Archive for Partnership

How Do I Set Up My New Business For Tax Purposes?

New business owners often ask, “How do I set up my business For Tax Purposes?” One of the choices you make when starting a business is the type of legal organization you select. This decision can affect how much you pay in taxes, the amount of bookkeeping and paperwork required, the personal liability you might be responsibility for, and your ability of borrow money.

For-profit businesses fall under one of four structures for tax purposes:

1. Sole Proprietor – An individual who owns an unincorporated business by themselves. Most small and home based businesses are sole proprietorships. For tax purposes, the business activity of a sole proprietor is reported on Schedule C of Form 1040. This is Read More

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Canadians With US Rental Property – What Are The Cross-Border Tax Implications?

Canadians earning income from US rental property can be fraught with unexpected tax problems, which could severely hurt their after-tax return on investment. It is important to consult a cross-border tax professional before the purchase to understand all the US and Canadian tax implications of owning US rental property and to make the best decision for their situation on the right structure to own and finance the purchase of US rental property.

This is the first of a series of articles on the cross-border tax considerations of investing in US rental property. If you are planning to purchase US rental property, you need to have some basic understanding of the following US and Canadian tax law before you can make a sound decision on how you should own and finance the purchase of US rental property. Read More

Written by | Posted in Corporate • Estate Planning Tax • Income Tax • Individual • International • North America • Partnership • Real Estate

S Corporation Pitfalls to Avoid

When a business operates as a sole proprietorship or as a partnership, there are few legal and tax regulations that must be followed. However, if that business converts to a corporation, a number of things change and the owner(s) must adhere to these new expectations or run the risk of having the corporate form of organization legally disregarded. When a corporation is legally disregarded, the law treats it as though it does not exist. In a worst-case scenario, this means that the limited liability protection provided by a corporation is lost, and the owners can be held liable for the debts and acts of the corporation.

Keep in mind that a corporation, whether an S corporation or a C corporation, is a legal entity separate and distinct from its owners. This is unlike the situation with a Read More

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U.S. Taxation of Entities, Associations, and Partnerships: What’s Your “Situs” Roger?

In the U.S. tax system, there is no characteristic of associations or entities (partnerships, corporations, and trusts) that corresponds exactly to the “nationality” or “residence” of individuals. For most organizations, however, there is a place – or at least a distinct legal environment – that establishes their existence and identity. This place, sometimes referred to as an entity’s “situs”, bears heavily on its taxation.

Corporations

The situs of a corporation is inextricably tied to the country of its incorporation. To that end, two simple words define the tax treatment of a corporation: “domestic” and “foreign.” A “domestic” entity (including a partnership or a corporation) is one “organized in the United States under the laws of the United States or of any State.” § 7701(a)(4). Colloquially, Read More

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S Corporations And Partnerships – The Importance of Basis

Basis is very important when determining gain or loss for certain transactions. It is also one of the limiting factors in determining how much loss can be deducted by partnership and S Corp shareholders.

What is basis?

For tax purposes, basis is the amount invested in a property adjusted for certain items.

Basis is usually equal to the cost, or the amount paid in cash, debt obligations, other property or services.

Basis in property is increased by capital items such as capital improvement and assessments for local improvement. Items that constitute a return of capital (e.g. Read More

Written by | Posted in Corporate • Income Tax • Partnership • Small Business

Time to Extend

Extensions for individual or business returns are relatively simple to complete, but they are becoming more and more important. If you filed your return already, you can probably stop reading this. For those who have not completed a return, I would consider an extension and keep reading…

An extension is an extension of time to file a return. It is not an extension of time to pay your tax. I repeat; it is not an extension of time to pay your tax liability.  For pass-through entities like S Corps or Partnerships, a federal extension doesn’t require any payment because generally those entities do not incur a tax liability. There may be liabilities on the various state returns the pass-through files. Read More

Written by | Posted in Federal • Income Tax • Individual • IRS • Partnership

Tax Implication of Publicly Traded Partnerships: Why Purveyors of the US Tax Code Snarl at Investment Brokers – Part II

My friend Roger Botterbusch recently put together a most excellent presentation on the tax implications of owning Publicly Traded Partnerships (PTPs), also commonly referred to as Master Limited Partnerships (MLPs). As a result I developed a new profound distaste for investment brokers pedaling these things for their ‘prospective’ fat returns whilst simultaneously poo-pooing the heavy, heavy administrative burden they bring at tax time.

