Question:

I have formed an LLC for the purpose of giving away my home via an essay contest a la ‘Spitfire Grill’. An entry fee will be collected from entrants, and, at the end of the contest, the LLC will purchase the home from me, the individual, to award to the winner. The purchase price will be determined by the number of entry fees collected, less the expenses of the contest (advertising, promotion, mailing, web site, etc.). I will manage all aspects of the contest, but will not pay myself. My expectation is that the LLC will net zero after ‘giving away’ the purchased home and paying contest expenses. I need to apply for an EIN to open a bank account under the LLC to deposit fees and pay expenses. Question: Does it matter whether I go with the default ‘Disregarded Entity’ designation, or should I file to have the status changed to an S-Corp?

Answer:

You might want to make sure of your footing on charging a fee for entry into drawing for a prize. You may not be able to legally do that. Of course that won’t be adjudicated until after you give away the title to your house. Any or all of the losing contestants may file a lawsuit and get their money back.

Fee based contest are considered gambling, and are highly regulated or downright illegal in most states.

Under the plan you have neither will protect you on the liability side and you do not expect to have any profits, so taxes is not an issue.

Since both options are equally flawed it would make little difference.

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I am a CDL driver (not owner operator) and my boss is holding my money from my every check on my social security, Medicare and taxes. I should open my own corporation to get full amount. Is it possible for him to pay me full amount even without corporation as long as I’m paying taxes individually? If not, what is he risking if he will pay full amount anyway?

Answer:

You should operate as all the most successful businesses do and do your trucking as a corporation, your taxes would be far lower. He could pay you the full amount with no risk.

His potential liability if he does not withhold the payroll taxes . . .

If you don’t pay the taxes and the IRS classifies you as a “common-law” employee he would have to pay all the back taxes, penalties of 50% and interest.

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Both seller and buyer have a list of sale allocation (furniture and fixtures, personal property, and goodwill). Seller (me) did not dissolve the original corporation, however, the DBA name and operations were transferred to the buyer/  I had to leave the corporation open to collect on previous (large) land installment sale.  I do have a no compete agreement and I continue to work for the buyer at the present time.  I am changing my entity type to not reflect the current business sold.  How do I show the goodwill allocation proceeds on the 1120 return for 2007 (an extension was filed)? Future returns will mostly have interest income from the installment portion of this sale and  the previous land installment sale.  I now pay myself salary and pay taxes for such on a personal level and I pay taxes on the interest income on the corporate level.  I would change to an S corp, but I was told my original sale may become taxable immediately, even though I still receive payments.

Answer:

You are stuck with opposing problems that can’t be solved well with a single corporation.

Right now you are in the best position as a Real corporation for the sale of your business, lower taxes, better deductions, fewer audits.

As you move forward, the corporation that you have now, as it is structured would pay higher taxes on the passive income (interest in your case). You would be deemed a personal holding company.

If you are looking for the best tax treatment you can’t get it from simply making a single switch.

If you want to call, I can give you a starting point to understand where you are and where you can be.

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Question:

I have a close friend who’s small business is probably not going to make it. They are incorporated. A company they were doing business with never paid them and they are trying to recover. They owe a lot in monthly sales tax to the IRS. Are they going to have to pay this back if they go out of business? They live in Washington state.

Answer:

Sales tax is not collected by the IRS, it is collected by the local business license authority and the penalties are stiff for not paying the collected sales taxes. You see, sales tax was never the businesses money. It was the governments money directly, that your friend had the obligation to deliver to the business license department.

Pay this one at all costs.

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I want to set-up a c-corp for my commissions. I currently am salaried and do other work for the company. I will also be doing sales in addition. Is there any conflict of interest by putting all my commissions in a c-corp while retaining my salary for my other job? I will have another client in 2 months that I will sell for also, and want to put those commissions in the c-corp also. Do you see any IRS or other problems with this?

Answer:

Nope, you are intelligently choosing to do business as a Real Corporation. As long as you live by the rules the IRS has laid out, there is absolutely no problem. In fact you will be less likely to be audited because you chose to do business as a real Corporation.

Congratulations, and I hope I had some part in encouraging you to run your business as all of the most successful businesses do.

