Limited Partner Subject to Self-Employment Tax

When it comes to tax law, there are quite a few known-unknowns. These are tax questions that have been raised tangentially in court cases and rulings, but have not been fully answered. These situations confuse taxpayers. Tax practitioners are often asked to provide answers. The answers from tax practitioners often differ, as practitioners have different…Continue readingLimited Partner Subject to Self-Employment Tax

S Corp Election Terminated by Standard LLC Language

If you make an S corporation election and do not fix the standard language that is typically included in the LLC company agreement, you’ll void the S corporation election. This is an issue that is usually identified by during an audit by the IRS. Many taxpayers overlook this issue until it is too late (it…Continue readingS Corp Election Terminated by Standard LLC Language

Loan to an S Corporation to Allow Tax Loss

Tax basis can limit a shareholder’s loss from an S corporation. If an S corporation has a tax loss but the shareholder doesn’t have sufficient tax basis to take the loss, the shareholder will typically have to loan money to the S corporation. This tax debt basis makes the loss allowable in the current year.…Continue readingLoan to an S Corporation to Allow Tax Loss

The IRS Recent Focus on S Corp Owners

The IRS has announced several new compliance campaigns focusing on S corporations. This is needed as the audit rate for S corporation is extremely low. The most recent IRS compliance campaign focuses on shareholder stock basis issues for S corporation owners. Those who have significant S corporation losses or large distributions should take time to…Continue readingThe IRS Recent Focus on S Corp Owners

Using Warrants to Make Future Purchases of S Corporation Stock

Can you make a gift to charity but retain the right to pull back the value of the gift in the future, and still get a charitable deduction for the gift? The court said “no” in In Re Stapley, No. 09-47699 RLE (Bankr. N.D. Cali. 2019). The failed tax shelter included an S corporation whose…Continue readingUsing Warrants to Make Future Purchases of S Corporation Stock

Can the IRS Ignore the Legal Existence of a Corporation?

If a taxpayer forms a legal entity and it is taxed as a C corporation, can the IRS disregard the legal existence of the corporation and assess the corporation’s tax to the owner? The court addresses this in Russell v. Commissioner, T.C. Memo. 2019-146. Facts & Procedural History The taxpayer filed his personal income tax…Continue readingCan the IRS Ignore the Legal Existence of a Corporation?

The Timing Trap: Failed Installment Sales

What happens if you sell an asset and are to receive payments in the future, but your accountant fails to elect the installment method? Do you have to report the full amount of the gain in the year of sale? What happens if the buyer fails to make the payments in subsequent years? The IRS…Continue readingThe Timing Trap: Failed Installment Sales

S Corp Conversions: Watch out for Disappearing AAA

Small and medium-sized business can save quite a bit in taxes by using S corporations. But with this tax savings comes complexity. This complexity comes from how S corporations flow through profit and have the profit taxed on the individual owner’s personal tax return. The rules for tracking this are, well, lacking. Accountants are often…Continue readingS Corp Conversions: Watch out for Disappearing AAA

Final Regulations Issued: Leveraged Partnership Distributions Still Viable

The “leveraged partnership distribution” or “disguised sale” is a common tax savings technique used by real estate owners. Taxpayers pushed the envelope with these transactions by using “bottom dollar guarantees.” This led to guidance from the government making it more difficult to benefit from leveraged partnership distributions. The Treasury recently finalized regulations that say what…Continue readingFinal Regulations Issued: Leveraged Partnership Distributions Still Viable

The Importance of Accounting for C Corporation Expenses

It is important to keep accurate books and records. Accurate books and records can result in significant tax savings. This is particularly true for entrepreneurs who own more than one business. When one or more of these businesses are taxed as a C corporation, the stakes can be even higher. The Nzedu v. Commissioner, T.C.…Continue readingThe Importance of Accounting for C Corporation Expenses

IRS & the Burden to Prove Constructive Dividends

When a C corporation pays expenses for its shareholder, the payment can be subject to income tax for the shareholder as a constructive dividend. One defense is that the expenses for the C corporation were legitimate. Does the taxpayer have to prove the amount of the expenses or does the IRS? The Combs v. Commissioner,…Continue readingIRS & the Burden to Prove Constructive Dividends

Planning for Start-Up Businesses, Yacht Rental Example

New businesses may not be immediately profitable.  To help mitigate the financial risk, many businesses are started by workers who have a day job.  If the business is not immediately profitable it can help the owner finance the business if the owner is able to use the tax losses from the business to offset the…Continue readingPlanning for Start-Up Businesses, Yacht Rental Example

