Posts Tagged ‘basis’

Tax Roundup, 3/29/16: How you figure S corporation stock basis. And: Cronyism!

Tuesday, March 29th, 2016 by Joe Kristan

capitol burning 10904Cronyism 95, Taxpayers 1. The bill to provide a refundable tax credit — that is, a subsidy run through tax returns — for “bio-renewable chemical production” flew through the Iowa House of Representatives yesterday. Only Bruce Hunter (D-Des Moines) voted against SF 2300 in the house. He joins three Senate Democrats (Bolkcom, Quirmbach and Dearden) as the only opposition in the General Assembly to a classic bit of central planning through the tax law.

Iowa already has 24 economic development credits, budgeted to cost taxpayers $277 million in the coming fiscal year. Apparently we needed one more.

Rep. Hunter and Sen. Quirmbach cast two of the three votes against the disastrous Film Tax Credit Program. With a $10 million cap, at least this mistake will cost less than the film fiasco.

Other coverage:

O. Kay Henderson, Biochemical tax credit gains legislative approval, headed to governor

Erin Murphy, Renewable chemical tax credit in Iowa advances closer to final approval

 

S-SidewalkBasis: the first hurdle for determining your deductible S corporation lossYesterday we outlined the unholy trinity of rules restricting losses from pass-through activities: Basis, the at-risk rules, and the passive loss rules. Today we’ll talk a little bit more about S corporation stock basis. Tomorrow will talk about how you can use loans to your S corporation to get basis for deductions, and Thursday we will talk about how the rules are a little different for partnerships.

S corporation basis changes every year.

–It starts with your initial investment in your S corporation stock.

-It is increased by your share of taxable income and deductible expenses, as reported in lines 1-12 of the 1120-S K-1.

-It is increased by tax-exempt income (like municipal bond income) and reduced bypermanently non-deductible expenses (like the 50% non-deductible portion of meals and entertainment expenses); these are reported on line 16 of the 1120S K-1.  If you have a business that generates depletion deductions, factor your “excess depletion” from 1120S K-1 line 15c.

– It is increased by capital contributions, which appear nowhere on the 1120S K-1.

– It is reduced by distributions, which are on line 16 of the 1120-S K-1.

If your losses exceed your basis, your losses are limited to your basis.   If you have multiple deduction items, you have to prorate them to fit your basis.

For example, Assume you started 2015 with $3,000 in basis in your S corporation shares.  You have a K-1 line 1 loss of 9,000, line 4 interest income of $2,000, and a charitable contribution passing through on line 12 (code A) of $1,000.

You have $5,000 in basis to deduct your $10,000 in in expenses – the opening $3,000 in basis plus the positive $2,000 interest income.  You pro-rate the $10,000 expenses — you can (potentially) deduct $4,500 of line 1 loss and $500 of charitable contributions.  The remaining deductions carry forward until you increase your basis via contributions, loans, or future income. I say “potentially” because you still have to clear the “at-risk” and “passive loss” hurdles.

Many S corporation tax prep programs generate helpful basis and deductible loss schedules. Not all preparers do this, though, and even when they do, they are only as good as their starting information.  If the preparer doesn’t know what you paid for your stock, the schedules can’t be correct. Ultimately, it’s up to taxpayers to track their own S corporation stock basis.

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

For more information on loss limitations from pass-throughs, check out Peter Reilly’s 2014 post Through The Hoops.

 

20160329-1

 

TaxGrrrl, Walmart Gets Big Win Over Puerto Rico: No More ‘Walmart Tax’. Puerto Rico’s desperate revenue grabs are a preview of what states like California and Illinois will soon face.

Robert Wood, IRS Admits Audit Chance Is Small — And Dropping Like A Rock. They’re busy with other things.

Stuart Bassin, Sixth Circuit Requires IRS to Disclose Return Information of Non-Parties in Tea Party Exempt Organization Litigation (Procedurally Taxing). “The Government can continue fighting, but that seems to be an uphill battle and a battle which may produce further precedent that the Service will not like.”

