Edsel

Absolutely. The employer, if performing as directed by the IRS, should prepare a W-2c for the year in question, and follow it up with a 941c or 941x. If the employee's portion of FICA/medicare is non-recoverable, the W-2c should be "grossed up" to include a phantom withheld amount for FICA/medicare. The employer will have additional payroll tax liability resulting from this, probably at least DOUBLE what he would have paid if properly filed to begin with. Ever what state he is in also benefits by a probably increase in the SUTA tax - most overwhelmingly assessed against the employer as well. The employee can prepare an amended 1040-X, claiming the new W-2 as wages, and subtracting of the gross amount on his schedule C. Expenses related to this amount should be reduced as well, and transferred to schedule A subject to 2%. (Assuming he included a schedule C on his original return.) Could result in a refund. Of course, this predisposes that the IRS was correct in recharacterizing the income to begin with. They are known to be very aggressive in reclassifying payments to employee-status, and not very correct. Several years ago there was a list of "20 factors" that they supposedly considered, and then they abandoned the 20 factors because some of them gave powerful support to the other party. They would rather the decision be more subjective than directed by axioms, so they can be less accountable for their decisions.

The more I read comments and learn from the available material, the more inclined I am to believe this entire thing should be considered a single construction project with revenue to be recognized on a percentage-of-completion method. The percentage-of-completion should be based on projected timing of receipts instead of projected cost estimates-to-complete.

Where on earth did the idea come from that he has to wait 12-18 months for his money? He does have expensive legal advice and banking advice - whether it's "quality" or not, I dunno. He has been quite business savvy in the past - I also suspect he has phantom backing from a couple of US congressmen. The awarding of contracts this large is tampered with by vested interests behind the scenes more often than not. He also thinks he has "quality tax advice" - y'all can comment if you wish. I'm thinking he'll need to get this advice from someone who has more E&O insurance than I do... Do any of y'all want to be recommended to this guy? You perhaps can make a little money.

These had best be taxpayer penalties. The date is March 25, 2018 and I am filing a Sch C for a small business proprietor. He hasn't issued any 1099s yet, and depends on me to do so. These will be late. Am I the party that's going to be penalized? Better not. I'll tell the client to do his own, which means the IRS will never get the information. Some of these ridiculous government actions have unintended consequences. The most prodigious example is a regulation in Great Britain which forces hospitals to see emergency patients within 8 minutes of their entry. It is not uncommon to see dozens of cars circling the hospital because they won't allow entry into the facility.

Good reading material Miss Judy. Reading through the item subclasses to class 48 and 49, it appears that the exact selection does not necessarily depend on the structure itself, but the kind of transmission going through the tower (e.g. cellular conversation, cable, radio, etc.) Your article seems to suggest that a "safe harbor" could be 7 MACRS and 12 ADS. The McGladry article brings out yet another issue. Perhaps we should NOT be considering the performance of the contract as two separate segments being (i)construction of the tower and (ii)operation of the tower for 12-18 months. This has been my approach with depreciation occurring during segment (ii). Based upon the economic substance, it is clear that the ultimate communications megaconglomerate which will pay the contractor is allowing the contractor some 12-18 months of revenue in order to subsidize the cost of construction. Using this approach, the entire revenue stream and all related expenses are taken as a whole instead of segmented. If this is the case, there would be no depreciation expense or LTCG. I certainly am not qualified to decide whether the contract should be taken in two segments or as a whole. The decision referred to in the McGladry article (circa 1960) determined that the portion of costs incurred prior to the holding period would create LTCG and costs incurred within the holding period would be short-term. An old citation to be sure but no reason to think that it would be pre-empted by anything that has occurred since. In order for any portion to qualify for LTCG, detail records would have to be kept as to when construction costs were incurred, and components purchased. I may back off of this and let a Big 8 firm do it. (Big 8 is, I think, reduced to Big 4 nowadays)

