GROCO Tax Ninja
got problems with the IRS? you know who to call.

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

Recently a 1936 Bugatti sold for over $30 million. Granted, that’s the world’s most expensive car, and one of only three ever built, but it raises an important financial question for car collectors.

While acquiring beautifully restored antique cars may be someone’s high-octane passion, the IRS could see that “hobby” as a business, thereby changing a person’s tax status.

As with many items within a wide range of expensive collectibles, those interested in classic cars and racecars often claim the reasons for their purchases are varied but most often include personal pleasure and recreation, increasing asset value and even short-term market movement, or business profit.

In terms of tax treatments, the distinction between collectors, investors and dealers is of great importance. Between collectors and investors, the tax rule is generally more favorable to the investors. Whereas, being a vehicle dealer may create unique tax advantages.

A collector is considered someone who buys and sells vehicles for personal pleasure and/or recreation. An investor is seeking profit from appreciation of a vehicle’s value. A dealer is pursuing business profit by selling vehicles to his or her customers.

The tax rate on long-term (collection held for more than one year) collectible capital gain is 28%, whether you are a collector or investor. With regard to capital loss, investors are allowed to deduct the loss in the current year as long as they have enough capital gain to offset such loss. Otherwise, the loss in excess of $3,000 is carried forward to offset future years’ capital gains.

In contrast, a collector’s capital loss is disallowed. For both collectors and investors, the deduction of collecting expenses (e.g., appraisal fee, maintenance expense, etc.) is treated as miscellaneous itemized deductions, subject to the 2% AGI (adjusted gross income) limitation. Additionally, the unfavorable Hobby Rule may apply to collectors, thereby only allowing them to deduct the expenses to the extent of their hobby income.

With this in mind, consider establishing a vehicle dealership if you are doing substantial and frequent purchases and sales. The disadvantage is that your net income is subject to the ordinary income tax rate. The current highest rate is 35%, 7% higher than collectible capital gain rate. However, more tax advantages may result from sales tax savings such as full deduction of ordinary losses and escape from passive loss limitation.

Tremendous sales tax is imposed on valuable antique cars and racecars. A dealer is not required to pay sales tax on vehicle acquisition if they purchase the car as inventory with intent to resell. If the vehicle is sold at retail to an end user, sale tax will apply. (You may need to be very careful about the more stringent use of the tax rule governed by the California Board of Equalization).

A vehicle dealership is considered ordinary trade or business. Its business-related expenses are completely deductible if they are ordinary, necessary and reasonable. Even if the expenses exceed the sale receipts, the excess is allowed to offset income from other activities, even investment activities (e.g., capital gains) or treated as a net operating loss (NOL) to carry back and forward.

Although the risk of an IRS “Hobby Loss” challenge is low, you may still need to pay attention, to not raise red flags. The key point is that you should keep adequate records to substantiate your “for-profit” purpose and reasonable regularity and continuity of your trade or business.

Furthermore, you should avoid the Passive Loss Rule kicking in which could suspend your loss deduction. This requires that you physically participate in the operation and management of your dealership business. As an alternative, properly using the Passive-Activity-Grouping Rule may help you escape the passive loss limitation for both a vehicle dealership and other business activities even though you are not a material participant. You will have a chance to apply exceptions to the passive rule to circumvent undesirable passive loss suspension.

When acquiring antique or classic cars, you have choices, each with pros and cons. It’s highly recommended you consult with a tax advisor for tax implications before any critical decisions are made.
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Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW’s American Dreams: Keys to Life’s Success Radio Show.

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein, Rogoff, Olsen & Co., LLP

Many find themselves faced with Foreclosure in the world today. Sometimes the circumstances leading to Foreclosure are not our fault. If faced with Foreclosure you will most likely want to know what to do, how to get help and if you can get out of the situation. Each situation is unique; to help those faced with foreclosure we’ve assembled a list of 6 tips on what you should do when faced with this nightmare.

1) Talk With Your Lender Now

Talk with your lender now and be honest about your situation. The sooner you make this appointment the more options you’ll have. Look at the possibilities of making interest only payments for a while, or refinancing your loan. Lenders are willing to help because generally they lose profit on foreclosures and would prefer to work out an agreement instead of taking your house.