Peter Reilly, Estate Denied Discounts For Marketable Security Family Limited Partnership. “This decision makes me nervous about getting discounts for any family limited partnership that consists solely of marketable securities.”

 

Jack TownsendGuest Blog: IRS FOIA Request Unveils Previously Undisclosed Estate Tax National Policy for Offshore Disclosures

Kay Bell, Which 2016 presidential candidate will cut your tax bill?

 

Scott Drenkard, A Very Short Primer on Tax Nexus, Apportionment, and Throwback Rule (Tax Policy Blog). “The best run down of these concepts can be found in our 2015 edition of Location Matters: The State Tax Costs of Doing Business.”

Stuart Gibson, Information Exchange: Bonanza for Tax Administrators, Temptation for Hackers (Tax Analysts Blog). “While many countries outside the U.S. first reacted negatively to this massive information grab, some soon began to realize the value of coordinated information exchange. They realized, as the old saying goes, ‘if you can’t beat ‘em, join ‘em.'”

Renu Zaretsky, Tax Day is around the corner, and the IRS can take your call! Today’s TaxVox headline roundup covers the eternal IRS complaints of underfunding, the DOA Obama budget tax proposals, and the subsidies Michigan paid for “Batman v. Superman,” because Michigan has solved all of its problems.

 

TaxProf, The IRS Scandal, Day 1055.

News from the Profession. AICPA and CIMA Putting This New Thing to Members for a Vote (Caleb Newquist, Going Concern).

 

Share

Tax Roundup, 3/28/16: Can I deduct that K-1 loss now, later, or never?

Monday, March 28th, 2016 by Joe Kristan

20161120s k-1 cornerBasis, At-Risk, Passive. The Schedule K-1 forms issued to owners of S corporations and partnerships might be the most confusing of the information returns we use to compute our 1040s. That’s because they can embody a lot of obscure tax law that goes into determining how partnership and S corporation income is taxed.

Partnerships and S corporations are “pass-through entities.” That means they normally don’t pay tax on their income. I instead “passes through” to the tax returns of their owners, the partners and shareholders. The owners report the income — and they also deduct the losses. But when they deduct the losses can be very confusing.

Search engine queries related to K-1 losses are one of the Tax Update’s biggest traffic sources, so it seems wise to give the Googlers what they want. Today we will give an overview of the three hurdles taxpayers must clear before they can deduct a K-1 loss. In the coming days we will spend a little more time on each hurdle, and I will update this post with links to those posts, but today we’ll stick to the big picture.

Start with your basis. The tax law first requires you to have enough “basis” in your partnership interest or S corporation stock (or debt, sometimes) to deduct the loss. If you start the year with $1,000 in basis, you have the potential to deduct $1,000 of losses — if you clear the next two hurdles. But if you don’t have basis, you go no further with your loss.

“Basis” can be complicated, but in most cases, it starts with your investment in the pass-through entity. It is increased by income and further investments, and decreased by losses and distributions.

Is your basis “at-risk”? The at-risk rules sometimes seem like a historical curiosity, like gas lines or 8-track tapes. They were enacted in the Ford Administration to attack that era’s mass-marketed tax shelters. But while obscure, they still count.

They add an additional requirement to the rules that require you to have basis to take a loss. They add a rule requiring that basis to be “at-risk.” While some of the rules can be obscure and arbitrary, the basic idea is that if you can’t really lose your own money on the deal, you shouldn’t be allowed a loss, except to the extent the deal generates income in the future. It also treats loans from some related parties or others with interests in the deal as not “at-risk.”

Is your loss “passive?” If you clear the first two hurdles, you still have to contend with the “passive loss” rules. These were enacted to fight the tax shelters of the 1980s by deferring “passive” losses until the taxpayer has “passive” income, or until the “passive activity” (still my favorite tax oxymoron) is sold. Whether an activity is “passive” is usually determined based on how much time you spend during the year working in it. Rental activities are automatically passive for taxpayers other than “real estate” professionals.

