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Archives for June 2017

Common Questions Regarding Charitable Remainder Trusts

Do I have to take the income now?

You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you.

 

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates.

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

 

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized.

Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts.

 

Sounds great for me. But if I give away the asset, what about my children?

If you are concerned about replacing the value of the assets that you place into the charitable remainder trust for your children you can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust (ILIT) or what is referred to as a Wealth Replacement Trust. The trustee of the insurance trust could then purchase enough life insurance to replace the full value of the asset, or more, for your children or other beneficiaries from the income generated.

 

What are my income choices?

You can receive a fixed percentage of the trust assets which is referred to as a unitrust. The amount of your annual income will fluctuate depending on investment performance and the annual value of the trust.

The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income could increase assuming the value of the trust grows.

Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily marketable, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust’s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year.

You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.

Who can receive income from the trust?

Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives.

The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you receives it. Instead of lasting for someone’s lifetime, the trust can also exist for a set number of years (up to 20).

Do I have to take the income now?

No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates. (Our example is based on a 3.0% Section 7520 rate.) Generally, the higher the payout rate, the lower the deduction.

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

What kinds of assets are suitable?

The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won’t qualify, either, but you might consider paying off the loan.) Cash can also be used.

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.

 

For more information on charitable remainder trusts, or questions about getting CPA tax help in Charlotte, give us a call today.

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Tax Efficient Way to Purchase Home For Children

There are several ways to approach purchasing a second home for a child to temporarily live in. This is very common for parents with children who are going to college or transitioning into a new stage of life.

With simple planning, your children can gain immediate access to their home and you gain some new tax deductions.  You can rent the home that you purchase to your children and treat the property as a rental for tax purposes.  Courts have ruled that landlords can reduce their fair-market rent by 20% when renting to relatives, the lower rent reflects the savings in maintenance and management costs.

If your children cannot afford rent or you do not wish to burden them with a rent payment, you can claim fair market value rent and claim the amount they don’t pay as a gift from you to them.

This year the gift exclusion not subject to gift tax is $14,000 per taxpayer.  By renting the home to your children, you can take all of the common tax deductions and tax breaks associated with a rental property. You will still need to consider your income level and classification as an investor, but the tax benefits may be significant.  ( https://www.camusocpa.com/real-estate/real-estate-professional-status-a-cpas-perspective/#/)

At Camuso CPA we encourage families to plan their finances and taxes as a whole, considering the situations of all family members. We can help you with the transfer of property from parent to child with our Charlotte CPA services.

Camuso CPA PLLC  offers a series of services to develop and tailor a first-rate tax plan for your investment portfolio.  Reach out to our team regarding any questions about tax planning or retirement planning.

Contact Us Today: https://www.camusocpa.com/contact/#/

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Single Member LLC’s (SMLLC)

Single-Member LLC’s offer significant benefits to their owners’; whether such an entity is beneficial for your business depends on the details of your own personal situation.

As the name implies, a Single-Member LLC is a limited liability company with only one owner.

Single-Member LLCs protect personal assets from the liabilities associated with the business conducted by the LLC.  If you use an LLC to hold rental property, and a tenant sues that plaintiff will be required to sue the LLC, not you personally.  If the plaintiff wins the lawsuit, they will only be able to come after the assets owned by the LLC, not the owner.

Single-Member LLCs are treated as disregarded entities for federal income tax and its profit or loss will be reported on an individual member’s Schedule C as if it were a sole proprietorship. This will save the member time and money for tax preparation of tax returns, since the separate LLC is not required to file an additional tax return.

A Single-Member LLC is beneficial if you own one or only a few rental properties. As the number of your rental properties grow, it is easy and cost effective to establish a Multi-Member LLC or Multi-Entity Structure from this original structure.

Single-Member LLCs are beneficial for operational businesses that are just beginning or recently established.  As the business grows the Single-Member LLC can convert to an S-Corporation when your income reaches a level to justify the cost/benefit analysis: https://www.camusocpa.com/tax/is-s-corporation-structure-right-for-your-business/#/

https://www.youtube.com/watch?v=rmVq5OSDCNA

 

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for Charlotte business finance and tax planning, and get your company in orderhttps://www.camusocpa.com/contact/#/

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Steps to Establishing An LLC

The requirements for establishing an LLC can vary from state to state, but there are commonalities across states. The name of your LLC must comply with the rules of your state’s LLC division.

  • the name cannot be the same as the name of another LLC on file with the LLC office
  • the name must end with an LLC designator, such as “Limited Liability Company” or “Limited Company,” or an abbreviation of one of these phrases (such as “LLC,” “L.L.C.,” or “Ltd. Liability Co.”),
  • the name cannot include certain words prohibited by the state, such as Bank, Insurance, Corporation or City

You also must ensure that the name you choose does not violate another company’s trademark. Further, you will want to reserve the website domain for your new business entity and confirm that it is available.

After choosing a name, the next step is to prepare and file the articles of organization with your state’s LLC filing office.

You will be required to list the name and address of a person, usually one of the LLC members, who will act as your LLC’s registered agent which means the person designated to receive legal papers in any future lawsuit involving your LLC.

https://www.youtube.com/watch?v=ca2XWhNtajg

Operating agreements are not required to be filed with the LLC filing office and are rarely required by state law, but it is essential that you create one. In an LLC operating agreement, owners set out rules for the ownership and operation of the business.

