SOLE PROPRIETORSHIPS; PARTNERSHIPS; S CORPORATIONS

Transcription

1 Tax Practitioner Institute 2016 Sno Barry, CPA, Principal Justin Morren, CPA, Senior SOLE PROPRIETORSHIPS; PARTNERSHIPS; S CORPORATIONS berrydunn.com GAIN CONTROL

2 LEARNING OBJECTIVES What are Sole Proprietorships, Partnerships, and S Corps What are the tax considerations when choosing an entity Partnership & S Corp Examples 2016 Updates Bonus: Hot Topics noted throughout Presentation 2

3 SOLE PROPRIETORSHIPS No legal distinction between the owner and the business (except single member LLC) Generally no limited liability (except single member LLC) Disregarded entities Income reported and taxed at the personal level 1040 Schedule C Income subject to self-employment tax Easy to form and operate 3

4 PARTNERSHIPS Pass through conduit for partners Separate entity distinct from owners Aggregate Entity Entity vs. Aggregate Theory Partnerships come in many different forms, including: General Partnerships Limited Partnerships Publicly Traded Partnerships Limited Liability Partnerships Limited Liability Limited Partnerships Limited Liability Companies 4

5 PARTNERSHIPS CONTINUED In 2012 LLCs made up roughly 70% of all Form 1065s filed Formation cost and administrative burden Liability Protection Continuity of life Partnerships offer flexibility Income reported on form 1065 and passed through to owners Income generally subject to self employment tax Tax accounting for partnerships can be complex 5

6 S CORPORATIONS Created through tax election Liability protection Continuity of Life S corporations file form 1120S and pass through income to their shareholders S corporations must pay their shareholder-employees reasonable compensation *hot topic* 6

7 WHAT ARE YOU LIKELY TO SEE? Corporations 5% S Corporations 13% Partnerships 3% Limited Liability Companies 7% Sole Proprietorships 72% From IRS tax statistics 2012 data 7

8 CHOICE OF ENTITY CONSIDERATIONS Adoption of Tax Year Salaries paid to Owners *Hot Topic* Fringe Benefits Interest in Entity Acquired in Exchange for Services Rendered *Hot Topic* Different Classes of Ownership Interest *Hot Topic* Eligible Investors/ Owners Number of Shareholders/Partners/Owners *Hot Topic* 8

9 CHOICE OF ENTITY CONSIDERATIONS CONT. Foreign Activities *Hot Topic* Gain or Loss on Complete Liquidation Interest of Partnership or Corporation Received Tax-Free in Exchange for Property *Hot Topic* Basis of Interest/ Stock upon Formation Allocation of Income, Deductions and Credits 9

10 CHOICE OF ENTITY CONSIDERATIONS CONT. Gain or Loss on Distribution of Property Effect of Liabilities on basis *Hot Topic* Step-Up of Basis of Entity s Assets upon Transfer by Owner 10

11 CHOICE OF ENTITY CONSIDERATIONS DISTRIBUTED PROPERTY PARTNERSHIP EXAMPLE Partnership example: Nontaxable current distribution of cash and property. In 2015 ABC partnership, a general partnership, distributes property with a FMV of $3,000 and basis of $1,000 as well as cash of $5,000 to Partner A during the year. Partner A s basis in the partnership (outside basis) at the beginning of the year was $6,500 and Partner A s share of the tax loss for the year was $

12 CHOICE OF ENTITY CONSIDERATIONS DISTRIBUTED PROPERTY PARTNERSHIP EXAMPLE ABC Partnership records the following for the cash distribution: Debit Partner A Capital $5,000 Credit Cash $5,000 ABC Partnership records the following for the property distribution: Debit Partner A Capital $1,000 Credit Equipment $1,000 No gain on distribution of property 12

13 CHOICE OF ENTITY CONSIDERATIONS DISTRIBUTED PROPERTY PARTNERSHIP EXAMPLE Partner A s outside basis schedule shows the following for 2015: Beginning basis 6,500 Less cash distributions (5,000) Subtotal 1,500 Less property distribution (1,000) Remaining basis 500 Deductible loss (500) Ending Basis 0 13

14 CHOICE OF ENTITY CONSIDERATIONS DISTRIBUTED PROPERTY S CORP EXAMPLE S Corp example: current distribution of cash and property. In 2015 ABC S Corp, distributes property with a FMV of $3,000 and basis of $1,000 as well as cash of $5,000 to shareholder A during the year. Shareholder A s basis in his S Corp stock at the beginning of the year was $6,500 and Shareholder A s share of the tax loss for the year was $500 (excludes gain on distributed property). 14

15 CHOICE OF ENTITY CONSIDERATIONS DISTRIBUTED PROPERTY S CORP EXAMPLE ABC S Corp records the following for the cash distribution: Debit Shareholder Equity $5,000 Credit Cash $5,000 ABC S Corp records the following for the property distribution: Debit Shareholder Equity $3,000 Credit Gain $2,000 Credit Equipment $1,000 Gain on distribution of property 15

16 CHOICE OF ENTITY CONSIDERATIONS DISTRIBUTED PROPERTY S CORP EXAMPLE Shareholder A s stock basis schedule shows the following for 2015: Beginning basis 6,500 Gain on property dist. 2,000 Less cash distributions (5,000) Subtotal 3,500 Less property distribution (3,000) Remaining basis 500 Deductible loss (500) Ending Basis 0 16

