Federal Tax Issues

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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…

“It Wasn’t My Fault”

When a business is successful and there are profits to share, the owners of the business get along well enough. As revenues fall off, however, while costs often remain steady or even increase, the owners will sometimes choose to “defer” the payment of so-called “trust fund” taxes in order to satisfy…

Exchanges, In General

A taxpayer must recognize the gain realized by the taxpayer from the conversion of a property into cash, or from the exchange of the property for other property differing materially in kind.

Under an exception to this general recognition rule, gain is not required to be recognized if property that is held…

Business Owners & Employment Taxes

In general, self-employed individuals are subject to employment taxes on their net earnings from self-employment.

The wages paid to individuals who are non-owner-employees of a business are subject to employment taxes regardless of how the business is organized.

The shareholders of a corporation are not subject to employment taxes in…