Updates in the series:

3/29/16: How you figure S corporation stock basis

How loans to your S corporation can give you basis.

This is another of our irregular series of 2016 filing season tips. We’ll be doing these right up through the April 18 deadline. 

20160328-2

 

 

Andrew Mitchel, Section 911 Housing Cost Amounts Updated for 2016:

Code §911(a) allows a qualified individual to elect to exclude from gross income an “Exclusion Amount” related to foreign earned income and a “Housing Cost Amount.” The Exclusion Amount for 2016 is $101,300.

Mr. Mitchel goes on to explain the more complicated housing cost amount.

Kay Bell, Problems with prepaid card tax refunds. “But there’s one big problem with these cards. Tax crooks absolutely love them”

Jason Dinesen, Glossary: Iowa Tuition & Textbook Credit. “Almost any expense counts toward the credit.”

Kyle Pomerleau, Why We Should Care About More Than Just Distributional Tables. “Growth, distribution, and revenue are all important aspects of tax policy. If we only focus on one, we miss important policy nuances.”

TaxGrrrl, IRS Commissioner Admits IRS Isn’t A Favorite, Talks Tax Refunds, Budget & Taxpayer Services:

Noting that “the IRS is not anyone’s favorite government institution, and we will not win any popularity contests, especially in an election year,” the Commissioner went on to share that a recent poll indicated that 12% of taxpayers liked Russia’s Vladimir Putin better than the IRS.

A Tax Notes story ($link) about Koskinen’s speech quotes him as saying, “But don’t look for a shot of me on CNN, without a shirt, riding a horse.” I don’t think anyone would actually look for such a thing.

 

half-mast

 

David Henderson, To Address the Top One Percent, Allow Competition (Econlog, quoting Jonathan Rockwell):

For lawyers, doctors, and dentists– three of the most over-represented occupations in the top 1 percent–state-level lobbying from professional associations has blocked efforts to expand the supply of qualified workers who could do many of the “professional” job tasks for less pay.

The IRS and its friends in the national tax prep franchise firms want to do the same thing with the tax prep business via their push for preparer regulation.

 

TaxProf, The IRS Scandal, Day 1052Day 1053Day 1054. The Day 1053 link is to It’s Been 513 Days Since Any Big 3 Network Has Touched the IRS Scandal. It’s been longer than that since I’ve watched a Big 3 network news show.

Peter Reilly, Sixth Circuit Looking To Protect Taxpayers From IRS Not IRS From Taxpayers. Peter still thinks the IRS is being picked on.

 

What are these “results” of which you speak? Results Only Work Environments (Caleb Newquist, Going Concern).

 

 

Share

Does my share of partnership debt let me deduct K-1 losses?

Thursday, April 11th, 2013 by Joe Kristan

As we discussed yesterday, you need basis in your partnership or S corporation interest to deduct losses on your K-1.  There are other hurdles, but if you don’t have basis, you’re done.  Your basis generally starts with your investment in your interest; it’s increased by income items reported on your K-1, and by additional investments, and it’s decreased by your share of losses, expenses and distributions.

With partnerships, there is an extra wrinkle: your basis also includes your share of debts owed by the partnership.  That’s not true for S corporations.  But how do you know what your share of partnership debt is?

A properly-prepared partnership return will report each partners share of debt on part K of Schedule K-1:

20110413-2.png

 

You can add the amounts on these lines to the amount of basis you have otherwise to determine your basis in your partnership interest.  The ability to use this “inside” partnership debt as basis is a reason why partners run out of basis less often than S corporation owners do.