2) Scams

Within hours of being notified that your foreclosure is beginning you will be getting phone calls. Be wary of false consultants. Never sign the deed of your house over to someone else or allow them to speak with the bank in your behalf.

3) Chapter 13 Bankruptcy

You could file Bankruptcy chapter 13. Here you will be able to keep your home and other possessions under the supervision of the court. You will then be given a specific time period to pay the debt accumulated.

4) Sell the Property

This should only be resorted to if you are able to sell the property for more than you owe the lender. This needs to be done before the lender auctions your house.

5) Short Sale in Lieu of Foreclosure

Upon agreeing with the lender you can quickly sell your house for less than you owe. Be careful to clarify all details connected with this agreement because some banks will expect to be paid in full even in if you are making a short sale agreement.

6) Second Mortgage

Sometimes you will be given the option of taking out a second mortgage. Do not be lured into this trap. Interest rates are extremely high sometimes up to 17%. More than likely you will just exhaust your resources with this option.
________________________________________________________________________
Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW’s American Dreams: Keys to Life’s Success Radio Show.

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

In 2010, the number of households in the United States worth over $1 million rose to 8.4 million[1]. Although the thought of acquiring a million dollars may be a whimsical fantasy for some, it is not out of reach. With careful saving and investing, becoming a millionaire is possible if you apply a 5 step plan involving the following areas:

1. Health
2. Spending
3. Savings
4. Investing
5. Career

Health
Take care of yourself. If your health is poor, you won’t enjoy the rewards of a solid financial plan. Eat right, exercise daily, and discipline yourself. The most successful investors are those who have the discipline to stay with the program.

Spending
It’s true; a person always lives up to the amount of income they earn. If you make the money, you are apt to find a place to spend it. The key to successfully saving is to spend less than you make and to also spend more money in areas that will actually preserve wealth.

Savings
A disciplined approach to saving reaps rewards in the future. While saving early in your career, allocate a larger percentage of your savings to investments. A 30 year old with $15,000 invested and saving $600 a month will become a millionaire by age 56 if the money invested returns 10% per annum. If the investment rate of return falls to 8% per annum, the millionaire age is moved to 60 years old.

Investing
Focus on an investment portfolio that minimizes your fees and maximizes your returns. If you are unsure about the types of investments, consider low cost index funds such as the S&P 500 or Russell 5000.

Career
No matter how much you position yourself, your career will dictate how quickly you reach the millionaire plateau. You have to move above and beyond your job description, excel in your performance and make yourself invaluable to the organization. Align your goals and focus on efforts that make you a valuable employee. You want those merit raises; they will add up.

Check out the GROCO Millionaire Calculator to determine how much you need to put away to enter the millionaire class.

[1]U.S. MILLIONAIRE POPULATION GROWS BY 600,000 IN 2010 TO 8.4 MILLION. Spectrem Group. March 15, 2011. Web. September 29, 2011. http://www.spectrem.com/
____________________________________________________________________
Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW’s American Dreams: Keys to Life’s Success Radio Show.

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

So you are under audit with the IRS or the Franchise Tax Board. Thinking about representing yourself? I suggest that you think again. As a former IRS agent, some of the easiest adjustments came from individuals representing themselves. Simply put, I would ask questions and then listen to responses. Within the first 15 minutes, I would have enough information in my arsenal to make the person turn over some more tax dollars.

I remember the contractor that I visited at his onsite office location. As I walked through the office, I saw a computer in the office. I said, “Nice computer”. The contractor then responded that he never knew how to really use the computer except for playing games.

Unknowingly, this contractor just admitted that he was not entitled to $3,000 worth of deductions.

Just in case you are still set on representing yourself, then I suggest these strategies for handling the IRS audit:

1. You should understand the procedures for the IRS audits and appeal procedures.

2. Do not volunteer information to the IRS and pretend to be helpful.

3. The IRS will be focused on certain items in your return, stick with the issues under audit, and provide the agent with proper documentation for the expense or income item claimed.

