jainen

>>The result was the same<< It wouldn't necessarily be the same. Suppose the partnership had an overall loss that was limited by partner's basis or at-risk rules. By reporting earnings/expenses on a Schedule C instead, profit could still support an IRA deduction or SE health insurance premium, while a loss could offset wages or investment income.

>>That will be tough to explain<< Show them Chapter 4 of Pub 535. Tracing rules are the very first topic. "In general, you allocate interest on a loan the same way you allocate the loan proceeds. You allocate loan proceeds by tracing disbursements to specific uses." If they think that isn't technical enough, skip a few pages to the Capitalization rules. If they still don't trust you, go back to the last sentence of your original post.

>>subsequent payments (principal and interest) go to operations<< In my opinion, the interest is traced to an asset that they are no longer holding for a business purpose. I can see the argument for continuing to trace it to the proceeds of sale, but I don't agree. Other than the common misunderstanding that all mortgage interest is deductible, can you cite any authority? Nor can you allocate it to Cost of Goods Sold. The LLC does not seem to be in the business of repairing property for sale, but in any case real estate can never be inventory (by definition, even when held by a dealer). Besides, this transaction looks mighty personal--they drew on LLC assets to benefit a family member.

>>subsequent interest would be operating expense<< No! Interest tracing changes when the use of loan proceeds changes. 90.3% of the proceeds went to acquire Property B, but since they sold the property it now goes NOWHERE. Non-deductible. The 9.7% is deductible ONLY if it was used for a genuine business purpose, not distributed to partners through the LLC. "Cash out to LLC" doesn't necessarily suggest a business purpose.

>>Using these conventional ordering rules, the "answer" is 20.<< Nice post, Don. It is a trick question because the other answers are just as correct in their own terms. To make this more obvious, consider that nobody is questioning whether the number set is in base 10. There are many famous math ambiguities, including some real-world ones. And of course there are lots of word and grammar puzzles along the same lines.

>>EA's and CPA's cannot represent their clients before the tax court<< An EA or CPA can be admitted to practice before the Tax Court under Rule 200 http://www.ustaxcourt.gov/rules/Title_XX.pdf. You must be sponsored by two attorneys . The examination is every two years; it's too late to apply for the next one on November 14. http://www.ustaxcourt.gov/press/050812.pdf

>>Someone told my client that his early distribution is not subject to penalty because he started a new business<< I believe that is true--somebody did him tell him that! Or at least he honestly believes that somebody told him. What he was probably actually told was that it was POSSIBLE to withdraw 401(k) money under a very loose application of the hardship exception. Possible, but still subject to normal tax and penalty. Or it could be that odd tax shelter of rolling the employer 401(k) into a solo 401(k) at your own company, so you can invest your retirement funds in your own company. Maybe that's what someone told him to do.

>>It toasts the days weather forcast onto the toast!<< Cute, but no thanks--I see where this will lead to.. I mean, okay I'd chuckle at a timely bluetooth birthday greeting. But it would probably come from my insurance agent, the only person who even sends a card. And I sure don't want my nine-grain accusing me of getting up too late for the Kohl's early-bird special. In my house, food is not permitted to speak unless spoken to. (Except, of course, chocolate.)

>>what happened to the unaccounted for 458K?<< It's not surprising that less than 3% of attorneys have registered to prepare taxes, but how do you explain the missing half of CPA's and even the 20% of supposedly tax specialist enrolled agents that haven't applied? Not to mention the seasonal shopping mall employees who are the target of the PTIN program.

>>ime to close this Schedule C and move to line 21 -- without S/E?<< No, never.

>>appraisor is the same used by sotherby's and christies so there is no doubt as to their valuation<< All right, then--slap it on and you're good to go! (I'll slide past the fact that you seem to avoid the word "basis.") 40K it is.

>>appraisal is rock solid<< So, you are absolutely sure that the form and content of the appraisal complies with Section 170(f), even though you don't know what else that section says? And you are absolutely sure it's reasonable that FMV used would only take 15K off the dealer's price new? >>sold it to a charity for their use<< And you are absolutely sure the charity will give the IRS a written two-year promise because it's a donation, even though they paid $20,000? I have a lot of doubts about this whole thing, doubts which could have been cleared up if the taxpayer had asked for advice BEFORE the transaction. I hope you aren't racing to finish this by Monday, because I think you need more research. The thing that bothers me the most here is that you started out saying, "Assuming -0- cost." With at least $10000 tax break for an uncommon gift arrangement, what you really should be absolutely sure of is that YOU are not exposed to the 50% preparer penalty the IRS is having so much fun with these days.

>>LOWER of cost basis or FMV unless it's an appreciated capital investment<< It doesn't have to be an "investment," just a long-term capital asset. It can't be inventory (from a music equipment dealer) or include depreciation recapture (from a concert performer), etc. I would also verify that the appraisal is current and qualified--not much of a growth industry for high-priced acoustic instruments these days.

>>Are we in agreement... my only choice is to amend previous years, correct?<< Jainen in agreement? Surely you jest! Read the Instructions for Form 1139. They even disagree with myself concerning my previous rant about amending.

I like to have opinions--but not informed opinions. It takes so much work to get informed that it defeats the whole point of having an opinion in the first place,

>>don't see the word "original" regarding a "timely filed return"<< Well, do you see the words "in such manner as may be prescribed by the Secretary"? That's why I cited the IRS publications instead of the code. And no, filing an amended return timely is not the same as filing a return timely.

