AGH
TAX TIME
TEACHINGS
AGH Top
Ten
• A suite of web-based products that allow users
to conduct business with the IRS electronically
• Online tools available:
• Tax return transcripts
• Tax account transcripts
• Taxpayer ID number
matching
• 2848s no longer allowed to be submitted via
E-services
• Research and development credit – To be
extended again along with its simplified
method
• IC-DISCs – An export tax incentive in the
form of permanent tax savings on the
commission
• Micro-captive insurance companies – Only
insure the risks of their owners via a
contingency fund built with pre-tax dollars
• Windsor v. United
States (same-sex
couples)
• Ruling applies to all
provisions where
marriage is a factor
federal tax
• Applies regardless of whether the couple lives in a
state that recognizes same-sex marriage or not
• For KS, joint returns not allowed for same-sex
couples
Frank Aragona Trust v. Commissioner
(Trustee and nonpassive flow-through entities)
• Trust held and developed rental and other real
estate properties
• Services performed by the individual trustees
on behalf of the trust were considered personal
services performed by the trust.
• PAL limitations and NIIT not applicable
Joanne Wandry v. Commissioner
(fixed-dollar formula clauses in estate planning)
• Shifts the valuation burden somewhat to the IRS
• No stated % transferred
• Rather, shares/units transferred which equal a set
value
• Marginal rates can approach 50%
• Deductions to consider:
• Home office
• Tax preparation fees
• Business use of cell phones
• Related for-AGI deductions:
• Self-employed health insurance premiums
• Retirement plan contributions
For closely held C corporations:
• C corporation income is taxed twice: Once when
earned at the corporate level, and again when
paid as dividends at the shareholder level. Thus,
they tend to pay large salaries, resulting in one
level of taxation. IRS might reclassify as
disguised dividends.
• Courts consider 5 Elliotts’ factors: Employee role,
comparisons to other companies, condition of the
company, internal consistency of compensation,
and consideration by hypothetical independent
investor.
For S corporations:
• Compensation is subject to payroll taxes; K-1
pass-through profits are not.
• Compensation is subject to income tax;
distributions aren’t.
• Kansas law changes make distributions even
more attractive than W2 income.
• Courts consider 5 Elliotts’ factors here, too.
• Estimated as 28% of
portfolio assets!
• Some alternative
investments:
• Master Limited
Partnerships
• Publicly Traded
Partnerships
• Option trading and
futures contracts
Tangible Asset and Repair Study (TARS)
• Impact any business that acquires, produces, or
improves property, regardless of size
• Safe harbors for small taxpayers (STSH)
• AFS, UOP, RMSH, BAR – a few common
acronyms to know
• Cost segregations studies are useful.
• Paid on the lesser of net investment income (NII) or the amount
by which modified AGI exceeds a threshold
•
NII EQUALS
•
Interest, dividends, annuities, royalties, and rents, PLUS
•
Income from a business that is (1) passive or (2) trades in financial
instruments and commodities, PLUS
•
Net gain attributable to the disposition of certain property (generally
passive) LESS
•
Deductions (after other limitations such as the 2% floor and itemized
deductions “haircut”) such as investment interest expense, investment
expenses, state and foreign income taxes, and other properly allocable
deductions
Ways to Reduce NII
•
Investing in tax-exempt investments, gifting, and
maximizing retirement plan contributions
•
Increase involvement in passive activities or group
them with nonpassive ones
Grouping of activities under Sec. 469
• A one-time regrouping is allowed in the first year in which a
taxpayer has both NII and MAGI in excess of threshold.
• Activities may be grouped into a single activity if they
comprise an appropriate economic unit based on 5 factors.
• Benefit of this regrouping is that it makes it easier to
satisfy the 500-hour test and be nonpassive with regard to
the entire group which is considered a single activity.
Three hoops to deducting flow-through
entity losses:
Basis
At-risk basis
• Code Sec. 465 limits a taxpayer’s deductible loss to
the amount at risk (loss of $) with respect to an activity
•
Form 6198
PAL rules
•
S Corporations
•
Are pass-through entities with income taxed once
•
Are tax-efficient whether the owners want to sell or retain their ownership
through retirement and management transition
•
C corporations incur a double tax
•
Despite year-to-year being similar, there are tax benefits upon
sale of an S corporation over a C corporation.
•
Even in a stock transaction, C corporation owners pay more tax
than S corporation owners.
•
A potential BIG tax would be a consideration in making
the S election.
Cathy Mitchell
Manager,
Corporate Finance Services
Allen, Gibbs & Houlik, L.C.
Cathy.Mitchell@aghlc.com
(316) 267-7231
Circular 230 Disclosure
Pursuant to federal regulations imposed on practitioners who render tax advice ("Circular 230"), we are required to
inform you that any discussion of tax matters contained herein (including any attachments unless expressly stated
otherwise) is not intended or written to be tax advice, and cannot be relied upon as such, nor can it be used for the
purpose of: (i) avoiding tax penalties that may be imposed by the IRS or states, or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed herein. If you seek definitive tax advice on a
matter, please request a written tax memorandum from your AGH tax advisor.