All Forum Posts by: Kory Reynolds

Baseline consideration.... turbo tax business live preparation service is $1,750 (yes they do regularly offer discounts that might get it down to $1,000).  From Turbo Tax.  May or may not be a CPA or EA, most likely they are seasonal, most likely you'll never talk to them again if you have an issue, you'll get someone else, most likely you will receive minimal to no advice on any kind of strategy, and definitely no follow up.

If you are getting good service from a knowledgeable professional, $1,200 is likely a good deal.  But it does vary wildly - I work with a larger firm, we have in house professionals who focus 100% of their time on state and local tax / sales and use tax, various aspects of international, employee benefits, trusts, estates, gifts, etc, in addition to various industry focuses - and as a result we charge higher fees because there is a significant amount of very specialized knowledge floating around that is at our clients fingertips as they need it.  Many small to even some mid sized investors don't need all those resources, so the question on if the fee is "worth it" will entirely be dependent on their situation.  It can also be dependent on the resources the firm has available - maybe none of your tax work is complex, but you have 10-20+ partnerships you want to get timely filed for your outside investors - a larger firm may be more likely to have the resources to accommodate that, but you will pay for that service.

Quote from @Account Closed:

For 2024: 

most people who own one business, have some small rentals, stocks, and a w2 or 1099 here and there, I would say anywhere from 700-2900 bucks. I've done quite a bit of market research when trying to standardize our pricing, and these are the market rates I've found. I don't think trying to save a few 100s on an accountant is the way to go either. In this industry, you really get what you pay for! Sadly most of the time people overpay because they are working with a top-tier CPA who is giving them all the bells and whistles when the client may not need all that. Or worse, they underpay and get an inexperienced accountant who then makes mistakes and makes problems for the next accountant who has to go back and amend those mistakes. Choosing the right accountant really is important! 

 Agreed.

Some Baseline numbers to consider - Turbo Tax Business has a baseline price of $1,750 for a partnership or S-Corp.  Their personal tax prep is around $500 for a 1040 with some stock issues.  This is for just someone who puts the numbers in the boxes for you, most of them are seasonal, and you won't see them again - if you have an issue, someone else will deal with it in the future.

If a CPA/EA isn't charging substantially more than these amounts, they are likely short changing themselves given they are often providing substantially more in services, guidance, strategy, etc.

State - it depends, you can have real estate transfer tax issues / re assessment issues.  Many states do have exemptions if the beneficial owner has not changed - like in your case.

Federal - there are no income tax issues here. An LLC wholly owned by a single person is disregarded for federal tax purposes, so as far as the IRS is concerned you took an asset out of one pocket and put it into your other pocket.

You also need to consider the paintings - to the point of @Michael Plaks, if you could have picked up a bunch of prints from Hobby Lobby to decorate the place - why did you do the $3,500 options? Perhaps it is a high end rental with tenants with certain expectations?  Or did you just want these paintings and parking them in you rental for a couple years seemed like a good way to get a tax write off?

While there have been many taxpayer friendly rulings in this area, be aware that the IRS has challenged the deduction of artwork in the past.  Tax Adviser has a great read on the topic, linked below, fairly technical, but gives you an idea that it may not be as black and white.

https://www.thetaxadviser.com/issues/2012/aug/clinic-story-0...

Generally DIY with taxes doesn't work great.  I have yet to have a prospective client come in that was a DIY preparer and that they didn't have material mistakes on rental properties, especially with depreciation / fixed assets / repairs and maintenance, missed deductions, missed opportunities, or they filed in a way that was advantageous to them but completely wrong.

You might not think its rocket science, and it isn't.  But those in the field still spend 2080+ hours a year doing it, plus 20-40 hours of continuing education a year, and still regularly come across issues they need to research or toss around with experienced colleagues.  You don't need the most expensive fanciest CPA/EA in the world for every situation, but if you are operating rentals and other businesses...I would highly recommend it.  At the very least, your few thousand dollars a year saves you the dozens of hours that you'll spend trying to to stay on top of all these tax rules as they apply to your situation, understanding the nuance, and also filing your own return.

@David Lopez you are unlikely to find too many professionals that would be interested in providing that kind of service - most of us have more than enough work as is, so another engagement for a few hundred dollars to bog us down around April 15th is not too high on the services we are interested in offering.

It depends on Johnny's tax rate, and how much employment income he already has.  Could readily be up to 40% in taxes depending on the circumstances.

Assuming this project was gone into with the intention of flipping it (that is the wording you used at least), it is self-employment type income subject to ordinary income tax rates and self employment tax.  Johnny developed and sold a piece of inventory.  This is different than acquiring an investment property with the intention of holding for appreciation and rental income, which does get capital gains treatment, subject to 0%-23.8% federal rates depending on income and circumstances.

