August 17, 2010
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.
Alan Olsen is Managing Partner, Greenstein, Rogoff Olsen & Co. LLP, CPAs. Alan is a former IRS auditor who now specializes in tax preparation and consulting for high-net-worth individuals. He has successfully represented some of the most successful entrepreneurs in the world in IRS audits. Read more at www.GROCO.com.
August 10, 2010
By Alan L. Olsen
, CPA, MBA (tax)
Managing Partner
Greenstein Rogoff Olsen & Co. LLP
As pressure from Congress to raise revenue and close the multi-billion dollar “tax gap” continues, the Internal Revenue Service is increasing the number of audits against high-net-worth individuals.
The IRS, as a result of increased funding and directives from Congress, is currently hiring a vast number of tax auditors and collectors, and creating special new units to use a wide spectrum of tactics for investigating wealthy taxpayers for tax compliance. A recent article in the New York Times reported that taxpayers who earned at least $1 million had an 8 percent chance of being audited in 2009, meaning roughly one out of every 12 returns was scrutinized. That’s up from 6 percent in 2008.
Most U.S. citizens take great pride in paying as little tax as legally possible, and they will pay good money for this right. But as the government tries to squeeze taxpayers for more than what they perceive as fair, animosity will begin to build, sometimes with catastrophic results. (To be fair, this deficit-reduction strategy can be found in areas represented by both sides of the aisle, and on the state level as well.)
If you receive an audit notice from the IRS, here are six things you should know to move forward:
Don’t panic. Many of these letters can be dealt with simply and painlessly. There are a number of reasons why the IRS might send you a notice. Notices may request payment of taxes, notify you of changes to your account, or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.
Follow the Instructions. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry. If you receive a correction notice, review the correspondence and compare it with the information on your return.
Don’t Put It Off. If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise. If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
If You Have Questions, Call. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.
Keep Careful Records. It’s important that you keep copies of any correspondence and a log of any telephone calls with your tax records.
Get Expert Advice. If you dispute the IRS findings and need help in resolving the matter, get in touch with an attorney or certified public accountant who has a track record of success dealing with IRS audits.
Alan Olsen is Managing Partner, Greenstein, Rogoff Olsen & Co. LLP, CPAs. Alan is a former IRS auditor who now specializes in tax preparation and consulting for high-net-worth individuals. He has successfully represented some of the most successful entrepreneurs in the world in IRS audits. Read more at www.GROCO.com.
August 3, 2010
Alan Olsen, Managing Partner
Is your investment seen as a hobby to the IRS? Alan Olsen, managing partner of Greenstein Rogoff Olsen and Co., LLP recently wrote an article on the tax consequences that may be involved with purchasing high priced collectibles. This is a trap that many will want to avoid if an audit comes in their direction.
Click here to read the article.
July 27, 2010
The IRS has announced the new Small Business Healthcare Tax Credit. This credit will allow small business owners to deduct 35 percent of healthcare premiums that they pay.
There are several requirements for eligibility including the number of employees in your business and the amount of health care coverage provided by the business. Also, the average wage that the employer pays employees must be under $50,000.
This credit can be taken by taxable and non-profit businesses.
To learn more about your eligibility for this credit, please visit http://www.irs.gov/newsroom/article/0,,id=223666,00.html?portlet=7 or contact us at 510-797-8661.
Greenstein, Rogoff, Olsen & Co. (GROCO®) is the trusted financial advisor to the venture capitalists who helped build companies such as Google, Skype, America Online, Oracle, Sun Microsystems, Compaq, Macromedia, eBay, and Genentech. Consistently ranked as one of the top accounting firms in the Bay Area, our firm provides consulting services and accounting services to high net-worth individuals and closely-held businesses. www.groco.com
April 20, 2010
March 16, 2010
March 9, 2010
There is a common phrase that states, “Nothing in life is free.” This may be true, but there are tax credits you can take to help save money when filing your tax return.
Credit #1-First Time Ho
me Buyer Credit
The first time home buyer credit has been extended to cover homes purchased between January 1, 2009 and April 30, 2010. Taxpayers can receive a maximum credit of $8000 if they purchased a home for the first time during this time period. The credit does not have to be paid back unless the home is no longer the tax payer’s main residence within a three year period. The credit has now been extended to cover homes purchased until April 30, 2010. There are phase out levels dependent upon the adjusted gross income (AGI) of the taxpayer. There is also a home buyer credit for existing home owners. For more information on income limits or the credit please see http://www.groco.com/readingroom/real_homebuyer_credit.aspx.
