Q. I AM PURCHASING A MODEST VACATION HOME WITH THE PLAN TO EVENTUALLY BUILD EQUITY AND ACQUIRE A MORE EXPENSIVE PROPERTY. CAN I DEFER THE GAINS TAX ON THE ORIGINAL PROPERTY?
 

A. Maybe. Though generally reserved for owners of business property — if properly planned for — investors in vacation properties may be eligible for Section 1031 “like-kind” exchange treatment. In a recent tax court case (Barry E. Moore, et ux. v. Comm’r), the IRS successfully challenged the taxpayer’s attempt at deferral. In doing so, however, the court reaffirmed a set of criteria which if met should lead to a more favorable result. Taxpayers must establish that investment is the primary motive for the purchase and then treat it accordingly — offering it for rent, claiming depreciation, maintenance and interest expense deductions in a manner consistent with an investment property.
 
Q. WHY SHOULD A BUSINESS OWNER SEEK A CPA ACCREDITED BUSINESS VALUATION ABV TO VALUE THEIR BUSINESS?

A. Business owners should use a CPA/ABV to value their business for buying or selling purposes or for property settlement purposes in a divorce. Scott Champion, CPA/ABV in my office, is an expert whose unique training and experience enable him to apply valuation methods and derive a value that is both reasonable and supportable. The use of a CPA/ABV is invaluable in negotiations since the valuation of a business is an art and not a science.
 
Q. SHOULD I BEGIN TAKING MY SOCIAL SECURITY BENEFITS EARLY?

A. Taking benefits at age 62 (for those born before 1954) typically makes sense. It will result in a lower monthly benefit rather than waiting until age 66, but it’s especially compelling if you need the money or will have earned income over the limit (currently $12,960). If you don’t need the money right away and can invest it, the breakeven point is age 89 assuming a 5 percent annualized return. Each person’s situation is unique, so all factors including life expectancy, must be considered to make the best choice.
 
Q. THE IRS HAS SENT ME A NOTICE THAT THEY INTEND TO AUDIT ME. NOW WHAT?

A. This is one of the most unnerving experiences an individual or small business can have. The first thing you should do is contact your tax advisor and consider if it makes sense to have them represent you. The less contact you have personally with the IRS the better. The second most important item is to be organized with your records. IRS agents are less likely to raise issues and “dig deep” if your documentation is complete and accurate.
 
Q. WHEN SHOULD A COMPANY CONSIDER AN ACQUISITION?

A. A company must be financially capable of taking a risk since growth through acquisition is generally more risky than organic growth. Obviously, the company’s bank should agree with this assessment. An acquisition is also appropriate when a company sees an opportunity to get into an attractive, but otherwise difficult to penetrate, market by acquiring a well-operated company at a fair price. Notice I didn’t say “cheap.”
Q. I HEARD CONGRESS HAS ONCE AGAIN MADE CHANGES TO THE “KIDDIE TAX.” WHAT ARE THE CHANGES AND WHEN DO THEY TAKE EFFECT?

A. Recent tax legislation passed earlier this year raises the applicable age limit for the kiddie tax from under 18 to under 19, or to under 24 for college students who do not provide their own support. The kiddie tax causes a child’s investment income over $1,700 to be taxed at the parents’ rate. The new law is effective Jan. 1, 2008. Therefore, 2007 is the opportunity for parents to gift appreciated stock to their college-age kids and have all or most of the long-term gains taxed at 5 percent versus the parents’ higher 15 percent rate.
Q. CAN MY COMPANY RECEIVE A TAX DEDUCTION ABOVE COST FOR DONATING MONEY?

A. C-corporations can potentially take deductions above the cost of their inventory for contributions: 1) for the care of the ill, the needy, or infants, 2) of scientific property used for certain research purposes, or 3) of computer technology and equipment. Contact your tax advisor for the specifics.