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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I formed an LLC to operate my business and I am the only member. I mistakenly
   applied for a federal ID number indicating the entity is a partnership. IRS sent a letter stating that a Form 1065 is expected. Do I have to file a partnership return?
   
   Unless you elect to have the LLC taxed as a corporation, the LLC is a disregarded entity. You are not required to file a Form 1065. IRS sent the letter in support of your application for a federal ID number. As long as you are the sole member of the LLC, no election is filed to have the LLC taxed as a corporation it remains a disregarded entity for tax purposes and the business activity is reported on Schedule C of your Form 1040.

2. I own three houses. One I live in, one is a vacation home and the other is used by my mother (rent free). The total purchase price for all three was less than $500,000 and I pay the mortgage and property taxes on all three. Can I deduct the mortgage interest and property taxes on all three?
   
   You may deduct the mortgage interest on your principal residence and any one of the two other properties for any year as qualified residence interest. However, you may deduct the property taxes that you pay on all of the properties on Schedule A. Until there is a change in the character of the use of at least one of the properties (e.g., the vacation home is converted to a rental property), the mortgage interest on the third property will be considered personal (not deductible).

3. I bought 100% of the stock of an S corporation business I am running and I am paying interest and principal to the former shareholder. Where do I deduct the interest?
   
   Given that you are active in the business and purchased more than 10% of the S corporation
   stock, you may deduct the interest paid to acquire the stock on Schedule E as an entry underneath the entry for the profit or loss from the S corporation.

4. I have acquired a piece of land that I may develop sometime in the future. I think I will have a sizeable profit on the sale of the land eventually even if I do not develop it and I do not want to deduct interest or real estate taxes currently. Do I have an option?eceived a single bill – can I deduct all of it?
   
   If you wish, an annual election may be made to capitalize the mortgage interest and real estate taxes of the land. You should note that once construction begins (i.e., the first shovel hits the dirt), generally interest must be capitalized. If you choose to deduct the interest before development starts, it is deducted as investment
   interest and is deductible only to the extent of investment (interest, dividends, etc.) income. It is still elective on an annual basis whether to capitalize the real estate taxes, even after construction begins.

5. I filed an extension on April 2 and will file my return April 15- I pulled the missing information together faster than I thought. If I file on time must I make my SEP contribution (I am a sole proprietor) by April 15th or do I have until October 15th- the extended due date?
   
   Given your valid extension, you have until October 15th to make your SEP contribution even if you file your tax return by April 15th.

6. I bought my sole proprietor business from another party several years ago. Part of the purchase was goodwill. I have been amortizing the goodwill over 15 years. Last year several of the customers I purchased left. Can I increase the write-off?
   
   You should continue amortizing the goodwill over 15 years. You have not abandoned
   the business or sold all of the assets. The departure of customers will not allow the amortization of the goodwill to speed up. Essentially, as long as you are in business, the goodwill gets amortized.

7. I have a sole proprietorship with no employees. I meant to start a SIMPLE-IRA last year, but never got around to it. I did file an extension. Is there anything I can do now to make a retirement contribution that is deductible for 2007?
   
   You have until the due date of the tax return,plus valid extensions, to establish and fund a SEP-IRA. This is unlike a SIMPLE, which must be established by the end of October or a profit sharing or pension plan, which must generally be established before the end of the year.

8. I added my children to the title of my house last year as joint tenants. I still live in the house and pay all the maintenance costs and the property tax. I do not and will not pay rent. My children do not live with me. I was told by a good friend that estate tax will be avoided on the residence upon my death since my children received the house before my death and that it will be left out of my estate. Is this true?
   
   It is likely that your friend confused the probate process with estate tax exposure.
   As the title to the property passes to your children automatically on your death, the value of the house is excluded from the state probate system. However, as you continue to occupy the house and you maintain the house as your residence, its value will be included in your estate for estate tax purposes. As you added the children to the title as an accommodation
   rather than intent to actually transfer ownership to them, there was no current gift and no requirement to file a gift tax return. The good news for your children is that under those circumstances, their basis in the house is its fair market value as of the date of death, rather than your basis in the property at the time of the “gift”.