Monday, August 25, 2014

Tax Planning for Partnership



Almost every day, CPA face the task of structuring a new business for a client. This can be one of the most critical decisions the CPA is involved in-and provides with a perfect opportunity to save the client tax dollars and headaches.

To ensure that the client is making the right entity selection, one needs to be familiar with all aspects of the client's business, know that all major tax and nontax issues have been addressed, and that all possible structures have been considered.

In the past, the choice of entity required a comparative analysis of C corporations, S corporations, partnerships [including general, limited, and limited liability partnerships (LLPs)], sole proprietorships, and limited liability companies (LLCs). With today's sophisticated tax planning, however, many new businesses are structured using two or more of these entities to maximize the advantages offered by each. Entrepreneurial businesses are also frequently structured with multiple entities. Typically, the business is operated in a limited partnership with the investors as limited partners and an S corporation owned by the entrepreneur as the general partner. This partnership structure allows the flexibility to both provide priority allocations to the investors and permit disproportionate capital contributions from the general and limited partners. The limited partners are protected against liability because of their limited partner status and the general partner shareholder also has limited liability when operating as an S corporation.

1 Whether the new business operates as a single entity or is structured using multiple entities, it is important  to understand the tax and nontax advantages and problems of using each type of entity. This chapter discusses the formation of the partnership entity, how it is different from other entities, partnership variations (e.g., LLCs and LLPs), and partnership agreement drafting considerations.

Among the features of partnership taxation that differ significantly from the taxation of C corporations or S corporations are-

a. the greater ability of partners to contribute property on a tax-free basis

b. the ability, within limits, to specially allocate items of income, gain, loss, deduction, and cash flow among the partners differently from the partners' shares of capital or profits

c. the ability, in many instances, to distribute property to partners without gain recognition at either the partner or partnership level

d. the ability of partners to increase their basis in their partnership interests to reflect increases in partnership liabilities, allowing them to deduct additional partnership losses
 
e. the ability, in many cases, to liquidate with little or no tax cost

 Choosing to operate a business as a partnership or in some other form, typically a corporation, is affected by a variety of concerns, including rules specifically related to the taxation of partners and partnerships. Nontax concerns, such as limiting liability for business obligations, obtaining public equity financing, or allocating management rights in a particular way, also play a role. Other considerations not directly related to specific partnership tax rules may also have a significant tax impact.


Monday, August 18, 2014

IRS Repeats Warning about phone scams

The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS.

Based on the 90,000 complaints that TIGTA has received through its telephone
hotline, to date, TIGTA has identified approximately 1,100 victims who have lost an estimated $5 million from these scams.

Taxpayers should remember their first contact with the IRS will not be a call from out of the blue, but through official correspondence sent through the mail. A big red flag for these scams are angry, threatening calls from people who say they are from the IRS and urging immediate payment. . People should hang up immediately and contact TIGTA or the IRS.”

Additionally, it is important for taxpayers to know that the IRS:
  • Never asks for credit card, debit card or prepaid card information over the telephone.
  • Never insists that taxpayers use a specific payment method to pay tax obligations
  • Never requests immediate payment over the telephone and will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior notification of IRS enforcement action involving IRS tax liens or levies. 
Potential phone scam victims may be told that they owe money that must be paid immediately to the IRS or they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.
Other characteristics of these scams include:
  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do:
  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to TIGTA at 1.800.366.4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add "IRS Telephone Scam" to the comments of your complaint.
Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.

The IRS encourages taxpayers to be vigilant against phone and email scams that use the IRS as a lure. The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS also does not ask for PINs, passwords or similar confidential access information for credit card, bank or other financial accounts. Recipients should not open any attachments or click on any links contained in the message.

 

Wednesday, August 13, 2014

What to do if you get a Notice from IRS

Each year the IRS mails millions of notices. Here’s what you should do if you receive a notice from the IRS:
  • Don’t ignore it. You can respond to most IRS notices quickly and easily. And it’s important that you reply promptly.
  • IRS notices usually deal with a specific issue about your tax return or tax account. For example, it may say the IRS has corrected an error on your tax return. Or it may ask you for more information.
  • Read it carefully and follow the instructions about what you need to do.