Why do partners get basis in partnership borrowing while S corporation don’t get basis in corporate borrowing?  Because partnership tax in many ways treats the partnership as a combination of its members, rather than a separate entity.  If you buy a $100,000 house with $20,000 in cash and $80,000 in borrowed money, your basis in the house if you sell it is still $100,000.  Getting basis for partnership borrowings is a logical extension of this idea if you just have two people borrowing together.

You may have noticed the “Partner’s capital account analysis” on part L of the K-1, just below the debt thing:

20110413-3.png

Can you use this as a shortcut to figuring your basis?  Usually not. Sometimes you can if the “Tax basis” box is checked, but even that is unreliable.  It’s much safer to track your own basis year-by-year based on your original and subsequent investments, distributions and K-1 items.

So you have basis?  Congratulations, but you still might not be able to deduct your losses.  Your basis still has to be “at-risk,” and your losses might be non-deductible if they are “passive.”

On the edge of your seat?  Check back tomorrow for another 2013 filing season tip!

Share

How much K-1 loss can I deduct? Start with your basis.

Wednesday, April 10th, 2013 by Joe Kristan

20130410-1If search statistics for the Tax Update are any indication, one of the most pressing issues for people who end up here is “why can’t I deduct my K-1 loss?”

There are three main reasons why your S corporation or partnership loss might be non-deductible:

1. You can’t deduct losses in excess of your basis.
2. Even if you have basis to deduct losses, the basis has to be “at-risk,” and
3. Even if the basis is “at-risk,” losses that are “passive” might be limited.

So how do you know your basis?

 

COMPONENTS OF BASIS

– Your basis starts with your initial investment in your ownership interest.

-It is increased by taxable income and deductible expenses, as reported in lines 1-12 of the 1120-S K-1, or lines 1-13 of the 1065 K-1.

-It is increased by tax-exempt income (like municipal bond income) and reduced by permanently non-deductible expenses (like the 50% non-deductible portion of meals and entertainment expenses); these are reported on line 16 of the 1120S K-1 and line 18 of the 1065 K-1.  If you have a business that generates depletion deductions, your “excess depletion” from 1120S K-1 line 15c, or line 20 of your partnership K-1, also reduces your basis.

– It is increased by capital contributions, which appear nowhere on the 1120S K-1 and on Part I, line L of the 1065 K-1.

– It is reduced by distributions, which are on line 16 of the 1120-S K-1 and Line 19 of the 1065 K-1.

If your losses exceed your basis, your losses are limited to your basis.   If you have multiple deduction items, you have to prorate them to fit your basis.

Example

Lets say you have an S corporation interest that starts 2010 with $3,000 in basis.  You have a K-1 line 1 loss of 9,000, line 4 interest income of $2,000, and a charitable contribution passing through on line 12 (code A) of $1,000.

You have $5,000 in basis to deduct your $10,000 in in expenses – the opening $3,000 in basis plus the positive $2,000 interest income.  You pro-rate the $10,000 expenses — you can (potentially) deduct $4,500 of line 1 loss and $500 of charitable contributions.  The remaining deductions carry forward until you increase your basis via contributions, loans, or future income.

Even if you have basis, that just gets you past one hurdle.  Your basis still has to be “at-risk,” and you can’t deduct a loss that’s “passive.”  More on that later this week.

This is, of course, a simple example.  It gets more complicated if there are distributions during the year (they count first), and if there are non-deductible expenses, like meals and entertainment.   Shareholders can count direct loans they make to an S corporation in basis — but not borrowings by the S corporation from anybody else, and not guarantees of S corporation debt.  You can learn more about S corporation basis at the IRS web site.

Come back for more 2013 filing season tips through April 15!

Share

Understanding your partnership K-1: can you deduct that loss?

Tuesday, April 3rd, 2012 by Joe Kristan

Flickr image by naotakem under Creative Commons licenseLife is always easier when you’re making money.  The problems of prosperity are much more pleasant than those of poverty.  That’s also true when your partnership is losing money. 

