•  Are the fundamentals still right?
•  Could you leverage an investment into something larger or more likely to expand?
•  Is there a tax implication?

Fundamentals

Every real estate investment is subject to the old maxim “location, location, location”. Do you hold a real estate investment where the surrounding neighborhood has deteriorated? Do you see upcoming changes that will make your location less attractive? Or is the growth in your city simply headed in some other direction?

If any of these conditions could have an impact on the value of your investment, now is the time to really evaluate the long term potential.

Selling an investment in a location that is not as likely to perform over the next decade or two may be the correct current action.

 Leverage

If you own a Colorado Springs real estate investment where your equity is well more than 50%, selling the property and swapping it into a more valuable parcel with a larger mortgage could be the way to make the most from your investment. A $1 million property could become a $2 million dollar property that has a larger upside growth potential. This approach can take advantage of the Section 1031 property exchange rules to defer capital gains tax.

On the other side of that strategy, if you are approaching retirement, and want to have a property that has positive cash flow with less management required, selling a property with substantial equity, and buying a smaller place with cash could provide a cash flow that will help with your everyday bills.

Tax Implications

If you have equity in a property and are able to take advantage of the current capital gains tax rules, you may be able to sell and use the cash with little or no tax obligation. You could even swap into another property at an increased basis that will save you tax dollars in the future.

 If you have any questions, give us a call and we can give you our best advice.

Do you have a real estate investment that you want to sell?  But you are worried that the capital gains tax on the transaction will be prohibitive. A 1031 tax swap could be a cost saving strategy.

 A 1031 tax swap is a real estate transaction which allows you to sell an investment real estate property and buy another investment property while transferring all of the tax obligations from the old property into the new property. In essence, it allows you to defer capital gains tax.

There are, of course, a number of rules related to the transaction. We are tax planning experts here in Colorado Springs, and can advise you on the details. But here are some of the rules:

• The new property must be “like kind”, which means it has to be another investment property.
•  If the purchase price of the new property is lower than the sale price of the old, you lose some of the benefit.  
• The amount of indebtedness must be the same or more – i.e. your mortgage on the new property must be at least the amount of the mortgage on the old property.  
• You must use an intermediary to satisfy the legal requirements.

Why would you want to undertake this type of transaction?  

• It may be that the old property requires too much management time, and you want to find a place that is a little less demanding.  
• An older property may be more fully depreciated and with a reduced cost basis selling outright would have such significant tax implications that you would not realize enough from a simple sales transaction.  
• You may want to free up some money for investments in a different locale.  
• You may want more leverage on a new place.  

If you have an investment that has little mortgage debt, you can use the equity in the old property to arrange a more expensive new property with a larger mortgage.  For example, a $500K building with no mortgage could become a $1 million building with a $500K mortgage.  More valuable buildings will generally appreciate more just because of the numbers.

Tax swaps are a valuable tool for tax planners, but any action requires some well thought out strategy.　 We here at The Shafer Group are a Colorado Springs tax planning group of professional financial experts, and we can help and advise you how to maximize the benefit from this tax issue.　 Call us at (719) 487-1200 or send us an email at info@theshafergroup.net

For most assets which you have owned for one year or more and disposed of before the end of 2012, the maximum federal capital gains tax rate is 15%.  If highest tax bracket that you pay is 15% or less, some or all of your capital gains tax will be zero.  How much capital gains tax you will pay depends on your income.

After 2012 the capital gains tax rate will return to 20%, so planning now to take advantage of the current rates is key.  And there is a Colorado capital gains tax that could run as much as 4.63% which you will need to take into account.

This presents some interesting tax planning questions for your family.  If you are retired, for example, you could consider selling appreciated assets, pay little or no capital gain tax, and re-invest the proceeds elsewhere.  In effect, that increases your cost basis for a saving in a future transaction while continuing an investment program that can show appreciation.

Or you could simply sell an appreciated asset, pay little or no capital gain tax and keep the funds available for your personal use.

Another option if you have parents that are in a lower tax bracket, and if you are assisting them in any way, is to gift them the appreciated asset.  They would carry your cost basis and could sell with little or no capital gain tax.

