Saturday, April 16, 2011

Q.  I know I will need an extension to get my return prepared, but how do I know if I will owe anything? JG, Texas

A.  The only way you can know is to do the best estimate with the information at hand you can, then review the IRS tables, and subtract any withholding from wages, and or estimated tax payments made. I have found over the years, especially with complex returns, that I need to have 90% of it finished in order to get an accurate estimate. By the time I go to all that trouble, I'd just as soon finish the return and be done with it!

Friday, April 15, 2011

Time to prepare my own return!

Happy April 15th everyone. Yes, I know, the filing deadline has been extended until the 18th due to some obscure holiday observed in Washington DC today. Yours truly is going to actually file her own tax return and a few extensions. So, I'm taking the day "off" to get this finished. No waiting for IRS servers for me! Hope you all had a great filing season and that you more or less learned what you needed to know. I'll get back to those questions ASAP, so keep them coming!

Thursday, April 14, 2011

Commentary

I've been receiving several inquiries regarding depreciation of RVs, so here is my opinion. First, you must legitimately use your RV for business. Second, you must be able to support and document the business usage. Only when you have the percentage of business use, can you make an informed decision as to what type of depreciation may be appropriate in your case.

Many times in the rush of taking advantage of favorable tax treatment, people opt for accelerated depreciation. This is fine, however, my feeling is to take a larger view. So often, RVs are used a lot at first, then after the bloom has faded, the usage drops to well below 50%.

If you first opt for accelerated depreciation of any type, you must remember two things: (1) When the business usage falls to below 50% you will need to report depreciation recapture. (2) If you dispose of the property prior to its useful life, you will also need to report depreciation recapture.

So what exactly is depreciation recapture? Simply the excess of depreciation over what it would be had you taken SL (Straight Line). In plain english, let's say an asset has a recovery period of 5 years, and the cost is $10,000. In SL depreciation, you would depreciation 20%, or $2,000 of the asset each year. But if you chose 200% DB (Declining Balance) with a half year convention, then the first year the depreciation would still be 20%, or $2,000, the second year $ 3,200, the 3rd year $1,920 and so forth.

The problem comes, as an example, when the asset is disposed prior to the 5 year recovery period. Let's say the asset is totally useless after 3 years. With total depreciation taken in 3 years of $7,120 the excess of accelerated depreciation over SL is ($7,120 - $6,000) or $1,120 which must be claimed as depreciation recapture, or income.

The other consideration is the category. Notice RV's aren't listed in the IRS tables of Class Lives and Recovery Periods. So, here you must use your best judgment. What type of vehicle best fits the size and weight of the RV under consideration? For big rigs, such as ours, I use the table for heavy trucks, which is given a 6 year life. Perhaps for an entertainer driving a Prevost, a Class Life for buses of 9 years is most appropriate. And for a typical gas RV like our old Fleetwood, possibly just using the mileage method would be best.

Whatever your decision, it is imperative that you be able to justify your position if and when an IRS examination should be held. I hope this will help guide you to the best decision for your situation.

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

Wednesday, April 13, 2011

Payment Options

Q.  When paying the IRS, are there any options available to me other than attaching a check to my return? I'm getting ready to go on a trip, and don't want to stick around to make certain the check cleared the bank, etc. PH, Pennsylvania


A.  If you are electronically filing your return, depending on the software you are using, there should be an option to have the funds taken out of your checking account electronically. In addition, you can now set up for electronic withdrawal of estimated tax payments. I have used this option for several years now and have found it to be quite satisfactory. In addition, the IRS website has an excellent Electronic Payment Options page from which you can choose. Just remember, that if you choose to pay by credit card, you will also have to pay a "convenience fee!"

Tuesday, April 12, 2011

How to pay?

Q.  I just received my tax return and find I owe about $2,000 more than expected. I understand I can apply for an installment plan, but that takes time and the IRS now charges a fee. Is there an alternative? HS, Kentucky

A.  What I tell my clients when confronted with a small amount due such as yours, to pay what you can with the 1040-V voucher. In approximately 4 - 6 weeks, you will receive a bill from the IRS with added interest. Often by then, you will have the additional funds, and will only be out the interest charged, currently 4%. Although this advice would most likely be frowned upon by the IRS, I can't think of a simpler or cheaper way to solve your problem. In theory, this could be done each time a bill appears. To my knowledge, as long as you keep paying, the IRS won't try to levy your wages or property. Good luck!

Monday, April 11, 2011

Extension please!

Tax Tip:  As mentioned in my last post, now is the time to file your extension. Waiting until next weekend is likely to be a disaster as the IRS servers will be totally overloaded. Note, the IRS Extension Form 4868 line 4 is where you need to estimate your total tax liability for 2010. Line 5 is for the payments made (this includes your withholding) and line 6 is for the balance due, if any, and finally, line 7 the amount you are paying.

Note in the past, if your estimate was more than 10% off, it rendered your extension almost worthless! Trust me on this, that last hour of effort can yield tremendous differences! I strongly suggest any tax due should be paid online to avoid late payment penalties.