Yesterday we showed how a K-1 works.  Today we cover the special problems of K-1s that show losses.  Just as the owners of a partnership pay income taxes on partnership income, they get to deduct the losses, too, right?

It depends.  There are three hurdles that a K-1 recipient has to clear to deduct K-1 losses. 

The first hurdle is basis. Your basis starts with your investment in the K-1 business; it is increased by income and cash contributions and decreased by losses and distributions. In partnerships  — but not S corporations — an owner’s basis may include a portion of the company’s borrowings from third parties.

Unfortunately, the K-1s do a poor job of tracking owner basis.  You, or your tax preparer, may need to keep a separate schedule of your basis to determine whether you might deduct K-1 losses.

The next hurdle is whether your basis is “at-risk.” The “at-risk” rules are an obscure leftover of tax shelter battles of the 1970s, but they still apply.They can be very complex, but their gist is that if your basis is attributable to borrowings that are “non-recourse” — that you aren’t personally liable for — it is not “at risk,” and losses attributable to that basis must be deferred. You may also not be considered “at risk” for related-party borrowing, especially if you borrow from your business or from a business associate to fund your ownership in the K-1 issuer.

Partnership K-1s provide some useful information in determining whether you have an “at-risk” issue. If you have losses in excess of your cash investment, and your share of debt on the K-1 part K is on the “nonrecourse” line, you are likely to have an at-risk problem. You will have to go to IRS Form 6198 to figure out whether you have to defer losses under the at-risk rules.

The “passive loss rules” are the final hurdle for deducting K-1 losses. These rules were enacted in 1986 to shut down that era’s tax shelters. If you have “passive” losses in excess of “passive” income, you have to defer the losses until you have passive income in a future year, or until you dispose of the “passive activity” in a taxable transaction.

A loss is “passive” if you don’t “materially participate” in the business. There are a number of tests that you can use to determine whether you materially participate, but the most common is working at least 500 hours in the business in a year. 

Real estate rental is passive by law, unless you are a “qualifying real property professional.”  Special rules keep you from generating “passive” income to allow you to deduct passive losses. For example, land rent and most investment income is not considered “passive” under these rules. The passive loss limitation is computed on Form 8582.

These rules are complicated, even for tax pros. If you aren’t sure where you stand, and the losses are significant to you, get in touch with a tax pro.

A version of this item previously appeared at IowaBiz.com.

Share

S corporation losses: you snooze, you lose.

Thursday, March 22nd, 2012 by Joe Kristan

Losing money stinks, but it can have its consolations at tax time.  That’s one reason S corporations are popular.  S corporation shareholders can, under the right circumstances, deduct corporate losses on their 1040s.  But one of the “right circumstances” is that the shareholder has to have “basis” in their S corporation stock.  Basis starts with your investment in the corporation, and  it is increased by capital contributions and your share of S corporation income.  It is reduced by losses and distributions — even if you don’t bother to deduct them on your 1040.

A couple, the Barnses, learned that lesson the hard way in Tax Court yesterday.  Their business, Whitney Restaurants, Inc., struggled over a period of years, with recurring losses and continuing capital contributions.  The Tax Court summarizes their K-1 loss and capital contribution history:

For reasons not clear in the case, the sharholders didn’t deduct any of the 1996 loss of $136,228.50 on their 1997 1040, even though they had made a big capital contribution; they instead reported income of $22,283.  The taxpayers thought that meant they had an extra basis of $158,511.50 to enable them to deduct losses in 2003.  The IRS thought otherwise and disallowed the $123,006.07 in losses (they used pennies on their returns?).

The Tax Court sided with the IRS, ruling that with S corporation losses, it’s use them or lose them.  First, the court ruled that reporting S corporation income you didn’t earn doesn’t increase your basis:

The IRS takes the position that the Barneses’ basis in the Whitney stock did not increase by $22,282 in 1996. It contends that, under section 1367, there is no upward basis adjustment for amounts that are erroneously reported by the shareholder as passthrough income but that do not correspond to the shareholder’s actual pro rata share of passthrough income. The Barneses seem to argue, without citation of authority, that the upward basis adjustment was appropriate because they reported $22,282 in passthrough income on their 1996 return. We agree with the position of the IRS.