Keep in mind that you could benefit in both 2011 and 2012, so now is the time to talk to us, we are expert at Colorado Springs tax planning.

While the concepts here are simple, any action requires some well thought out planning.  We here at The Shafer Group are a Colorado Springs estate planning group of professional financial experts, and we can help and advise you how to maximize the benefit from this tax issue.  Call us at (719) 487-1200 or send us an email at info@theshafergroup.net

Taxes may be unavoidable, but that doesn’t make paying them any easier.  Here are five of the most overlooked income tax deductions and credits.

Tax Deduction Tip #1

Certain Reinvested Dividends Might Not Be Subject to Income Tax

Dividends received under certain mutual fund or company direct reinvestment plans may not be subject to income tax if the dividends are reinvested in mutual fund shares or stock when there is no right to receive cash dividends.  Otherwise, the reinvested dividends are currently taxable.  Be sure, however, to add the taxable reinvested dividends to your basis to reduce the gain on the sale of the mutual fund or company shares in the future.

Tax Deduction Tip #2

Charitable Expenses Paid Out of Pocket are Tax Deductible

While most taxpayers remember to write off the value of any charitable donations – cash or non-cash – they’ve made during the year, many don’t realize that they can also deduct any out of pocket expenses paid in the pursuit of charity. The value of goods purchased specifically for use in a charitable venture (such as food purchased for use in soup kitchens) may be deducted from income taxes. The IRS also allows a mileage deduction for those who must drive a car to and from, or in the course of, volunteer work in connection with charitable events (14 cents a mile for tax year 2009).

Tax Deduction Tip #3

Interest Paid on Student Loans May be Tax Deductible

Recent graduates paying back student loans on their own won’t be able to take advantage of this tidbit of tax advice—unless they have their parents make the payments for them. Parents don’t have to be able to claim their children as dependents for this tax break. Children whose parents make their student loan payments for them may be able to deduct up to $2,500 from their income taxes.

Tax Deduction Tip #4

State Taxes Paid the Can be Deducted from this Year’s Federal Taxes

State taxes paid in one year become federal tax deductions for that year. State income taxes withheld from paychecks, taxes paid by quarterly estimated or extension payments and current year payment of any prior year state tax obligations are deductible from federal income taxes.  Be sure to track the payment date of state taxes to insure that you claim a deduction for all state taxes paid in a given year.

Tax Deduction Tip #5

Surrendered Jury Duty Pay Can be Deducted from Taxes

Most people keep collecting their usual wage while serving on a jury. Once jury duty ends, however, employers may require these employees to surrender jury duty pay to the company. These fees can be deducted from federal income taxes, but there’s no space on Form 1040 that allows taxpayers to deduct juror’s fees. Simply add the amount in with the other write-offs on line 36, and write the words “jury pay” on the next dotted line.

The IRS makes far more income tax deductions available than many people realize. Learning and using some of the less well-known federal tax deductions can shrink tax bills enormously.

More Tax Tips Resources…

• Tax Deduction Guide & Tax Deduction Tips
• Overlooked Income Tax Deductions on Schedule A
• Deductions and Federal Tax Credits Not to Miss

Income tax deductions can be elusive, but it just takes…. Knowing Where To Look.

If you would like to make sure you are receiving the benefit of every available tax deduction the law allows, consider letting a professional CPA firm with extensive knowledge of the latest IRS tax codes, rules, regulations, and procedures handle your taxes – The Shafer Group.

Yearly, thousands of Colorado Springs and out of state business owners and residents entrust their tax preparation work to The Shafer Group – Let Us Stress The Numbers, So You Don’t Have To!