The most interesting point of the presentation was that all but two PTP’s traded in the United States kick out incredibly complicated year end K-1′s to the owner for reporting on the 1040. In preparation for the presentation a ridiculous case study was bandied around about a taxpayer who engaged in ‘day trading’ PTP’s. The ‘trading’ activities on their face were moderately successful but when taking into consideration that the tax practitioner Read More

Written by | Posted in Partnership • Tax Provision/Tax Reporting

Tax Implication of Publicly Traded Partnerships: Why Purveyors of the US Tax Code Snarl at Investment Brokers – Part I

My friend Roger Botterbusch recently put together a most excellent presentation on the tax implications of owning Publicly Traded Partnerships (PTPs), also commonly referred to as Master Limited Partnerships (MLPs). As a result I developed a new profound distaste for investment brokers pedaling these things for their ‘prospective’ fat returns whilst simultaneously poo-pooing the heavy, heavy administrative burden they bring at tax time.

The most interesting point of the presentation was that all but two PTP’s traded in the United States kick out incredibly complicated year end K-1′s to the owner for reporting on the 1040. In preparation for the presentation a ridiculous case study was bandied around about a taxpayer who engaged in ‘day trading’ PTP’s. The ‘trading’ activities on their face were moderately successful but when taking into consideration that the tax practitioner Read More

Written by | Posted in Partnership • Tax Provision/Tax Reporting

IRS Wins Tax Shelter Penalty Case And DOJ Going Back Into Cases Affected By The Decision

The United States Supreme Court agreed with the Internal Revenue Service and sustained the assessment of a 40% penalty against the taxpayer who invested in a 1990s tax shelter.

The decision, U.S. v. Woods, reversed a 5th Circuit opinion which held that the 40% penalty did not apply in sham partnership cases and declared the issue “well settled.”

The Woods’ case got to the Supreme Court to resolve a split between two circuits that found for the taxpayers in these type of case and other circuits that found for the IRS.  The issue involves the maximum income tax penalty that can be imposed on a tax shelter investor. More specifically, this decision resolved the issue concerning whether the penalty Read More

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United States Partnership Tax: Partner’s Capital Accounts, Part I

Remember from a tax perspective, partners agree to share the economic benefits and burdens of ownership. This means that not only will they share profits, but they will also share losses and – in a worst case scenario — perhaps contribute additional capital in support of the business. For tax purposes, we need to create and maintain some record of this activity.

Enter the partner’s capital account. This is the most important element of partnership taxation; it is an ongoing record documenting the partner’s economic participation in the partnership. The actual workings of this account are one of the most complex in US taxation and therefore beyond the scope of a few blog posts. However, some initial observations can be made. Read More

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Debt and Proving Basis in Flowthrough Entities

TaxConnections Picture - Tax written on computer keyboardS Corporations

Taxpayers with ownership interests in flow-through entities cannot deduct entity losses if they do not have basis in those entities. Consequently, a taxpayer’s basis is often scrutinized by the IRS, particularly when basis is claimed based upon debts incurred by a flow-through entity.

In mid-2012, the IRS issued Prop. Regs. Sec. 1.1366-2 (REG-134042-07) to establish a standard for when shareholders can increase basis in S corporations based upon loans to the S corporation. Under this standard, a shareholder may increase basis by “bona fide indebtedness” of the S corporation that runs directly to the shareholder. Partners, in contrast, are subject to the more complex partnership basis rules of Secs. 752 and 465. As basis laws change and develop over time, the IRS will continue to scrutinize reported losses.

Shareholders Basis

The proposed regulations do not establish factors or criteria to determine when S corporation indebtedness is bona fide. Instead, whether indebtedness is bona fide is determined under general tax principles. The preamble to the proposed regulations cites four cases that establish whether a debt is bona fide: Knetsch, 364 U.S. 361 (1960); Geftman, 154 F.3d 61 (3d Cir. 1998); Estate of Mixon, 464 F.2d 394 (5th Cir. 1972); and Litton Business Systems, Inc., 61 T.C. 367 (1973). Geftman, for instance, established three factors to determine whether a loan is bona fide: (1) contemporaneous intent to repay; (2) Read More

Written by | Posted in Corporate • Federal • Partnership
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