Some time ago I prepared taxes for a hairdresser who owned her own shop, and had another hairdresser pay her "chair rent". She didn't really have much in records to support either revenue or expense but we did the best we could with a bank account. I have 6-7 other cosmetologists with varying income so I have somewhat of a grasp, but certainly not as much grasp as would have been the case with adequate records. Most hairdressers are better cosmetologists than they are record-keepers. She ended up owing some money. She then proceeded to order me to remove revenue until her tax liability was reduced to zero. Nope. Not this guy. Bye Bye hairdresser who owns your own shop and turns in only $150 a week. She did have a child. A friend of hers told me earlier tonight that she found another tax preparer, and that she ended up with a $4000 refund. She and all her friends think her new tax preparer is a genius - and I am not very good at all. Grrrr! I have found out that the IRS is much more interested in penalizing preparers than they are going after the taxpayers themselves when cheating is determined. A couple years ago, a colleague of mine called his congressman whom he personally knew. In a day or two the congressman wrote him the intent of the earned income credit was to redistribute income and that tracking down cheaters was counter to their purpose. The interception of violations is basically now upon tax preparers. From the mass numbers I've been made aware, a good 25-50% of EIC recipients are not due, similar to my experience above. Aggressive claiming of social security numbers not entitled, social security numbers for sale on the black market, phony relatives, etc. In my county, the existence of 2-3 audits per year would scare off most of the cheaters. It is amazing how much they know about earned income credit. Yet the 8867 places all the burden on the preparer where in almost all instances, the preparer has no vehicle to be aware of violations. You've heard all this whining before, of course. Most of you have experienced it first-hand. But where is the light at the end of the tunnel?

Don't think they would be inventory. The business is contracting, and the purpose for retaining the towers for as much as 12-18 months is (i)to assure operability and (ii)to subsidize construction costs by allowing the contractor 12 months of revenue upon commissioning. We have to ask ourselves if he is in the "business" of selling cell towers. Historically he is not, however, this project is so big that it eclipses prior business revenue. Normally, he is $15-$20 MM annually, and this thing could be $300MM. (I would not reveal his actual numbers, but use these numbers so the reader could grasp the situation). I have also had a problem finding MACRS and ADS lives under which these things may be depreciated (if at all). There is a series of class 48 and 49 stuff which include various kinds of communication equipment.

Have a large client bidding on constructing 20 cell towers between two regional large cities. He will have ownership/title to the towers for a brief period of time before selling them to a multiconglomerate communications company. He would be under contract to sell to them after they are operable for 12-18 months. I am aware depreciation on property does not start until the property is placed in service. My question is what is the holding period for LT capital gains? Does it include the time the unit is construction in progress? Construction should not take more than 60 days depending on delivery time for equipment, but since he is going to sell the towers anyway, the question is extremely relevant. This is a critical question because it will affect the choice of entity. C Corps get no benefit from LTCG.

Part of our ability to comply with these bold directives depends upon our clients' ability to receive 1095s on a timely basis. Last year, after the big insurance companies had 4 years to comply with this by January 31, they whined to the IRS that they weren't ready. So the IRS announced their deadline had been extended to March 15th. This extended the coalition between powerful institutions to heap misery on the rest of us trying to comply. Ask ourselves how much time we have to spend cleaning up the mess behind brokerage houses, financial custodians, etc. when they issue errant 1099s, and we all know they have the resources to do their job right. Yet when it comes to compliance, these huge companies lead a charmed life, as I have not been aware of a single incident where these companies ever receive a penalty or have to be accountable for their train wrecks. If their position on ACA enforcement has indeed changed, it could very well be that the fate of the ACA has only become more permanent than was perceived a year ago.

Thanks for the various discussions. I suppose time to put this thread to a merciful end. I actually did get a couple helpful responses out of my original question as to how to reduce depreciation beyond the extent of alternative lives: Make sure the equipment has been placed in service. Reduce basis by a percentage of personal use. Thanks to those who offered these suggestions. Much more time was spent on the effect of non-election of bonus depreciation and the spectre of hobby losses. The discussion was helpful. And yes, one more thing. Snow is rare where I live, but when I was young we got a dump of some six inches. Even a half-inch paralyzes traffic, and Dad said absolutely NOTHING is going to get him out to drive in the snow. Mom hollered "We're out of cigarettes!" The result being Dad dresses to the max, cranks the tractor, and drives it 5 miles to the nearest open store. Made a non-smoker out of me for life...

No problem - not intending to ask for an apology. We know each other well enough to not worry about that. It just seemed like a whole gallery of board members were tag-teaming with you to buy into the idea of a lying farmer when they didn't know the client or the situation. There is a worthy discussion about hobby income and why it should be avoided. You are forced to claim all the revenue on line 21 and are only allowed deductions on Sch A with a 2% throwaway. Imagine what $100,000 in farm revenue would do on line 21, and expenses limited on Sch A. To be honest, I would rather not even know about hobbies than to go through this phony collection activity on behalf of the IRS. But you can't ignore reporting $100K in revenue, especially when there are $15K in 1099s for machine hire. I congratulate you if you have your own farm operation and report a profit. Maybe 1/3 of my farmers report a profit, the rest of them are poor businessmen making uneconomic purchases, and even still have to pay a ton of tax money when they sell their property. One of the factors used by the IRS to determine hobby is how much time is spent on the activity - and if you have a farm yourself you can only imagine how much time is require to raise and sell $100,000 in a single year. For what it's worth, I am much more aggressive in disallowing Sch C losses than I am Sch F. And I won't put up with a farmer who spends $5000 in feed and $3000 in fertilizer, and never seems to sell more than 2-3 calves. Some of our job is knowledge of tax laws, and some of it is just plain common sense.