For a quote to do your personal or corporate tax returns this year, call Martin Barretta (Business Director)  at: (719) 487-1200 ext. 26    http://theshafergroup.net

While Leno might not have it exactly right, he is on to something: The IRS does look for red flags when selecting a return for audit. Their methodology, however, is a little more sophisticated than what the comedian suggests. While there’s no foolproof way to escape an audit, here are some tips for keeping your return from being flagged:

Tax Audit Tip #1…Watch Your Math & Pay Attention To Detail

The IRS continually cites bad math as on of the top errors on tax returns. Making math mistakes on your tax return will get you noticed — and not in a good way. While the IRS will generally just correct your mistake and send you a bill, too many math errors might indicate a level of carelessness that causes your return to be flagged. So, use caution when preparing your return. Copy numbers onto forms or input into software carefully – and double-check those numbers when you’re done. Check for transposition errors, as well as addition and subtraction. Don’t have a false sense of security when using a software package. Your tax prep software can’t tell when you’ve made a mistake before entering your data.

Here are few of the most commonly made mistakes when it comes to paying attention to detail

• Incorrect or missing social security numbers
• Incorrect tax entered based on taxable income filing status
• Missing or incorrect numbers for child care providers
• Withholding and estimated tax payments entered on the wrong line
• Computation errors in figuring: taxable income, withholding and estimated tax payments, Earned Income Credit, Standard Deduction for age 65 or over or blind, the taxable amount of social security benefits and child and dependant care credit.

Tax Audit Tip #2…Don’t Appear To Be Too Rich

Statistically, you’re about six times more likely to be audited if you report over $1 million in income than if you report income of less than $200,000. You are about three times more likely to be audited if you report between $200,000 and $1,000,000 in income than if you report income of less than $200,000.

Does the IRS have it out for the rich? Not necessarily. Those who make more money tend to take advantage of more itemized deductions, such as charitable contributions, which attract the attention of the IRS. Filing a Schedule A with significant charitable contributions or miscellaneous expenses may trigger an IRS examination.

It’s also highly likely that many higher income taxpayers are small business owners. Statistically, taxpayers who file a Schedule C are two to four times more likely to be audited. Many tax professionals recommend that taxpayers who are collecting substantial income from a small business consider incorporating in order to avoid filing a Schedule C that attracts attention.

Tax Audit Tip #3…Don’t Appear To Be Too Poor

While the upper class is generally the target of most audits, the other end of the spectrum isn’t spared. When examining returns, the IRS is particularly interested in errors related to the Earned Income Tax Credit (EITC), a refundable credit that may only be claimed by lower income taxpayers. The error rate is about 30%, nearly three times higher than with other social programs.

Common mistakes included amounts that were figured or entered incorrectly; missing or incorrect taxpayer ID numbers for qualified children; failure to report income; and dependent children who were ineligible for purposes of the credit.

If you qualify for the EITC, pay attention to the fine print. Report all your income; check and double-check your math (see number one above).

Tax Audit Tip #4…Live Within Your Means

Even if you’re not too rich or too poor, make sure your tax return accurately reflects your economic reality. It doesn’t make sense for you to report $30,000 in charitable donations on a $45,000 salary – or home mortgage interest deductions of $10,000 for your $15,000 job. Think about the picture you’re painting on your return: Does it make sense?

The IRS has a database, of sorts, of what it thinks it takes to survive based on where you live and the number of dependents you report. If your numbers are wildly different from those norms, it will question whether you are under reporting income or over reporting deductions. Just ask Rachel Porcaro, the Seattle mother of two boys, who was flagged for audit because the IRS did not understand how she could support her family on her salary.

The bottom line when it comes to reporting income and expenses: Your tax return shouldn’t raise more questions than it answers.

Tax Audit Tip #5…Don’t Appear To Have Lost Too Much Money

As mentioned prior, filing a Schedule C may increase your risk of audit. This is because, according to a recent Government Accountability Office report, the IRS estimates that as many of 70% of taxpayers who report net losses on a Schedule C have artificially inflated expenses to create losses.

The IRS understands you will have years that are good and years that are not so good. But it likes to think you’re in business to make a profit, even if you don’t every single year. If, however, you’re reporting losses on your Schedule C every year (especially for three or more years in a row), the IRS might question how you’re managing to get by. The IRS may disallow recurring losses as hobby losses. Expect the agency to ask about recurring Schedule C losses.