17 CHOICE OF ENTITY CONSIDERATIONS - EFFECT OF LIABILITIES ON BASIS PARTNERSHIP EXAMPLE Partnership example: Basis from liabilities A, B, and C form a partnership to acquire a rental property. When ABC partnership was formed A contributed $50,000 B contributed $50,000 and C contributed $50,000. In addition the partnership obtains a $850,000 qualified nonrecourse loan and purchases the rental property for $1 million. A, B, and C share in all partnership items equally. In each of the first three years the partnership has $10,000 of net operating income and a $100,000 depreciation deduction. 17

18 CHOICE OF ENTITY CONSIDERATIONS - EFFECT OF LIABILITIES ON BASIS PARTNERSHIP EXAMPLE Partner s basis schedule for the first three years of ABC partnership. A B C Total Capital contribution 50,000 50,000 50, ,000 Assumed share of 283, , , ,000 partnership liabilities Year 1 Loss (30,000) (30,000) (30,000) (90,000) Year 2 Loss (30,000) (30,000) (30,000) (90,000) Year 3 Loss (30,000) (30,000) (30,000) (90,000) Ending basis 243, , , ,000 In a partnership liabilities create outside basis but keep in mind the at-risk rules 18

19 CHOICE OF ENTITY CONSIDERATIONS - EFFECT OF LIABILITIES ON BASIS S CORP EXAMPLE S Corp example: Basis from liabilities A, B, and C form an S corp to acquire a rental property. When ABC S Corp was formed A contributed $50,000 B contributed $50,000 and C contributed $50,000. In addition the S Corp obtains a $850,000 loan from C and purchases the rental property for $1 million. In each of the first three years the S Corp has $10,000 of net operating income and a $100,000 depreciation deduction. 19

20 CHOICE OF ENTITY CONSIDERATIONS - EFFECT OF LIABILITIES ON BASIS S CORP EXAMPLE Shareholder s stock basis for the first three years of ABC S Corp: A B C Total C Debt basis Contribution 50,000 50,000 50, , ,000 Loan Year 1 Loss (30,000) (30,000) (30,000) (90,000) - Year 2 Loss (20,000) (20,000) (20,000) (60,000) - (suspended losses) Year 2 Loss (10,000) (suspended losses) Year 3 Loss (30,000) (suspended losses) Ending stock basis (0) (0) (0) (0) 810,000 Ending debt basis In a S corp debt basis can only be obtained from a debt that is owed by the corporation directly to the shareholder 20

21 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER Partnership example: Cross-purchase with Section 754 election in place Assume at the end of year 3 of ABC partnership partner A sold his entire interest in the partnership to B for $50,

22 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER Partner s basis schedule for the first three years of ABC partnership. A B C Total Capital contribution 50,000 50,000 50, ,000 Assumed share of 283, , , ,000 partnership liabilities Year 1 Loss (30,000) (30,000) (30,000) (90,000) Year 2 Loss (30,000) (30,000) (30,000) (90,000) Year 3 Loss (30,000) (30,000) (30,000) (90,000) Ending basis 243, , , ,000 22

23 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER Partner A recognizes a gain: Cash Proceeds 50,000 Partnership debt transferred 283,333 Amount Realized 333,333 Adjusted Basis in the partnership 243,333 (remaining debt basis) Gain recognized 90,000 23

24 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER A B C Total Capital contribution 50,000 50,000 50, ,000 Assumed share of 283, , , ,000 partnership liabilities Year 1 Loss (30,000) (30,000) (30,000) (90,000) Year 2 Loss (30,000) (30,000) (30,000) (90,000) Year 3 Loss (30,000) (30,000) (30,000) (90,000) Ending basis 243, , , ,000 Transfer (243,333) 283,333-40,000 Cash Paid 50,000-50,000 Ending basis 0 576, , ,000 B s outside basis after purchasing A 24

25 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER B s share of inside basis after purchasing A: Cash 30,000 (10,000 per year net operating income) Building 1,000,000 A/D (300,000) 730, ,333 A s inside basis sold to B (1/3 of total) 333,333 B s outside basis purchased from A 90,000 Section 743 Step up 25

26 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER S Corp example: Cross-purchase Assume at the end of year 3 of ABC S Corp shareholder A sold all of his stock to B for $50,

27 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER Shareholder A recognizes a gain: Cash Proceeds 50,000 Adjusted stock basis 0 Gain recognized 50,000 27

28 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER A B C Total C Debt basis Contribution 50,000 50,000 50, , ,000 Loan Year 1 Loss (30,000) (30,000) (30,000) (90,000) - Year 2 Loss (20,000) (20,000) (20,000) (60,000) - (suspended losses) Year 2 Loss (10,000) (suspended losses) Year 3 Loss (30,000) (suspended losses) Ending stock basis (0) (0) (0) (0) 810,000 Ending debt basis Transfer - 50,000-50,000 - B s stock basis immediately after purchasing A 28

29 CHOICE OF ENTITY CONSIDERATIONS - STEP-UP OF BASIS OF ENTITY S ASSETS UPON TRANSFER BY OWNER B s share of S Corp assets after purchasing A: Cash 30,000 (10,000 per year net operating income) Building 1,000,000 A/D (300,000) Debt (850,000) (120,000) (40,000) B s share purchased from A (1/3 of total) 50,000 B s outside basis 90,000 No step up to inside basis for S corps 29

30 2016 UPDATES Changes to C corporation, partnership, and other tax return due dates Calendar year C Corporations deadline now April 15 th Calendar year partnerships deadline now March 15 th FinCEN Form 114 deadline now April 15 th New Partnership Audit Rules enacted by Bipartisan Budget Act of 2015 to replace TEFRA rules apply to partnership taxable years beginning after December 31,

31 INTERESTED IN MORE? WE RE AVAILABLE FOR QUESTIONS. Sno Barry, CPA, Principal Justin Morren, CPA, Senior 31