Accounting & Financial Women s Alliance

Transcription

1 Accounting & Financial Women s Alliance 2014 Annual Conference New Orleans, Louisiana Sept. 28 Oct. 1, /8/14 Tax Geek, LLC ( 1 The Tax Geek s Guide to: How to Read Forms 1065 & 1120S Like a Pro, including Partnership, LLC & S Corporation Basis Issues. 9/7/2014 Tax Geek, LLC ( 2 1

2 Presented by: Peter A. Slowiaczek, BS, MST, JD 5/10/2013 Tax Geek, LLC ( 3 Disclaimer This publication is designed to provide accurate and authoritative information regarding the subject matter covered as an aid to education in conjunction with a seminar presentation. It is not legal or taxation advice and may not be used for any other purpose. Ownership is fee simple absolute by Tax Geek, LLC. It is provided with the understanding that the author is not engaging in or rendering specific legal, accounting or other professional service, and is immediately outdated as a result of daily treaty, statute, ruling, regulation, litigation and other promulgation. No tax return or planning positions are recommended to any taxpayer or third-party recipient of tax services; nor is any written or oral communication specific enough to be tax advice to any individual taxpayer. It may not be relied upon to avoid any Federal, state or local penalties. The author, publisher, and distributor of this document assume no responsibility to any recipient of this document to correct or update its contents for any reason, including difference of opinion, changes in any law or professional standard. These materials and the information contained herein is protected under Federal copyright laws of 17 U.S.C. 101, et. al. If you are not the intended recipient of these materials, you are hereby notified that any viewing, copying, disclosure, distribution, re-broadcast or re-publication of this material and the information contained herein, is subject to legal restriction and may result in criminal and civil prosecution to the fullest extent granted by law. If tax or legal or other expert assistance is required, the services of a competent professional should be retained. Names and examples are made up and modeled after Treasury regulations, court cases and vivid imagination; anyone perceiving any resemblance to any taxpayer, person, entity or example contained herein should have their ego checked. This document should not be relied upon to diagnose, treat or cure any illness, disease or other health malady. Continued exposure to this document may lead to sleep deprivation, diahhrea, high blood pressure or other physical, financial or mental discomfort. This document contains coarse language and should not be viewed by anyone. This material may not be broadcast, re-published, rewritten or re-distributed. Obviously, it should never be copied. Copyright /10/2013 Tax Geek, LLC ( 4 2

3 Loss Limiters Can I deduct the flow-through loss? 5/10/2013 Tax Geek, LLC ( 5 Net book value Fair market value Inside basis Outside basis The Annual Scorecard Limits loss deductions Basis Terminology 5/10/2013 Tax Geek, LLC ( 6 3

4 Debt Debt Secured debt Shortfall (FMV > debt) Recourse Nonrecourse 5/10/2013 Tax Geek, LLC ( 7 Crane v Commissioner (1947) Amount realized includes: Cash Other boot received Nonrecourse debt relief. 5/10/2013 Tax Geek, LLC ( 8 4

5 Commissioner v Tufts (1983) Amount realized includes nonrecourse debt relief. The fair market value is irrelevant. This is the precurser of minimum gain. 5/10/2013 Tax Geek, LLC ( 9 Basis Debt Allocations Gain (Loss) Percentages Only issue is in cases of differences Recourse Loss Even in a loss, a partner on the hook must pay the debt Nonrecourse Income A partner will only pay back the loan out of profits 5/10/2013 Tax Geek, LLC ( 10 5

6 At Risk Loss limited to amounts at risk Qualified nonrecourse debt No co-owner loans 5/10/2013 Tax Geek, LLC ( 11 Entity Structure How does the owner get money out of their entity tax-free? 3 piece pie. 5/10/2013 Tax Geek, LLC ( 12 6