Tax Audit Tip #6…Either You Are Married (Or Not)

Your marital status is determined as of December 31^st of each year. It doesn’t matter if you just got married (or divorced) on December 31st or if you’ve been married (or divorced) for the entire year up to December 31^st – it’s your status at the end of the year that counts. You may not file as single if you are still married — even if you are living apart from your spouse. And you may not file as married filing jointly without the consent of your spouse. Don’t file using the wrong marital status, and don’t file without the proper number of signatures — although it feels obvious, a joint return should have two signatures. Your spouse may forgive you if you forget that you’re married, but the IRS won’t.

Tax Audit Tip #7…Don’t Claim The Wrong Number Of Dependants And Exemptions

You may claim a person as a dependent only if that person meets the legal definition of a dependent. Don’t claim your cousin down the street just because you may send him or her a few dollars from time to time. If you’re not sure who might qualify as a dependent.

Adding or removing dependents from year to year without explanation could cause you to land on the IRS’ radar screen. Similarly, claiming the same dependent as another taxpayer (which happens from time to time in the case of a divorce) may raise questions or cause your claims related to a dependent to be rejected, as will reporting the wrong Social Security number. If your dependent doesn’t have a Social Security number but otherwise qualifies as your dependent, you’ll need to get an ITIN for tax purposes.

Tax Audit Tip #8…Report All Income

If you’ve ever used a software package to prepare your tax return, you should have noticed that the program constantly reminds you to enter the information on forms 1099, W-2, and the like exactly as it appears on the form. It’s not just an annoying computer generated message — there’s a method to their madness. The IRS makes every effort to match nearly 100% of the forms submitted to them by employers and other organizations. Financial information reported by banks, brokerage houses, and other financial institutions are matched about 96% of the time. This makes your individual margin for error incredibly small. Take the time to collect all the forms sent to you by employers, banks and other organizations. If you fail to receive a form, follow up — ask your employer where your form W-2 is, just in case it got lost in the mail. You don’t want to overlook income that should have been reported on your return, especially when the IRS is so diligent about checking this one.

Tax Audit Tip #9…For Best Results, Type Your Return

It may sound silly, but handwriting your return may slow down processing and result in a mistake that attracts the attention of the IRS. If the IRS cannot read your return, the return may be rejected. The IRS encourages you to e-file for just this reason; it claims the error rate on e-filed returns is reduced to 1% as compared to nearly 20% on a paper return. This, in the IRS’ own words, “means a decreased likelihood of hearing from the IRS.”

Tax Audit Tip #10…Be Normal

You may have noticed a trend with respect to these tips: The IRS doesn’t like returns that are different. In fact, it likes norms so much that it has a computer program to make sure you fit them. The program is called the Discriminant Inventory Function System (DIF), and it assigns a numeric score to each individual tax return after it’s been processed.  If your score varies widely from the norm, chances are, you’ll be flagged.

The bottom line: Be smart. But don’t cheat yourself, either. Don’t let a fear of being audited discourage you from reporting unusual losses or significant itemized deductions that you may be entitled to. Just be sure to keep good records to substantiate those items.

It is true that your chances of being audited are increasing. As the numbers of audits go up, take steps to protect yourself. Don’t be greedy, keep good records, and check (and double-check) your return. The fewer reasons you give the IRS to take a second look at your return, the better.

To help lessen your vulnerability to tax return errors or a tax audit, consider letting a professional CPA firm with extensive knowledge of the latest IRS tax codes, rules, regulations, and procedures handle your taxes – The Shafer Group.

Yearly, thousands of Colorado Springs residents entrust their tax preparation work to The Shafer Group – Let Us Stress The Numbers, So You Don’t Have To! Martin Barretta (Business Development Director) http://theshafergroup.net
(719) 487-1200 ext. 26

Sole Proprietorship…

A sole proprietorship is a one-person business that typically doesn’t require registration with the state in which you operate your business, with the exception of fictitious name or doing-business-as (DBA) paperwork.

Here, the owner is the business and the business is the owner. There is no legal separation. The owner is personally responsible for all aspects of this business — from income tax (profits and losses) to liability (debts and judgments).

Typically, a sole proprietorship can be dissolved at any time by the owner and automatically terminates with the death of the owner. You own the company and are responsible for both its assets and liabilities.  You can, however, transfer a sole proprietorship to a partnership, LLC or corporation usually tax-free.