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I have an SBA loan on my business property under S-Corporation. The loan is in the amount of $500K; suppose I do a short sell on the property for $400K and suppose the lender forgives the debt of $100K and issues a 1099-C. What would be my tax liabilities?

Answer:

The loan does not directly figure into the tax liability.

What is your basis in the property?

If you bought the property for $200,000 and depreciated by $50,000 then you have a $200,000 gain, and $50,000 of recaptured income. The recapture will be taxed at your prevailing income tax rate. The gain would be taxed as either short term or long term.

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I recently bought a home in Florida and my husband owns a home in Wisconsin. Can we (as a married couple) be residents of different states?( I want to be a Florida resident and my husband a Wisconsin resident for tax benefits.)

Answer: 

Well it is theoretically possible, however, married or single is not the determinant. Job, length of stay, etc. is.

If you have a job, a drivers license, or stay in a state for 6 months you are a resident. If you are in a state more than 30 consecutive days, most have requirements that you register for a drivers license.

So can you claim, that you do not stay in Wisconsin for 30 consecutive days, while you husband can claim he does not do so in Florida?

Do you earn no money in Wisconsin, while he earns no money in Florida? Are you willing to give up the $250,000 exemption in cap gain savings on the Wisconsin house, and your husband give it up on the Florida residence?

And if found driving in Wisconsin on a Fl Drivers License what is the penalty? How many times do you think you can be charged with that before it is not worth the work?

You didn’t mention what type of work each of you do? Are you employees or do you have your own business? If you have your own business there may be easier ways to handle the tax issues, while getting FAR greater savings than trying to avoid a portion of the 7.9% Wisconsin tax.

Follow-up Question:

We are both retired. My husband who would be the Wisconsin resident has a pension. I, who would want to be the Florida resident, am on Social Security Disability. My name is on the Florida residence we bought and my husbands is on the Wisconsin residence. Neither of us earn any money in either state besides the mentioned disability and the pension. I would be in Florida more than Wisconsin and my hubby would be in Wisconsin more than Florida(over the required 6 months and 1 day.) I did check with motor vehicle and it doesn’t matter where you have your drivers license to drive in any state. I would of course have a Florida drivers license and my hubby would have the Wisconsin drivers license. Wisconsin doesn’t give a break on the property tax like Florida does on theirs, unless you are low income in Wisconsin. My husband would save on his hunting fees and he does every type of hunting in Wisconsin so it all adds up. I would help us save on the property tax bill in Florida . Does that help in justifying us to each be residents of a different state? That was my main question if it is legal to do just that. Thanks for any more insight you can give to this.

Follow-up Answer:

Like I said, if you can live by the rules then it is theoretically possible.

To clarify on the Drivers License. You certainly can drive in any state on any drivers license. It is an issue of the state having the right to require that anyone residing in their state have a local state issued drivers license. Most states have multiple requirements, one of which that anyone that is in the state for 30 or more consecutive days is no longer pass through, they are residing (or if you get a job it is immediate).

Second Follow-up Question:

What about all the people that are snowbirds to Florida, AZ , TX or wherever?? They are there much longer than 30 days (usually 3 to 4 months during the winter months). Never heard that people couldn’t drive in the winter months state while they were not visiting there. Now as far as the $250,000 exemption for selling a home don’t we own the homes separately and why couldn’t we just sell them when the time comes to do so? (We actually are going to at some point put the homes under our daughter s names(We have two daughters, so one home under one and one under the other)We would do it as life estates. Hope that helps with more info.

Second Follow-up Answer:

You can each sell you own home and get a $250,000 exemption. You cannot both sell one home and get a $500,000 exemption, or in theory sell both homes and get 1 million dollars in exemption.

As long as you die before 2010 then your daughters would get a step up in basis (they would owe no tax at sale) after 2010, it is up in the air. They may have to take the homes at your adjusted basis and pay taxes on the gain at sale.

As to the enforcement of registration laws, in this country as all laws, they are selectively enforced.