What about the loss they didn’t use?

Basis is reduced, the IRS contends, even if the shareholder does not actually claim the passthrough losses on his or her return. Therefore, the IRS argues, the Barneses’ basis was reduced by $136,228.50 for 1997 because of the $136,228.50 loss suspended in 1996 that the Barneses were required to take into account as a deduction for 1997.27 The Barneses’ basis calculations did not incorporate this reduction. Therefore, says the IRS, their basis calculations for subsequent years were inaccurate.

The Barneses offer a different interpretation of the applicable statutes. Section 1367(a)(2)(B), they argue, requires basis reduction only for losses that the S corporation shareholder reports on his or her tax return and claims as a deduction when calculating tax liability. …

The plain language of sections 1366 and 1367 supports the IRS’s interpretation.

The moral?  Somebody – either the taxpayers or their preparers — dropped the ball in 1996 and 1997.  Maybe they thought that they couldn’t use the losses then so they would “save” them until they were needed.  It doesn’t work that way.  If you can deduct your K-1 losses in the year they happen, that’s when you have to deduct them.

Cite: Barnes, T.C. Memo. 2012-80

UPDATE: Anthony Nitti has more.

Share

Don’t know what grandpa paid for that farm land he gave you?

Monday, December 19th, 2011 by Joe Kristan

If you receive property as a gift, you basis for determining gain or loss on a sale is normally it’s cost to the property donor. That can be hard to track down. Paul Neiffer has some practical thoughts on tracking down land basis.

Share

Tax Court: pledge of stock of one S corporation doesn’t create “at-risk” basis for related S corporation

Wednesday, September 7th, 2011 by Joe Kristan

If you want to deduct losses from your S corporation, you need to clear three hurdles:
– You have to have basis in your S corporation stock or debt from a personal loan to the S corporation;
– The basis has to be “at-risk”; and
– You have to not run afoul of the “passive loss” rules.
A Michigan couple tripped over the first two tests in Tax Court last week, leaving them with a $16 million deficiency. We talked about the basis problems yesterday, so let’s hit the “at-risk” problem.
The taxpayers borrowed money to fund “Alpine,” a money-losing S corporation. They pledged the stock of another S corporation, “RFB,” as security on the loan.
Congress enacted the “at-risk” rules in the Ford administration to shut down that era’s tax shelters. Taxpayers would enter equipment leasing partnerships financed with debt secured by the equipment. If the loan went unpaid, the lender could repossess the equipment, but the partners weren’t personally on the hook. The at-risk rules fought this by saying a pledge of other property “used in the business” does not by itself create at-risk basis. A pledge of personal property not used in the business, in contrast, does make you “at-risk.” While Congress wasn’t willing to let equipment lessors cross-collateralize their lease property to get at-risk basis, it was willing to let taxpayers deduct losses if they put their personal assets on the line.
The Tax Court held that in this case the RFB stock was “property used in the business” because it had business ties to Alpine (citations omitted):

Pledged property must be “unrelated to the business” if it is to be included in the taxpayer’s at-risk amount. The Alpine entities were formed by petitioner to expand RFB’s existing cellular networks. RFB also used some of Alpine’s digital licenses to provide digital service to RFB’s analog network areas. RFB then allocated income from the licenses back to Alpine. The RFB stock is related to the Alpine entities.

