ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Kirstie Alley stars as New York accountant Mollie Jensen in the 1989 romantic comedy "Look Who's Talking." She meets cab driver John Travolta when she needs to get to the hospital in a hurry because she's about to have a baby. Travolta helps her bring up the baby, but the real father is her tax client George Segal. The baby's voice also sounds strangely like Bruce Willis. Alley reprised the part of Mollie in the 1990 sequel "Look Who's Talking Too," in which Roseanne Barr joined Willis in providing the voice of another of Mollie's kids. The 1993 threequel "Look Who's Talking Now" added the voices of Diane Keaton and Danny DeVito, but this time as Mollie's dogs.

PROGRAM TO SNIFF OUT GIFT TAX CHEATS!

It appears that the IRS is initiating a program to sniff out gift tax cheaters who are not properly filing their gift tax returns. The IRS estimates that between 60% and 90% of taxpayers who transfer real estate for little or no consideration to family members fail to file form 709 to report the gift. The IRS is now checking real estate transfer records for 15 states: Conn., Fla., Hawaii, Nebraska, NH, NJ, NY, NC, Ohio, PA, Texas, VA, WA, and Wisconsin. So far, over 500 taxpayers have been audited and many more are lined up for audit.

Our normal method of making these types of gifts is to form a partnership or LLC and then gift the partnership or LLC interest. In this case we can many times apply a minority and lack of marketability discount and there is no filing of the transfer of the real estate so nothing for the IRS to catch.

Remember, even if the gift is not taxable, if it exceeds $13,000 to any one person in a year, you are required to file a gift tax return on form 709. Our advice if your are making non cash gifts is to file a gift tax return even if you are under the $13,000 threshold to start the three year statute of limitations.

FOLLOW-UP ON HOBBY LOSSES

Recently I posted two hobby cases (horse breeding) with different results. I have been asked “why the difference?” For tax purposes, a hobby has some very unfavorable consequences to the taxpayer. Net income is always reported, however, a net loss is limited to zero.

Therefore, how do you make sure that your activity is a profit motive and not a hobby? Here are several items to keep in mind:

• Your intent of the operation is to make money, not create a tax loss.
• You must run the operation like a regular business. This means having a separate checking account for the business; do not commingle personal funds together; have letterhead and business cards.
• If the operation runs at a loss for several years, you must be able to document how you will finally make money. In some cases, showing how you have created extra value in the asset when it will be sold will be sufficient, but be ready for an audit if you show too many years of losses.
• A horse farm has a greater chance of being determined as a hobby farm.
• The size of the operation can affect the hobby status. For example, it is fairly hard to argue that a 2 acre garden plot is a farm (however, in some extensive forms of farming, this can be true).

Remember the key point to ask yourself, is this truly an operation being operated like a business, or is it merely intended to create a tax loss? If it is the latter, then it is more difficult to not treat it as a hobby.

ACCOUNTANTS IN THE MOVIES

In Hollywood, accounting can seem like a pretty glamorous profession, or not.

Rick Moranis played Sigourney Weaver's accountant neighbor and admirer Louis Tully in the 1984 comedy classic "Ghostbusters." Possessed by a demonic ghost, Louis is transformed from a mild-mannered accountant into the "Keymaster" and needs the help of Bill Murray, Dan Aykroyd, Harold Ramis, Ernie Hudson and the rest of the ghost-busting crew (along with their Proton Packs). Moranis reprised the role in the 1989 sequel "Ghostbusters II" and hopefully will come out of retirement to appear in "Ghostbusters III," which is set to be released next year.

YOU MAY WANT TO UNWIND YOUR ROTH CONVERSION

Many taxpayers elected in 2010 to convert their regular IRA to a Roth and either pay the tax in 2010 or spread it out over 2011 and 2012. If you converted your Roth as long as you timely filed your income tax return or got an extension to October 15, 2011, you have until October 17th “unwind” the conversion and treat it as if it never happened.

The primary reason for considering this is the drop in stock prices from 2010 until now. By unwinding the conversion, you may be able to then redo the conversion and save substantial tax this year.

For example, let’s assume a taxpayer had $500,000 in his IRA on June 1, 2010 when he converted it into a ROTH. Now, let’s assume the value of the ROTH is only $300,000. By unwinding the ROTH conversion, the taxpayer does not pay tax on the difference between the $500,000 last June and the $300,000 value now. At the highest tax bracket including applicable state income taxes, the total tax savings could approach $100,000.

Remember, you only have until October 17, 2011 to unwind this conversion

TAXES ON THE CUTTING EDGE

Q. My 14-year-old son is cutting lawns this summer. Does he have to report this income?

A. Yes, if it exceeds $400. However, the income can be sheltered from federal income tax by the standard deduction. The normal standard deduction for 2011 is $5,800. However for dependents, the standard deduction is the lesser of: 1) Earned income plus $300, or 2) $5,800. In other words, he most likely will not owe federal or state taxes. That's the good news.

Here is the bad news. If your son’s net income is over $400 he will need to file a return and pay self-employment tax.

LONGTIME PARTNER

I have to take a few minutes and pay tribute to Bob Sylvester CPA who died September 23, 2011

Bob Sylvester was a former partner of mine and a close friend. Bob had been ill for some time and he was in hospice for the past few weeks. Bob and I go way back. In 1972, Bob gave me a chance and hired me as new junior accountant with the firm of Lindell, Sylvester Lindell. He was my mentor and taught me a lot about business. Eventually we became partners to form Kopsa, Swanson & Sylvester accounting firm. In 1999, Bob became sick and retired to enjoy his family. Much of the success that I have had is attributable to valuable lessons from Bob. He will be missed.

To read more about Bob's life: Robert Sylvester