Owning and running a business means wearing many hats, including keeping a close eye on your payroll taxes. Here’s a real-life story that underscores the importance of vigilance.
Rodney Taylor trusted his corporation’s accounting to Robert Gard, CPA. Over several years, Gard embezzled between $1 million and $2 million, including funds meant for payroll taxes.
Despite Gard’s actions, Taylor was held responsible for settling the unpaid payroll taxes with the IRS as the business owner and “a responsible party” under tax law.
This case teaches a vital lesson: delegation is necessary in business, but you cannot delegate your legal responsibilities. Here are two proactive measures to help safeguard your business:
- Direct oversight: Ensure you personally receive payroll reports for initial review.
- Regular verification: Periodically confirm that payroll tax payments have been made via the IRS Electronic Federal Tax Payment System (EFTPS).
By incorporating these practices, you can significantly reduce the risk of embezzlement and ensure compliance with tax regulations, protecting your business’s financial health.
Selling Your Home to Your S Corporation
If you’re considering turning your home into a rental property, selling it to your S corporation can offer significant tax advantages.
Advantages of Selling to Your S Corporation
– Tax-free profit on the home sale: By selling your home to your S corporation, you can take advantage of the home-sale profit exclusion—up to $500,000 for married couples—assuming you meet the eligibility requirements.
– Higher depreciation deductions: The sale increases the depreciable basis of your property, leading to higher annual depreciation deductions.
Addressing Potential Concerns
– Property tax increase: The sale may lead to higher property taxes due to reassessment at current market value, but the overall tax savings and increased depreciation typically outweigh these costs.
– Homestead exemption loss: Converting your home to a rental property means losing any homestead exemption benefits, whether or not you sell to your S corporation. Therefore, this is not a disadvantage unique to the sale.
– Legitimacy of the transaction: Selling to your S corporation is a related-party transaction, but it is legitimate under tax law. The profit is treated as ordinary income, but if you can apply the home-sale exclusion, you avoid federal taxes on that income.
Steps to Implement
– Form an S corporation: Establish a separate S corporation to hold your former home as rental property.
– Get an appraisal: Obtain an independent appraisal to determine the fair market value of your home.
– Follow formal procedures: Use professional services to handle the title transfer and legal documentation, ensuring the sale reflects an arm’s-length transaction.
– Keep thorough records: Maintain detailed records to support the transaction’s legitimacy if the IRS investigates.
Conclusion
Selling your home to your S corporation before converting it to a rental property can offer substantial financial benefits. Despite the potential for increased property taxes, the tax savings and enhanced cash flow can result in a net positive financial outcome.
Home-Office Deduction Without Business Income?
You might have heard that you can’t claim a home-office deduction without business income. That’s a misconception. Here’s why:
Key Points
– Claim business deductions regardless of income: Even if your business didn’t generate income this year, you should still claim all business deductions. This might create a net operating loss, which can be carried forward to offset future taxable income.
– Claim home-office deduction without income: Home-office expenses that aren’t deductible this year can be carried forward to future years. This is particularly important for deducting business miles.
– Impact on business miles: If you don’t claim your home office as your principal place of business, trips to many business locations are considered personal miles. Claiming the home office simplifies this.
– File a tax return: Even without business income, file a tax return to claim these deductions and losses.
Action Steps
– Document your home office: Keep records proving your home office is your principal place of business.
– Claim all deductions: Even in loss years, ensure you claim all possible deductions.
Conclusion
A home office can provide substantial tax advantages, even when your business income is minimal or nonexistent. Position yourself to fully utilize these benefits now and in the future.
Tax Implications of Dissolving a Partnership
Considering winding down your partnership? Here’s what to expect in three common scenarios of dissolution.
Scenario 1: One Partner Buys Out the Others
When one partner buys out the others, the departing partners will likely recognize a capital gain or loss on their sale. The remaining partner’s new basis in the acquired assets becomes their foundation for a new business structure, whether as a sole proprietorship or another entity.
Scenario 2: Liquidation with Asset Sale
If the partnership liquidates by selling all assets and distributing cash, each partner must report their share of gains or losses on Schedule K-1. These gains could be taxed as long-term capital gains or ordinary income, depending on the asset type and depreciation recapture rules.
Scenario 3: Distributing Assets Directly to Partners
The most complex scenario involves directly distributing all assets to the partners. This can lead to varied tax outcomes based on asset type and each partner’s basis in the partnership. Gains may arise if “hot assets” like appreciated inventory or receivables are included.
General Considerations
– Tax forms: Regardless of the scenario, file a final partnership tax return (IRS Form 1065) and issue a final Schedule K-1 to each partner.
– State taxes: Be aware of potential state tax obligations.
– Passive losses: Liquidating the partnership may make suspended passive losses deductible.
Understanding these scenarios and planning accordingly can help mitigate tax burdens and streamline the dissolution process. If you have questions, don’t hesitate to contact me.
