Mr. Pencil

Since you already forestalled my sarcasm, the best I can do is remind you to tell her that as a true professional you DO know a secret trick for the IRS, by which she can still file her taxes as a corporation even before the state approves the corporation. It's called check-the-box, and applies to any non-corporate entity including a sole proprietorship. Of course, for 2013 she would now have to qualify for late election relief (show her the Instructions for Form 8832). Which you can do easily enough--she just needs her other tax advisor to draft the statement of reasonable cause, because it was all HIS fault!

After further research, I agree.

Cost segregation is theoretically possible, but not practical for a residential rental house. First, literally first, you have to identify separate assets before you start depreciation. You need an engineering study to do that, and nobody wants to bother for less than $100,000. Then you have to get IRS agreement for a change in accounting method, and they don't like those very much unless there is real solid business (non-tax) purpose for it. So just include the cost of removal in the basis of the new roof, and let the old depreciation schedule run its course.

Yep, and flows through to Schedule SE as you say. Subject to withholding too, just like any other taxable fringe benefit.

Nope, that was outlawed way back in 1981 by the change to ACRS. You can no longer use component depreciation like that--when a structural component of a building is removed, it is not treated as a disposition until the entire building is disposed of. There is no adjustment to basis, no gain/loss, no recovery of cost allocated to the removed component. The building as a whole continues on the same depreciation schedule, even though a new schedule is started for the replacement component.

Structural integrity is not the only issue. These days a new roof is often an upgrade with steel or hi-tech materials for fire proofing or energy efficiency. The new regs call that a "betterment" and require capitalization.

In that case you DO have a problem, which I already mentioned. It sounds like she will have little taxable gain, but she still faces a huge withholding anyway. It's based on sale price. She needs to contact her escrow officer about making an election, and there are still plenty of escrow officers who have their own procedures or just plain don't know how it works. Meanwhile you need to get her records and accurately calculate her gain. Here is a general link that will refer you to more detail and forms. https://www.ftb.ca.gov/individuals/wsc/California_Real_Estate.shtml

Yes, but what if you repair a small section on one corner of the roof of a house that is not yet in service as a rental? You can't deduct it currently because the activity is not being operated for profit at the time. When rental does start, you still can't depreciate it because it was not a capital improvement. Only if the rental (a passive activity) can be considered "active conduct of a trade or business," and if repairs can be considered start-up expenses, would a Section 195 election apply. I don't know of any actual regs or rulings allowing a rental to use Section 195, so that's an aggressive (though reasonable) position. It would be safer to treat a series of such repairs as an overall remodel adding to the acquisition basis.

Yes, it is definitely taxable to California. The rules are probably the same as federal (unless there's a reason to adjust California basis, such as an energy credit). There is no tax break for capital gains rates, so prepare your client for a shock as California hits her at the highest rate for her world-wide income, probably about 10%. Also, California will withhold a big chunk--3.3% of sales price unless she calculates and declares a lesser gain amount before signing off. Your software should do Form 540NR with little trouble. You won't have to register in California to e-file from Washington.

Yes, I thought about that. Actually I thought that was the question and that my links were not directly on point. Although a rental shares some characteristics of an "active trade or business," I wouldn't bet a lot of tax that rental start-up expenses can be deducted/amortized under Section 195. There's probably a ruling on that somewhere, limited to specific circumstances. Anyway, "capitalize" in this context does not necessarily mean "depreciate." You still have to determine if they are repairs, which are not MACRS property and can only be recovered when the activity is disposed of. As to the effective date, which I acknowledged, I think in this particular case it is reasonable to rely on the current regs for an original return. These regs interpret existing tax code that is not changing.

Is your opinion based on the new taxpayer-friendly regulations effective 20 days ago? Here's a nice summary http://tax.cchgroup.com/downloads/files/pdfs/legislation/repair-capitalization-regulations.pdf And here is an interesting and up-to-date essay by someone who knows the legal issues, Appendix 2 in the Audit Guide http://www.irs.gov/Businesses/Capitalization-v-Repairs-Audit-Technique-Guide#14

No. See the chart on page 36 of Pub 15.

