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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I am the principal member of a two member LLC that is taxed as a partnership. The LLC holds rental real estate. I am buying out my partner. For legal reasons I am maintaining the LLC. May I continue to file Form 1065?

   A single-member LLC is disregarded for tax purposes unless it elects to be taxed as a corporation. We generally recommend against holding real property in a corporation. Therefore, your rental property would no longer be reported on Form 1065. Instead, it is reported on your Form 1040 on Schedule E. The required tax reporting for a single-member LLC does not mean the LLC must cease to exist under state law. You may confer with your attorney as to the continuation of your LLC for legal purposes.

2. I am buying all of the assets of a corporation for over $400,000, rather than buying stock. In addition to doing this to have depreciable basis in the equipment and amortizable goodwill, I am doing this to avoid any potential liability for the debts of the corporation. Are there any tax problems I should be aware of?
   

   Many states have a “bulk sale” provision. Under this provision, if substantially all of the assets of a business are purchased the new owner will be liable for any unpaid sales taxes (and many state laws also cover unpaid payroll taxes) of the business. Several states, including Michigan , Pennsylvania and Texas have allowed the provision to apply to unpaid corporate income tax (the Franchise Tax in Texas ). With any purchase of a business, even with an asset purchase, it is a good idea to get a tax clearance letter. Insisting on a right of restitution is a good idea, too, but it still could leave you holding the bag until the restitution is obtained from the seller. Make sure your attorney goes over these issues in detail with you before you finalize the sale.

3. I am the only shareholder of a corporation. I am planning on a sale of all of the corporate assets in the near future. Would an election to S corporation status avoid tax at the corporate level?
   

   If the corporation elects S status, any gain on the disposition of assets present on the S election within 10 years of the effective date of the S election will expose the corporation to the built-in gain (BIG) tax. The tax is assessed at the corporate level at a flat 35% rate. The BIG tax paid at the corporate level will reduce the amount of pass-through gain to the S corporation shareholder on the sale of assets.

4. About a year ago I filed an amendment to my 2004 income tax return (filed by April 15 th) and paid the additional tax due. I am self-employed. I just discovered a box with more 2004 information- I failed to claim almost $10,000 of expenses that would eliminate the income and SE tax that I paid when I amended my 2004 return and reduce the tax due on my original return. Is it too late to amend and claim a refund?

   The limitation period within which a refund may be claimed is generally within the later of three years of filing the return or two years from the time the tax was paid. The original due date of the 2004 return was April 15 th 2005 . You are within the three year period. You may amend the return to report the additional expenses and claim a refund for taxes paid with the original return and the first amend.

5. I am getting ready to incorporate my business. My assets have a net book value of $25,000 but I have liabilities, mostly loans, of $30,000. Can I shift all of the liabilities to the corporation and still have the incorporation be tax-free? An acquaintance has suggested a loan to shareholder to make up the difference.

   To qualify for tax-free treatment, the net book value of assets transferred to the corporation must be at least equal to the liabilities transferred.Otherwise the incorporation is treated as a taxable sale of assets. We advise that you retain enough liabilities to ensure a positive incorporation. The interest paid on the retained business liability is deductible on Schedule C. IRS will attack an attempt to establish the net deficit in equity as a “loan to shareholder.” In addition, many states prohibit a negative incorporation.

6. I am the majority owner of two business entities; an S corporation and a two-member LLC. I am the only employee of the S corporation- there are several employees in the LLC. Can we set up a defined contribution retirement plan in the S corporation without including the LLC?

   A defined contribution retirement plan is subject to non-discrimination rules that would prevent the corporation from establishing a plan while excluding the employees of the LLC. The failure to meet non-discrimination requirements may result in the plan being disqualified (all contribution deductions disallowed and all income earned in the plan taxable). When determining whether a plan is non-discriminatory all members of a commonly controlled group of businesses, whether incorporated or not, will be included.