts, sales and charge slips, payment confirmations

So what? Who cares?
True, the audit rate is low, and the example involved larger amounts.

The takeaway might be that solid documentation can make deductions more valuable by increasing the odds their benefits will be realized. It may also reduce other costs such as time and energy to resolve disputes.

In the example, 230,000 at an assumed 20% tax rate might impact cash by around 50,000.

[1] Ray Kouza et al. v. United States

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