S-Corporations Owning Multiple Entities: Mastering Tax Reporting and Planning Opportunities

Transcription

1 FOR LIVE PROGRAM ONLY S-Corporations Owning Multiple Entities: Mastering Tax Reporting and Planning Opportunities TUESDAY, MAY 10, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 S-Corporations Owning Multiple Entities May 10, 2016 Jason Watson Watson CPA Group Robert W. Jamison Indiana University, Kelley School of Business

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 S Corp Owning Multiple Entities Agenda Problems with S Corps Jason Watson S Corp Owning SMLLCs Jason Watson MMLLC Owned by S Corps Jason Watson S Corp Owning S Corp Robert Jamison Questions and Answers 5

6 Problems With S Corps Distributions in accordance with shareholder percentages. Does not allow for an eat-what-you-kill revenue split (such as two insurance salespeople who team up but want personal income to be determined by a formula). Ownership expansion within a broad spectrum-ed S corp. 6

7 S Corp Owning SMLLCs Married couple. S corp is holding company, owned by couple. S corp is sole member of two LLCs. One LLC is mortgage lending, other LLC is online internet sales (examples). Each LLC is disregarded entity (SMLLC), income flows onto S corp tax return. Payroll is handled at S corp level (efficient) versus multiple S Corps. Yes, you could have S corp do both business activities, but what if 7

8 S Corp Owning SMLLCs Continued What if the client wants to To expand ownership of the internet sales company? Very easy to make one of the SMLLC a MMLLC with one member being the S corp and the other member being the new outside/third party member. Sell the mortgage lending company? Branding, financials, assets, basis history, etc. has been compartmentalized naturally. Provide some financial division and protection between business units? 8

9 S Corp Owning SMLLCs Continued Self rental. If S corp is operating company and ownership is contained to one person or married couple, rentals should be owned personally or owned by LLC outside S corp. Allows for ownership expansion within the S corp without affecting other assets (e.g., office building). Rent paid must be market rate. 9

10 MMLLC Owned by S Corps Two insurance agents or real estate agents want to team up, and share costs such as E&O (scaled economies). Want revenue split based on eat-what-you-kill, fluctuating quarterly / annually. Joint venture? Perhaps. Create MMLLC owned 50%-50% by two S corps which are 100% owned by each partner. Operating agreement dictates revenue split, and ultimate K-1 issuance. 10

11 MMLLC Owned by S Corps Continued Each S corp reports K-1 income from Form 1065 on respective Form 1120S. Salaries are paid commensurate to reasonable salary testing within each S corp. Flexibility is enhanced- home office, company car, for example. Limitations on 401k plans since controlled group exists (5 or fewer members controlling 80%). Operating agreement might need to be robust for death, divorce and incapacitation. Exits might be easy if the MMLLC has no value within itself. 11

12 Qualified Subchapter S subsidiaries and other multi-entity arrangements Robert W. Jamison, CPA, PhD Professor Emeritus of Accounting Indiana University (IUPUI) Copyright Robert W. Jamison 12

13 Qualified Subchapter S Subsidiary (QSub) S corporation may elect to treat a 100% owned domestic corporation as a QSub. In general, the subsidiary is treated as a nonentity (in the same manner as a single-owner limited liability company) for federal income tax purposes. Thus, this method can be effective for consolidating operations of various corporations. Copyright Robert W. Jamison 13

14 Reno, Inc. and Rentco, Inc. Reno, Inc. 100% active gross receipts Gross receipts $1,000,000 per year. Rentco, Inc. 100% Passive gross receipts Gross receipts $3000,000 per year. Substantial accumulated earnings and profits (AE&P) Subject to the passive investment income tax Will likely lose its S election unless it pays out its AE&P as dividends. Shareholders do not want dividend income Copyright Robert W. Jamison 14

