John K. McGill, MBA, CPA, JD
My office building roof is leaking, and I am now faced with the cost of removing and replacing the roof-covering material. I plan to immediately write off this repair, but my CPA says that I will need to count it as a building improvement and write it off over 39 years. Is there any way I can get a faster write-off?
Yes. In Campbell vs. Commissioner (T.C. Summary Opinion 2002-117), the court held that an $8,000 expenditure for roofing work was a deductible repair, and did not need to be capitalized and written off over a 39-year period. In that case, the roofing contractors removed the existing top layers of the roof and recovered it with fiberglass sheets and hot asphalt, making no structural changes to the roof. Since the sole purpose of having work done was to prevent leakage and not to prolong the life of the property, increase its value, or make it adaptable to another use, the court found the entire amount paid was immediately deductible as a repair expense.
Recently, my unincorporated general dental practice was audited and the IRS assessed additional taxes and interest from three years ago. Is this interest tax deductible?
Probably not. Temporary Treasury Regulation Section 1.163-9T(b)(2)(i)(A) provides that no deduction is allowed for interest charged on an individual income tax deficiency. Several courts, including Robinson vs. Commissioner, 119 T.C. 4 (2002), have upheld the denial of this interest deduction where the interest arises from an audit of an unincorporated dental practice or other business.
My father was a dentist for many years and sold his practice just two years before he died. As part of the sale, he was to receive $20,000 a year for five years as a covenant-not-to-compete agreement. At his death, he still had $60,000 to collect on this covenant. I thought that all income tax on the $60,000 left to collect would be “forgiven,” since all of his assets received a “stepped up basis” at his death, but my accountant is unsure. Is this correct?
No. In Coleman vs. Commissioner (T.C. Memo 2004-126), the court held that payments received on a covenant-not-to-compete are not eligible for the same “stepped-up basis” that most other assets (e.g., real estate, stocks, bonds, etc.) receive at the date of death. Accordingly, these amounts must be reported as ordinary income when received.
Two years ago, I had to put my parents in an assisted living center, since they were unable to care for themselves and no other relatives were available to help. In filing their income tax returns, I did not deduct any of the $4,000 a month paid to the assisted living center for their care. Now, from speaking with several of my colleagues, I have learned that some of this might be deductible. How do I figure this out?
In Baker vs. Commissioner, 122 T.C. 8 (2004), the Tax Court held that when a taxpayer pays a monthly life-care fee to a retirement home, the portion of the fee that can be proven to be for medical care is deductible as a medical expense. This case specifically addressed the question of the proper method of allocating fees paid to a long-term care facility between deductible medical expenses and nondeductible personal living expenses. Under the “percentage method,” the percentage allocable is determined by dividing the total amount of medical expenses for the retirement home by the retirement home’s total operating expenses. Once determined, this percentage is multiplied by the amount paid to determine the allowable medical expense deduction.
I recently spoke with a friend of mine who had a great idea for tax avoidance I wanted to share with you. He owns a business and had that business sell its accounts receivable cheaply to another corporation owned by his Roth IRA. By doing this, when the corporation owned by his Roth IRA collects the money for the accounts receivable, it will be totally tax-free. Is this legitimate?
No. In Notice 2004-4 IRB, the IRS reviewed such a transaction and labeled it as an “abusive transaction” that could subject a taxpayer to penalties. The IRS ruled that any arrangement between a Roth IRA and a taxpayer which has the effect of unfairly transferring value to a corporation owned by a Roth IRA is comparable to a contribution to the Roth IRA. As a result, this can exceed the limits on contributions contained under Section 408A of the tax law and result in penalties.
John K. McGill is a tax attorney, CPA, and MBA, and is the editor of The McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($199 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217. Call (704) 424-9780 or visit the Web site at www.bmhgroup.com.