Tax Planning and Compliance for Closely Held Businesses and Their Owners. Edward K. Zollars Phoenix, Arizona

Transcription

1 Tax Planning and Compliance for Closely Held Businesses and Their Owners Edward K. Zollars Phoenix, Arizona

2 Edward K Zollars ed@tzlcpas.com Website: Thomas, Zollars & Lynch, Ltd. Nichols Patrick CPE, Inc. Arizona Income Tax Guide

3 The Need for Planning

4 The Need for Planning The Need for Planning Family Problems Previously Inactive Surviving Spouse Combination of Active & Inactive Children Both Active & Inactive Inherit Only Active Children Inherit the Business Multiple Owners, Not All Owners Active Children

5 Business Succession Planning Economic Impact of Death of Owner Economic Cost of the Disability of the Owner

6 The Accountant s Concerns Prime Position of the Accountant Succession Planning Service

7 The Family Business

8 Security Continuity of the Business Concerns of the Parent About Business as a Source of Income Concerns About Income for a Surviving Spouse

9 Equity Between Active & Inactive Children Pass Other Assets to Inactive Children Recapitalization of Stock Life Insurance to Equalize Asset Distributions

10 Active Sons and Daughters in Laws Leave Interest Directly to the Son- or Daughter-Inlaw Sell the Interest to the Son- or Daughterin-Law From the Estate Leave Stock to the Child Married to the in- Law Leaving Shares in Trust

11 Retaining Key Employees Compensation and Fringe Benefits Package In Some Cases, the Parent Will Transfer Some Stock to the Key Employee Sale to the Key Employee Phantom Stock Arrangement

12 Deferring Transfer Tax Liabilities Transfer to Child at Death of First to Die Leaving Shares to QTIP Trust

13 The Qualified Plan

14 Review of Existing Programs Defined Benefit Pension Plan Defined Contribution Plans Money Purchase Pension Plan Target Benefit Pension Plan Profit Sharing Plans and 401(K) Plans Age-Weighted/New Comparability Profit Sharing Plans

15 Qualified Plans Sources of Plan Assets Taking Inventory of Owner Benefits

16 Life Insurance Purchases Defined Benefit Plans Defined Contribution Plans Profit Sharing Plans Employee Contributions/Rollover Accounts Insured Person

17 Distribution Planning General Rule for Distributions Payments on the Death of the Participant Planning for a Second Marriage One Year Rule Trusts as BeneficiariesAccounts for Decedents Who Had Attained Age 70 ½

18 Distribution Planning Spouse Selection of Alternatives Beneficiary Designation Issues in a Division of the Decedent's Assets Tax Complications With Retirement Accounts Determining the Beneficiary Designations

19 Use of Life Insurance Qualified Plans Individual Retirement Accounts

20 Reversions

21 Estate Planning for the Business Owner

22 Estate and Gift Taxation Basics of the Transfer Tax Closely Held Business Deferral of Tax Valuation of Assets

23 Marital Deduction QTIP Trusts Spouse Not a U.S. Citizen (QDOT)

24 Estate & Gift Taxation Lifetime Exclusion Annual Exclusion for Gifts of a Present Interest Retirement Account Transfer Tax Complications

25 Life Insurance Incidents of Ownership Three Year Exposure Irrevocable Life Insurance Trust Value of a Life Insurance Policy Transfer for Value Issues

26 Business Succession Planning Gifts Valuation of the Gift Section 2701 Section 2702 Fixed Payment Qualified Interest Unitrust Qualified Interest Noncontingent Remainder Interest Transfers in Trust Personal Residence Trust

27 Estate and Gift Planning Family Limited Partnerships Grantor Retained Annuity Trusts (GRATS) Transfers of Minority Interests in Family Owned Businesses

28 Business Succession Planning Bequests Life Insurance to Provide Liquidity Transferring the Business Interests to a Trust

29 Business Succession Planning Life Structure of Arrangement Funding of the Irrevocable Life Insurance Trust

30 Business Succession Planning the Qualified Plan

31 Business Agreements for Stockholders and Partners

32 Need for Stockholders' Agreement Control Dissension Between Surviving Shareholders and Heirs Avoid Leaving Heirs at Mercy of Surviving Shareholders

33 Structure of Stockholders Agreement Conformity to Provisions Made for Funding Stockholders with Full Understanding of the Terms of the Agreement Optional Provisions

34 Purchase Price Difficulty in Valuing Agreed Value Method Formula Value Method

35 Terms of Payment Purchase Terms Promissory Notes

36 Death Buyout Arrangements Mandated Sale at Death Option in Lieu of Mandate Issues for Children

37 Disability Buyout Arrangements Definition of a Disability Salary Continuing Agreement Trigger for Sale Disability Buyout Insurance

38 Funding Life Insurance Profit Sharing Plan - Life Insurance Disability Buyout Insurance Risk of Proceeds Not Being Available Escrow Agent

39 Lifetime Buyout Arrangements Mandated Buyout Right of First Refusal

40 Other Considerations Dealing with Unfunded Balance Use of Deductible/Nondeductible Payments Covenant Payments

41 Next Generation Planning Permitted Gift/Bequest, Otherwise Mandated Sale Securing Family of Parent Special Option for Currently Inactive Children Concerns of Other Shareholders

