Saturday, March 19, 2011

Unbelievable but true

This next question, although not of general interest, is so unbelievable that I feel compelled to relay it to you. Amazing!

Q.  Recently I received a Notice of State Income Tax Due from the Franchise Tax Board (FTB).  When I read the fine print, it seems I am being penalized for an Other Liability Code 4, whatever than means. Can you explain?  MJ, California

A.  As luck would have it, I also had a client come in with one of these letters. The short answer is you are being penalized for sending the FTB a check instead of paying online! Here is what happened to a client of mine.

She authorized the FTB to take around $90,000 in estimated tax payments directly from her account. During the course of the year it became apparent to me she would be grossly under-withheld, so I had her send in another $100,000 to the FTB. The infamous Notice of State Income Tax Due letter together with a penalty arrived and she paid the penalty.

This week, the actual notice, rather than the faxed copy previously received, arrived on my desk. When I found the code and turned the letter over, Code 4 is explained as a Mandatory e-pay penalty of 1%. Unable to believe what I was reading, and since my client authorized automatic withdrawals, I called the FTB to find that because my client paid the extra amount by check instead of paying online, she was being penalized.

Absolutely unbelievable! You would think a state as broke as California would be happy to get the money any way they could. Most states are so broke they are nickel and dime-ing us to death. Watch out - this may be coming to a state near to you in the very near future, if it hasn't already happened!

Friday, March 18, 2011

What is this?

Tax Tip:  Many of us have our investment portfolios handled by one of the big investment houses, or possibly an investment adviser in our local community. If this is the case and you have investments in a taxable portfolio (I'm not talking about your IRA, 401K, 403B, or within an annuity, etc) it is imperative for you to know what tax forms to expect. Now that March 15th has come and gone, many taxpayers are just now receiving what are called K-1 forms from investments, especially publicly traded partnerships. If you filed your tax return prior to receiving these documents, you may need to amend your tax returns.

Always communicate with your investment adviser as to what forms to expect and make certain they are all accounted for prior to filing your return.

Thursday, March 17, 2011

Family challenges!

Q.  Last year I sold my share of a RV Resort lot I owned with my brother. I wasn't using it and he wanted to buy my share. He was short on cash, so we agreed on some cash together with 1,500 shares of stock he owned, which he was able to transfer over to me. The difficulty I'm having is establishing the value of the stock, which was gifted to him through an UGMA account way back in the 80s from my parents. How should I proceed? RC, Vermont

A Without details and without researching court cases or IRS rulings, I would rely on the willing-buyer willing- seller concept. Since you actually sold a capital asset, it is a reportable taxable event. Whatever share of the lot you sold, your selling price would be the cash received together with the agreed FMV (Fair Market Value) of the stock received. I would ascertain the average trading price (assuming it is a publicly traded stock) as of the date of sale, and report that together with the cash, as your selling price. Hopefully you had the lot appraised at the time of the sale so you don't have below market issues to contend with. Since this was a personal asset, and if the lot was worth less than the purchase price, the transaction is reportable, but you won't be able to take any loss (assuming a loss is the result). If the result is a gain, your holding period will determine whether you have a short term or long term gain.

Wednesday, March 16, 2011

No Depreciation!

Q.  I was working on my tax return today and noticed the program gave me no deduction for depreciation. I have the RV at a cost basis of $128,000 and am using SL depreciation over 5 years. My business use this year is 31%.  Can you tell what I am doing wrong?


A.  Depending on when you put your RV into business use, and the annual percentage of business use (which will usually change slightly each year), it's possible you already used up the allowable depreciation.

Case in point is the tax I worked on this morning. The taxpayers came to me in year 4 of using their coach. The firm which previously prepared the return didn't communicate with my client and used 100% business usage for his coach. In reality, the business usage was in the 30+% range. When I set up the depreciation properly, I had to put in the depreciation previously taken. And yes, because it was way over-depreciated in years 1 -3, there was no deduction for depreciation on the coach at all this year.

It is possible to pick up additional depreciation in a future year, providing the business use of the asset in question goes up. My suggestion is to check all prior year returns to ascertain if the business usage was properly calculated. Without more specifics it would be impossible to say. Computer programs aren't perfect!

 PS. Since my original comment, depreciation has been disallowed for RVs. See Jackson, T.C. Memo 2014-160, August 7, 2014.

Tuesday, March 15, 2011

Inherited Securities

Q.  My father passed away in February last year and I am his sole beneficiary. I sold several of his stocks in October, and now I need to report them on my return. How do I find out when he purchased them and how much in paid for them so I can report them on Schedule D? He's owned some of these stocks for decades! AA, Maine

A.  There are two possibilities: (1) if you were required to file an estate tax return for your dad, all the assets were re-valued as to either the date of death or 6 months thereafter, known as the alternate valuation date. This will be clearly reported on the estate tax return, if indeed, one needs to be filed, and if it has been filed. In this scenario, if the estate tax return has yet to be filed, you may have to file an extension for your return until the information is available to you.

If no estate tax return is required, then you simply get the average trading price for each security on the date of your dad's death, or the nearest trading day to your dad's death, in case he passed away on a weekend or holiday.

The good news is that there is no need to find out when he actually acquired each security and how much he paid for them. You simply report them as inherited and you will automatically receive long term capital gain treatment.

Monday, March 14, 2011

Record of Travel and Entertainment Expenses

Tax Tip:  One of the most frustrating aspects of preparing income tax information is gathering detailed records to maximize your deductions. This is especially true for out-of-pocket expenses pertaining to entertainment and travel.

If you haven't already done so, start today by using this or a similar chart to record contemporaneous expenses. If you have a taxable entity other than a sole proprietorship, each week, you should submit the record of expenses to your employer for reimbursement. If you are self employed, write a check either on your corporate, partnership, or LLC account to reimburse yourself. This alleviates the necessity of reporting these expenses on your personal individual return where they may be more closely scrutinized. The expenses will be a deduction at the entity level and will not need to be reported as income on your individual return.