Recently, I had a client ask me to draft a vendor agreement. I drafted the agreement and sent it on to the vendor to review. When we received back the vendor’s revised agreement they had included a provision that would create a tax problem for my client. The provision essentially created a situation where my clients would bear a disproportionate tax burden from the proposed structure of the arrangement. In concept alone the structure was fine, but because we considered the tax consequences of the structure my client was able to avoid a tax burden that was not necessarily intended by the vendor. However, if we had not caught the tax this could have strained the relationship down the road when a tax bill came due to my client. This is just one example, but the tax burdens or benefits of business transactions is very important to consider. If you would like Paul to assist you with your business transaction contact Paul by clicking here.
A deceptively simple prospect in tax reporting is a US citizen working abroad. There are many pervasive misundertandings in this area of US tax law. Generally speaking, gross income, for US tax purposes, does not include the foreign earned income and a “housing cost amount” of a qualified individual who makes the appropriate exclusion election. A “qualified individual” has a “tax home” in a foreign country and meets one of two tests. Under the first test, the person must be a U.S. citizen who establishes that he has been a bona fide resident of a foreign country or countries for an continuous period within an entire taxable year. Under the second test a person must be a U.S. citizen or resident who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in that period. The election is made by completing Form 2555
, “Foreign Earned Income.” There are a great many nuances and circumstances to be considered in this area as well. If you need assistance in this area or help in preparing your tax return that deals with Foreign Earned Income, please contact Paul for assistance by clicking here.
Form 1042-S is, conceptually, much like Form 1099 for US citizens and persons residing in the US. The difference being that the payments reported on Form 1042-S are amounts paid to foreign persons (including persons presumed to be foreign) that are subject to withholding, even if no amount is deducted and withheld from the payment because of a treaty or Code exception to taxation or if any amount withheld was repaid to the payee. Examples of payments to foreign persons include, but are not limited to: Corporate distributions; Interest; Rents; Royalties; Compensation for independent personal services performed in the United States; Compensation for dependent personal services performed in the United States (but only if the beneficial owner is claiming treaty benefits); Annuities; Pension distributions and other deferred income; Most gambling winnings; Cancellation of indebtedness; Effectively connected income (effectively connected income to the US); Notional principal contract income; and REMIC excess inclusions. To state the obvious, each situation is different and should be carefully analyzed. If you or your business needs assistance preparing Form 1042-S and 1042, or just discussing withholding requirements, contact Paul by clicking here.
A common practice in closely held businesses is to insure the life or lives of key employees or owners. When Congress enacted the Pension Protection Act in 2006, some requirements were imposed on these types of life insurance arrangements. First written notice must be given to any employee on whom a company purchases life insurance. If the proper notice is not given, then the insurance proceeds likely will be considered taxable. Employers are also required to file IRS Form 8925 annually with regard to these insurance policies. It seems that failing to report the policy on Form 8925 will likely result in the proceeds being taxable even if the Company did not deduct the premiums on its tax return. There are specific issues to consider with employer-owned life insurance policies. If you or your business need advice in this area, click here to contact Paul to discuss the issue.
Maintaining capital accounts for state law purposes and for tax purposes is a very complicated task. State law and federal tax law can conflict creating disputes about ownership and allocation of profits, losses, and especially in the liquidation of assets. On the tax side of capital account maintenance, IRC Section 704(a) provides that the partnership agreement should generally control the allocation of each partner’s distributive share of partnership tax items. The Internal Revenue Code recognizes that allocating all partnership items on the same basis to each partner may alter the economic reality of business transactions in the partnership. Partnership taxation has a valuable non-tax feature that permits conducting business with flexibility in allocating and reallocating certain sources of income or expense in disproportionate, contingent, straight-forward, or even undetermined ratios. Thus, if a particular partner in a partnership bears or benefits from a disproportionate economic share of a particular transaction, the Internal Revenue Code recognizes that the partnership should be able to adjust the tax consequences in a corresponding manner. There is also, however, a requirement to maintain substantial economic effect in the allocations that are made. As you can see partnership agreements or operating agreement play an essential role in maintianing capital accounts. The state law aspects of capital accounts is where significant issues can arise in determining and maintaining capital accounts. Disproportionate distributions can, under the laws of many states, dilute a business owner’s ownership in the partnership or LLC. This will generally come as a surprise to most business owners. The point here is that capital account maintenance is an important piece of business entity structuring and operations. If you would like more information about whether your business entity needs to assistance in this area click here to contact Paul.
Selling or buying a business is an exciting time no matter which side of the transcation you stand. If you are selling a business you have worked hard to build your business and a new chapter of life is about to begin. If you’re buying a business your excitement comes from thinking about the potential of the road ahead and your future as an independent business owner. Regardless of which side of the transaction you are on there are important tax and legal considerations that require the attention of a professional. If you are thinking of buying a business or selling your business, contact Paul to make the transaction the most beneficial it can be. To contact Paul click here.
If you own a business with a partner or with several partners, you and your partners should have a buy/sell agreement. A buy-sell agreement is a contract between business partners that dictates who can buy a departing partner’s share of the business and establishes a fair price for the partner’s ownership interest. The agreement also describes how to determine a company’s value if all the owners decide to sell. Contact me to discuss if a buy/sell agreement is right for your situation.