You've put me on the carpet, so I am compelled to respond. For Rita, and the chorus of people who "like" what she says...he is not lying. Nobody is rude enough to call me a liar, but after lo these many years, no one seems to give me credit for knowing liars when I encounter them. I have some that I am suspicious are giving calves to their kids to sell in their own names, and various other situations where I believe people are tip-toeing around the truth. When the situation becomes such that I can no longer ignore common sense, I will quit them. It is written of the devil that his most powerful trait is his ability to deceive, so I imagine some few of them may be able to fool me. Remember that people can survive on losses if the losses are "on paper". Especially if there is an endless supply of collateral creating cash coming from loans. I comply with his request to furnish banks with copies of his tax return every year, and sure enough, when I prepare his taxes there are new loans. To put this in perspective, you might google up the value of 2500 acres in Williamson County, Tennessee and get a handle on just how much collateral is available. Below is what his farm income would be without the depreciation deduction. Remember, depreciation on his equipment costs him nothing except debt service, since it is bought with borrowed money. Year Schedule F(prior to depreciation) 4797 income 2016 32,135 23,427 2015 33,967 68,427 2014 63,185 0 2013 6,340 10,283 He also has a trucking operation where he hauls his own grain to market, and grain for other farmers, clearing around $50K per year. He can live somewhat comfortably on this income, as he does not have cash outflow for huge equipment expenditures. Stupid? Yes. A liar? No. This guy is 56 years old, and I've known him since he was a boy. He grew up two miles from where I did. Thanks to all who have responded in an attempt to advise how to reduce depreciation expense. But he won't be driving a manure spreader to WalMart.

Thank you for your response, but several thousand dollars worth of effect is lost relating to wasted std deductions and exemptions. Depreciation recapture on equipment is at ordinary income rates, because he never sells or trades real estate. His massive real estate is what provides collateral for loans and the loans are what enable him to spend the ridiculous prices for equipment, so there is no chance he will ever sell real estate (which is land only and wouldn't have recapture anyway). Buying into your idea, NOL's are often preferable in cases where you are confident the succeeding year is going to be very profitable. NOL's can often reduce income off the top in years of high tax brackets in such a case. However, this is not likely to happen with my client, given his track record. I believe you are comparing my client's operation to some of your own people who are involved in real estate, and the two do not really compare. I fear what happens to his survivors if he passes owing all that money against his assets. You can't always save people from their own folly. I'm going to ask again for ideas to minimize depreciation. There has been quite a bit of helpful discussion about why I should or shouldn't do one thing or another, but I haven't heard the first idea about how to minimize depreciation. Often on such a forum, the original question is ignored.

Judy, bluntly stated, I have not been opting out, nor have I been deducting it. And I have no intention of recapturing the "excess" in the event of disposition. If they catch me, then so be it. I remember a seminar when they taught that "bonus" depreciation would be the new default. Neither the instructor nor the class could believe the IRS would create such an extra hoop to jump through and failed to see the mentality behind it. Since then, "bonus" depreciation has been on the chopping block and has been saved at least once by a now-annual December congressional reprieve. This "bonus" depreciation is not allowed for many state tax returns so we can't depend on the "flow" to states via software. I use a different program (other than Drake) to handle fixed assets and depreciation. Like s.179, bonus depreciation in the early years of a business is rarely advantageous to the taxpayer. It is better if they save some depreciation for later years where it will be much more needed than Year 1, instead of "going for broke" in the first year. In spite of my disdain for the need for such an election, I am well-advised to listen to your advice. If the requirement does not die a merciful death, I should be making this election in the future. Thank you for the discussion.

