CPA CONSULTANTS PA

Real Estate Dealer versus Investor

2011-10-17T08:05:00.001-07:00

Land held for long periods of time as investment or farming land should be sold to an S corporation before development to capture capital gains tax rates on the land.

2011-02-06T04:43:00.000-08:00

That's my granddaughter Emma with me at Sarasota Jungle Gardens. It is really a great place to spend a few hours. Oh, and our friend is a Burmese Python.

Why Hire a PFS?

2011-02-05T16:35:00.000-08:00

What is PFS?

PFS, or Personal Financial Specialist, is the financial planning specialty credential issued by the American Institute of Certified Public Accountants (AICPA) exclusively to qualified CPAs like myself with proven expertise and experience in comprehensive personal financial planning. The AICPA is the premier professional association for CPAs in the

U.S.

and has more than 350,000 members. You must be a CPA member in good standing of the AICPA before you can obtain the PFS Credential.

Why is PFS a preferred choice among financial planning credentials?

PFS is granted exclusively to CPAs like me who are members in good standing of the AICPA. As a PFS Credential holder, I demonstrate a comprehensive knowledge of the core areas of financial planning. Also, to obtain the credential, I met stringent requirements with professional work experience, education and training and passed an examination that tests my financial planning knowledge. As an added benefit, when you choose me as a CPA/PFS for your financial planning needs, you also gain an advantage thanks to my knowledge and expertise in related areas such as tax, accounting and business management. This ensures that your needs are more fully met through an integrated, holistic approach.

What are other reasons I should hire a CPA who holds a PFS Credential?

Studies by independent groups have repeatedly shown that CPAs are among the most trusted advisers to the public. As such, CPAs have built a reputation over the last 100 years as a profession that provides competent, ethical and trustworthy advice. As a client, you can count on objective financial planning advice from me that will always meet your best interests.

Personal financial planning is a core competency for CPAs, and PFS is the only personal financial planning credential that is specifically designed for CPAs and the unique perspective we bring to the practice.

How do CPAs qualify for the PFS Credential?

To obtain a PFS, CPAs must prove their broad-based knowledge and business experience in core areas: estate planning, investment planning, the personal financial planning process, personal income tax planning, retirement planning and risk management planning. They must also pass an intensive qualifying examination and commit to lifelong learning requirements.

How can i be assured that you are serving my best interests?

CPAs adhere to the AICPA’s strict code of professional conduct and ethics. In addition, PFS Credential holders follow the AICPA’s Statements on Responsibilities (SORs) in Personal Financial Planning. These SORs describe specific planning procedures as well as guidelines for developing plans and communicating advice to clients. As a PFS Credential holder, I follow these guidelines when working with my clients and other advisers such as bankers and attorneys.

Favorite Investment Websites

2011-02-05T16:19:00.000-08:00

For those investors who want to go it alone, here are a few of my favorite online resource sites for Investment knowledge:

MSN Money http://moneycentral.msn.com/companyreport?symbol=mips - This site has a lot of information - (A) Under financial results- statements- click on the 10 yr summary tab (B) Under Earnings Estimate - click on Earnings growth rate tab - 5 yr growth rate (C) Analyst ratings ---Sometimes I open up four MSN Money tabs so I can look at various factors of a particular company
FinViz http://finviz.com/ They also have a great screener
Seeking Alpha http://seekingalpha.com/ Sometimes anecdotal, sometimes factual info on smaller companies and sectors
Vanguard https://personal.vanguard.com/us/funds/vanguard/all?sort=type&sortorder=asc Jack Bogle's legacy
Pink sheet securities http://www.pinksheets.com/pink/otcguide/investors_howtobuy.jsp smaller cap companies
Business week stocks - for a greater number of worldwide companies than MSN Money http://investing.businessweek.com/research/common/symbollookup/symbollookup.asp
Barons-WSJ-Marketwatch subscription service is a worthy investment
EE Times - Technology cutting edge articles http://www.eetimes.com/
Embedded computing design http://embedded-computing.com/magazine/news
Lightreading - Telecom industry http://www.lightreading.com/
Infoworld Cloud Computing http://www.infoworld.com/d/cloud-computing
Stockcharts.com www.stockcharts.com Free charts and chart school
Yahoo screener http://screener.finance.yahoo.com/newscreener.html

These are my favorites. Let me know if you have a good one I have not listed.

Ray Burnett CPA PFS

Foreclosure and deed in lieu - tax consequences

2011-02-03T21:46:00.000-08:00

FORECLOSURE
If your lender forecloses on your property, the action is deemed a sale of your property. If the mortgage balance exceeds the sale proceeds and the excess is not forgiven, then the foreclosure price is your sales price and your loss is the difference between the debt and your basis.