4. Do not allow the IRS to go on fishing expeditions into areas that fall outside the audit.

5. If your return was prepared wrong, discuss the situation with a qualified professional. We all make mistakes. If the mistake was innocent, then admit the mistake and go on.

For help with representing yourself before the IRS, contact us at 510-797-8661 or www.groco.com.
_____________________________________________________________________
Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW’s American Dreams: Keys to Life’s Success Radio Show.

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP

Are the rich paying enough in tax? Billionaire Warren Buffett announced that he pays a lower tax rate than his cleaning lady[1]. With high net worth individuals facing multi-million dollar tax bills, this issue is debatable, but the point of the matter is that with the rising Federal Deficit, Uncle Sam will be looking for more ways to put National spending in line with Annual tax revenues. Tax hikes from prior legislations are already in place and new increases are on the horizon.

Here are some of the upcoming tax hikes to be aware of:

1. Social Security tax to increase on January 1, 2012

A temporary 2% cut in the social security tax will expire on January 1, 2012. If a person is earning $106,800 or above, (maximum wage subject to Social Security) they will see a tax hike of $2,136. The additional tax will raise an additional $111 billion in social security tax revenue.

2. AMT Tax to increase

The AMT patch was signed into law on December 17, 2010. The temporary patch raised the AMT exemption to $74,450 for 2011 for married joint filers and $48,450 for single filers. This patch will expire at the end of 2011, returning exemptions to the 2000 levels of $45,000 for joint filers and $33,750 for single filers[2].

3. Capital Gain rates set to expire

For taxpayers who fall above the 15% tax bracket, the capital gains tax rate for non-corporate taxpayers is currently 15%. This rate will expire at the end of 2012 unless changes are made by Congress, bringing the capital gain tax rate up to 20%.

4. Gift and Estate tax rates to increase

With the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, when an individual dies, estates are currently taxed at a 35% rate with a $5 million exemption per individual. As of January 1, 2013, the estate tax rate will increase to 55% and the exemption will drop down to $1 million, unless changes are made by Congress.

5. Qualified Small Business Stock tax exclusion to expire

The Tax Relief Act currently allows a 100% gain exclusion for Qualified Small Business Stock purchased after September 27, 2010 and before January 1, 2012. This tax cut will expire at the end of 2011. Also, the stock must be held for over 5 years to qualify[3]. For stock purchased after 2011, the exclusion is 50%[4].

6. Health Care surtax coming on January 1, 2013. 3.8% extra levy on investment income and .9% surtax on salaries above $250,000.

The Healthcare Reform Act brings with it a 3.8% tax on investment income. Those with salaries above $250,000 (married filing jointly status) will have to pay the tax on the lesser of the $250,000 threshold amount (for married filing jointly) or 3.8% of the investment income. The threshold amount is different for different filing statuses. Additionally, the Medicare tax will increase by 0.9%[5].

7. Expiration of 2001 and 2003 Bush tax cuts

The Economic Growth and Tax Relief Act (EGTRAA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRAA) were extended until the end of 2012. These tax cuts will expire in 2012, so be on the lookout for increased taxes in 2013.

As you begin your tax planning for 2011, make sure to take advantage of tax cuts that are available before they expire. Contact a qualified CPA to assist you in your tax planning.

[1]Baker, Brent. “Networks Embrace Buffett’s Call for Higher Taxes on ‘Mega-Rich,’”. Wall Street Journal. August 17, 2011. Web. August 2011. http://online.wsj.com/article/SB10001424053111903392904576512823989633638.html?mod=googlenews_wsj
[2]What is the latest news about AMT legislation in Congress? Mystockoptions.com. August 2011. Web. Nd. http://www.mystockoptions.com/faq/index.cfm/catID/DFE2FBA7-9773-4AE3-BBE66CABB4CE79B8/objectID/D943A51D-30A9-11D4-B9080008C79F9E62
[3]Important 2011 Tax Changes. Byers, Byers, and Associates. Web. Aug. 2011. http://ritabyerscpa.com/Tax_Breaks.html
[4]Expiration of the Bush Tax Cuts. Tax Policy Center. Web. Aug. 2011. http://www.taxpolicycenter.org/taxtopics/Expiration_Bush_Tax_Cuts.cfm
[5]Current Planning to Avoid the Future Health Care 3.8% Surtax. Weiser Law Group. Web. Aug. 2011. http://www.weisslerlawgroup.com/NewslettersforClients/Current-Planning-to-Avoid-the-Future.shtml
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Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW’s American Dreams: Keys to Life’s Success Radio Show.