I'm looking to reduce his depreciation, so "no" to bonus depreciation. To be honest, I have not been using the election to bail out of the special depreciation and don't know anyone around here who goes to the trouble. I'm aware that bonus depreciation is the default, but fill out the 4562, page 2, and ignore the statement. His farm never shows a profit, but there are some years when the combined Sch F and 4797 income nets out to a profit. It's hard to paint a picture where this is a hobby, considering he doesn't have any other job. It is virtually impossible to sell $100,000 worth of farm production a year and have time for anything else. I have several farmers who rarely show a profit, but virtually every single one of them has to pay horrific taxes when property is sold, as well as depreciation recapture on their equipment. Most farmers are poor business managers, spending $$ on equipment that is rarely used because they don't wanna borrow from their neighbors. They also spend big money on items such as fertilizer that cannot economically be supported. Stupid doesn't mean they don't have a profit motive. Land values around here escalate 5-10%, and the increase alone in any given year is usually more than a farm loss. It is not unusual in this part of the country to find millionaires playing checkers on the public square with only one tooth in their head. Thanks for your response...the threat of hobby loss for farmers is a good discussion. I do have several "part-time" farmers where this is an issue. Farming is so labor-intensive, any appreciable revenue requires more than casual time.

One of my clients inherited thousands of acres of land. He has (in round numbers) $100,000 annually in Farm Revenue. But he has been buying $200,000 in equipment every year for the last several years. He is peculiarly enamored by equipment, but cannot justify the money spent. I have been trying to find ways to minimize his depreciation expense because he faces an NOL in many years. For 2016, he spent $40,000 in 5-yr property, and $130,000 in 7-yr property. The ADS tables stretches out 5-yr property to 6-yrs, and 7-yr property to 10 years. I take half-year convention and only SL depreciation. Any ideas on how to minimize depreciation any more than I already have? It may have occurred to many readers how this guy continues to operate, as he faces an NOL in many years of up to $50K sometimes. I grew up on a farm close by and being somewhat familiar, I believe he is reporting all his sales. But he continues to spend ridiculous amounts on top-of-the-line equipment that can never economically be justified. He solves his cash flow problems by borrowing against his land. At some point, his banker should just shut him down, as he owes some $2MM. Land is worth probably $5MM, so there may be no end in sight for this continued idiocy.

Ideally, the incentive should always be need-driven, and gimmick-related such as pressure from social agencies, special political interests, and yes, tax credits/deductions. However, there are impediments which stop companies from hiring needed personnel. Fear of being sued by employees, requirements for medical coverage, available space to accommodate workers, etc. To the extent that these impediments can be quantified with dollars, the credit helps offset as much as 50% of the compensation.

Well-noted Miss Sara. But there are virtually no more full-time jobs in the country than there were in 2007, in spite of the plunging unemployment rate, and you are right that the jobs are paying no more now than 10 years ago. The unemployment rate has had their calculation change to depress the rate and give the impression that workers are now fully-employed. If you read my plan, the credit rewards companies who increase wages as well as increase jobs. The credit is based on W-3 totals, and it doesn't matter what causes the increase: more jobs, or higher paying jobs. Or both. Plus if the workers are given a raise, the eligible executive pay increases by 20X the wage.

All of the tax cuts over the years, proposed or actual, claim to be a "jobs tax cut." Usually, immediately upon revelation and claim that the bill will "create jobs" there ensue claims by one group or another that the bill will NOT create jobs. Here is a plan - has it ever been tried? Instead of cutting tax rates, what about creating a CREDIT for employers to increase their payroll? Take a three-year increasing total of W-3s reported at year-end, using the same mentality of the increasing R&D credit. Allow a 50% credit applied to the amount of the increase, to be recaptured if employer slashes jobs in a succeeding year. Limit W-3 amounts to those employees whose compensation exceeds 20X the median of salary rates so the credit would not apply to absurd executive pay sucking up the benefit. 3-yr average of W-3s is $260,000. In year 4, W-3 totals are $280,000. Employer is entitled to a $10,000 tax credit (50% X $20,000). Ah yes, I'm aware we have a "targeted" jobs credit, for chronically unemployed, disabled, prison record, i.e. people who are not going to get hired. But has anyone ever proposed a general jobs credit such as I've described above? This would be a REAL credit for companies who create jobs, not just some presumed ethereal "help the economy and create jobs as a result" plan, which only increases bottom-line tax savings for companies who slash jobs or move the jobs overseas. This way the "jobs tax cut" goes to those companies who really do create jobs. Also curtails criticism that the bill will "not really help jobs." Has any taxing authority ever tried this? Federal or otherwise? p.s. this is NOT submitted as a political post. Please don't try to attach connotations otherwise.