42 Partnership Arrangements Professional Practice Formula Value Regulatory Issues - Law Practices Ongoing Operation

43 Choice of Entity

44 Entity Types (Tax) Sole Proprietorship Partnership Corporation S Corporation C Corporation

45 Entity Types (Legal) Proprietorship General Partnership Limited Partnership Limited Liability Company Limited Liability Partnership Corporation

46 Proprietorship Business Considerations Tax Classification Liability

47 General Partnership Business considerations Tax issues - reporting Liability

48 Limited Partnership Formation Self-Employment/FICA Tax

49 C Corporation General considerations Tax reporting Liability

50 S Corporation Advantages/disadvantages Formation Self-employment tax/fica

51 Limited Liability Company General business considerations Liability Taxation - check the box

52 Entity Classification Rules Check the box regulations Entity classification Automatic corporation types Other One owner (domestic vs. foreign) Multiple owner domestic (domestic vs. foreign)

53 Other Tax Considerations Fringe Benefits FICA/FUTA/SUTA Taxes Tax rate differential

54 Change of Entity

55 C Corporation Partnership S Corporation Built-in gain tax Tax on excess passive income/loss of S status

56 Tax Free Incorporation IRC 351 (p. 7-6) Requirements (p. 7-9) Potential problems (p. 7-9)

57 Incorporating an Existing Business General tax attributes Initial capitalization

58 General Partnership to Limited p 7-11

59 Partnership to LLC Continuation of partnership (p. 7-12) Transfer of interest (p. 7-13) Merger (p. 7-14)

60 Office in Home General 280A Limitation Rental of home office 280(c)(6) Ira Wars (Feldman v. Commissioner, 791 F. 2d 781 CA9, affirming 84 TC 1) The Congress Strikes Back (No Return of the CPAs edition)

61 Entertainment, Meals and Automobiles

62 Meal and Entertainment Deductibility 274(d) 50% limitation rule - and exceptions Entertainment tickets

63 Travel Expenses Documentation 274(d) Allowed expenses Optional method (per diem) Travel vs. personal Special limits

64 Employer Provided Vehicles Personal vs. business use issues (p. 8-6) No recordkeeping options (p. 8-7) Valuation methods (p. 8-8) Employee concerns (p. 8-10) Reporting summary (p. 8-11)

65 Employer Provided Aircraft General rule (p. 8-12) Noncommercial flight valuation rule (p. 8-12) Seating capacity rule (p. 8-16) Specified individual limit on deduction (p. 8-17)

66 Per Diem Rates Publication 1542 GSA Website GSA Mobile applications ios Android Blackberry

67

68

69 Compensation and Certain Fringe Benefits

70 Executive Compensation Current (p. 9-1) Deferred Qualified plans Nonqualified plans (beware of 409A)

71 Reasonable Compensation Total compensation issue Factors to consider C corporation vs. S corporation issue

72 Below Market Loans IRC 7872 (p. 9-2) Shareholder/Employee loan Demand loans Term loans

73 Fringe Benefits Benefits generally (p. 9-3) General rule - fringe benefit is taxable income - see 61 s explicit language Must have authority to exclude from employee s income

74 Cafeteria Plans Key issues (p. 9-4) Employees only (for owners only works for C corporations) (p. 9-5) Nondiscrimination rules (SIMPLE Cafeteria Plans) Benefits

75 Cafeteria Plans Written plan requirement (p. 9-7) Election issues Information reporting requirements (p. 9-8) Health care FSAs (p. 9-9)

76 Section 132 Various fringes (p. 9-11) No additional cost services Qualified employee discounts Working condition fringes De minimis fringes

77 Adjusted Current Earnings

78 Adjusted Current Earnings C Corporation AMT issue (p. 10-1) Applies earnings & profits concepts

79 Calculating ACE Depreciation Earnings & Profits items Nondeductible items that were included in AMTI (p. 10-4) Items Excluded from both AMTI & E&P ACE but not E&P adjustments

80 Life Insurance Cash value policies Term insurance

81 p LIFO Inventory

82 Planning for a Sale

83 IRC 1060 Allocation rules of 1060 (note that assigned value will pre-empt later cost segregation attempt) Contractual allocations Operating provisions

84 C Corporation General Utilities repeal (p. 11-3) Martin Ice Cream issue Not a silver bullet solution Howard case illustration of traps

85 Dissolving Small Corporations

86 Tax Aspects of Selling Proprietorship - tax on assets sold Partnership - Tax on assets sold, liquidation of partnership (with gain/loss potential) Sale of partnership interest Hot asset rules Generally capital gain/loss

87 Tax Aspects of Selling S Corporation Sale of stock - capital (no hot asset rules) Sale of assets Gain/loss on inside sale Gain/loss on liquidation of shares (after basis adjustment for asset sale)

88 Tax Aspects of Selling C Corporation Sale of stock - capital gain/loss Sale of asset Gain/loss on sale of assets Gain/loss on redemption of stock (no basis adjustment for inside gain)

89 Tax Aspects Classification of assets (p. 12-1) Character of Gain/Loss Capital assets ( 1221) 1231 assets Ordinary assets

90 Depreciation Recapture issues Real property and 291 Other property 1245

91 Complete Liqudations Definition (p. 12-9) Tax consequences (p ) Shareholders (p ) Liquidating corporation (p )

92 IRC 337 Remaining tax free liquidation Corporate shareholder requirement