If the excess is forgiven (typical short sale), then amount realized on sale is the mortgage balance. However, the forgiven amount is cancellation of indebtedness income, and the remainder from your basis is capital loss. If the forgiven debt is on your principal residence, then it is excluded from income, but the basis in the residence must be reduced. There is a One Million dollar exclusion for this personal residence debt forgiveness income (2 million if married) if the debt was used to buy or improve the residence. Be careful with documenting home equity loan uses, as that Heloc check to pay off your credit card probably doesn't qualify for the exception.

The timing of the sale date is the year the foreclosure becomes final. You may want to waive your right to redeem to time the date of sale.

DEED IN LIEU
Deed in lieu of foreclosure is also considered a sale at the mortgage balance. However, if the fair market value of the property is less than the mortgage, the excess is considered forgiveness of debt income. This same treatment applies to an abandonment. The principal residence debt forgiveness income exclusion rules still apply.

INSOLVENCY
If you are insolvent at the moment before a foreclosure, then the forgiveness of debt income is reduced by the amount of your insolvency. There are no excluded assets in this calculation (IRA's). Thus, it may be wise to sell investment properties before your personal residence, as the personal residence debt exclusion is not tied to the insolvency calculation. Please remember to document the values of your assets and liabilities at the moment before foreclosure with as much documentation as practical/possible. If you have multiple properties in foreclosure, your insolvency will decrease with each property closing. If your are truly broke it shouldn't matter much, but if you have a big IRA or 401k, you will have to be more careful.

RESIDENCE
It is important that a property be considered your residence even though you move out. Remember the two years out of the last five years as primary residence rule. Consequently, be sure to treat any temporary rental of the residence as such, by including rental income on page one of your 1040 and deduction investment expenses related to the temporary rental on schedule A. Do not depreciate the temporary rental of your residence, to be more conservative.

LOOSE ENDS
Since the lender has to spend money getting a judgment, perhaps the deficiency will expire without much ado. There will be issues if the debt is not forgiven and a judgment is obtained. In some states a judgment can be valid for over 20 years. You may have a big capital loss carryforward, and then one day have debt that expires due to statute. Or you may settle and have income from the debt reduction. These things are not fair when there are capital losses that are limited and ordinary forgiveness income. I will have to ponder that possibility a bit longer.

FIRPTA 10% withholding exception

2011-02-01T22:08:00.000-08:00

Use as a Residence - Exception from FIRPTA Withholding
When the purchaser intends to use the acquired U.S. real property as a personal residence for himself or his family, the foreign seller may be subject to FIRPTA tax, but no withholding may be required on the disposition. For this exception to apply, one or more individual purchasers must acquire the USRPI for use as a residence, and the amount realized must be $300,000 or less. 802 If the amount realized exceeds $300,000 by even one penny, this exception does not apply at all. The purchaser must be an individual; the entity or individual status of the foreign seller is irrelevant. No form or other document needs to be filed with the IRS if this exception from withholding is relied on.

802 Section1445(b)(5); Regs. §1.1445–2(d)(1).

A common misconception regarding this exception is that it is the seller's use of the property as a residence that is relevant. As described, the anticipated use of the purchaser is the only determinant under the “use” test.
Some sellers believe that because the purchaser is not obligated to withhold FIRPTA tax, any gain the seller realizes is not subject to this tax under §897. This is not true. The exception is only for withholding of tax by the purchaser. If the seller incurs a gain that is otherwise subject to FIRPTA tax, it must pay that tax when it files its income tax return.
(1) “Use as a Residence” Test
A mechanical test determines whether the acquired USRPI will be used as a residence.
• First, the purchaser–transferee must estimate the number of days that the USRPI will be used by any person in the 12–month period after it is acquired. The number of days that the property will be vacant are not taken into account.
• Then, the purchaser must estimate the number of days she will actually reside there during the same 12–month period. Days of use by a purchaser's family member count, provided the family members are related to the purchaser within the meaning of §267(c)(4). 805 Under this section, a person's family includes only her brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.
• If the purchaser plans to reside at the property for at least 50% of the number of days that the property is to be used by all persons in the 12–month period, then the property will be considered as acquired for use as a residence. But before the purchaser can avoid withholding, she must make a similar calculation for the second 12–month period after the acquisition. Only if the property will be used as a residence in both years will she be able to avoid withholding.

Since only days of actual use count for this test, a purchaser–transferee can have multiple residences that qualify for this exception. There is no requirement that the property serve as his or her principal residence.
A benefit of this exception to the purchaser is that it does not require her to pay over, before or within 20 days of the closing at least 10% of the seller's amount realized. This is useful to her if most or all of the purchase price is to be paid on a deferred payment basis. If she had to pay the full withholding amount on closing, this could force her to come out of pocket for some of the purchase price earlier than the IRS might otherwise require (although she could seek a withholding certificate and defer the withholding obligation in this way).

