Business

An often-explored theme of this blog is the frequency with which similarly situated owners of similarly situated closely held business, facing a similar set of economic circumstances, and presented with a similar set of choices, will repeat the mistakes made by countless taxpayers before them.[i]

Rational behavior? Does the answer depend upon the taxpayer’s appetite for risk-taking? Being an entrepreneur necessarily involves some exposure to risk. However, there is a difference between the calculated risk that an intelligent business owner knowingly takes, on the one hand, and the risk that comes with negligently disregarding well-established tax principles, on the other.
Continue Reading Unreasonable Compensation As Constructive Dividend, Redux

Withdrawing Value

In general, the owners of a closely held business have several options by which they may withdraw money from the business without selling their interest in the business.[i] For example, an owner may:

  • Receive compensation for services rendered to the business (an employee-employer, or other service-provider/service-recipient, relationship);
  • Receive rent or royalty for allowing the business to use the owner’s property (a lessor-lessee/licensor-licensee relationship);
  • Sell property to the business (a seller-buyer relationship); and
  • Borrow money from the business (a debtor-creditor relationship).

…
Continue Reading Current Partnership Distributions: When Do You Figure Your Basis?

Withdrawing Value

Any tax adviser who has represented closely held businesses and their owners long enough realizes there are certain recurring themes that transcend the otherwise unique characteristics of the industry of which the business is a part, the market or geographic region in which the business operates, the overall economic climate, and even the personal traits of its owners.

Last week we explored a variation on one of these themes – the withdrawal of value from a closely held business on a tax-efficient basis – when we reviewed several of the factors that the owners of a closely held business (organized as a C corporation[i]) should take into account in setting the amount of compensation the business should pay the owners in exchange for their services while preserving the corporation’s ability to deduct such payments in determining its taxable income.[ii]…

Continue Reading Constructive Dividends and The Closely Held C Corporation

Double Tax

The shareholders of C corporations have long sought legitimate operational and transactional structures by which they may reduce the double tax hit that is realized when such a corporation distributes its after-tax operating profits or its after-tax sale proceeds to its shareholders.[i]…
Continue Reading Reasonable Compensation Meets The Principal Shareholder of a C Corp

“It’s My Business”

The owner of a closely held business will often find it difficult to distinguish the business from their own person. That is certainly true for a sole proprietorship. In many cases, unfortunately, the owner’s perspective toward the business does not change appreciably when the business is owned and operated by a legal entity, such as a corporation or a limited liability company, the equity in which is owned by, well, the “owner.”…
Continue Reading Me, Myself, and I: Tax Liabilities and Dealing with One’s Own Business

“Would I ever leave this company? Look, I’m all about loyalty. In fact, I feel like part of what I’m being paid for here is my loyalty. But if there were somewhere else that valued loyalty more highly, I’m going wherever they value loyalty the most.” Dwight Schrute, The Office

Retaining Talent

A constant challenge in the world of the closely held business, and one that is likely to become even more daunting as Baby Boomers continue to pass their businesses along to younger family members[i] – many of whom may share the older generation’s appreciation for living well, but neither its drive nor its business acumen – is the retention of key employees who are able to operate the business profitably in spite of changes in ownership or leadership within the family and the business.
Continue Reading Deferring the Tax Hit on a Grant Equity to an Employee – Are You Prepared to Enforce the Forfeiture Provision?

8-5-20

Movement Toward Tax Increases

You may have read last week that Democrats on the Senate Budget Committee announced they had reached a deal on a budget resolution that will enable them to bypass Senate Republicans on the way to enacting most of the “social infrastructure” programs called for under the President’s American Families Plan.[i] Significantly, after the announcement, Senator Manchin, who is not a member of the Committee, indicated he would not stand in the way of the budget resolution, thereby practically assuring its passage and the start of the reconciliation budget process.…

Continue Reading Employee-Shareholders, Reasonable Compensation And Employment Taxes

Head-Scratchers

The Code is chock-full of provisions that will challenge the intellectual capacity, not to mention the patience, of most tax professionals. The complexity of these rules does not arise out of some sadistic intent on the part of Congress, the Treasury, or the IRS to torment taxpayers and their advisers;[i] rather, it is often a reaction to, and a direct function of, the complicated, multifaceted schemes that many of those very same taxpayers and advisers devise with the intent of reducing the taxpayer’s income tax liability.…

Continue Reading Bona Fide Intercompany Loan – Are you Sure?

Not Good

As Mr. Biden settled into the White House, and as the Democrats began planning how to best utilize their slim Congressional majority to enact and pay for their sweeping legislative agenda, the principal concern among most owners of successful closely held businesses was Mr. Biden’s proposal to almost double the federal income tax rate applicable to the long-term capital gains recognized by an individual taxpayer.[i]…

Continue Reading Tax Increases in Sight? Time to Sell the Business? Focus on Economics

2-5-21

I Read the News Today

Much of today’s news is dominated by the future of the Administration’s broadly defined infrastructure plan. Discussions among “those in the know” inevitably turn into debates over the wisdom of pursuing the bipartisan legislative approach favored by centrists from both sides of the political divide as contrasted with the “go-it-alone through reconciliation” budget process being pushed by the more progressive wing of the President’s party.…

Continue Reading Tax Changes in the Offing? “Close Scrutiny” of Business Owners’ Economic Benefits Remains a Constant