Question of Election

[Snaggletooth]

Willie Workaholic files a schedule C for his machine shop. Each year he has to buy equipment, either to improve his operation or to replace/upgrade existing plant.

Willie has been generally profitable for a number of years, making enough to support himself and family. Then, in 2009, like many other people, he has a bad year.

Consistently, Willie has taken liberal depreciation on his equipment purchases. He typically takes Double-Declining and sometimes Bonus depreciation. Then, in 2009, he takes alternate MACRS with an election for longer lives. By doing this, Willie reports a profit of $15,000 on his schedule C. Had he followed his usual pattern, he would have reported a loss of $2,000.

Willie has a wife and two children ages 14 and 12. For 2009, his EIC amounts to $3800. He would NOT have EIC had he elected typical depreciation. He was prompted by his tax preparer to make the elections.

Question: Has the tax preparer properly advised and prepared Willie's return?

My vote is "yes." These elections exist for the very purpose of maximizing tax posture. I believe there will those who disagree...

[Brian EA]

That's why there are elections
brian

[Gretel]

I don't see anything wrong with depreciation elections whatsoever. Furthermore I believe that this is what makes a preparer a good preparer: to legally minimize the tax burden. Every day is a new day, so what does "usual pattern" mean anyway?

[Black Bart]

I see your point.

...Willie...typically takes Double-Declining and sometimes Bonus depreciation...in 2009, he takes alternate MACRS...By doing this, Willie reports a profit of $15,000 on his schedule C. Had he followed his usual pattern, he would have reported a loss of $2,000...his EIC amounts to $3800. He would NOT have EIC had he elected typical depreciation...

Question: Has the tax preparer properly advised and prepared Willie's return?

Answer: Yes.

I can see why you're concerned. While it may seem an obvious "election" (thanks to Brian for the short version ) these things can be looked at several different ways depending on who's doing the looking. Doubtless this is the responsible thing to do for your client, but such things are "edgy" questions in today's harsh preparer-pen atmosphere and IRS is so money-hungry that it's smart to consider the maybe not so far-out possibility that they'd twist this into a penalty for trying to help a client at their expense.

This question relates to a discussion here a year or so ago; at the time I provided a cite stating all expenses incurred must be used and cannot be NOT taken just to "up" the EIC. I don't have a cite to support the negative, however you have surely concluded and I fully agree that this ADS depreciation election is tax planning -- avoidance rather than evasion -- and would be legally allowed.

I'm thinkin' others are... thinkin' the same?

[S T]

Deduction Allowable and EIC

My own viewpoint, because of due diligence, and now the onslaught of potential preparer penalites, and potential audits of EIC, etc, I would take a very long hard look at whether or not I wanted to place the client into "EIC".

Another question, is it always in the best interest of the client to obtain the "special Allowance Depreciation" or the Sect 179 - I always have a lot of questions that I ask my tax client, before making that decision. Sometimes it just comes back in a few years and "bites you - you know where"

It should be noted it would be on a case by case Taxpayer basis and a taxpayer that I had a longer term relationship with for Tax Planning, not a ONE time client and possibly not even a brand new client - Clients all like us when we find these "refunds" or "Minimize Tax Liability" but is it always in the best interest over the long term of 5 years or so?

There are elections on the tax returns that we prepare and I believe the Taxpayer/Client should be informed about choices and what would be allowed/allowable and also what those consequences might be. We as preparer's can only apply the rules and regulations, based on the taxpayer information provided and then provide that final outcome information to the Taxpayer to make the decision.

I would want an engagement letter and and understainding with the Tax Client to the choices in the example that you present and what might be the outcome of changes in operation or disposal of assets relating to those choices over the next few years.

Sandy

[Gretel]

I totally agree with explaining the consequences of choices on future years to the clients, I always do, but never occurred to me to better put in writing. Good idea.

Now back to this client who normally has good income and is now hit by the down turn. What better purpose can the EIC have but to help out in a situation like this? What good arguments could the IRS have?

We diligent preparers would probably feel a whole lot better after some such cases went to the court and were won by the preparer or client. We live kind of in an impossible situation. So many people are truly hurt by the economy and then insult is added to injury.

[ChEAr$]

I totally agree with explaining the consequences of choices on future years to the clients, I always do, but never occurred to me to better put in writing.
(balance snipped for brevity's sake.)

While I generally agree with making client aware of what's happening, what might happen, and what will happen IF.... ....
And while I generally think of myself as an advisor as to certain actions.........

Just about always i go ahead an do the math, decide the exactly amount to go into an IRA
maybe to bring tax down to zero by maximizing the RTC; or plot and scheme with maybe
$ 45,000 plus one possibilities as to section 179. why?
Because clients are many time like sheep.
My question "Did you do what I recommended about that 401k plan?
His answer " Yes, I did just what you TOLD me to do."
(shrugs)

[Black Bart]

Sandy,

My own viewpoint, because of due diligence, and now the onslaught of potential preparer penalites, and potential audits of EIC, etc, I would take a very long hard look at whether or not I wanted to place the client into "EIC".

Most EIC cases are not as risky as popular literature leads you to believe. We do at least two or three hundred a year and I've only had one audit ever for such (for a what I call a "lightweight" client who can't stand much scrutiny). With the caveat however that almost all of mine are good, solid middle-classers who aren't making up C items to manipulate the credit. While you might reasonably ask why they're getting EIC if they're middle-class, it's because wages are so low in this area that lots of the good guys fall into EIC brackets along with the professional welfare cases (I usually send those on their way).

Another question, is it always in the best interest of the client to obtain the "special Allowance Depreciation" or the Sect 179...

I also do not always use this and many times prefer to use ADS instead of MACRS to spread the expense over as many years as possible to lighten the annual tax load.