    If it says that the IRS corrected your tax return, review the information in the notice and compare it to your tax return.

If you agree, you don’t need to reply unless a payment is due.

 If you don’t agree, it’s important that you respond to the IRS. Write a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Include the bottom tear-off portion of the notice with your letter. Mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for a response from the IRS.

  • You can handle most notices without calling or visiting the IRS. If you do have questions, call the phone number in the upper right corner of the notice. Make sure you have a copy of your tax return and the notice with you when you call.
     
  • Keep copies of any notices you get from the IRS.
  • Don’t fall for phone and phishing email scams that use the IRS as a lure. The IRS first contacts people about unpaid taxes by mail – not by phone. The IRS does not contact taxpayers by email, text or social media about their tax return or tax account

Friday, August 8, 2014

IRS Introduced new 1023-EZ form for applying 501(c)(3) Tax exempt Status

 

The Internal Revenue Service  introduced a new, shorter application form to help small charities apply for 501(c)(3) tax-exempt status more easily.
 
This approach  will help reduce lengthy processing delays for small tax-exempt groups and ultimately larger organizations as well
The change cuts paperwork for charitable groups and speeds application processing so they can focus on their important work.

The new Form 1023-EZ, available  on IRS.gov, is three pages long, compared with the standard 26-page Form 1023. Most small organizations, including as many as 70 percent of all applicants, qualify to use the new streamlined form. Most organizations with gross receipts of $50,000 or less and assets of $250,000 or less are eligible.

Previously, all of these groups went through the same lengthy application process -- regardless of size. It didn't matter if you were a small soccer or gardening club or a major research organization. This process created needlessly long delays for groups, which didn’t help the groups, the taxpaying public or the IRS.

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog.

The Form 1023-EZ must be filed using pay.gov, and a $400 user fee is due at the time the form is submitted. Further details on the new Form 1023-EZ application process can be found in Revenue Procedure 2014-40.

Monday, August 4, 2014

Offer in Compromise


What is an Offer in Compromise :

An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. IRS considers your unique set of facts and circumstances:

  • Ability to pay;
  • Income;
  • Expenses; and
  • Asset equity.

IRS generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time. Explore all other payment options before submitting an offer in compromise. The Offer in Compromise program is not for everyone. If you hire a tax professional to help you file an offer, be sure to check his or her qualifications.

Make sure you are eligible

Before we can consider your offer, you must be current with all filing and payment requirements. You are not eligible if you are in an open bankruptcy proceeding.

Submit your offer

You'll find step-by-step instructions and all the forms for submitting an offer in the Offer in Compromise Booklet, Form 656-B (PDF).  Your completed offer package will include:

  • Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms;
  • Form 656(s) - individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656;
  • $186 application fee (non-refundable); and
  • Initial payment (non-refundable) for each Form 656.

Select a payment option

Your initial payment will vary based on your offer and the payment option you choose:

  • Lump Sum Cash: Submit an initial payment of 20 percent of the total offer amount with your application. Wait for written acceptance, then pay the remaining balance of the offer in five or fewer payments.
  • Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

If you meet the Low Income Certification guidelines, you do not have to send the application fee or the initial payment and you will not need to make monthly installments during the evaluation of your offer. See your application package for details.

Understand the process

While your offer is being evaluated:

  • Your non-refundable payments and fees will be applied to the tax liability (you may designate payments to a specific tax year and tax debt);
  • A Notice of Federal Tax Lien may be filed;
  • Other collection activities are suspended;
  • The legal assessment and collection period is extended;
  • Make all required payments associated with your offer;
  • You are not required to make payments on an existing installment agreement; and
  • Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date

 

Choosing a Retirement Plan for the Self-employed


Choosing a Retirement Plan for the Self-employed
 
Self-employed individuals can adopt a qualified retirement plan (often referred to as a Keogh plan), a simplified employee pension (SEP) plan, an individual retirement account (IRA), or a savings incentive match plan for employees (SIMPLE IRA plan). These plans offer self-employed individuals the same opportunity to accumulate retirement savings in tax-deferred accounts as individuals covered by corporate retirement plans. .

