Business Tax

Technically, it does not hurt to save every single receipt and there are tools available to easily convert hard copies to digital. However, that doesn’t mean you need to save receipts for taxes in every instance.

Should I save my receipts?

The answer is yes if you need to justify an expense on your tax return. However, those that file a simple tax return and elect the standard deduction usually do not need to save their receipts for everyday purchases. Typically, you will not need a receipt for groceries as that’s not an item you can itemize on your tax return, unless sales tax is involved. It’s a different story for receipts related to charitable donations and mortgage interest payments as that can generally be claimed on your tax return.

Continue reading

Question:
Our US based C corporation is 100% owned by a US resident. The owner needs to transfer 100% of their shares to a foreign related corporation in another country. What would be the tax implications of transferring C corporation stock to a foreign entity?

Continue reading

Question:
If a real estate partnership has a partner that is a single member LLC, and the LLC has an EIN, should the K-1 be reported on Schedule E page 1 of our Form 1040? Should we simply use the ending P&L rate to reflect the income on the schedule E page 1, or just pick up the income on the 1040 schedule E page 2?

Continue reading

A bonafide “loan” from a shareholder to your company can turn into something much worse should it go unpaid. Even if there is a legitimate loan document detailing the interest, repayment schedule and other characteristics of the loan, it does not mean much when the terms are not enforced. There could be serious consequences as we explain below.

What happens if the loan isn’t repaid?

In these situations, the debt is generally reclassified to equity and any interest deduction taken is disallowed as per the court cases Roth Steel Tube Company v. Commissioner, 800 F2d 625 & Indmar Products Co., Inc., TC Memo 2005-32.

Continue reading

Businesses that establish nexus within a particular state may be required to meet certain tax compliance requirements even after they stop conducting business within that state. For instance, some states have implemented trailing sales tax nexus rules which require companies to collect sales tax even if they no longer have tax nexus.

What is sales tax nexus?

Tax nexus can best be defined as the seller’s minimum level of physical presence within a state that permits a taxing authority to require them to register, collect and remit sales and use taxes. In determining whether an out-of-state seller needs to comply with tax nexus laws, it is appropriate to examine a combination of federal and state laws. Having said that, if de minimis activities are performed within a state that establishes only the “slightest presence” in a taxing jurisdiction, it is unlikely that the seller will need to register and collect sales tax in that area. If the company has more than a de minimis physical presence in the state, then sales tax registration and collection would likely be required. Most states characterize “doing business in their state” as regularly or systematically soliciting business either by employees, independent contractors, agents or other representatives or by distribution of catalogs or other advertising matter. It is important to know the rules in each state where your company conducts business.

Continue reading

The IRS recently released an update on the tax rules for health reimbursement accounts in relation to the Affordable Care Act (ACA) and S Corporations. This update addresses small businesses that do not offer healthcare coverage, but do reimburse employees for insurance purchased on the healthcare exchanges. The IRS is waiving noncompliance penalties for the 2014 tax year and the first half of 2015.

Is this temporary?

Yes, the IRS has provided relief for businesses to transition to the new ACA rules. Moreover, an employer with less than 50 full-time employees will not be subject to the infamous $36,500 Section 4980D penalty per employee. The relief applies to employers that are conducting an employee reimbursement plan for 2014 and through June 30th, 2015. However, penalties will still be applied beginning on July 1, 2015.

Continue reading

The rules for deducting travel and living expenses while away from home depend on how long the work is being performed away from your family home. Please note that your family home is different from your tax home. So, are business travel expenses deductible?

Where is your tax home?

The first step we need to do is establish where your tax home is as per IRS Publication 463 and the Internal Revenue Code (IRC) Sections 162 & 274. This is your regular place of business, regardless of where you maintain your family home. Generally speaking, if you and your spouse do not live at your tax home, you cannot deduct the cost of traveling between your tax home and your family home. You also cannot deduct the cost of meals and lodging while at your tax home. However, there is an exception to the rule in which you are only on a temporary assignment. This means that you expect to be at your temporary assignment for less than a year. In this case, your tax home does not change to your work location, but continues to be where you reside. Thus, you would be able to deduct travel expenses and living expenses that are not reimbursed by your employer.