General Partnership…

A general partnership is simply a business owned by two or more people. No special paperwork is required. The same responsibilities – tax and liabilities – that are associated with a sole proprietorship apply; however, in a partnership, they’re shared.

How the responsibilities are distributed among the partners is determined by the partnership agreement. An equal division of partnership may not be best. For instance…a company with 51% women ownership may qualify as a woman-owned business enterprise with possible added commercial benefits.

The partnership may function best with a legal agreement in place.

Limited Partnership…

Another type of partnership is the limited partnership. This kind of partnership is not usually recommended for the average small-business owner. As a general rule, limited partnerships are created by one individual (or company), known as the general partner. The general partner solicits investments from others, who, in turn, are limited partners.

The general partner is liable for business debts.

This isn’t a business structure that should be created without the input of legal guidance. There are CPAs and business attorneys who specialize in this area.

Limited Liability Company (LLC)…

The main benefit of a corporation or an LLC is that the owners’ personal liability for business debts and court judgments leveraged against the business is limited with these business structures.

A limited liability corporation (LLC) can potentially provide limited personal liability for business debts, claims, and judgments. However, LLC’s are similar to partnerships in this regard to tax treatment. The owners of an LLC report income or loss and pay taxes on their portion of the business income on their personal tax returns.

Potential business owners who may be sued by another party, those who run the risk of substantial business debts, and individuals who wish to protect individual assets are all among those who should consider an LLC or corporate structure.

C Corporation…

A C corporation is an independent entity, for legal and tax purposes; it’s separate from the people who own, control, or manage the business. The business isn’t synonymous with the owner, and the owner isn’t synonymous with the business – in structure.

In most cases, owners of a C corporation don’t use personal tax returns to pay tax on corporate profits. As a separate entity, the C Corporation itself pays these taxes. Owners, however, pay personal income tax on money received from the C Corporation – as dividends, salaries, bonuses, and other forms of compensation.

The primary advantage of a C Corporation is its potential for a greater number of shareholders and that shareholders don’t have to approve any special consents. For large firms that require outside investments, the S-Corporation limitation of 75 shareholders might be too restrictive.

S Corporation…

An S Corporation is a form of corporation allowed by the IRS for most companies with 75 or fewer shareholders that allows the company to enjoy the benefits of incorporation while being taxed like a partnership or sole proprietorship.   Additional tax savings from self-employment tax reductions might be possible with the use of an S corporation under current tax laws.

Non-Profit Corporation…

A non-profit corporation is formed to carry out a charitable, educational, religious, literary, or scientific purpose. Usually, non-profits raise their funds through public and private grant money. They can also solicit donations from individuals and companies.

While there are exceptions to this, federal and state governments generally don’t tax non-profit corporations on their donation and investment income, as long as it’s related to the intended non-profit purpose.

In most cases, you can switch from one form of business to another without major consequences. Consultation with a CPA tax expert is critical when the form of a business is changed.

Regardless of the type of business you wish to form, one of your first steps should be a visit with a CPA or business attorney that can best guide you in this area.

To help you determine the best legal structure for your business, feel free to call Colorado Springs #1 Tax Planning & Business Advisor Specialists – The Shafer Group and ask for Martin Barretta Business Director  at (719) 487-1200 ext. 26 or visit our website at: http://theshafergroup.net

This oversight has caused many business owners to obtain the services of a CPA not familiar with their business needs and end up paying a lot more in taxes or not getting the tax refund they deserve. Missing one small tax law could make for one big headache, costing you extra time and extra money.

You see, unless a CPA specializes in small business accounting, there is a high probability that they are not thoroughly familiar with the massive tax codes and complicated IRS rules and regulations regarding your small business. For this reason, they are oftentimes very conservative with your tax deductions, which can result in more taxes you have to pay. You can see why it would be a good idea to obtain the services of a CPA firm that specializes in small business accounting and tax matters.

Some other commonly overlooked factors when considering a CPA for ones small business are items such as, personality, customer service, operating philosophy, fee structure, and the like.