Quote from @Gordon Middleton:

Thank you @Kory Reynolds. That is a very helpful explanation. 

As far as bonus depreciation goes though, is there a need to separate the operations from the property? Whether the active income is separate from the rental portion doesn't affect how we can use the depreciation correct? 

 There is no need to separate out the operations from the property just as it relates to bonus depreciation - the same amount of bonus can be claimed with either structure, and grouping elections if needed can lump it all together for addressing any passive / active splits.

If it is a relatively small hotel, I would lean towards keeping it simple and just doing a single entity. The only ones I am involved in that they do these types of structures are typically 7 figures of NOI annually. Having an additional $5k/year in compliance costs, having additional costs to maintain two sets of books, more registration fees, getting leases set up and maintained...it can be expensive to split it up so one needs to be sure the tax costs are worth it.

Our recommendation to most of our clients is that until we have additional information, if you are going to be able to claim bonus depreciation, just extend that tax return and wait for it to be finalized.  Especially in Partnership land - the complexities of amending a partnership return are not cheap, and if you have 20 partners that now need to all amend their returns to get their 100% bonus depreciation later, that is a lot of compliance fees just for not wanting to extend.

If you just file as is with the 80% rules, you can always amend later if/when it gets bumped to 100%, so that isn't a significant problem, just an extra step.

What I would not recommend doing is filing as 80%, and then not bothering to fix it if it goes to 100%.  When you sell that property depreciation recapture is technically measured on "allowed or allowable" depreciation on the property - meaning there is a possibility if someone claims the 80% and doesn't fix it, they'll still be paying recapture on the 100%, even if they didn't get the tax benefit of it.

Quote from @Jorge Vazquez:

Quote from @Kory Reynolds:

The piece to be aware of with seller financing that can readily bite someone - depreciation recapture.  The regular straight line depreciation is fine, that receives the normal treatment.  But if you have done cost segregation studies and have 1245 / ordinary recapture to deal with, all of that income is taxed in the year of the sale, regardless of what you received for proceeds.

Not previously as big of an issue, but in this world that we have had the last few years of 100% bonus depreciation, it is rearing its head more and more often.

 Can you elaborate more on "1245"?

Sure thing - IRC 1245 refers to Personal Property type assets - think of all that 5-7 year property you pull out in a cost segregation study.  When you recognize depreciation recapture on these types of assets, that depreciation is taxed as "Ordinary" income, therefore is not eligible to be included in an installment sale.    Depending on what one can defensibly argue for the allocation of the sale price, it may or may not be an issue.  But if you are doing seller financing on assets you acquired in the last few years and did a cost segregation study, it is something to be cognizant of.

There is also "1250 recapture" which is taxed as Ordinary income as well, and is not subject to installment reporting - this is when you took accelerated depreciation (bonus) on any real property assets.  Primarily this applies to when one took bonus depreciation on land improvements, or in the case of nonresidential property, qualified improvement property.

The one type of depreciation recapture you can defer with an installment sale is "1250 unrecapture" - this is that typical 25% depreciation recapture rate that you think of, which is the depreciation recapture on the straight line building and/or straight line depreciation on something like the previously mentioned land improvements or qualified improvement property.

Allocation of the sales price is incredibly important here.  You can't arbitrarily decide that you don't want to allocate any of the proceeds to the portion of the property that will create Ordinary income recapture (thus can't be included in the installment sale treatment) - it should technically be allocated amongst all the assets in accordance with their fair market value at the time of the sale.  Whether that is determined in a reasonable approach by you and your accountant, or you come to an agreement with the buyer of the property - you just need to do something.

Quote from @Kevin S.:

Quote from @Kory Reynolds:

Your answer to those questions will be "it depends" - it depends on the state and local jurisdictions that you and your real estate investments (or other business ventures) are subject to.  The CPA themselves don't need to be local, what is important is that they (or their team) can address any specialty concerns of your locality.  And even then...many state / local jurisdictions require effectively no specialty knowledge.  

There is definitely no one size fits all for how to look for a CPA / firm - it is going to be highly individualistic.  

 Thanks.  Just like choosing an attorney that should be licensed in the state of his/her client (state law applies and differs) I wasn't sure if the same hold true for accountants and whether local tax laws differ from state to state.  Especially an investor who is not a W2 earner but has small business.  

 CPA / EA are (thankfully!) unlike attorneys in that regard - they do not be licensed in a particular jurisdiction to prepare tax returns and provide advice related to that Jurisdiction.  I say thankfully since it is not uncommon, especially in todays world, to have relatively small businesses filing in a high volume of states - it would be a massive headache to have to be licensed in all of them!