Credit #2-Lifetime Learning Credit
College enrollment has increased since the downturn of the economy. The lifetime learning credit allows individuals who are paying college tuition to receive a credit for qualified tuition and related expenses. With this credit, taxpayers can receive back 20% of qualified out-of-pocket education expenses up to $2000. To qualify for the credit, your modified adjusted gross income (MAGI) must be less than $60,000 if you are a single filer. If you are married filing jointly your MAGI must be less than $120,000 to qualify. Those who are married, but filing separately do not qualify for the tax credit. For more information regarding this credit, please see http://www.irs.gov/publications/p970/ch04.html#en_US_publink1000178153.
Credit #3- Making Work Pay Credit
The government has passed the American Recovery and Reinvestment Act of 2009. This act allows for the “Making Work Pay” tax credit. With this credit, tax payers can receive up to $400 for working individuals and $800 for working families. For most, the credit will automatically be received as the amount will be withheld from employees paychecks. However, if the credit is not automatically received, individuals can claim the credit on their income tax return. The credit is phased out for taxpayers with an AGI of over $75,000.
Credit #4 -Energy Efficient Home Improvements 
The government has created several “green incentives” with their energy efficiency tax credits. If you made changes to your existing homes in 2009 that include one of energy efficient changes below, you can claim a tax credit of up to $1,500. Changes may include:
- Adding insulation
- Installing energy efficient heating and air conditioning
- Installing energy efficient windows and doors
Also, if you installed qualified solar heating energy systems, you can deduct up to 30% of the costs for installation.
Credit #5-Unemployment Benefits Credit
If you received unemployment benefits in 2009, you can get a tax credit. The first $2400 that you received in benefits for 2009 is not taxable.
If you qualify for any of these tax credits, you may save yourself quite a bit of money. If you need help with claiming the credits on your tax return, you can seek professional assistance. Feel free to contact our office at 510-797-8661 or by clicking on the link http://www.groco.com/company/contact.aspx.
March 2, 2010
Do you want to minimize your chance of being selected for an IRS audit? There is no way to completely avoid being selected for an IRS audit however; there are tips that you can follow to minimize your likelihood of being audited.
Below are six tips to lessen the chance of your return being selected for an IRS audit:
- Be honest-If you live by the simple rule of honesty, it will save you a lot of stress. It is wise t
o see that all of your expenses and deductions are true when recorded on your tax return. Mistakes happen, but avoid intentional ones.
- Be organized-It is important to keep good records. Properly record any expenses that you are deducting on your tax return. Business expenses such as travel, meals, mileage etc. can be deducted, as long as they have been recorded. If the expense is minimal, a simple note written in a notebook or on a spreadsheet will work, but if the expense is large, keep the receipt. A receipt will help to prove an accurate deduction.
- Report all interest- Collect all appropriate tax documents when your tax return is prepared. If your bank or other investment companies have not sent you 1099s for interest on accounts, contact them. The IRS has record of these documents and so you need to record them on your tax return.
- 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 your income and business expenses if you are self-employed. You should not record personal expenses as business deductions.
- Watch your deductions-If you take deductions that are unreasonable for your income bracket, this may raise a red flag to the IRS. The process that the IRS uses to select returns to audit starts with the IRS computer. The IRS computer gives each tax return a Discriminate Function Score (DIF score). During this process, the deductions that you take are compared to other scores within your income bracket. High scores result from unrealistic deductions within certain tax brackets. If a return receives a high score, it will be passed on to an IRS agent for review to see if any additional tax can be collected. If your deductions seem a bit unrealistic, you should have proof to back them up.
- Use a tax professional-A tax return that is prepared by a CPA or other accounting professional is 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.
Greenstein, Rogoff, Olsen & Co. (GROCO®) is the trusted financial advisor to the venture capitalists who helped build companies such as Google, Skype, America Online, Oracle, Sun Microsystems, Compaq, Macromedia, eBay, and Genentech. Consistently ranked as one of the top accounting firms in the Bay Area, our firm provides consulting services and accounting services to high net-worth individuals and closely-held businesses. www.groco.com
February 23, 2010
Having an overdue tax bill may lead to severe problems. Understanding the IRS collections process may help to steer you out of harm’s way.
What is a lien?
When a tax payer owes money to the IRS, the IRS can file a tax lien against them. A lien is a legal claim that the IRS issues on the taxpayer’s property to satisfy the debt owed. The debt is not just the taxes owed, but interest and penalties assessed. The lien can be filed when the IRS sends a taxpayer a notice of payment and the taxpayer does not respond to it within 10 days. (www.irs.gov)
The lien will be for the amount of your tax debt. If the tax debt is not satisfied, the lien can be attached to assets s
uch as your car, home or business.
