One of the most positive aspects of my job is to talk to people who come in with their start-up ideas. Whether those are tried & tested ideas or totally out of the box schemes, the excitement at starting something new is always palpable. It’s like planning a baby’s room or buying a new house.
If you have a calendar year 2014 partnership, S-corporation, or trust return on extension, don’t forget the extension for filing those returns ends on September 15, 2015.
Pass-through entities such as Partnerships, S-corporations, and fiduciaries (trusts, estates) pass their income, deductions, credits, etc., through to their investors, partners, or beneficiaries, who in turn report the various items on their individual tax returns. Partnerships file Form 1065, S-corps file Form 1120-S, and Fiduciaries file Form 1041, with each partner, shareholder, or beneficiary receiving a Schedule K-1 from the entity that shows their share of the reportable items.
If all of the aforementioned entities could obtain an automatic extension to file their returns Read more
Knowing one’s cost basis in an S Corporation is a vital issue for most owners of S corporations. However, to many such shareholders, basis is not understood and not known. Part of the confusion arises from the fact that S Corporations, LLC’s, and partnerships face two different basis numbers – inside basis and outside basis. Both are important, but the outside basis is more likely to become an issue annually for the shareholder. Shareholders may not deduct losses from the corporation in excess of their outside basis.
Inside basis is basically the balance in the owner’s capital account. It is the ownership interest in the corporation, but not necessarily what that ownership interest cost. Inside basis is maintained on the corporate books. It represents: Read more
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.
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
Many Americans hold interests in vacation or recreational properties in Canada. Often such properties are intended to be passed on from generation to generation.
Canada taxes U.S. residents on capital gains from the sale or other disposition of Canadian real estate, even if such real estate is held for recreational or vacation purposes.
Canada’s ability to tax U.S. residents on gains from the disposition of Canadian real estate is recognized in Article XIII(3) of the Canada-U.S. Tax Convention (“the Treaty”)
In addition, when a U.S. resident dies owning Canadian real estate, that individual will generally be deemed to have disposed of the property immediately before his or her death Read more
The most intriguing aspect of maintaining this tax blog is the pleasure of meeting and engaging a wide variety of successful people all with the courage to take the risk of venturing out on their own profession in pursuit of dreams and aspirations. Sharing with me the lessons learned through experiences chalked up to enduring hard knock after hard knock I have learned from my readers and subscribers along the way of which I am profoundly thankful.
I couldn’t help but notice that many of my friends and clients alike, particularly those of you in the business of providing services to the community, have become successful beyond anyone’s wildest expectations and are now more prepared than ever to accept the significance of gifting in the greater scheme of life’s affairs. Because people that read my Read more
Someone said, “The 3 C’s of life were: CHOICES, CHANCES and CHANGES. One must make a choice to take a chance or one’s life will never change”. We are faced with choice in every thing we do, and making the right choices requires sound knowledge of the various options available to us.
When choosing an operating entity for a company, it is very important that we thoroughly research the options available. Your business can be a sole proprietorship, a partnership with someone else, a single member LLC, a pass-through entity like an S Corporation or it can be a C corporation. What I will layout in this blog today are the characteristics of an Limited Liability Company and an S Corporation; the pros and cons of choosing each entity type; and converting from one entity to another. Read more
Generally speaking, S-Corporations do not pay tax. If they were previously a C-Corp it’s possible they could run into some built-in gains, but those are somewhat unusual. A true S-Corp shouldn’t pay any tax, but sometimes they do need to make a tax deposit. No tax liability, but a tax deposit required? Yes it’s as strange as it sounds.
For fiscal year S-Corps that have individual shareholders, a deferral period occurs between the fiscal year-end and the calendar year-end that the individual shareholders have. That deferral creates a tax benefit the IRS wasn’t too pleased about. So they created a tax deposit system where the S-Corp calculates the tax being deferred and makes a deposit with the IRS for that amount. Every year the company re-calculates and if the deferral decreases, the S Corp gets a refund or a partial return of their deposit. If the Read more
The National Association of Manufacturers (NAM) sent a letter (10/28/13) to Congress about the upcoming budget conference. NAM comments on various budget related topics including tax reform and entitlement problems. Regarding tax reform, NAM suggests that tax reform include:
1. 25% corporate rate
2. Lower taxes for S corp owners
3. Permanent and competitive research incentive
4. Competitive international system
5. A “robust capital recovery system to spur business investment and expansion in the United States.”
Observations:
While they specify a rate for corporate tax, they don’t for S corp shareholders. Does that mean they don’t think it should be as low as 25% or perhaps it can’t be in a revenue neutral manner? They might also be recognizing that not all passthrough entities have lots of income (and thus might already be taxed at rates well below the maximum rate of 39.6%) and are really more focused on publicly-traded corporations. Read more
S CorporationsTaxpayers 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.
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
A shareholder-employee’s compensation from an S corporation is often subject to IRS scrutiny because S corporation flow-through income enjoys an employment tax advantage over that of sole proprietorships, partnerships and LLCs. This advantage finds its genesis in Revenue Ruling 59-221, which held that a shareholder’s undistributed share of S corporation income is not treated as self-employment income. In contrast, earnings attributed to a sole proprietor, general partner or many LLC members are subject to self-employment taxes.
As employment tax rates have climbed, this advantage of operating as an S corporation has become magnified. Because S corporation income is not subject to self-employment tax, there is tremendous motivation for shareholder-employees to minimize their salary in favor of distributions, which are also not subject to payroll or self-employment tax.
So how does a taxpayer or more likely his advisor determine what is “reasonable compensation” for an owner/employee of an S Corporation? Read more
Private Debt Collection: Hardship (Part 2 of 3)
Participating vs Non-Participating Shares – Canada Tax FAQs
Tax Burdens Prompt More Americans To Ditch Citizenship
FBAR Instructions For U.S. Expats Filing FinCEN Form 114
Practice Ignition Training Webinar – Thursday, July 26th
™
