There are changes coming to any business operation that is currently taxed as a partnership in the United States. The concept of the “tax matters partner” is being done away with in favor of what is called a “partnership representative.”
Tag: tax (Page 1 of 3)
If you become aware of the fact that you’ve failed to report and pay tax due to New York State, don’t think that it will go away. It will only get worse. Penalties, interest and especially criminal charges are serious business. The New York Tax Department has a Voluntary Disclosure and Compliance Program that you can avail yourself of.
If you are a “qualified New York manufacturer” doing business as a corporation and you paid real property taxes (either as the owner or as the lessee) for your business location where you perform the manufacturing activities, you are eligible for the New York State Manufacturer’s Real Property Tax Credit.
The Credit is equal to 20% of the eligible real property taxes paid by the manufacturer each year. The manufacturer must exclude portions of the owned or leased real property that are not used in the manufacturing activities (such as parking lots, and common areas, etc.).
A “qualified New York manufacturer” is a manufacturer that either (1) has property in New York State of the type described for New York’s investment tax credit under Tax Law section 210.12(b)(i)(A) that has an adjusted basis for federal income tax purposes of at least $1 million at the end of the tax year, or (2) has all its real and personal property in New York State.
Faced with the situation that you or your company has been misreporting income or miscalculating taxes, you should not stick your head in the sand and hope that it never catches up with you. You should work with your accountant and attorney and calculate the amount due.
First, the IRS has two voluntary disclosure programs. The first is for domestic voluntary disclosure of tax issues, which I am discussing here. The other is a separate program for Offshore Account Voluntary Disclosure (to be discussed in a later post).
Partnership taxation is a complex area of tax law. We’ll be walking through some of the issues you should be aware of.
The first is to ensure you are getting the deal you thought you were. Partners (or LLC members where the LLC has multiple members and does not “check the box“) can agree on how to allocate the profit and losses of the business as they see fit in the agreement. The allocations can be done in any manner the partners/members choose, provided that the allocations have “substantial economic effect.” See IRC 704(b); Treas. Reg. 1.704-1(b).
In addition to the other ways we’ve discussed here (stock options, phantom stock, stock appreciation rights), another way to compensate individuals working for a startup is to give them a cash payment upon a change in control of the company, called in the industry a “strip right”.
For example if a startup company has four founders each owning 25% of the shares, and they bring on another but don’t grant him or her shares, the initial founders can agree to pay the new individual a percentage of the “net proceeds” received from a “change in control” of the corporation. “Net proceeds” is usually defined as the gross proceeds received minus transaction costs and brokers commissions as well as some other items. A “change in control” is defined as it normally is in these agreements, and covers if the company merges with another or sells substantially all of the company’s assets. In such a case, the shareholders would receive cash (or assets it can sell for cash, like tradeable shares of the acquirer). The strip right agreement would require the shareholders that granted it to pay to the holder of the strip right, either a percentage or flat fee before they received their cash for the change of control.
In the example, if the four founders grant a 10% strip right, and a couple years down the road the company is sold for one million dollars, with transaction fees of $100,000, the holder of the strip right would receive $90,000 (net proceeds of $900,000 x ten percent). The shareholders would split the rest of the $810,000 and each receive $202,500.
One of the benefits of the granting of the strip right is that it is not taxable to the recipient. The downside, at least to the recipient is that they are not a shareholder of the corporation and they may never receive a cent if there is never a change in control. Due to its tenuous nature, the strip right is usually granted in connection with other compensation awards.
Another item that could cause an entity taxed as an S corporation to lose the election is disparate distributions. Like most things, this is simple in theory but more complicated in application. The theory is that the shareholders of an S corporation are entitled only to the proportion of corporation distributions based on their percentage ownership of the stock. In other words, if you are a shareholder of an S corporation, you are entitled to the same proportion of distributions as you own shares (if you own 1/3 of the shares, you are entitled to 1/3 of the distributions).
Owners of corporations elect S corporation taxation status for the pass through and other benefits the election provides. There are various things that can arise that would cause an S corporation to lose its election. In this and following posts, I’ll walk through some of the most common. The one I want to discuss now is the S corporation passive income restriction.
I’m going to be posting a number of posts on the ins and outs of electing and operating a corporation which elects to be taxed as a small business corporation (an “S Corp”) with the IRS. There are many benefits to such an election, but there are also pitfalls that many owners run into that could jeopardize the election.
The first post in this series is simply how to make the election.
First of all, I won’t advise anyone to withdraw their 401(k) funds early as the tax hit the IRS enacts is insane. If you are thinking about doing that, please don’t, or at least don’t do so until you’ve spoken to your accountant.
This post will, however, detail how to use your qualified retirement plan or IRA to start a new, or buy an existing, business. This name given to the process I’ll discuss is rollovers as business startups (“ROBS”). The main gist is that an individual’s current retirement plan is rolled over into a newly established 401(k) plan sponsored by a startup company and then used to purchase the startup company’s stock. The ROBS arrangement allows income taxes and penalties (see IRC Section 72(t))to be avoided because it is a rollover from one qualified plan to another.