How is a lien filed?
When a debt is owed, the IRS will usually send several notices to the taxpayer informing them of the debt. Before resorting to enforced collection, the Automated Collection System (ACS) will contact the taxpayer informing them that they have 24 hours to make the payment before collection is enforced.
The IRS does not need to issue a lien before collecting assets from the taxpayer. However, IRS agents usually acquire a court order before entering the taxpayer’s property.
How to avoid a tax lien?
A lien may reflect badly on your credit rating making it very difficult to take out any future loans. Proper preparation is the surest way to avoid problems with the IRS. The following tips will help in to avoid having a lien filed against you.
- Pay all tax bills in a timely manner. A good way to do this is to set aside the money that you will need to pay in tax right after you receive a paycheck. If you are self-employed, find the tax percentage for your income and set it aside in a separate bank account.
- Respect IRS agents. Keep in mind that, as a taxpayer, a “Bill of Rights” has been written in your behalf. However, when working with the IRS, rude comments will not work in your favor. Realize that the IRS agent that you are working with is also an individual and may be able to work things out with you. Disrespect will most likely not yield the results that you want.
- Work with a professional. A CPA can help you to understand what tax amounts need to be paid and when. This may have a higher short term cost, but will sometimes save you stress and money later on.
What to do if a lien is filed against you?
If a lien is filed against you, immediately seek professional help. A CPA or tax attorney may be able to assist you. A lien can be released 30 days after the debt is satisfied, but be prepared to pay additional fees to release and file the lien.
It is always better, less expensive and more convenient to avoid tax liens.
For more information on IRS collections, please visit http://www.groco.com/readingroom/tax_irscollections.aspx.
Greenstein, Rogoff, Olsen & Co. (GROCO®) is the trusted financial advisor to the venture capitalists who helped build companies such as Google, Skype, America Online, Oracle, Sun Microsystems, Compaq, Macromedia, eBay, and Genentech. Consistently ranked as one of the top accounting firms in the Bay Area, our firm provides consulting services and accounting services to high net-worth individuals and closely-held businesses. www.groco.com
February 16, 2010
College. Tuition, books, housing, computer, food, etc… Sound familiar? These items are just a few of the many frequent expenses encountered in a student’s college career. The government made education credits to try and offset these expenses through giving tax benefits for them. From a tax standpoint Education credits have usually been nonrefundable, meaning they can only reduce your tax, dollar for dollar, until your tax is zero and then the remainder disappears. However, thanks to the American Recovery and Reinvestment Act of 2009 it is possible to get a REFUND through education credits. Some may have heard of the “Hope Credit” or the “Lifetime Learning Credit,” since these education credits have been around for many years.
Although not refundable,
the “Lifetime Learning Credit” is not limited to a certain amount of years as other credits are, nor does it require the pursuit of a degree or educational credential. You can reduce your tax by up to $2,000 on the first $10,000 of qualified expenses. This also does not vary with the number of eligible students in a family, so if you have multiple student dependants, the expenses are combined toward the $10,000 of qualified expenses.
With the new “American Opportunity Tax Credit” you can get money back to help lift the burden of college expenses. In most situations this credit replaces the old “Hope Credit”* and widens the scope of people who qualify for the credit. Through this credit you can write off the first $2,000 of qualified college expenses₁. Then you can take $500 of the next $2,000 of qualified expenses. This can be claimed for the first FOUR years of postsecondary education instead of the previous two years under the “Hope Credit.” So under the “American Opportunity Credit” you have up to $2,500 to reduce your tax to zero or below, and it is available for four years of college instead of two, and 40% of the credit is refundable if you have a higher amount of credit than you have tax. That means that an amount up to $1,000 could be refunded to you.
See www.groco.com/readingroom/2009_dependentcredits.aspx for more information on the Educational Credits phase outs, comparisons, and much more!
*Midwestern students in disaster areas can elect to apply previous rules of the Hope credit.
₁ Qualified expenses include tuition, books, and mandatory fees. The American Recovery and Reinvestment Act of 2009 has also included course supplies and equipment necessary for the course of study even if they are not purchased from your school. Section 529 Education Plans also include computers and computer technology in qualifying college expenses.
Greenstein, Rogoff, Olsen & Co. (GROCO®) is the trusted financial advisor to the venture capitalists who helped build companies such as Google, Skype, America Online, Oracle, Sun Microsystems, Compaq, Macromedia, eBay, and Genentech. Consistently ranked as one of the top accounting firms in the Bay Area, our firm provides consulting services and accounting services to high net-worth individuals and closely-held businesses. www.groco.com