With this in mind, the question now becomes . . . “How can I know if a CPA firm is a right fit for my small business?”

As a tool to help you find a CPA firm that would be an ideal match for you and your business, we have compiled a Free E-Book for you titled: “10 Must Know Tips To Help You Find The Ideal CPA For Your Individual Or Business Needs”.

The information contained in this Free E-Book has help save hundreds of business owners a lot of time, money, and frustration in their search for an ideal CPA for their business. We know it can do the same for you too.

Download your Free E-Book at: http://theshafergroup.info/my/rept.pdf

For more details, you can contact Martin Barretta with The Shafer Group at

(719) 487-1200 ext. 26

Are you a married or formerly married taxpayer whose spouse or former spouse has given you an unexpected gift – an income tax liability from a previous tax year? You may want to contact your local Colorado Springs accountant to see if you qualify for relief of this income tax liability under innocent spouse rules.

Normally, when a joint income tax return is filed, the law makes both the taxpayer and the spouse responsible for the entire tax liability, even if you later divorce. However, in some cases, a spouse or former spouse will be relieved of the tax, interest, and penalties on a joint tax return under three types of relief available to married persons who filed joint returns.

1. General relief available to all filers;
2. Separate liability relief available to joint filers who are treated as no longer married; and
3. Equitable relief for taxpayers who do not qualify for the other two types of relief.

General relief is available when there is an understatement of tax regardless of whether the couple is still married and living together, is separated, divorced, or one spouse is deceased at the time of the request. An understatement of tax exists when there is a difference between the tax calculated on a tax return and the tax that should have been shown on the return. If innocent spouse relief is granted, the requesting spouse may also be entitled to a refund of any amount of the tax liability previously paid by the requesting spouse. The qualifications for general relief are complex so please contact your local Colorado Springs CPA for help on seeing if you qualify for this type of relief.

Separate liability relief is available to spouses who are divorced, legally separated, or living apart and it allocates the tax liability stemming from an understatement of tax between the electing spouse and the other spouse. If successful, the electing spouse is able to limit his or her liability to the portion of an assessed deficiency properly allocable to him or her. Please consult with a Colorado Springs certified public accountant to see if you meet the criteria for this type of innocent spouse relief.

 Equitable innocent spouse relief may be available to a spouse who is otherwise ineligible for the other forms of relief. The typical situations unique to this type of relief involve the underpayment of tax rather than a dispute about the amount of tax liability for the year. An underpayment of tax occurs when the requesting spouse and the nonrequesting spouse report an item correctly on an original or amended return but are unable to pay the tax resulting from such item. Under this relief, either money for payment of taxes reported on a return never reaches the IRS because the nonrequesting spouse misappropriated the funds for his or her personal use or the nonrequesting spouse cannot pay for an unpaid liability that arises out of that spouse’s income. This relief may also be granted in addition to other innocent spouse relief, for example, when the requesting spouse seeks to be relieved from and underpayment of tax and not just an understatement of tax. Your Colorado Springs CPA can help you apply your circumstances to this type of relief to see if you qualify for equitable relief.

Procedures for Seeking Innocent Spouse Relief

A spouse or former spouse seeking innocent spouse relief must first file Form 8857, Request for Innocent Spouse Relief. The filing must take place no later than two years after the IRS commences collection activities (consult with your Colorado Springs CPA for details) and provides that spouse with notice of innocent spouse rights. The requesting spouse may request one, two, or all three types of innocent spouse relief in one request. Once the requesting spouse files a Form 8857, the IRS must send a notice to the nonrequesting spouse’s last known address that informs the nonrequesting spouse of the claim for relief. This notice gives the nonrequesting spouse the opportunity to submit information for the IRS to consider in making its determination. Further, filing for innocent spouse relief puts an immediate halt on federal and state collection activities.

Before making any decisions related to seeking innocent spouse relief, please take the time to check with your Colorado Springs accountant and trusted Colorado Springs business advisors  The Shafer Group.  Your Colorado Springs tax planning and potential relief of a tax liability you are not responsible for are too important to not discuss further with a Colorado Springs accountant at The Shafer Group.