Many preparers now put a cutoff date in their welcome letter, generally meaning things like Dropoffs only, no more appointments New returns processed only to estimate extension payment Can't promise pending returns won't go on extension

Although critics throw a cheap shot at this, it is actually one of Obamacare's major advantages--no annual or lifetime limits on coverage. Obviously HSA's and FSA's have annual limits, so they needed new compliance regs (which have already been issued). The rules vary depending on the kind of program and source of the policy. So the critics are wrong. It is definitely still possible for an employer to pay for health insurance pre-tax. Plans just need to be updated for the broader coverage. Small businesses like our clients still have Section 105 Medical Reimbursement Plans as a really valuable option, and a good insurance advisor can still set up many other other arrangements.

I agree the IRS is not much to worry about. Even with a 1099 the business can demonstrate a deductible expense. But if they don't treat the worker as an independent contractor, it might look like an employee relationship. And if somebody gets (or pretends to be) hurt, the business could be ruined.

I would do the return for any client who wants to file correctly.. If she will in good faith complete the organizer and supplement it with something similar to a P&L, I can promise a return that can be defended in audit. I would explain she can reconstruct records the same way the IRS does, using bank statements and monthly expenses like rent. If her numbers are reasonable and consistent, I would not question them. I wouldn't expect her to have many kinds of expenses, but costume would be a big one. I would explain that tanning is probably what Tax Court calls "inherently personal," but generally her show makeup is part of the costume. Vehicle expenses are one thing I am required to investigate further, and commute would not be allowable. I would also say that she sounds like a common law employee, and explain the implications of that. I would not make that decision for her, but would file that way (including SS-8) if she wanted.

The way I used to do it, and still occasionally partly do, is run a check-tape from source documents to see if I get the same answer as the computer. Later, when software got better, I paid more to be sure I had a program with very robust diagnostics. I then began printing draft copies and worksheets, and checking off EVERY item of data entry with a colored pencil, on the actual source document and on the printout. Those actions still fall short, however, in a couple of ways. First, if (i.e., when) I misread a number, I might still see it the same way the next time. And if (i.e., when) I get the theory wrong, I get it wrong. So a few years ago I gave up my solo practice and merged with a local firm that puts two colored pencils on every return.

What a whirlpool!

That's exactly right. Your role for individuals this year is not very big, so relax about it. Many tax issues are much more complicated, such as dependency or IRA contributions/distributions/conversions/inheritance. Overall, Obamacare policies only affect about 20% of the population anyway. Just explain that there is a choice of policies in different price ranges. Direct them to www.healthcare.gov for more information, including personal assistance. There will be some new forms and procedures next year, but your software will step you through it just fine. A few cautions, though. First of course don't talk about the national politics or media coverage. Tell your client to find out the specific FACTS for his own case from www.healthcare.gov (or a state exchange). If the client insists on knowing the amount of credit or penalty, don't try to do it immediately. Just say you will include it in your workpapers while you are finishing this year's return. Also, recommend the exchange rather than an insurance agent for low-income clients. Although they might get the same policy, it is only eligible for subsidy or credit if they buy it through the exchange.

Yeah, that's definitely a hot point.

I may tag some of my files for a price review.

I pledge not to do this any more. That is my resolve. I'm going to clean-up my act.

In my opinion, what you need to do is get a referral fee from a CPA that handles international business returns. The process is to call around.

That rule changed back in 2005. The question now is whether the child lived with her mother for more than half the year, including temporary absence. If it was jail, that's so clearly temporary the IRS pubs even use it as an example. But state prison usually means more than 12 months planned or total absence, so if that was the case I'd say probably not qualifying child.

When they press her for details, she'll bounce back to you.