The Tax Court held that even if the RFB stock were unrelated, the taxpayers were not really on the hook for the loans in any case.
The at-risk rules are obscure and often overlooked. That can be dangerous. You don’t have to have a business set up as a tax shelter to run into these rules. Any time you have financing where you are not personally on the hook for a loan, except in third-party real estate financing, these rules can bite. Even if you personally liable for a loan, the at-risk rules can still apply if the loan is from a related party, especially a party connected with the business.
Cite: Broz, 137 T.C. No. 5
Related:
Brother-sister S corporations can be bad basis news
S CORPORATION SHAREHOLDER LOSES BASIS APPEAL

Share

Brother-sister S corporations can be bad basis news

Tuesday, September 6th, 2011 by Joe Kristan

When you lose money in your business and can’t deduct it, that’s a bad thing. When your losses come from an S corporation, you can only deduct your losses to the extent you have basis in S corporation stock, or in loans you have made to the S corporation.
When taxpayers have two or more S corporations, they can find themselves running out of basis in one of the corporations while having plenty of basis in the other one doing them no good. For a Michigan couple, this turned out to be a $16 million problem.
The couple was in the cell phone licensing business. They had two S corporations, RFB and Alpine. Things went badly, and the owners and the corporations all went into bankruptcy in 2003 — but only after the couple got a $16 million tax benefit from Alpine losses. The IRS disallowed the losses, both because of basis limits and for other issues.
The couple said they had enough basis in Alpine to deduct their losses because they borrowed money from RFB and loaned it to Alpine. The tax law doesn’t like “back-to-back” loans from an S corporation to its owners to another S corporation. In the Oren case, the owner of the Dart Trucking business lost millions of tax deductions funded that way. While such loans theoretically can work, they have to meet a stiff test, as the Tax Court explains (citations omitted):

When the taxpayer claims debt basis through payments made by an entity related to the taxpayer and then from the taxpayer to the S corporation (back-to-back loans), the taxpayer must prove that the related entity was acting on behalf of the taxpayer and that the taxpayer was the actual lender to the S corporation. If the taxpayer is a mere conduit and if the transfer of funds was in substance a loan from the related entity to the S corporation, the Court will apply the step transaction doctrine and ignore the taxpayer’s participation.

The Tax Court said the taxpayers failed here. They said the paperwork didn’t show that the funds were first lent by RFB to the owners, and then back to Alpine; instead the loan ran from RFB to Alpine, bypassing the owners and therefore giving them no basis:

Petitioner never substituted himself as “lender” in the place of RFB. There is no evidence that the Alpine entities were indebted to petitioner rather than to RFB. Interest on the unsecured notes accrued and was added to the outstanding loan balances…
Moreover, the payments petitioners made to Alpine from the CoBank loan proceeds were characterized as advances, rather than loan distributions, at the time the payments were made. The payments were recharacterized as loans only through yearend reclassifying journal entries and other documents. The loan ran from RFB to the Alpine entities, and petitioners served as a mere conduit for the funds. Accordingly, we find that the Alpine entities were not directly indebted to petitioners.

This was bad news for the taxpayers. Most of these problems might have been avoided if the taxpayers had used an S corporation holding company structure, with an S corporation parent holding two electing “Qualified S corporation Subsidiaries,” or “Q-Subs.” These combine all of your basis in one place, eliminating the problem of shifting basis between corporations.
The taxpayers still had one argument left, though, which we’ll address tomorrow.
Cite: Broz, 137 T.C. No. 5.

Share

Farm Buildings and 100% bonus depreciation

Friday, August 12th, 2011 by Joe Kristan

Paul Neiffer summarizes:

If a farmer is constructing a new building and the construction commenced after September 8, 2010 and is finished before January 1, 2012, then the total cost is allowed to be 100% depreciated during 2011. If the building construction commenced before September 9, 2010 and was finished in 2011, then only 50% bonus depreciation is allowed (unless you can segregate out some components that can be 100% bonus depreciated this year).

This only applies to farm buildings. Non-farm residential or commercial real estate is not eligible for bonus depreciation, with a very limited exception for some restaurant buildings. If the bonus depreciation generates a loss, the usual rules limiting losses may apply — basis limitations, at-risk rules, and the passive activity loss rules.

Share