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A year ago my mother was diagnosed with lung cancer with the prognosis less than a year. A good friend of my mom’s and dad’s visited and told my dad in private of a female friend of hers that married a recently widowed man, indicating that it was a win win situation for both. He received a housekeeper and she received a permanent pension. He then proceeded to tell my mom and sister of the private conversation which upset my mom and rightly so.

My mom passed three months ago and my dad, with a prognosis of less than one year, has mentioned this mutual friend on many occasions such as marrying her in a joking way. He recently mentioned that he would think it appropriate if she received something from his will if she was his long term companion.

My question is if he did marry her, but not change his will, what would she be entitled to? He lives in a house that my mother struggled to pay off years ago so they would be debt free in addition to putting away a nice savings.

Putting aside our feelings toward this lady that betrayed my mother, we want to do what is best for my dad.

Answer:

She would be entitled to everything as a normal course of the law. Normally, the living spouse is entitled to all community assets. Children are normally in line after spouse. Even if there was a will she would have a strong case to contest it.

Your father could set up a living trust, separate the assets and put you children on as beneficiaries of the trust. But this has a lot of snags and loopholes that can get sticky.

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I would like to buy a second home for my in-law in Kentucky. Our principal residence is in Virginia. We plan to collect no rent for this second property but would like to understand if some rent should be collected to increase the possible tax deductions/losses that can be claimed for this property. Our annual income is approximately $180k and my mother has no annual income and is a resident alien.

Answer:

Is your annual income derived as a w-2 salary, or are you in business?

Contrary to common belief, deductions are not a prize to seek. Deductions are not good, deductions make bad things less bad. If you collect rent you will have the privilege of attaching Schedule E on your 1040 form. Increasing your potential for IRS audit 18.5 times. http://www.irs.gov/pub/irs-soi/07db09ex.xls

Some of the deductions you would not be eligible for would be your own time and efforts to repair, maintain, improve or manage the property, since you are not real estate professionals. At your AGI you may start to lose some of your personal deductions through “Phase Out” which would actually increase your taxes.

 I am not suggesting that buying a home for your mother to live in is bad, nor am I saying that you should not consider the business side. I AM saying that if you are looking at doing this business you should DO THAT Business as all the most successful businesses do, do it as a Corporation.

 Lower taxes, better deductions far fewer audits, easier separate book keeping, etc.

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2 members are starting an LLC, 1 Member is contributing $75k in cash as initial capital contribution for a 50% interest (capital, profits & loss) and the other is bringing to the LLC his background, experience and expertise in the industry and ability to get business for the LLC for his 50% interest (Capital, profits & loss).

I was told 2 different scenarios, 1 is that the 2nd members interest was a contribution of an intangible asset, goodwill, and would not result in any taxable income to him for his 50% capital interest.

 Then I was told, his expertise etc. was NOT considered good will, that he is actually obtaining his interest in the LLC for future services, therefore resulting in taxable income of $75k (value placed on his experience etc.) to him.

Which is the proper treatment and could you please reference a code section on reference for the correct treatment.

Answer:

Allow me to point out that capitalization is not a taxable event. So your contribution or his contribution will result in no tax due. Contributions set the “basis” for the ownership interest. Basis is used to calculate gain or loss when the ownership interest is sold.

So there is no tax event when you are starting up the business, period. The contributed value of the ownership interest creates no tax event while the business is operating, from year to year. The contributed value of the ownership interest may never create a taxable event.

The only time that the contributed value of the ownership interest would even have a tax consideration is when the owner either exchanges his ownership interest for money (sells it), or closes and liquidates the business and gets a distribution of assets (effectively selling the ownership interest back to the business to wind it up). At that point the difference between the adjusted basis and the sale price would either be a wash (same amount in and out), a gain (more came out than went in), or a loss, more went in than came out. Taxes would be calculated on that.

Now the basis does adjust, as the LLC is profitable, attributes tax liability to but does not give you money your basis is adjusted up.

Now I have to ask, why be an LLC? It provides no tax benefit over being the biggest of tax victims the General Partnership; It has been unsuccessful at limiting liability.

I know, your accountant said it was the best option, but did you really grill him on why? Because I am certain he will fall back to, it is the way that everyone is doing it.

 But let me ask you, is that really true? Who is everyone, certainly not any of the most successful businesses . . .

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