7 3 Piece Pie Transfer property from the entity to the owner. Determine the character of the cash flow. SE Taxable Someone is managing Non-SE Taxable Dividends, interest, Royalties, return on capital, return of capital, fringe benefits SE Taxable Reasonable Compensation For Services Management Compensation Other 5/10/2013 Tax Geek, LLC ( Entity Choices Sole Proprietorship (SP, SME). Partnership (GP, LP, LLP, LLLP). Corporation (C, S). Limited Liability Company (LLC). 5/10/2013 Tax Geek, LLC ( 14 7

8 Schedule C Heading. 5/10/2013 Tax Geek, LLC ( 15 Advantages: Single taxation. Sole Proprietorship Simple tax reporting. Simple home office deduction. Disadvantages: Unlimited liability. Self-employment tax. No fringe benefits. 5/10/2013 Tax Geek, LLC ( 16 8

9 Proprietor Basis Proprietor is the basis. 5/10/2013 Tax Geek, LLC ( 17 Heading. Form /10/2013 Tax Geek, LLC ( 18 9

10 Partnerships GP, LP, LLP, LLLP, LLC Advantages: Single taxation. Easy to organize (cavemen bang clubs). Special allocations. Reasonable compensation is not an issue. 5/10/2013 Tax Geek, LLC ( 19 Disadvantages: Partnerships Self-employment tax on net income. Guaranteed payments for services = SE tax. Net income is allocated every year by %. Even if there is no distributions. General partner is personally liable on 100%. Fringe benefits are taxable to the partners. It can be expensive to liquidate early. 5/10/2013 Tax Geek, LLC (

11 Line 7a. Line 18. Line 19a. 5/10/2013 Tax Geek, LLC ( 21 Capital Capital Account Bookkeeping entries Capital Percentage Per the Partnership Agreement Amount % Partner A $250 50% Partner B $ % 5/10/2013 Tax Geek, LLC (

12 Partnership Basis Tax basis capital Direct partner indebtedness Guarantees No basis in self-created debt VisionMonitor Software LLC v Commissioner, 2014 TC Memo 182 (Sept. 3, 2014). 5/10/2013 Tax Geek, LLC ( 23 Heading. Form /10/2013 Tax Geek, LLC (

13 C Corporation Advantages: Limited liability. Flexible year-end. Owner deduction for fringe benefits. Owner deferred compensation. Income splitting. Ease of access to capital markets. Ease of transferability of ownership. 5/10/2013 Tax Geek, LLC ( 25 C Corporation Advantages continued: Different classes of stock. 351 tax-free incorporation. $100,000 ordinary loss treatment % gain exclusion % collectible on excluded ½. 5/10/2013 Tax Geek, LLC (

14 C Corporation Disadvantages: Double taxation. Unreasonable compensation. Accumulated Earnings Tax. Personal Holding Company Tax. Alternative Minimum Tax. Losses do not flow to shareholders. Personal Service Corporation 35%. Personal Holding Company trap. 5/10/2013 Tax Geek, LLC ( 27 C Basis Common Stock Additional Paid-in Capital Direct Indebtedness 5/10/2013 Tax Geek, LLC (

15 Form 1120S Heading. 5/10/2013 Tax Geek, LLC ( 29 Page 1 Expenses Line 7: Officers compensation. 5/10/2013 Tax Geek, LLC (

16 S Corporation Advantages: Single taxation. TOB income not SE income. Income shift without loss of control. Non-voting stock for estate planning. No Accumulated Earnings Tax. 5/10/2013 Tax Geek, LLC ( 31 Disadvantages: S Corporation 10-year built-in gain handcuff (or 7?). Fringe benefits is wages to >2% owners. Only 100-ish shareholders (family attribution). No disproportionate distributions. Shareholder loans might be 2 nd class of stock. Unreasonable compensation? Basis replenishment proration 5/10/2013 Tax Geek, LLC (

17 S Basis Common Stock Additional Paid-in Capital Direct Indebtedness No to Personal Guaranty Until and to extent of performance thereon Limits loss deductions Distributions Not AAA 5/10/2013 Tax Geek, LLC ( S K-1. Ownership %. Line 16: Shareholder basis 5/10/2013 Tax Geek, LLC (

