Farrell Fritz P.C.

Subscribe to Farrell Fritz P.C.'s Posts
Contact:Read more about Farrell Fritz P.C.

In general, the creditors of a corporation cannot recover the corporation’s debts from its shareholders—the shareholders enjoy the benefit of limited liability protection as a matter of state law. Among the corporate liabilities from which shareholders are usually shielded is the Federal income tax imposed on a corporation’s taxable income.

There are a number of exceptions to this general rule, however – some of which are better known than others – including the ones described below.
Continue Reading Shareholder Liability For Corporate Income Tax?

Picking up on yesterday’s discussion, how can a PEF reconcile its preference to acquire a depreciable or amortizable basis for its target’s assets while, at the same time, affording the target’s owners the opportunity to roll-over a portion of their equity in the target into the PEF HC on a tax-favored basis? The answer is hardly simple, and it will depend upon a number factors.
Continue Reading Rolling Over Target Equity Into A PE Fund: Part II

For many business owners, the final step of a successful career may be the sale of their business. At that point, the investment into which the owners have dedicated so much time, effort and money is liquidated, leaving them with what is hopefully a significant pool of funds with which to enjoy their retirement, diversify…

Over the last thirty years, I have reviewed the income tax returns of many closely held corporations and partnerships. Quite often, on Schedule L (the balance sheet), I will see an entry for “other assets” or “other liabilities,” which are described on the attached explanatory statement as loans to or from affiliates, as the case may be. I then ask a series of questions: did the board of directors or managers of the entities approve the loan; how was the loan documented; is there a note with repayment terms; is the debt secured; does the loan provide for interest; has interest or principal been paid; has there ever been a default and, if so, has the lender taken action to collect on the loan?
Continue Reading Loans Between Related Entities

A business entity that is treated as a “flow-through” for income tax purposes enjoys the benefit of a single level of tax – the entity itself is typically not subject to tax on its net income; rather, that income “flows through” to the entity’s owners, who then report it on their own income tax returns. This flow-through treatment occurs whether or not the entity has made a distribution to its owners. For that reason, partnership/LLC agreements and “S” corporation shareholder agreements often provide for so-called “tax distributions,” meaning that the entity will distribute, on an annual or quarterly basis, enough cash to enable its owners to satisfy their income tax liabilities attributable to their share of the entity’s income that is flowed-through to them.
Continue Reading When Investing In A Partnership May Be A Tax Problem

Back to Basics

This is not a silly question. In fact, it is often one of the most difficult issues confronted by a tax adviser, and it arises from one of the most basic of tax principles; specifically, that income is taxable to the person who earns it. The difficulty in addressing the issue derives…

According to statistical data released by the IRS earlier this year, the examination rate for partnership tax returns has been increasing significantly over the last couple of years; of course, this includes returns filed by LLCs that are treated as partnerships for Federal income tax purposes. This should come as no surprise given the significant…

Captives: In Theory

Assume that a business pays commercial market insurance premiums to commercial insurers to insure against various losses. These premiums are deductible in determining the business’s taxable income. As in the case of most P&C insurance, the premiums are “lost” every year as the coverage expires.

A business will sometimes “self-insure” by setting…