Guaranteeing a Loan for Your S Corporation

In Phillips v. Commissioner, No. 17-14439 (11th Cir. 2018), the court concluded that a judgment against the owner of an S corporation for guaranteeing the business debts does not increase the owners tax basis in the S corporation.  This is one area where a little advance planning can go a long way to avoiding a tax…Continue readingGuaranteeing a Loan for Your S Corporation

Court Says Rent Income from S Corp Not Subject to Self-Employment Taxes

In Martin v. Commissioner, 149 T.C. 12 (2017), the court concluded that S corporation shareholders can avoid self-employment taxes by holding their farming operations in their S corporation. While the court case considered farming operations, its holding is not limited to farming operations. The case provides authority shareholders may cite in support of similar but…Continue readingCourt Says Rent Income from S Corp Not Subject to Self-Employment Taxes

No Tax Due on Foreign Corporation’s Redemption of U.S. Partnership Interest

Many businesses that operate outside of the U.S. want to do business in the U.S. and they want to limit their exposure to U.S. income taxes. To do this, many in-bound investments are structured as U.S. partnerships with the parntership being formed in the U.S. to carry on the business activities in the U.S. This…Continue readingNo Tax Due on Foreign Corporation’s Redemption of U.S. Partnership Interest

Issue for the New Partnership Audit Procedures Raised in TEFRA Case

The Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) procedures were intended to make it easier for the IRS to audit partnership tax returns. TEFRA failed to deliver. The rules are nuanced and hard to apply. The new partnership audit procedures are intended to remedy this. With the new partnership IRS audit procedures coming…Continue readingIssue for the New Partnership Audit Procedures Raised in TEFRA Case

IRS Says Personal Expenses Paid by S Corp. Not Loan Repayments

If a Subchapter S corporation pays its shareholders personal expenses, can the payments be for the repayment of loans not subject to employment instead of wages subject to employment taxes? This is a common issue that has to be addressed when preparing S corporation tax returns. The IRS addressed this in AOD 2017-04 disagreeing with…Continue readingIRS Says Personal Expenses Paid by S Corp. Not Loan Repayments

S Corporation Owner Who Didn’t Receive Distribution Subject to Tax

Taxpayers who own an interest in an S corporation but who are not familiar with the tax rules are often surprised to learn that they have to pay tax on the business profits even if they do not receive distributions from the business. The court recently addressed this fundamental concept in Dalton v. Commissioner, T.C.…Continue readingS Corporation Owner Who Didn’t Receive Distribution Subject to Tax

Subchapter S Corporation Losses Limited by Tax Basis

One of the benefits of Subchapter S corporations is the ability to have losses flow through from the business’ tax return to the individual shareholder’s tax return. These flow-through losses are limited by the shareholder’s tax basis in the S corporation stock. The court recently addressed this limitation in Tinsley v. Commissioner, T.C. Summary Opinion…Continue readingSubchapter S Corporation Losses Limited by Tax Basis

Deducting Back Taxes in Current Year for Defunct Business

Can an S corporation shareholder for a defunct business pay unpaid taxes in the current year, and have the defunct business deduct the payment in the current year?  The court addresses this in Brown v. Commissioner, T.C. Memo. 2017-18.  Most business owners may miss this deduction given that the business is no longer operating. Facts &…Continue readingDeducting Back Taxes in Current Year for Defunct Business

S Corporation Owner Subject to Self-Employment Tax

Taxpayers often establish Subchapter S corporations to avoid Social Security and Medicare taxes on a portion of their earnings. This is a very common arrangement.  The Fleischer v. Commissioner, T.C. Memo. 2016-238, court case provides an example of how the Subchapter S corporation must be structured to avoid these taxes. Facts & Procedural History In Fleisher, the…Continue readingS Corporation Owner Subject to Self-Employment Tax

Using a Subchapter S Corporation to Reduce Payroll Taxes for a Sole Proprietorship or Partnership?

Sole proprietors and partners who provide services to their partnership business have to pay self-employment taxes on the income they earn from the business. Self-employment taxes include Social Security and Medicare taxes. The owner of the sole proprietorship is then able to deduct one half of this amount in determining his federal income tax liability.…Continue readingUsing a Subchapter S Corporation to Reduce Payroll Taxes for a Sole Proprietorship or Partnership?

Taxes & Limited Liability Companies

The Limited Liability Company or LLC is a legal entity formed with the state. Once formed, taxpayers have the ability to determine how the LLC is taxed for Federal income tax purposes. This presents a number of issues that have to be considered for LLC owners. Income Taxes & LLCs The IRS regards a single…Continue readingTaxes & Limited Liability Companies