Growing Without Rain

News and Views about Taxes

Helping the tsunami victims

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Remember that for your contribution to be tax-deductible it must be directed to a US-based charity. Check out this link at About.com for more information.

UPDATE: Stacie Clifford Kitts has some more suggestions for you.

Written by nctaxpro

March 11, 2011 at 2:03 pm

Does “biggest refund” = “best tax value”?

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Apparently, according to CPA Success:

We knew it. The profession knew it. Anyone who has ever worked with a CPA knew it.

Now, the rest of the country knows it, too.

“It” is simply this: The best bang for your tax preparation buck comes from a CPA.

Here’s the problem with the video: We don’t know what refund the couple should have received if they took all legal deductions and credits, because we know almost nothing about the information they presented to the various tax services. The only thing that we do know – that they recently started a business for which they tried to deduct expenses and for which they were told they could not until 2011 by the H&R Block preparer – tells us nothing about whether they actually could have deducted the expenses legally or not. (Full disclosure: I work for Block.) We don’t know what the CPA found that led to a $4000 refund, nor what Block didn’t find that made the refund smaller. We don’t know if the couple presented the same information to the CPA that they did to Block, or entered the same information into TurboTax.

Yes, I’m defending my fellow Block preparer here. I don’t doubt that Mr. Kane did a good job based on the information that he had, but what I don’t know – and more to the point, what CPA Success doesn’t know – is whether the Block preparer failed to gain access to the same information because he/she didn’t ask the right question, or because the clients didn’t have (or know how to present) the information when they saw the Block preparer.

Furthermore, by presenting this as “biggest bang for the buck”, CPA Success leaves the impression that it’s primarily about the size of the refund, and we all know how dangerous a proposition THAT can be. Again, not questioning Mr. Kane one bit – but does CPA Success really want to embrace the proposition that the most important thing is how much money the preparer can “get back”, rather than that the preparer has given the client the best tax advice for his situation? I look at the value proposition differently – I want my clients to get the biggest refund to which they are legally entitled, based on the deductions and credits that they can support if the IRS comes calling. And if they can’t support a home office deduction or that the miles they drive from home to a job site aren’t commuting miles (which are by far the two biggest questionable deductions I see on CPA-prepared returns), then I tell them they shouldn’t take them, because it’s on them if the IRS reviews their return.

For the record: most CPAs are excellent at what they do…but so are we. Like anything else, you should vet your preparer thoroughly whether it be a CPA or someone at a brick-and-mortar tax prep house like ours.

Written by nctaxpro

March 8, 2011 at 11:07 pm

Energy-efficient, tax-inefficient

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Scott Hodge of the Tax Foundation Tax Policy Blog (italics mine):

Bloomberg recently reported that:

“Whirlpool Corp. will claim $300 million this year in U.S. tax credits for making energy- efficient appliances, collecting almost four times the government’s estimate for what all companies would receive from the tax incentive.

The credit will generate about one-third of Whirlpool’s earnings this year, according to the company’s projections.

Company filings show that as of Dec. 31, 2010, Whirlpool had $555 million in stockpiled business credits and $2 billion in tax losses. Both can typically be used to offset up to 20 years of future income and taxes.”

There are so many issues raised by this story it is hard to know where to begin. But it provides a good learning moment for why we should not use the tax code to incentivize economic behavior – no matter how noble the cause.

I couldn’t agree more. Unfortunately, it’s all too easy for our elected representatives to give the appearance of doing something by inserting a preference into the tax code to achieve some desired behavior – only to find that it becomes difficult or impossible to sunset the preference later without blowing up someone’s means of livelihood.

Written by nctaxpro

February 24, 2011 at 12:12 pm

Legitimate enterprise or illegal drug trafficker? Only the IRS knows for sure

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The Sacramento Bee reports that the IRS is looking into the tax returns of an Oakland medical center that, among other things, dispenses medical marijuana:

Harborside Health Center proclaims itself the world’s largest marijuana dispensary. For certain, it is California’s most ambitious – a holistic care center with a naturopathic physician, acupuncturist, chiropractor, yoga instructors and therapists in “universal life force energy.”

Its Oakland facility handles $22 million in annual medical marijuana transactions.

Now Harborside is attracting scrutiny from the Internal Revenue Service. Since last year, the IRS has been auditing 2008 and 2009 federal tax returns for the Oakland location, one of two outlets Harborside operates for 70,000 medical marijuana users. The other facility is in San Jose.

The outcome may eventually establish whether U.S. tax authorities treat medical marijuana as a legitimate enterprise or illicit drug trafficking.

The relevant law is 26 USC section 280E, which reads:

No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted.

Harborside is relying on this 2007 case to be able to claim its largest deduction. I’m no lawyer, but after reading Kay Bell’s assessment of the decision I think Harborside could be on shaky ground. I guess we will see how this plays out; it just seems to me as though the IRS has better audit targets than the medical marijuana community in states where it’s legal.

Written by nctaxpro

February 19, 2011 at 12:03 pm

Here’s a novel business idea!

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Tax preparation and check-cashing services have gone hand-in-hand for a long time. So has the desire for a good stiff drink after your taxes are finally complete. In Wilmington, Delaware, as Bed buffaloes in your tax code blog author Mary O’Keeffe notes, you can do them all in one place, with live music to boot:

if you come in next Friday, February 25, to do your taxes, you can catch this band’s gig while waiting for your preparer

Why didn’t I think of that?

Written by nctaxpro

February 17, 2011 at 11:35 am

Posted in Current Events, Taxes

What I’m seeing this year

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We are now one month into tax season. I’ve seen about 60 clients already, a few more than at the same point last year (although the office overall is down). Here are some trends that I am seeing:

1. More companies are making tax documents available online earlier in the tax season. While this has been increasingly true of W-2s over the past few years, I’m seeing people coming in earlier with 1098s for their home mortgage interest and with brokerage statements/combined 1099s from their investment accounts, all of which were accessed and printed online. Usually I don’t start seeing the latter until closer to the end of February/beginning of March.

2. More people want to be made aware of developments that affect their taxes. For example, when I had to explain to clients that the IRS would not accept their returns until February 14 because they had deductions on Schedule A, the clients by and large not only knew that but in many cases knew why – and most of the ones who didn’t know the details really wanted to know them. With my repeat clients, I am spending more time, on average, than I did last year.

3. The effect of the loss of Refund Anticipation Loans (RALs) has not been all that big. I had only one client leave because the client couldn’t get a RAL from us, and our overall traffic, while down, isn’t down as much as we half anticipated. Most of the prior RAL clients I’ve seen were willing to wait the extra time. That’s encouraging.

4. More people are trying to do their taxes themselves rather than consulting a professional. The number of calls that I field from people with tax questions is going up – and the questions themselves are becoming more complex.

Now obviously, this is primarily about price; even the people who keep coming back year after year balk when the prices go up. But I think we are getting close to the point that what we provide in expertise and reduced noncompliance risk isn’t going to be enough to bridge the gap between what we charge and what people can get from doing it themselves – and I don’t see enough of us being creative in trying to bridge that gap. I think that going forward our key to long-term success as tax professionals is to figure out how we remake ourselves in this market.

Written by nctaxpro

February 15, 2011 at 1:28 pm

Posted in Taxes

Questions? Fire away!

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I’ve started using Quora over the past couple of weeks. It’s got an option that allows me to answer questions directly – so if you have any questions that you want to ask me directly, shoot them here.

Written by nctaxpro

January 19, 2011 at 2:18 pm