By Alan L. Olsen, CPA, MBA(tax)
Managing Partner
Greenstein, Rogoff, Olsen and Co., LLP

Expensive art collections, investment hobbies and off shore bank accounts may raise red flags when it comes to IRS audits. In 2010, the Internal Revenue Service audited 18.4% of taxpayers whose income was above $10 million [1]. This percentage increased by almost 8% from 2009.

Although there is no way to completely avoid being selected for an IRS audit, there are steps you can take to minimize the likelihood of an audit.

1. Be honest – Living by the simple rule of honesty will save a lot of stress. Report all income including; unreported interest, dividends or miscellaneous income. The IRS has record of all your 1099s, so be sure to report them. Omitting income will raise a red flag. Be sure to properly report all your expenses and deductions.

2. Be organized – Keeping organized records is important. Properly record any expenses that will be deducted. Business expenses such as travel, meals, mileage etc. can be deducted, as long as they have been recorded. Keep all receipts, they will help to prove an accurate deduction. Be sure to give exact numbers versus rounding. When it’s time to submit your return, double check and make sure there is no missing information or signatures.

3. Be prepared if you are self-employed – The IRS realizes that self-employment also increases the likelihood of unreported income. You must have proof of all income and business expenses if you are self-employed. Do not record personal expenses as business deductions.

4. Watch your deductions – Taking deductions that are unreasonable for your income bracket may raise a red flag to the IRS. Be sure you have proper records for proof of all of your all deductions.

5. Avoid Fluctuation in Income – The IRS has a good idea of how much you make; if they notice a drastic change in your income this may raise another red flag. Be aware of reporting abnormally low income for your profession. On the flip side, be extra cautious if your income is over $100,000. IRS audits are 5 times more likely in this tax bracket.

6. Watch your Number of Charitable Contributions – Donating to charities is important, but be aware that a red flag may arise if you have made a lot of contributions. Hold on to all receipts, particularly if you are donating five times as much as the average person in your income bracket.

7. Use a Tax Professional – The best way to prevent or avoid an IRS audit is to use a CPA or accounting professional. These returns are often less likely to be selected for an IRS audit than a self-prepared return. A professional knows the laws and can help you to make sure that all proper deductions are taken and that all income is reported.

Taking these steps in preparing your return can help you to avoid possible red flags that could lead to an IRS audit.

[1] “IRS Boosted Auditing of Rich Taxpayers; Almost Doubling Rate Last Year.” Bloomberg. Mar. 2011. Web. Aug. 2011. http://www.bloomberg.com/
____________________________________________________________________
Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses. Olsen is also host of KDOW’s American Dreams: Keys to Life’s Success Radio Show.

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein, Rogoff, Olsen and Co., LLP

Business traveling costs add up fast. If you own a vehicle that is primarily for business use, there are tax deductions available readily awaiting. You can choose to deduct the standard mileage rate or actual expenses. If you are unsure of what option is best for you, consider the following:

Standard Mileage Rate

For July 1, 2011 to December 31, 2011 the standard mileage rate increased to 55.5 cents per mile, 4.5 cents higher than the first six months of the year.
If you own a vehicle, you can use this deduction beginning with the first year that you place your vehicle in service. If you are leasing your vehicle, and use this deduction, you must use it for the entire period that you lease the vehicle for. This means that you cannot switch between the standard mileage deduction and the actual expenses deduction[1].

With the standard rate, you can deduct miles driven as well as toll expenses and parking fees. You cannot deduct depreciation expenses, fees for leasing and renting or vehicle operating expenses[1].

Actual Expenses

The Standard Mileage Rate does not require as much record keeping as the actual expense deduction, but this deduction may be more beneficial if you keep a detailed record track your expenses.