15 Hyco, Inc. and Loco, Inc. Hyco, Inc. (S Corp.) Willie owns all stock Consistent profits Lends to Loco Substantial stock basis Willie must pay tax Loco, Inc. (S Corp.) Willie owns all stock Consistent losses Borrows from Hyco Minimal stock basis No basis from Hyco s loans May not deduct losses Copyright Robert W. Jamison 15

16 Cashco, Inc. and Fixco, Inc. Cashco, Inc. (S Corp) Substantial liquid assets Little AAA Large AE&P Distributions would be dividends Fixco, Inc. (S Corp) No liquid assets Large AAA Distributions would be tax free Copyright Robert W. Jamison 16

17 QSub Election Mitigates Reno & Rentco The gross receipts of the combined entities would be aggregated for purposes of the passive investment income test. Hyco and Loco Shareholder would have one basis in stock and debt. Income and losses of the different corporations would be combined. Cashco and Fixco AAA of the existing corporations is also aggregated, and distributions from one of the corporations would be treated as made by the combination. Copyright Robert W. Jamison 17

18 Qualified Subchapter S Subsidiary (QSub). Creative use of the QSub can yield some significant tax planning for S corporations. For example, using a QSub may enable a corporation to effectively make a mid-year S election, which is not permitted under the general rules of Subchapter S. Similarly, the results of a 338(h)(10) or 336(e) election can be obtained in a stock sale, without the need to meet the qualifications or procedures for these elections. Copyright Robert W. Jamison 18

19 Disregarded Entity Status of Qualified Subchapter S Subsidiary The subsidiary corporation is not treated as a separate corporation for federal income tax purposes. Thus all of the assets, liabilities, income, deductions, etc. of the subsidiary corporation are treated as belonging to the parent. Copyright Robert W. Jamison 19

20 The Master S Corporation Legal Structure of Master S Corporation and Subsidiaries Shareholders Holding company Operating company 1 Operating company 2 Operating company...n Copyright Robert W. Jamison 20

21 The Master S Corporation Tax Treatment of Master S Corporation and Subsidiaries Shareholders Master S Corporation (Holding Company) QSub 1 QSub 2 QSub..n Copyright Robert W. Jamison 21

22 Tiers of QSubs Shareholders S Corporation QSub QSub QSub QSub Copyright Robert W. Jamison 22

23 Election The effective date of the QSub election may be not more than two months and 15 days before the filing of the election, nor may it be more than 12 months after the date on which the parent S corporation files the QSub election. Any date outside of the limit will be effective on the nearest date within the limit. The Qualified Subchapter S Subsidiary election need not be made as of the beginning of the taxable year of the QSub. Reg (a)(3). Reg (a)(4). Copyright Robert W. Jamison 23

24 Election Example On May 10, 2016, PS Corporation, an S corporation, acquires all of the stock of Q corporation. PS may file QSub election by July 25, 2016 to take effect on May 10, 2016 Copyright Robert W. Jamison 24

25 Ceeco Essco Example Ceeco is a C corporation with substantial net operating loss carryforwards. Ceeco anticipates substantial profits in the near future. There is the possibility of an asset sale in a few years. Ceeco would like to have the benefits of an S election, but does not want to lose its carryforwards. Ceeco has one class of stock, is owned by U.S. citizens, and has no aspects that would disqualify it from S status. Ceeco uses the calendar year for tax purposes. If Ceeco makes an S election, it must start at the beginning of a taxable year. If it does so within the first two months and 15 days of 2017, the election will be in effect January 1, If it files the election after March 15, 2017, the election will be effective on January 1, Copyright Robert W. Jamison 25

26 Ceeco Essco Example (Cont.) However, as the income starts to materialize, Ceeco may find itself using up its net operating loss carryforwards before or after the next available effective date. It can only postpone the election in increments of one full year. Thus it may run the danger of under or over utilizing its loss carryforwards. Essco is an S corporation that is owned by the same shareholders as Ceeco. If the shareholders contribute their Ceeco stock to Essco, making sure that Essco owns all of the Ceeco shares, they can gain some flexibility. Alternatively the shareholders could form a Master S corporation and contribute all of the Ceeco shares and All of the Essco shares Copyright Robert W. Jamison 26