18 Distributions Line 16d S distributions The Holy Grail. Line 17c C dividends Ugh! (double taxation). 5/10/2013 Tax Geek, LLC ( 35 Distributions C = dividend to extent of E&P (double tax). S = distribution to extent of AAA (single tax). Compensation issues. Absent a property transfer, nobody cares. Work for free. FICA limit: $113,700 in / 50 rule. SE tax > half. 5/10/2013 Tax Geek, LLC (

19 Re-payments of Shareholder Loans Line 16e. Not net change; this is gross repayments. Promissory notes. Minimum AFR interest. Annual payments; changes in annual balances. Basis issues. Replenish debt basis before stock basis. 5/10/2013 Tax Geek, LLC ( 37 Line 17c - Dividends of E&P Prior C life. Probably a depreciation difference. Form 1099 DIV. 5/10/2013 Tax Geek, LLC (

20 Line 17d Other Stuff Shareholder medical. 179 dispositions. 5/10/2013 Tax Geek, LLC ( 39 Line 7. Line 19. Annual changes. Debt. Recourse? Equity section. Balance Sheets 5/10/2013 Tax Geek, LLC (

21 Balance Sheet Line 7 Loans to shareholders. Line 19 Loans from shareholders. July 22, 2014: T.D Final Regs: Shareholder debt must be bona fide No basis in contribution of shhldr debt Scan beginning balances to ending balances. Indebtedness typically nonrecourse Schedule M-1. 9/7/14 Tax Geek, LLC ( 41 Book to tax income. M-1 5/10/2013 Tax Geek, LLC (

22 M-2 The money shot. 5/10/2013 Tax Geek, LLC ( 43 M-2 Accumulated Adjustment Account AAA. Other Adjustment Account OAA. Previously Taxed Income PTI. 5/10/2013 Tax Geek, LLC (

23 PTI Subchapter S Revision Act of Any distributions of PTI: Only to that pre- 82 shareholder, and Only in cash. 5/10/2013 Tax Geek, LLC ( 45 Tax-exempt income. OAA Municipal bond interest income. Life insurance proceeds. Expenses associated with tax-exempt income. Municipal bond annual account fee. Life insurance premium payments. Not the same as non-deductible expenses. 5/10/2013 Tax Geek, LLC (

24 AAA Everything else. AAA may equal retained earnings. AAA may not equal retained earnings: Prior C life. Balance sheet on GAAP; AAA is tax basis. Distributions may not make AAA negative. Except in a net-negative adjustments year, up to BB. 5/10/2013 Tax Geek, LLC ( 47 Limited Liability Company #1 reason = limited liability! Single or multi member. Flexible management. Management committee looks like SE. Management looks like non-passive. Elect out of K. Into C. Into S. 5/10/2013 Tax Geek, LLC (

25 Case Study Family, LLC 8 family members Rental properties Contracts receivables Bank debt Related company debt Member debt 5/10/2013 Tax Geek, LLC ( 49 Family, LLC 1065 Page 1 Trade or business Rental non-tob Balance sheet debt K-1 no debt Management = Self employment 5/10/2013 Tax Geek, LLC (

26 Family, LLC Quickbooks Cash Contracts Receivable Rental Properties Debt Grandchildren debt Bank mortgages Capital accounts 5/10/2013 Tax Geek, LLC ( 51 Debt Instruments Heritage cover page Contract receivable 1 Rental 1 Rental 2 Rental 3 Rental 4 Rental 5 Rental 6 Grandpa, Son Son, Son s spouse(?) Son Son SonGrandpa(byPOA) Son Grandpa, Son 5/10/2013 Tax Geek, LLC (

27 Loss Limiters Can I deduct the flow-through loss? 5/10/2013 Tax Geek, LLC ( 53 The Tax Geek s Guide to: How to Read Forms 1065 & 1120S Like a Pro, including Partnership, LLC & S Corporation Basis Issues. 9/7/2014 Tax Geek, LLC (

28 Thank-you 5/10/2013 Tax Geek, LLC (