Keogh Plans for the Self-employed

Qualified retirement plans (e.g., profit sharing, money purchase, and defined benefit plans) established by sole proprietorships (or partnerships) for the benefit of the sole proprietor (or partners) and their employees are often referred to as Keogh plans.

Keogh plans are generally subject to the same rules as those covering corporate qualified retirement plans. Like a corporate plan, a Keogh cannot discriminate among employees in determining participation, benefits, or contributions. The deduction limits for contributions on behalf of both employees and self-employed individuals are the same as those for corporate plans. However, the deduction limit for self-employed individuals is based on net self-employment income earned in the trade or business for which the plan is established

 Advantages of a Keogh include:

a. A taxpayer with self-employment income can generally establish a Keogh, even though he is covered, as an employee, by an unrelated employer's retirement plan (Ltr. Rul. 7839059). Examples of common self-employed/employee situations include doctors, lawyers, accountants, and corporate directors.
 
b. Fees for administering the plan are tax-deductible or may be eligible for a tax credit.

c. Taxes on earnings in the plan are deferred until withdrawn.

d. The self-employed taxpayer can direct plan investments.

e. The contribution deduction is above-the-line; the taxpayer does not need to itemize deductions to obtain a tax benefit from the contribution, and, because the deduction reduces adjusted gross income (AGI), it can increase the allowable amount of AGI-sensitive deductions and credits.

f. Lump-sum distributions may be eligible for favorable tax treatment.

 Deducting Keogh Contributions

 Like a corporate plan, a Keogh cannot discriminate among employees in determining participation, benefits, or contributions. The deduction limits for contributions on behalf of both employees and self-employed individuals are the same as those for corporate plans. These rules generally allow the following deductions:

a. Money Purchase and Profit-sharing Plans. For 2014, the employer's maximum deduction for contributions to profit-sharing and money purchase plans is limited to 25% of the total compensation of all participants eligible to share in the contribution allocation [IRC Sec. 404(a)(3)]. For this computation, each participant's compensation is limited to $260,000 [IRC Sec. 401(a)(17)]. Elective deferrals to a 401(k) plan are not subject to this limit.

b. Defined Benefit Plans. The employer's deduction limit for contributions to a defined benefit plan is in most cases the minimum funding amount,. The minimum funding standards generally require the employer's annual contribution to be large enough to cover the annual cost of future benefits and administrative expenses, as well as any past benefits not funded. These deduction limits are actuarially determined..

The deduction limit for self-employed individuals is based on net self-employment (SE) income earned in the trade or business for which the plan is established. Net SE income is calculated after the Keogh contribution deduction and the deduction for half of the self-employment (SE) tax. This first reduction results in a simultaneous equation that effectively reduces the self-employed participant's maximum contribution percentage (based on precontribution earned income).
 
  Defined Benefit versus Defined Contribution Plans

 A defined benefit plan for a self-employed individual who is over age 45 (and has significant net business income and the cash necessary to fund required, and possibly large, annual contributions) can be an excellent vehicle for making relatively large tax deductible contributions. This is possible because the benefit the plan participant will receive is established, and the contributions necessary to create a fund that will provide the desired benefit are calculated based on actuarial assumptions such as interest rates, years until retirement, and life expectancy. However, defined benefit plans are most useful when the owner-participant is significantly older (and better paid) than other employees. Otherwise contributions required to be made on behalf of other employees may be prohibitive. Additionally, the costs of implementing (e.g., legal fees) and maintaining (e.g., actuarial fees) a defined benefit plan must be considered.

 Conversely, self-employed individuals under age 45 may be reluctant to establish a defined benefit Keogh plan because of the costs involved in computing the annual contribution, compared to the amount of contribution required for a defined contribution plan (usually not significantly greater compared to other types of self-employed plans since retirement is many years away). Thus, defined contribution (e.g., profit sharing) plans are typically the most popular choice for younger self-employed taxpayers and those without the cash necessary to fund and maintain a defined benefit plan.

