Tax Planning and Compliance for Closely Held Businesses and Their Owners Edward K. Zollars Phoenix, Arizona ed@tzlcpas.com www.cperesources.com
Edward K Zollars Email: ed@tzlcpas.com Website: www.cperesources.com Thomas, Zollars & Lynch, Ltd. Nichols Patrick CPE, Inc. Arizona Income Tax Guide
The Need for Planning
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
Business Succession Planning Economic Impact of Death of Owner Economic Cost of the Disability of the Owner
The Accountant s Concerns Prime Position of the Accountant Succession Planning Service
The Family Business
Security Continuity of the Business Concerns of the Parent About Business as a Source of Income Concerns About Income for a Surviving Spouse
Equity Between Active & Inactive Children Pass Other Assets to Inactive Children Recapitalization of Stock Life Insurance to Equalize Asset Distributions
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
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
Deferring Transfer Tax Liabilities Transfer to Child at Death of First to Die Leaving Shares to QTIP Trust
The Qualified Plan
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
Qualified Plans Sources of Plan Assets Taking Inventory of Owner Benefits
Life Insurance Purchases Defined Benefit Plans Defined Contribution Plans Profit Sharing Plans Employee Contributions/Rollover Accounts Insured Person
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
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
Use of Life Insurance Qualified Plans Individual Retirement Accounts
Reversions
Estate Planning for the Business Owner
Estate and Gift Taxation Basics of the Transfer Tax Closely Held Business Deferral of Tax Valuation of Assets
Marital Deduction QTIP Trusts Spouse Not a U.S. Citizen (QDOT)
Estate & Gift Taxation Lifetime Exclusion Annual Exclusion for Gifts of a Present Interest Retirement Account Transfer Tax Complications
Life Insurance Incidents of Ownership Three Year Exposure Irrevocable Life Insurance Trust Value of a Life Insurance Policy Transfer for Value Issues
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
Estate and Gift Planning Family Limited Partnerships Grantor Retained Annuity Trusts (GRATS) Transfers of Minority Interests in Family Owned Businesses
Business Succession Planning Bequests Life Insurance to Provide Liquidity Transferring the Business Interests to a Trust
Business Succession Planning Life Structure of Arrangement Funding of the Irrevocable Life Insurance Trust
Business Succession Planning the Qualified Plan
Business Agreements for Stockholders and Partners
Need for Stockholders' Agreement Control Dissension Between Surviving Shareholders and Heirs Avoid Leaving Heirs at Mercy of Surviving Shareholders
Structure of Stockholders Agreement Conformity to Provisions Made for Funding Stockholders with Full Understanding of the Terms of the Agreement Optional Provisions
Purchase Price Difficulty in Valuing Agreed Value Method Formula Value Method
Terms of Payment Purchase Terms Promissory Notes
Death Buyout Arrangements Mandated Sale at Death Option in Lieu of Mandate Issues for Children
Disability Buyout Arrangements Definition of a Disability Salary Continuing Agreement Trigger for Sale Disability Buyout Insurance
Funding Life Insurance Profit Sharing Plan - Life Insurance Disability Buyout Insurance Risk of Proceeds Not Being Available Escrow Agent
Lifetime Buyout Arrangements Mandated Buyout Right of First Refusal
Other Considerations Dealing with Unfunded Balance Use of Deductible/Nondeductible Payments Covenant Payments
Next Generation Planning Permitted Gift/Bequest, Otherwise Mandated Sale Securing Family of Parent Special Option for Currently Inactive Children Concerns of Other Shareholders
Partnership Arrangements Professional Practice Formula Value Regulatory Issues - Law Practices Ongoing Operation
Choice of Entity
Entity Types (Tax) Sole Proprietorship Partnership Corporation S Corporation C Corporation
Entity Types (Legal) Proprietorship General Partnership Limited Partnership Limited Liability Company Limited Liability Partnership Corporation
Proprietorship Business Considerations Tax Classification Liability
General Partnership Business considerations Tax issues - reporting Liability
Limited Partnership Formation Self-Employment/FICA Tax
C Corporation General considerations Tax reporting Liability
S Corporation Advantages/disadvantages Formation Self-employment tax/fica
Limited Liability Company General business considerations Liability Taxation - check the box
Entity Classification Rules Check the box regulations Entity classification Automatic corporation types Other One owner (domestic vs. foreign) Multiple owner domestic (domestic vs. foreign)
Other Tax Considerations Fringe Benefits FICA/FUTA/SUTA Taxes Tax rate differential
Change of Entity
C Corporation Partnership S Corporation Built-in gain tax Tax on excess passive income/loss of S status
Tax Free Incorporation IRC 351 (p. 7-6) Requirements (p. 7-9) Potential problems (p. 7-9)
Incorporating an Existing Business General tax attributes Initial capitalization
General Partnership to Limited p 7-11
Partnership to LLC Continuation of partnership (p. 7-12) Transfer of interest (p. 7-13) Merger (p. 7-14)
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)
Entertainment, Meals and Automobiles
Meal and Entertainment Deductibility 274(d) 50% limitation rule - and exceptions Entertainment tickets
Travel Expenses Documentation 274(d) Allowed expenses Optional method (per diem) Travel vs. personal Special limits
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)
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)
Per Diem Rates Publication 1542 GSA Website GSA Mobile applications ios Android Blackberry
Compensation and Certain Fringe Benefits
Executive Compensation Current (p. 9-1) Deferred Qualified plans Nonqualified plans (beware of 409A)
Reasonable Compensation Total compensation issue Factors to consider C corporation vs. S corporation issue
Below Market Loans IRC 7872 (p. 9-2) Shareholder/Employee loan Demand loans Term loans
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
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
Cafeteria Plans Written plan requirement (p. 9-7) Election issues Information reporting requirements (p. 9-8) Health care FSAs (p. 9-9)
Section 132 Various fringes (p. 9-11) No additional cost services Qualified employee discounts Working condition fringes De minimis fringes
Adjusted Current Earnings
Adjusted Current Earnings C Corporation AMT issue (p. 10-1) Applies earnings & profits concepts
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
Life Insurance Cash value policies Term insurance
p. 10-9 LIFO Inventory
Planning for a Sale
IRC 1060 Allocation rules of 1060 (note that assigned value will pre-empt later cost segregation attempt) Contractual allocations Operating provisions
C Corporation General Utilities repeal (p. 11-3) Martin Ice Cream issue Not a silver bullet solution Howard case illustration of traps
Dissolving Small Corporations
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
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)
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)
Tax Aspects Classification of assets (p. 12-1) Character of Gain/Loss Capital assets ( 1221) 1231 assets Ordinary assets
Depreciation Recapture issues Real property - 1250 and 291 Other property 1245
Complete Liqudations Definition (p. 12-9) Tax consequences (p. 12-10) Shareholders (p. 12-12) Liquidating corporation (p. 12-16)
IRC 337 Remaining tax free liquidation Corporate shareholder requirement