The actual expense deduction allows you to deduct fuel costs as well as insurance, oil, maintenance, license plates, and other operating costs. You cannot take this deduction if you deduct the standard mileage rate. If your business uses at least 5 vehicles or if you use your vehicle for transporting purposes, you only have the option of taking this deduction and not the standard mileage deduction[1].

Also, deductions are available to you for purchasing vehicles for business purposes. However, before hoping for a deduction after purchasing the latest sports car or a cargo truck, realize that there are some requirements to qualify. The weight of the vehicle purchased must be over 6000 pounds, but not over 14,000 pounds gross weight. The vehicle must seat no more than 9 people and must not have a cargo area of more than 6 feet in length not attached to passenger area. There is also a $25,000 yearly limit for this deduction[2].

Decide in advance which deductions you want to use so that you will have proper records when it’s time to file your tax return.

Sources:

[1] 1040 Schedule C Line 9 Instructions. http://www.irs.gov/pub/irs-pdf/i1040sc.pdf
[2] Form 4562 Instructions page 13. IRS. Web. August 2011. http://www.irs.gov/pub/irs-pdf/i4562.pdf

By Alan L. Olsen, CPA, MBA (tax)
Managing Partner
Greenstein, Rogoff, Olsen and Co., LLP

With the spread of international corporations and nationally located businesses, owning a private business jet is becoming more common. Some may see this expense as a luxury rather than necessity, but regardless of how it is viewed, owning an aircraft for business use can have significant tax benefits. If you are considering purchasing a plane for your business, you may be able to deduct purchase and expense costs for the use of the aircraft.

Deducting Your Jet

There are certain qualifications that you must meet if you want to deduct a private jet for business use. If you qualify, you may be able to take the Special Depreciation Deduction Allowance on it. You need to have purchased the aircraft after December 31, 2007 and before January 1, 2014. If you own a shipping company or want to start a commercial flight business, be aware that aircraft deductions cannot be taken for businesses which taxi individuals or transport cargo[1].

The jet or aircraft must take more than 4 months to produce and cost at least $200,000. At the time that it is purchased, you must pay $100,000 or a 10% nonrefundable deposit for the cost of the aircraft[1].

How do you figure how much you can deduct? The Internal Revenue Service states that to calculate the depreciation allowance, multiply “the depreciable basis of qualified property by 50% (or 100% if placed in service after September 8, 2010 and before January 1, 2013)[1].”

The IRS goes on to state that you can “treat the leasing or compensatory use of an aircraft by a 5% owner or related person as a qualified business use if at least 25% of the total use of the aircraft during the year is for a qualified business use [2].”

Deducting Travel Expenses

Except for special exceptions, you cannot deduct commuting expenses from your place of residence to your workplace unless you have a home office that is your primary work place. You can deduct the cost of traveling from one office to another (see IRC section 162 a).

If you travel extensively in your plane for business, keep track of your travel expenses on a log in case you need to show documentation to the IRS [3].

For more information on this deduction or to see if you meet qualifications, be sure to consult with a tax professional.

Sources:
[1] Publication 946: How to Depreciate Property: How much can you deduct. IRS. Web. July 2011 http://www.irs.gov/pub/irs-pdf/p946.pdf
[2] Publication 946: How to Depreciate Property:Qualified Business Use: Exception for Leasing or Compensatory Use of Aircraft. IRS. Web. July 2011 http://www.irs.gov/pub/irs-pdf/p946.pdf
[3] Miller, Karen and Flesher, Tonya. “Deductibility of Business Aircraft”. Journal of Accountancy, July 2003. AICPA 2011. Web. August 2011. http://www.journalofaccountancy.com/Issues/2003/Jul/DeductibilityOfBusinessAircraft.htm

Alan L. Olsen is Managing Partner at Greenstein, Rogoff, Olsen & Co., LLP, a leading CPA firm in the San Francisco Bay Area. With more than 25 years of experience in public accounting, Alan works with some of the most successful venture capitalists in the world, developing innovative financial strategies for individuals and businesses.