Money purchase plans operate similarly to profit-sharing plans. However, the plan must contain a set formula under which contributions are made instead of allowing discretionary contributions. Once adopted, contributions determined by the formula must be made annually. The contribution deduction limit for money purchase plans is 25% of total compensation for all employees. Since the contribution limit of profit-sharing plans is equal to that of money purchase plans, there is no advantage to establishing a new money purchase plan.

  Plan Loans
 Keogh plans can make plan loans to owner-employees under the same rules applicable to other participants. However, the plan document must set out specific loan provisions.

 How to Set Up a Keogh Plan
 A Keogh plan must legally exist by the taxpayer's year-end to claim a deduction for the contribution. Thus, calendar-year taxpayers must adopt the plan by December 31. In addition, the trust agreement (if the plan uses a trust) and the plan itself must be in writing and communicated to any employees by that date [Reg. 1.401-1(a)(2)]. Some states require that the trust be funded with at least a nominal amount of money prior to year-end.

 The easiest and quickest way to establish a plan is for the taxpayer to adopt a master or prototype plan (offered by most financial institutions). The sponsoring organization has already applied to the IRS for plan approval of the master or prototype plan document, then provides the taxpayer with a copy of the approved plan and determination letter.

   Due Date of Keogh Plan Contributions

 Contributions to Keogh plans are generally deductible only in the year paid. However, a special rule permits a deduction for certain contributions made after year-end. Under this rule, a contribution is treated as made on the last day of the tax year if: (a) it is identified as being made for that year, and (b) it is actually made by the due date of the taxpayer's return, including extensions [IRC Sec. 404(a)(6)]. If the contribution is made by mail, the postmark date is the controlling date (see Ltr. Rul. 8551065, which applies to traditional IRA contributions and which, presumably, also applies to contributions to other retirement plans).

One-person 401(k) Plans
 One-person 401(k) plans are becoming increasingly popular for a business that employs only the owner. Given the right circumstances, these plans can allow a large amount to be contributed on behalf of the owner while maintaining flexibility in making contributions in future years. The cost of preparing the annual return (Form 5500 required after plan assets exceed $250,000) is nominal in comparison to the additional funding a one-person 401(k) plan allows. Also, because the plan has no employees other than the owner, it is not subject to the complicated nondiscrimination tests normally applicable to 401(k) plans.

 For 2014, a business owner can make an elective deferral contribution of up to $17,500 ($23,000 if he is age 50 or older) plus an employer contribution of up to 20% of SE income or 25% of compensation. In calculating the allowable employer contribution, the owner's SE income or compensation is not reduced by the owner's elective deferral contribution [IRC Sec. 404(n)].

 However, the total contributions (elective deferral plus the employer contribution) cannot exceed the lesser of 100% of the participant's compensation or $52,000 ($57,500 if age 50 or older) for 2014.

SEPs Offer Simplicity but Less Flexibility

 In a SEP plan, the employer makes annual contributions on the employee's behalf to an IRA established for the employee (referred to as SEP IRAs). A SEP is generally easy to adopt, and the rules governing participation are straightforward. An advantage of establishing a SEP (rather than a Keogh plan) is that reporting, recordkeeping, and funding requirements are minimal. A taxpayer who is self-employed and files a Schedule C or F also has the ability to adopt a SEP plan after year-end, and to make contributions up to the due date of their personal tax return.

 An employer is not required to make SEP contributions every year or to maintain a particular contribution level. However, contributions may not discriminate in favor of highly compensated employees. This means contributions for all eligible employees must generally bear a uniform relationship to includable compensation [IRC Secs. 408(k)(3)(C) and (D)]. A contribution rate that decreases as compensation increases is considered uniform [Prop. Reg. 1.408-8(c)(1)].