27 Ceeco Essco Example (Cont.) At the time of the contribution, Ceeco will continue to be a C corporation. With the identity of ownership, the stock transfer will not trigger any Code Section 382 limitations on the losses. Thus, as long as Ceeco retains its C corporation status, it may use its net operating loss carryforwards to offset its current income. When it has determined that it has gotten full tax benefit from these losses, Essco can make a QSub election for Ceeco. Ceeco will be treated as liquidated on the effective date of the QSub election. Moreover, the parties have a two month and 15 day hindsight window period to decide on the appropriate time for the QSub election. Copyright Robert W. Jamison 27

28 C Corporation Subsidiary Permitted S Corporation may be only shareholder or there may be others Shareholders S Corporation C Corporation Copyright Robert W. Jamison 28

29 Uses of a C Corporation Subsidiary C corporation retains some viability. The S corporation is limited as to the excludable fringe benefits it can offer to a person who actually or constructively owns more than 2% of the corporation s outstanding stock. A C corporation is considerably less restrictive. The corporation can offer such fringes as accident and health insurance, or meals and lodging for the convenience of the employer. Although a shareholder of an S corporation cannot exclude these benefits, any employee, even a 100% shareholder, of a C corporation is permitted this exclusion. To avail oneself of a fringe benefit exclusion, a person must be an employee of the C corporation. If the person is also an employee of the S corporation, the employers could be exposed to double payroll taxation. Copyright Robert W. Jamison 29

30 S Corporation as Partner in Partnership Permitted Often used by professional organizations Shareholders Others S Corporation Partnership Copyright Robert W. Jamison 30

31 Forbidden Structure Partnership as shareholder Shareholders Others Partnership S Corporation Copyright Robert W. Jamison 31

32 Forbidden Structure C Corporation as shareholder Shareholders C Corporation S Corporation Copyright Robert W. Jamison 32

33 Forbidden Structure S Corporation as shareholder Shareholders S Corporation S Corporation Copyright Robert W. Jamison 33

34 Balance Sheet Consolidation P Corporation Q Corporation C&E Combined Cash Receivables IC receivables 75 0 (75) 0 Other assets Total Current libs IC payables 0 75 (75) 0 Cap Stock Retained earnings Total Copyright Robert W. Jamison 34

35 Income Statement consolidation (book) Q sold $90 to P Q paid $125 management fee to P P Corporation Q Corporation C&E Combined Sales ,460 COGS (90) 985 Expenses (125) 275 Book depreciation Other income NIBT 200 (60 ) 140 Copyright Robert W. Jamison 35

36 Tax Return page 1 Sales 1,460 COGS 985 Expenses 275 Tax depreciation 65 Taxable Income 135 Copyright Robert W. Jamison 36

37 Book Tax Differences P Corporation Q Corporation Combined Book depreciation Tax depreciation To M-1 line 6a 5 Copyright Robert W. Jamison 37

38 Schedule M-1 Copyright Robert W. Jamison 38

39 S Corporation and C Corporation Returns S Corporation must file Form 1120S, with K-1 to each shareholder. C Corporation must file Form After 2015, returns are due 3 months + 15 days after year end Exception for June 30 year ends until months + 15 days Copyright Robert W. Jamison 39

40 S Corporation and Partnership Returns S Corporation must file Form 1120S, with K-1 to each shareholder. Partnership must file Form 1065, with K-1 to each partner. After 2015 both are due March 15 if entity uses calendar year. $205/month/K-1 penalty Copyright Robert W. Jamison 40

41 Special discount by CCH S Corporation Taxation Multistate Tax Guide to Pass-through Entities Copyright Robert W. Jamison 41

42 Copyright Robert W. Jamison 42

43 Copyright Robert W. Jamison 43