Many of you know that the estate tax is scheduled to go to zero next year before it reverts to the pre-Bush rates and rules in 2011. So dying in 2010 seems like a good plan (just kidding, of course).

We all knew this was too good to be true, didn't we? There is now a bill in the making that will permanently extend the 2009 estate tax provisions. While this may be sad for those planning to die in 2010, it's really very nice for the rest of us.

You see, the pre-Bush estate tax provisions only allowed a $1,000,000 exclusion and taxed everything over that at 55%. The 2009 rules allow a $3,500,000 exclusion and the rate for estates greater than this is 45%. So, this would be a very nice change for future years.

Hopefully, they will also add a provision to increase the exclusion for inflation. I'll keep you up to date on this bill as it makes its way through the system.

FYI, there is another tax bill that has been introduced in the form of a "technical corrections" bill. People think technical corrections just mean minor clarifications, but sometimes they can be significant provisions. I'll let you know more about that bill in a future blog.

Stay on top of taxes and so you don't get blindsided and keep control of your hard-earned money.

Warmest regards,

Tom

Corey asks the following question:

Q: Tom, We have a Vacation home that we would like to put into an LLC for asset Protection. The LLC is owned by the AMLP. What are the options for doing this. I realize that we will not be able to deduct the Mortgage interest on our personal return after we do this. Do we need to rent the Vacation home from the LLC for our personal use(it is all personal usage no rentals for this home) in order to maintain the corporate legalities for asset protection? If we did rent it to ourselves would it have to be a net zero lease for taxes? Just looking for the best way to handle this with respect to taxes and asset protection combined. Thanks again! Corey

A: Corey, putting your vacation home into an LLC will not affect your mortgage interest deduction. Especialy if it is still owned by you and your spouse. In fact, you won't even have to file a separate tax return for the LLC as it can be considered a disregarded entity for tax purposes.

I don't recommend you rent it to yourself. You actually can lose tax benefits by doing so. There are several other tax benefits you can achieve with a vacation home, especially if you rent it out or if you have a business that you can rent it to.

Warmest regards,

Tom

Terry asks some excellent questions regarding an IRS audit and how to prepare:

Not that any one wants to go through an IRS audit, but I wonder if you could do 3 lists for all of us.

Q: What steps do we need to take to reduce a chance of an audit?
A: The most important thing you can do to reduce the change of an audit is to hire a really good tax preparer. This makes a huge difference on your chances of an audit. There are many options of how to report income and expenses A good tax preparer will look for ways to minimize your risk of audit.

The second thing you can do is build the right entity structure as part of your tax strategy. Some entities have a much greater likelihood of audit than others. A good tax strategist who also can prepare your tax returns can reduce your chances of an audit by as much as 90%.

Q: What forms and records do we need to have on hand so that the IRS auditor will not go on a fishing expedition through our records?
A: Good documentation is essential. The two most important records are a proper set of books through Quickbooks or some other complete software package and a completed corporate book for each of your entities.

Q: At an audit who should be there with us?
A: I strongly recommend that you have your CPA go to the audit without you. There is no reason for you to be there. Your CPA should be experienced in handling audits and auditors. And if the auditor asks your CPA a question, he/she can always say, "I don't know." You can't say that. This gives the CPA and you time to prepare an appropriate response to the auditor. This will help keep the auditor from going on the fishing expedition you were talking about earlier.

At ProVision, we take care of all of these aspects of an IRS audit for our clients. We have courses on bookkeeping and documentation (corporate formalities) at http://www.wealthstrategyuproducts.com and we routinely create tax strategies for our tax clients. For more information, contact us at cs@provisionwealth.com or call us at 866.467.5809.

Ada asks the following question about the tax effects of loans between an owner and their business:

Q: Could you tell me is a loan payback payment a deduction for a C-Corp so it will be excluded from the total income?

A: No, a loan repayment from a corporation to a shareholder is not a deduction. The reason is that when you loaned the money to the corporation, the corporation did not have to pay tax on it. So, when it is repaid, there is no deduction. The good news is that it is not income to you either.

Warmest regards,

Tom

Recently, David, one of our School of Wealth Strategy students, asked about using Quickbooks versus using some other accounting software. Is Quickbooks really that much better?

Interesting timing on this question, as I evaluated a new software, Working Point, just yesterday. What I found was that Working Point has several features not included in Quickbooks, most notably that it is an online solution and Quickbooks' online solution is not very good.

However, Working Point did not include several of the excellent features found in Quickbooks. For example, Quickbooks allows you to enter checks and deposits directly into the check register just like you would if you were doing it manually with an old style checkbook. This is a great feature because it really speeds up the time for entering data. Working Point does not have this feature. Also, Working Point does not allow you to write and print checks. Quickbooks does.

Quickbooks also has several reporting features, such as budgets and forecasts that aren't available to Working Point. And, you can do your payroll very easily through Quickbooks.

Quickbooks is far from perfect and there may be a better system out there. I just haven't found it yet. When evaluating bookkeeping software, make sure you get full reporting, including balance sheet, income statement and statement of cash flows and look for ease of reporting. Also, make sure it allows you to do online banking as this is a great time saver.

Most investors and emerging entrepreneurs can easily do their own bookkeeping in an hour or two a week with good software and using online banking. We have two excellent courses on bookkeeping, one is the Basics of Bookkeeping and the other is the Basics of Using Quickbooks. You can find these courses in our online book store at http://www.wealthstrategyuproducts.com.

Let me know if you find bookkeeping software that has the good features of Quickbooks and that you like better than Quickbooks. Especially if you find a good software that is online instead of having to load it on your computer.

Warmest regards,

Tom

Last week in our School of Tax Strategy call on Business Start Up expenses, we got to talking about education expenses. The IRS appears to be challenging a lot of education expenses, particularly those relating to public seminars on real estate and other investments. So, I promised I would give my opinion as to how to get the best tax benefits from your seminar education expenses.

Most people know about the Lifetime Learning and Hope Credits and other benefits for higher education though an accredited school. I'm not going to discuss those here. Rather, I'll focus solely on seminar expenses relating to some type of business or investing.

The general rule is that continuing education is not deductible if it qualifies you for a new profession. The genesis of this rule is in people going back to school for a law degree or some other professional designation. Congress decided that becoming qualified for a new profession should not be deductible.

So what about seminars for real estate and other businesses? If you are taking a class to become a real estate agent, that is clearly not deductible as it qualifies you for a new profession. On the other hand, if you are thinking about starting a new business, say real estate, then the seminars should qualify as investigative or other start up costs for the new business. These are generally amortized over 180 months once the business starts in earnest.

Let me give you an example. Suppose you spent $40,000 on educational courses and another $14,000 with attorneys and accountants and others to get the business set up. Once you begin business, you can start taking a deduction of $300/month for the next 180 months (15 years). ($54,000/180 = $300).

If your total start up costs are less than $50,000, then you can take a $5,000 deduction in the first year you do business and then amortize the remaining amount over 180 months.

The key here is to be able to show that the courses don't qualify you for a new profession, but rather are part of your investigative costs for your new business. I highly recommend you sit down with a qualified CPA who specializes in real estate to document your seminar expenses properly. Also, your CPA should know how to make the proper start up cost elections and how to properly report your expenses on your tax return. If you would like a recommendation for a qualified CPA, please feel free to call us at 866.467.5809 and ask for Wendy.

Warmest regards,

Tom