>>you can amend AND make the election only before Oct. 15<< Hey guys--original post was about a C-corp. Election can only be made on a timely-filed (including extensions) original return. (Even if it could amend within 6 months like individuals, estates, and trusts, that would run out Sept 15 for a calendar year c-corp.) [let's see--source is Pub 542, compare with pub 536.]

>>Other employment is irrelevant to if this is a business or hobby.<< Based only on the original post, I'd guess that this was a business started in or before October 2011. But OldJack's reasons are misleading. According to Pub 535, factors to consider include how much time is spent and how important the income is. Therefore a full-time job is very relevant. It is also backwards to say the IRS can't question it for 3 to 5 years, or that some years of profit will prove it's not a hobby. The law presumes it is NOT for profit unless it satisfies 3 out of 5, but no presumption otherwise. I would also not be quick to say hobby is an "awful status." You must consider the rest of the tax return, such as the effect of taking assets out of service in 2012. Not to mention that for $150 you might rather not attract a closer look, if you know what I mean. Local issues may be important too, like sales tax and business license requirements. There may even be personal issues, like the baby, that makes a business too much trouble. So my answer to the original question is that depreciation can not be deducted on hobby assets at all. And even if they are later converted to business use, depreciation would be based on the lower of FMV or cost, which would mean she never recovers the full expense.

>>do I have this correct<< Yes, you have your options correct--but your reasons are backwards! You can not file two Schedule E's because that would mean a Qualified Joint Venture, which is not allowed for an LLC. In most states that means you would have to file a 1065, but the ruling allows you to file ONE Schedule E on a joint return in a community property state. So, 1065 or one Schedule E. The 1065 might have advantages if this were a business, but you probably don't need it for rentals..

>>doesn't having formed the husband and wife llc negate the choice to file two separate E's<< Yes--an LLC can never be a qualified joint venture in any state. Thank you for the citation of Rev Proc 2002-69, which says the spouses in a CP state can choose to file an LLC as a partnership or a disregarded entity (sole proprietorship). Sorry Marilyn, that means only a SINGLE Schedule C or Schedule E! If they both want Social Security earnings, they must report their separate earnings on a partnership return. Or hire one spouse as an employee of the other. Apparently there is no authority for LLC spouses in other states to file anything except partnership. (Of course, any of these can elect to be taxed as a corporation.)

>>information on the number of efiles submitted by other practitioners in your area<< Not a scam, and not private information. It's just a bunch of statistics---the commercial product might be packaged nicely, but the source data is free on the IRS website. http://www.irs.gov/uac/e-File-Demographic-Data. The IRS wants to help "focus your marketing, thereby increasing the numbers of electronically filed returns."

>>I just doubt any employee has the ability to just void a tax court deadline<< Well, I may have left out a detail or two but it really did happen like that. I had tried to respond to the original CP2000 but they kept ignoring me until I corrected my CAF number. The NOD was dated July 1, so yesterday was the last day to file with Tax Court. But that doesn't mean the tax had actually been assessed yet. Since it never went to Examination, Tax Court would have simply kicked it back anyway. So I faxed in a statement and the case was resolved. Two lessons. First, admit your error and be friendly and personable. (Obviously that's me through-and-through!) Second, Mrs. Kinsey noted that since you can only attach certain things to the 8453, a CP2000 is the only way to deal with some hot topics when you e-file. Paper with explanation would have avoided the whole problem. (Of course, they fine us if we don't e-file, and don't even tell us what their hot topics are that need more info.)

>>Other than a deductible there would be no loss<< The deductible is NOT a loss, and in fact is irrelevant to the tax position. First determine the reduction in FMV; presumably two weeks before closing there was a reliable appraisal separating land from improvements, although some improvements such as paving may not have been destroyed. Compare that to insurance proceeds, regardless of how calculated, to see if there was a gain or loss. Next determine basis for sale. Add demolition costs to the non-depreciable land basis. Subtract depreciation from the original basis of structure, make any other basis adjustments, and further reduce (but not below zero) by the insurance proceeds. Increase by any reconstruction costs. Later, compare that to the actual sales price. Tax-wise he is in good shape. He didn't have to sell in a depressed market, facing capital gains tax. Instead he can elect to keep the property waiting for higher prices in the next two years, but without any tenant hassles. Meanwhile he has a ton of tax-free cash he can use for anything, including new property that will defer capital gains tax forever!

I won't accept any jokes about the kinder and gentler IRS today, and particularly commend Mrs. Kinsey #0710240. I missed the deadline for filing in Tax Court on my son's Notice of Deficiency. But when I explained that his middle initial was for my own name, she said that was sweet and cleared the account.

>>I charge what the bank charges me plus<< I guess this won't be a popular answer, but I strongly disagree. I've been lucky, and it's only happened a time or two. I just shrug it off as an ordinary cost of doing business. It's peanuts, and not worth hassling your clients over. Unless you put it in the engagement letter or post it at the front desk, you have no legal basis for such charges they never agreed to. No moral basis either, in my opinion. When you accept their check it is simply an order to pay from a particular account. If you want to involve a different account or bank, that's for your own convenience. Pay your own bank fees.