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TOP TAX QUESTIONS OF THE MONTH

This is a monthly reference source. By providing these samples of questions and answers, we hope to help you understand that we provide a superior service in our ability to get answers to your questions. There are some general caveats that go along with this presentation. Understand that tax law is fluid and always changing; the answer that is correct today may be incorrect tomorrow. Also be aware that changing one small fact may change the entire answer. We are not trying to give a complete outline of any particular subject. We are attempting to give a general direction that can be taken to resolve a problem or obtain an answer. We can call and talk over your particular situation with the Research Department before we try to answer the specific problem YOU may have. You may not rely on any answer given to avoid a penalty assessed by IRS.

1. I have employed my two children for some time in my business (sole proprietorship). They are not yet age 18. I am forming a single-member LLC for liability protection purposes. Does the exemption from FICA and FUTA continue to apply?
   
   The exemption from FICA and FUTA for the children of a sole proprietor will continue to apply if no election is made to be taxed as a corporation. For tax purposes, a single-member LLC is a disregarded entity unless an election is made to be taxed as a corporation. As a disregarded entity, the LLC continues to be reported on Schedule C and the business is treated for tax purposes as a sole proprietorship. If an election is made to tax the business as a corporation the wages paid to the children will be treated as any other employees and will be subject to all payroll taxes.
   
2. I will enter into a Section 1031 exchange this month. I am using a qualified facilitator. I have identified replacement property even before the 45 day period begins and the qualified escrow on the replacement property is expected to close well within the required 180 day limit. Given the anticipated selling price of my property I expect to get about $35,000 of cash back on the closing. May I then use that cash to make improvements to the new property and use those improvements to defer recognizing gain if I make the improvements within the 180 day limit?
   
   If you have access to cash, you are taxable on that amount as “boot” regardless of how it is used. You may not use cash from the transaction to make improvements and defer gain. The gain is recognized and the improvements depreciated. If possible, work with your facilitator to have the escrow agreement drafted to require that the desired improvements be made to the property by the seller before it is distributed to you (make sure the improvements are completed within the 180 day limit). Having the improvements made by the seller before the property is transferred to you (thereby eliminating the cash receipt) will allow you to avoid receiving boot.
   
3. I married a foreign national late last year. She was a student here and had no income during the year. She is applying for residency this year, but last year she was here on a student visa. Can we file jointly?
   
   As long as your spouse elects to be taxed as a US resident and reports her worldwide income (if any) on the return the two of you may file a joint return. A statement to that effect should be attached to the return to document the election.
   
4. I formed a single member LLC for my business. When submitting my SS-4 I inadvertently indicated that the single member LLC would be a corporation. I want to be a sole proprietorship. Does the way I completed the SS-4 require that the LLC be taxed as a corporation?
   
   Filing a Form SS-4 does not obligate you to form a particular entity. As you formed a single member LLC, under regulations by default that LLC is a disregarded entity unless an election is made on Form 8832 to be taxed as a corporation. You may report the business activity on Schedule C as long as you wish to have the LLC be a disregarded entity. If IRS questions the employer ID number, explain the error in checking the box on Form SS-4.
   
5. I plan on buying all of the assets of a corporation for over $250,000, rather than buying stock. In addition to doing this to have depreciable basis in the equipment and goodwill that is being bought, I am doing this to avoid any potential liability for the debts of the corporation. Are there any problems I should be aware of?
   
   Many states have a “bulk sale” provision. Under this provision, if substantially all of the assets of a business are purchased the new owner will be liable for any unpaid sales taxes (and many state laws also cover unpaid payroll taxes) of the business. Several states, including Michigan, Pennsylvania and Texas have allowed the provision to apply to unpaid corporate income tax (the Franchise Tax in Texas). With any purchase of a business, even with an asset purchase, it is a good idea to get a tax clearance letter. Insisting on a right of restitution is a good idea, too, but it still could leave you holding the bag until the restitution is recovered from the seller.
   
6. I am contemplating having my corporation (a regular corporation) pay for my key-man life insurance. Is there any way to deduct the premium payments?

   If the insurance is owned and controlled by you individually, the corporate payment of the premiums will be deductible by the corporation as compensation. The payment of the premiums will be income to you (subject to withholding) and will be subject to payroll taxes. If the policy is owned and controlled by the corporation, the payment of the premiums is not deductible and is not included in your income.
   

7. I am the sole shareholder of an S corporation. I have a bad habit of always filing the return late. I just heard there is now a potential penalty for late filing of the S corporation return. Is what I heard true?
   
   As part of the Mortgage Forgiveness Debt Relief Act of 2007, there is a new failure to file penalty for S corporations. The penalty is $85 per shareholder per month for up to 12 months. I would strongly recommend that if you will not file the S corporation return on time (by March 15 generally for calendar year corporations but March 17 for 2007 returns ) that you extend it and make sure that you file no later than the extended (September 15 for calendar year S corporations) due date.