Tax Roundup, 3/30/16: IRA blows up after investing in closely-held business. And: S corporation loan basis!

March 30th, 2016 by Joe Kristan


No Walnut STAnother IRA-owned business disaster. 
We’ve noted the dangers of using your IRA as the owner of your closely-held business. A Tax Court Case yesterday illustrates the dangers.

The married taxpayers rolled over funds from their retirement plans to IRAs, and then used them to fund a new corporation, which in turn bought the assets of another corporation. Part of the purchase was debt-funded, and the couple guaranteed the loan.

Tax Court Judge Marvel found that a prohibited transaction resulted, disqualifying the IRA and triggering a $180,000 deficiency:

In closing, petitioners’ participation in the prohibited transactions on or about June 18, 2003, caused petitioners’ IRAs to cease to be IRAs as of the first day of petitioners’ taxable year in which the prohibited transactions occurred. See sec. 408(e)(2)(A). Furthermore, petitioners are deemed to have received distributions on that first day of amounts equaling the fair market values (on the first day) of the assets in petitioners’ IRAs as of that first day… We also hold that petitioners are liable for the 10% additional tax set forth in section 72(t)(1) with respect to the $432,076.41, because neither petitioner was 59-1/2 years of age or older during 2003.

Using your IRA to fund your business is playing with fire.

Cite: Thiessen, 146 T.C. No. 7

 

BitcoinHow loans to your S corporation can give you basisWe talked yesterday about how S corporation stock basis can enable stockholders to deduct losses. Even if you are out of stock basis, the stockholders might still be able to take a loss — if they have loaned money to the S corporation.

This comes up most often with multiple owner S corporations. You might have one owner who can’t fund capital contributions, or who is passive and can’t use more losses. The other owner might still want to deduct his share of losses; that owner can loan money to the corporation and get a deductible loss.

There are drawbacks. If you repay the loan before the S corporation has earned back the deducted loss, the repayment will trigger taxable income.

EXAMPLE: Joe is an owner of Joebwan Inc., an S corporation. He is out of stock basis at the end of 2015, so he loans the company $30,000 in December 2015 to enable him to deduct his $25,000 share of corporate losses on his 1040. That leaves him $5,000 basis in his loan.

In January 2016, a customer pays an overdue bill, enabling Joebwan Inc. to pay back the $30,000 advance. The company breaks even in 2016.

Unfortunately for Joe, he has $25,000 gain on the repayment in January 2016; because the corporation had no taxable income, Joe’s basis wasn’t restored before repayment.

Making a new loan at the end of 2016 doesn’t fix this result. Only income does. If Joe’s share of 2016 income had been $30,000, it would have restored the entire $25,000 loss to his loan basis, and he would have had no gain.

Some things to know about debt basis:

-Only loans directly to the corporation from the shareholder work; debt guarantees do not provide S corporation basis.

-If there is gain on the loan repayment, the income is capital gain if the loan is documented with a note; the gain is ordinary if it is for “open account” debt, where no note documents the loan terms.

Complex rules govern “open account” debt repayments, causing taxable gain in unexpected situations.

This is another of our irregular series of 2016 filing season tips, running through the April 18 filing deadline.

 

20120906-1Taxing you to lure and subsidize your competitors. Mason City pork plant snags $15M in state incentives (Donnelle Eller, Des Moines Register):

A proposed $240 million pork processing plant in Mason City received approval for nearly $15 million in state incentives.

The Iowa Economic Development  Authority Board Tuesday agreed to provide Prestage Foods of Iowa nearly $11.5 million in tax incentives, plus $3.3 million in job-training assistance.

It may shock you to know that Iowa already has pork packing plants, ones that opened without getting “nearly $15 million in state incentives.” I’m sure they are thrilled to see their taxes go to fund a competitor.

 

Paul Neiffer, Danger, Will Robinson. Paul explains how a $1 difference income can trigger thousands of dollars of taxes. For health!

Jason Dinesen, Beware of the Deadlines on Amended Tax Returns.

Robert Wood, CEO Faces 5 Years For Spending $6.8M Withheld IRS Employment Taxes. And he still has to find $6.8 million to repay the IRS.

William Perez, Reviews of 18 Tax Preparation Software Programs

Kay Bell, Film industry’s willingness to sacrifice tax breaks helps defeat Georgia’s anti-gay marriage law. They would have taken some other state’s tax breaks instead, those noble filmmakers.

Keith Fogg, The Eleventh Circuit Requires IRS to Hold a Hearing Prior to Making a Trust Fund Recovery Penalty Assessment if Proposed Responsible Officer Makes Timely Request (Procedurally Taxing).

TaxGrrrl, IRS Encourages Taxpayers To Check Refund Status Online (Millions Already Have)

 

20140508-1

 

Howard Gleckman, Cruz and Trump Would Slash Taxes on New Business Investment, But Cruz Would Cut Them More (TaxVox).

TaxProf, The IRS Scandal, Day 1056

 

Career Corner. That Time an Accounting Firm Recruiter Told Me That My Personality Sucked (Leona May, Going Concern). Reminds me of the time the first guy at the job interview spray-painted an “X” on the back of my jacket.

 

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