 Despite a SEP's simplicity and ease of adoption, SEP plans do have disadvantages. For example, all eligible employees must be covered. An eligible employee is one who at a minimum (a) has attained age 21; (b) has performed any services for the employer during at least three of the preceding five years; and (c) has received at least $550 in compensation (for 2014) [IRC Sec. 408(k)(2)]. Additionally, employees have a nonforfeitable right to contributions (i.e., are immediately vested). Thus, there is no partial vesting, and no possibility that contributions will be reallocated back to the employer or key employee. Finally, every eligible employee must set up or modify an IRA to accept a SEP contribution. Failure of even one eligible employee to do so destroys the ability of the employer to use a SEP. However, employers may overcome this problem by setting up an IRA on the employee's behalf [Prop. Reg. 1.408-7(d)(2)]. Finally, if contributions are made to IRAs of some but not all eligible employees, none of the SEP contributions are deductible (Brown).

How to Adopt a SEP Plan

 For most self-employed taxpayers, adopting a SEP means completing and signing Form 5305-SEP, "Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement." The form is not filed with the IRS, but should be maintained as part of the employer's permanent records. In addition, a copy of Form 5305-SEP (including the accompanying instructions) must be given to each employee covered by the SEP.

Post Year-end Tax Planning with a SEP

 Unlike Keogh plans, a SEP does not have to be adopted by the taxpayer's year-end; it can be adopted any time before the deadline for filing the taxpayer's return, including extensions
 
   Contribution Limit

 For 2014, the contribution limit for a SEP is the lesser of (a) 25% of up to $260,000 of compensation or (b) $52,000. For self-employed individuals, the contribution limit is based on net self-employment (SE) income earned in the business that established the SEP. Net SE income is calculated after the SEP contribution deduction and the SE tax deduction. This first reduction results in a simultaneous equation that effectively reduces the self-employed participant's maximum contribution percentage (based on precontribution earned income).

SIMPLE IRA Plans

SIMPLE IRA plans are available to employers with 100 or fewer employees receiving at least $5,000 of compensation in the prior calendar year. Self-employed individuals are also eligible to participate in a SIMPLE IRA plan. An employer may impose less restrictive eligibility requirements by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both, under its SIMPLE IRA plan. However, the employer cannot impose any other conditions on participating in a SIMPLE IRA plan (Notice 98-4, Q&A C-2). The employer may not currently maintain any other qualified retirement plans while making contributions to a SIMPLE IRA plan.

 The greatest advantage of SIMPLE IRA plans is that they are easier to operate than Keogh plans. SIMPLE IRA plans do not have to meet the nondiscrimination requirements, minimum participation and minimum coverage rules, vesting rules, or the top-heavy rules applicable to qualified plans. However, if a plan will cover only the owner-employee, the complicated nondiscrimination rules do not apply. This may make a one-person 401(k) plan worth consideration. Although the fees for setting up and maintaining a one-person 401(k) plan may be higher, the additional allowable contributions may be substantial.

Contribution Limits

 SIMPLE IRA plans allow employee elective contributions and require employer matching contributions or nonelective contributions. For 2014, employee elective contributions are limited to $12,000.

SIMPLE IRA plans can also allow catch-up contributions for taxpayers age 50 or older by the end of the applicable year. The catch-up contribution for 2014 is an additional $2,500.

601.44 Employer contributions must be made under one of two formulas [IRC Sec. 408(p)(2)(A), (B), and (C)(ii)]:

a. Matching Contribution Formula. Employers must generally match employee contributions on a dollar-for-dollar basis, up to 3% of the employee's compensation for the calendar year. However, in two out of every five years, the employer has the option of electing a matching percentage as low as 1% of each eligible employee's compensation. For purposes of the matching contribution, compensation is not limited.

b. Nonelective Contribution Formula. In lieu of making matching contributions, the employer may contribute 2% of compensation for each eligible employee having at least $5,000 of compensation during the calendar year. For purposes of this formula, compensation of each eligible participant is limited to the Section 401(a)(17) limit ($260,000 for 2014), thus limiting the contribution to no more than $5,200 (for 2014) per employee.