May not agree. Or I may. It could depend on whether the organization is obligated to repay the contributors in the event that the trip doesn't happen. I assume this is an accounting question, not necessarily a tax question. And it has been a long time since I had exposure to fund accounting and things may have changed. So I'll spew out my rationale, and anyone who knows better is welcome to correct me. Fund accounting has always been goofy. Fund accounting recognizes Revenue and Expenditures as they naturally occur, without respect to whether revenue/expenditures are prepaid or deferred. So the money collected for the trip is recorded as revenue upon receipt. The net difference between revenue and expenditures becomes part of the fund balance, i.e. "equity" of sorts. Once the current difference becomes amalgamated with the existing fund balance it is indistinguishable unless there are bylaws committing current activity. Think of the fund balance as totally comingled at this point. Once the final fund balance is calculated, the organization may commit chunks of it to any purpose. The purpose may or may not be dedicated to the forthcoming trip. The equity accounts should consist of any number of "restricted" funds, and finally "unrestricted" funds. A $75,000 total fund may consist of a $50,000 amount restricted for building remodeling, and $25,000 unrestricted, for example. There is no special compunction to restrict the fund for a forthcoming travel trip unless the trustees deem it to be the case. The complexion may change somewhat if the organization is required to refund the money if the trip does not occur as planned. My recommendation is that there is indeed a reserve for a "Temporarily Restricted Net Assets", but the character is changed to a true liability and not part of equity. For accounting purposes the revenue is indeed deferred until the obligation is consummated. For what it's worth, I believe John's treatment is far more noble, with the foresight to treat things right. But I believe in general, fund accounting is "everything in" and "everything out" prior to designation of any reserves or restrictions. OK, the Tennessee Ron has spoken. Y'all tell me where I'm wrong.

If the C Corp rate is slashed to 20%, look for many S Corps to bail out of the S Corp election. Of course, we don't know whether that will happen or not.

Rita lives in my state, not too far away and I've known her for several years. I'll take all the hugs she is willing to give out!

I'm a little bit confused as to why two short year returns were required. It seems to me this could only occur if there were two separate events involving ownership change. Please correct me if I'm wrong (and maybe several of you will jump all over this), but I did think the purpose of a short year return was to re-establish the fiscal reporting year, and then annual reporting would pursue from that point forward. Example: Form 1065 has a year ending Aug 31st and enters into a situation where they must change to December 31. A short-year return for four months is required, but subsequent returns will file a full year ended Dec 31. Appears to me a situation requiring two consecutive short years would be two different events which have the effect of changing the reporting period TWICE within 12 months. What am I missing?

Hi Gail - I had not read far enough into your response after you explained Virginia, so I apologize for that. Had I read far enough I would not have responded to the OP. However, NJ instructions under page 1, Filing Status, it clearly states they are bound by whatever status they choose on their Federal return. You refer to page 15 which allows them to choose. In case of a conflict, fact-specific instructions usually trump general instructions, so I would say your answer would be more correct than mine. However, yet another consideration (and I'm not going to spend the time to research) is whether NJ or VA requires a marriage of total income to the federal return regardless of filing status for state purposes. Essentially, many states do this in order to move the taxpayer into a higher bracket. Works like this: Spouse 1(VA) reports $70,000, Spouse 2(NJ) reports $30,000. States who do this would require reporting of $100,000 as total income to determine the progressive tax bracket and establish tax before proportionate reduction. For such an example, NJ would calculate tax on $100,000 based on filing status, then take 30% of the tax to assess the proper amount. This method will result in a higher NJ tax than simply taxing $30,000. The methodology requires tracking to the Federal return - meaning if there is a separate federal return $30,000 is reported to NJ, and if there is a MFJ return $100,000 is reported for NJ regardless of NJ filing status. Following through on all options is what I do and it does run into time and fees. Although my state has no income tax, I have Federal contractors as customers who must file in every state where they have a contract. And being long and narrow with all contiguous states having an income tax, in Tennessee you're never far away from a client who has to deal with state income taxes. Apologies to you, Gail, for not having read your entire message.

Requirements for a Federal joint return are not bounded by state borders, so married filing joint would be allowed, presuming the separate living conditions are presumed to be temporary. If he is married, he cannot file single. It looks like Virginia requires MFS, but also appears that the new wife will not have to file a non-resident Virginia return unless she has Virginia income. Reading from the NJ instructions, it appears he must use the same filing status for NJ as he does for federal. Assuming he files MFJ for federal, he must do so for NJ even though only one of them has NJ income. This would require claiming total of all income on the New Jersey joint return. However, the return would be eligible for "taxes paid to other states" after the NJ tax has been calculated. There is no reciprocity with Virginia. NJ apparently has reciprocity only with PA. I love doing state returns with problems and choices such as this. I do not charge proportionately more than simply the extra time, effort, and filing costs that occur. Even limiting my fee to extra time, I would expect to charge about double what I would for the federal return only.