(2) Property Not Actually Used as a Residence
The “use as a residence” test is based on the purchaser transferee's estimate of future use. A purchaser can rely on this exception to avoid withholding but in fact not reside at the property the requisite number of days during the two years after the purchase. In this case, if withholding would otherwise have been required and the seller–transferor did not pay the full amount of income tax due on its gain, then the purchaser will be liable for failure to withhold. He or she will not be penalized only if the subsequent failure to reside was due to a change of circumstances that could not reasonably have been anticipated at the time of the purchase.

Comment: A purchaser–transferee is not necessarily safe in relying solely on this residence exception and should not do so unless he or she obtains some tangible benefit (such as a reduced purchase price) from accommodating a seller–transferor in this way. A purchaser who does not use the property as a residence in the two years following the purchase will be left with the task of justifying this failure to the IRS as due to unanticipated change in circumstance. Withholding instead avoids this exposure.

(3) Dispositions by Foreign Partnerships
Since withholding by reason of a foreign partnership's disposition of a USRPI is governed by §1446 and not by FIRPTA, the exception for USRPI acquisitions for use as a residence cannot be used to avoid §1446 withholding.

News - Intangible Drilling Cost and AMT

2011-01-07T13:22:00.000-08:00

A recent case involved a taxpayer who wants to recognize IRA income now, rather than wait for higher tax rates. To offset higher income he is investing in an oil and gas partnership to obtain the intangible drilling cost deduction available in these investment vehicles.

The essential point to remember is that the IDC deduction cannot exceed 40% of AMTI before the deduction without the excess being classified as a tax preference. This is for independent producers, not integrated oils (most of these investment vehicles qualify for the reduced AMT preference).

For example, if a taxpayer has $750,000 in IRA income and $235,000 in IDC, he has a net income ignoring other deductions of $515,000. How much of the IDC is preference? You consider the $235,000 as tentative preference and add it back to the $515,000 to get back to $750,000. Then take 40% of the $750,000 for a IDC preference ceiling of $300,000.

Since the taxpayer has only $235,000 of IDC, none of it exceeds $300,000 and the AMT preference is ZERO.

In this example the client could invest up to $300,000 in pure IDC before any of it became a preference item.

As with any oil and gas calculations, your mileage may vary.

Ray Burnett prepared income tax returns and financial statements for oil and gas clients in the 1980's at the Firm of Beddingfield, McDowell and Lytle, CPA's in Houston Texas. He has diverse experience in oil and gas taxation and financial statements, including IDC and percentage and cost depletion calculations.

Tranfer Title Variable Annuity w/o Tax

2011-01-06T10:14:00.000-08:00

Revocable Trust owns Variable Annuity

Grantor dies

Beneficiary is Child

The IRS in two PLRs has ruled that the Child is considered the Beneficial Owner of the Variable Annuity and the variable annuity can be distributed to the child without triggering the built in gain.

FATCA - Foreign Account Tax Compliance Act

2010-08-07T17:29:00.000-07:00

ALL FOREIGN ASSETS MUST BE REPORTED (NOT JUST CASH)
US Taxpayers with Foreign Assets with an aggregate value exceeding US$50,000 at any time during the year must report them on their 2010 US Form 1040. Note that this is NOT JUST CASH as must reported under FBAR on Form TDF 90-22.1, but the AGGREGATE VALUE OF ALL foreign assets (IRC 6038D).

PENALTIES - The filing requirements are similar to FBAR. The minimum penalty is US$10,000 increasing to a maximum of US$50,000. The penalty may be waived with reasonable cause. Their is a an additional penalty of 40% on any underpayment related to income not reported on unreported 6038D assets.

SIX YEAR STATUTE OF LIMITATIONS IF $5,000 OF INCOME OMITTED
The statute of limitations is extended to Six Years on any US Tax Return where the asset not reported under FATCA (IRC 6038D) resulted in more than US$5,000 of income being excluded from the return.

TAXPAYERS COVERED - The law applies to Individuals, but the Treasury Secretary (currently Mr. Geithner), has the authority to require other US entities to file these informational returns. The Secretary is to issue regulations exempting non-residents and bona fide residents of US possessions from the FATCA filing requirements. He can also exempt certain assets.

FOREIGN REPORTING IN 2013 - In 2013, FATCA also requires Foreign Companies with substantial US owners to disclose information regarding US taxpayers. Failure by the Foreign entity to report will result in mandatory 30% withholding on payments to US taxpayers.