Continue reading

Many existing C Corporations and new businesses elect to be taxed as an S Corporation. However, some of these businesses fail to meet the filing deadline, which is 75 days after incorporating or 2 months and 15 days after the beginning of the tax year. So, established businesses must file by March 15 of the new tax year, or before. New businesses must file by March 15. Fortunately, there are exceptions to this rule in which businesses may qualify for late election relief.

What is an S Corporation?

 An S Corporation is one of the tax structures a business can opt to file with because it provides unique benefits, including corporate tax returns. There are specific criteria requirements in order to be considered for this filing status, so be sure to be informed about what it entails before filling in the necessary documents. However, this process need only be completed once and will remain valid every following year, even if new shareholders do not consent.

HOW DOES A BUSINESS ELECT TO BE TAXED AS AN S CORPORATION?

The company will need to have an officer and all associated shareholders sign a Form 2553 and then file it with the IRS to elect to be taxed as an S Corporation. After this is completed, the IRS sends a CP261 Notice to businesses to confirm acceptance of the S Corporation election. If the business owner and/or accountant did not receive the letter or do not have a record of it, they should contact the IRS directly at their Business and Specialty Tax Line at (800) 829-4933 (M-F, 7 am-7 pm).

HOW TO QUALIFY FOR S CORPORATION LATE ELECTION RELIEF

If a company fails to timely file the form with the IRS to elect to be taxed as an S Corporation, it may still be eligible for a late election to be an S Corporation. However, the company must show that failure to file Form 2553 on time was the result of a reasonable cause. The IRS has two acceptable forms of reasonable cause: (1) a company’s president, chief executive officer, or similar responsible person neglected to file the election, and (2) that the corporation’s tax professional or accountant neglected to.

If a company does not file the Form 2553 on time, but still meets the late election relief criteria in IRC Section 1362(b)(5) detailed below, the next steps should be to file the IRS Form 2553. When filing the form, write at the top of the form the following words: “FILED PURSUANT TO REV. PROC. 2013-30.” Furthermore, if you make the election with your first tax return, write in the top margin of the first page of Form the 1120S “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30.

The Corp. meets the S-Corp. eligibility criteria:

1. The corporation intended to be classified as an S corporation as of the date entered on line E of Form 2553;
2. The corporation fails to qualify as an S corporation on the effective date entered on line E of Form 2553 solely because Form 2553 was not filed by the due date
3. The corporation has reasonable cause for its failure to timely file Form 2553 and has acted diligently to correct the mistake upon discovery of its failure to timely file Form 2553
4. Form 2553 will be filed within 3 years and 75 days of the date entered on line E of Form 2553

Please note that to request late election relief when the above requirements are not met, the corporation generally must request a private letter ruling and pay a user fee in accordance with Rev. Proc. 2014-1, 2014-1 I.R.B. 1.

Up until recently, most businesses needed to file Form 3115 to ensure that tangible property items have been properly capitalized or expensed in current and prior years. However, the IRS recently issued Revenue Procedure 2015-20 which provides relief for certain businesses. Under this new procedure, certain small taxpayers have the option of following the new regulations only prospectively, without filing a 3115. Please note that a small taxpayer is any business with total assets of less than $10 million as of the beginning of the first tax year that started on or after Jan. 1, 2014, or with average annual gross receipts of $10 million or less over the three prior tax years.

What if our business still needs to file form 3115?

First, you should note that it will take time to review the regulations associated with Form 3115. Specifically, be prepared to spend time reviewing your accounting records. The IRS has actually provided guidance for practitioners and businesses to understand and apply the law. Specifically, the IRS recommends 20 hours to learn the law, 39 hours to review work papers and 24 hours to prepare the form. While we believe that these estimates are a little extreme, it will still take several hours.

While it may take time to prepare, it’s important to note that your business may benefit financially by filing the form. There may be several instances in which your business can and should have claimed expenses that it has not done so in the past. This will be reported as an IRC Section 481(a) adjustment.

Continue reading

There are many different types of real estate professionals in the market. Some do it for a living, while others manage one or two properties for supplemental income. The business tax deduction rules vary greatly depending on how you are classified as a real estate investor as detailed in IRS Publication 925.

To qualify as a real estate professional for tax purposes, you need to meet the following requirements:

• More than 50% of your professional services are provided in the real estate field
• You spend more than 750 hours each year in managing a real estate business
• You are not an employee of the business (unless you own at least 5% of the business)
• You must also materially participate in the rental activity

Continue reading