The following links will take you to the corresponding articles:
Material Participation Key to Deducting LLC and LLP Losses
The PAL Rules
The 7 Tests
Make Sure Your Company Is Prepared For Any Disaster
Tax Planning Critical When Buying a Business
2 Ways Spouse-owned Businesses Can Reduce Their Self-employment Tax Bill
Timing Strategies Could Become More Powerful in 2017, Depending on What Happens With Tax Reform
Thorough Due Diligence Can Protect Your Acquisition From Fraud
Material participation key to deducting LLC and LLP losses
If your business is a limited liability company (LLC) or a limited liability partnership (LLP), you know that these structures offer liability protection and flexibility as well as tax advantages. But they once also had a significant tax disadvantage: The IRS used to treat all LLC and LLP owners as limited partners for purposes of the passive activity loss (PAL) rules, which can result in negative tax consequences. Fortunately, these days LLC and LLP owners can be treated as general partners, which means they can meet any one of seven “material participation” tests to avoid passive treatment.
The PAL rules
The PAL rules prohibit taxpayers from offsetting losses from passive business activities (such as limited partnerships or rental properties) against nonpassive income (such as wages, interest, dividends and capital gains). Disallowed losses may be carried forward to future years and deducted from passive income or recovered when the passive business interest is sold.
There are two types of passive activities: 1) trade or business activities in which you don’t materially participate during the year, and 2) rental activities, even if you do materially participate (unless you qualify as a “real estate professional” for federal tax purposes).
The 7 tests
Material participation in this context means participation on a “regular, continuous and substantial” basis. Unless you’re a limited partner, you’re deemed to materially participate in a business activity if you meet just one of seven tests:
1. You participate in the activity at least 500 hours during the year.
2. Your participation constitutes substantially all of the participation for the year by anyone, including nonowners.
3.You participate more than 100 hours and as much or more than any other person.
4. The activity is a “significant participation activity” — that is, you participate more than 100 hours — but you participate less than one or more other people yet your.participation in all of your significant participation activities for the year totals more than 500 hours.
5. You materially participated in the activity for any five of the preceding 10 tax years.
6.The activity is a personal service activity in which you materially participated in any three previous tax years.
7. Regardless of the number of hours, based on all the facts and circumstances, you participate in the activity on a regular, continuous and substantial basis.
The rules are more restrictive for limited partners, who can establish material participation only by satisfying tests 1, 5 or 6.
In many cases, meeting one of the material participation tests will require diligently tracking every hour spent on your activities associated with that business. Questions about the material participation tests? Contact us.
Make Sure Your Company Is Prepared For Any Disaster
What could stop your company from operating for a day, a month or a year? A flood or fire? Perhaps a key supplier shuts down temporarily or permanently. Or maybe a hacker or technical problem crashes your website or you suddenly lose power. Whatever the potential cause might be, every business needs a disaster recovery plan.
Get started by brainstorming as many scenarios as possible that could devastate your business. The operative word there is "your." Every company faces distinctive threats related to its size, location(s), and products or services.
There are some constants to consider, however. Seek out alternative suppliers who could fill in for your current ones if necessary. Moreover, identify a strong IT consulting firm with disaster recovery capabilities and have them a phone call away.
The Right Voice
Another critical factor during and after a crisis is communication, both internal and external. You and most of your management team will need to concentrate on restoring operations, so appoint one manager or other employee with necessary skills to keep stakeholders abreast of your recovery progress. These parties include:
- Staff members and their families,
- Banks and other financial stakeholders, and
- Local authorities and community leaders (as appropriate).
He or she should be prepared to spread the word through channels such as your company's voice mail, email, website, and even traditional and social media.
Whatever you do, don't expect to create a disaster recovery plan and then toss it on a shelf. Revisit the plan at least annually, looking for shortcomings.
You'll also want to keep your plan fresh in the minds of your employees. Be sure that everyone - including new hires - knows exactly what to do by holding regular meetings on the subject or even conducting an occasional surprise drill. And be prepared to coordinate with fire, police and government officials who might be able to offer assistance during a catastrophe.
Thoughts and Concepts
These are just a few thoughts and concepts to consider when designing, implementing and updating your company's disaster recovery plan. Our firm can help you identify both risks and cost-effective ways to safeguard your employees and assets.
Tax planning critical when buying a business
If you acquire a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.
Complacency can be costly
During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. So it’s common for the parties to wrangle over taxes at this stage.
Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. Tax management during integration can also help your company capture synergies more quickly and efficiently.
You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.
Merging accounting functions
One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments. There’s no time to waste: You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your acquisition.
To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system.
The tax consequences of M&A decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.
2 ways spouse-owned businesses can reduce their self-employment tax bill
If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)
For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.
Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.
1. Establish that you don’t have a spouse-owned partnership
While the IRS creates the impression that involvement by both spouses in an unincorporated businessautomatically creates a partnership for federal tax purposes, in many cases, it will have a tough time making the argument — especially when:
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Steven Rose has been in the public practice of accounting since 1975. He obtained his Bachelor of Science, Business Administration degree with a major in Accounting from the State University of New York at Oswego.
Steven was on the audit and accounting staff of several full service CPA firms servicing small to medium businesses and individuals which included all of their accounting and tax needs. In November of 1997, he founded his own full service accounting firm with the idea of providing the full resources expected from a large accounting firm while maintaining the personal touch and fee structure of a small firm.
Steven is married to Marilynn, has a son, Greg, and a daughter, Elizabeth. He currently lives in Massapequa Park, New York.