A typical operating agreement includes:

  • the members’ percentage interests in the business
  • the members’ rights and responsibilities
  • the members’ voting power
  • how profits and losses will be allocated
  • how the LLC will be managed
  • rules for holding meetings and taking vote

Some states require the newly established company to publish a notice in a local newspaper, stating that you intend to form an LLC. Owners are required to publish the notice several times over a period of weeks and then submit an affidavit of publication to the LLC filing office.

After completing the steps above, owners must obtain the licenses and permits that all new businesses must have to operate. These may include a business license, a federal employer identification number, a sellers’ permit, or a zoning permit.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients. If you are setting up a business in Charlotte, you can save a lot of money enlisting our help establishing an LLC.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

 

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Tax Planning For S-Corporation Health Insurance Deductions

If you are a more than 2 percent shareholder of an S corporation, you must take the correct measures to capture a health insurance deduction.

The first step is for the S-corporation to pay the insurance company directly for the cost of the health insurance. Next, the S-corporation includes the cost of the health insurance as additional compensation to the shareholder-employee on the employee’s W-2 which is subject to income tax withholding but exempt from Social Security, Medicare, and unemployment taxes. The W-2-reported health insurance is treated as a cost of self-employed health insurance. This amount is deducted on page 1 of Form 1040.

This is an area where tax planning is imperative. The S-corporation must reimburse you for all medical insurance that you pay for yourself and your family. This includes Medicare and accident and health premiums paid to schools and athletic programs to cover your children.

S-corporation owners can pay health insurance costs personally. In this case, the owner must have the S corporation reimburse the cost of the insurance to the owner-employer to qualify for the health insurance tax deduction.

Taxpayers may have to pay payroll taxes on the amount included in wages for your insurance premiums If the corporation does not provide health insurance to your non-owner employees, then you are exposed to payroll taxes. If the corporation does provide health insurance to your non-owner employees, you are not exposed to payroll taxes. If the corporation has no other employees, you are not exposed to payroll taxes.

If you are eligible to participate in an employer-subsidized health plan maintained by either you or your spouse’s employer, you may not claim the self-employed health insurance deductions for the months when you were eligible to participate in an employer plan.

If a taxpayer pays for the health insurance themselves and does not submit it to the corporation, the  cost of health insurance becomes an itemized deduction suffering from both  the 10 percent of adjusted gross income floor and  the phaseout of itemized deductions, possibly completely eliminating the deduction.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

 

 

 

 

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Tax Planning for S-Corporation Fringe Benefits

S-corporation owners are disallowed certain fringe benefits. There are three methods taxpayers can use to deal with this loss of fringe benefits depending on the benefit. For fringe benefit purposes, S corporations have two types of employees:

  • Owners: Employees who own more than 2 percent of the S corporation’s stock
  • Non-owners: Employees who own 2 percent or less of the stock

If you are an owner-employee, you lose some of your fringe benefits. This is because the law treats owner-employees as if they were partners in a partnership which limits the fringe benefits that are available to partners.

For purposes of fringe benefits, the IRS treats your family as owning the same amount of stock that you do; this includes your spouse, children, grandchildren and parents.

If you are considered an owner you are not permitted to the following tax-free fringe benefits:

  • Amounts paid to an accident or health plan
  • Group term life insurance
  • Meals or lodging furnished for the employer’s convenience
  • Tax-free benefits provided under a cafeteria plan

The following fringe benefits are available to a partner in a partnership and, therefore, available to the more than 2 percent owner employee:

  • Employee achievement awards
  • Qualified group legal services plans
  • Educational assistance programs
  • Dependent care assistance programs
  • No-additional-cost services
  • Qualified employee discounts
  • Working condition fringe benefits
  • De minims fringe benefits
  • On-premises athletic facilities
  • Medical savings accounts

Taxpayers have three tax choices for how to treat the disallowed fringe benefits:

  • W-2 compensation to the owner-employee
  • Distribution to the owner-employee
  • Reimbursement by the owner-employee to the S corporation

W-2 Compensation

The S corporation may treat the disallowed fringe benefit as W-2 compensation to the owner-employee.  The corporation can deduct the fringe benefit as compensation to the owner-employee and the owner-employee will receive the fringe benefit as taxable compensation.

This is the most common approach when dealing with health insurance benefits.  The W-2 recognition of the S-corporation’s payment of the owner-employee’s health insurance is not subject to FICA or Medicare while W-2 recognition of the disallowed fringe benefits other than medical is subject to FICA and Medicare taxes.

As a result, this is not the most common approach on non-medical disallowed fringe benefits to prevent exposure to FICA and Medicare taxes.

 

 Distribution

The S corporation can also make disallowed fringe benefits a distribution by the corporation to the owner-employee. If this approach is utilized, the S corporation has no tax deduction and the owner-employee has no taxable income.

The disallowance of the fringe benefit  will trigger any additional loss because of payroll taxes. This is not advantageous for health insurance fringe benefits because the owner of the S corporation will lose the medical deduction on their personal tax return.

When there is only one-owner in the S corporation, there are no complications in using the distribution strategy for disallowed fringe benefits other than medical benefits. If the S corporation has multiple owners, the S corporation distributions need to avoid preferential dividend treatment that could create a second class of stock and terminate the S corporation’s election.

 

Reimburse the S Corporation

The final option for the owner-employee is to reimburse the corporation for the cost of the fringe benefits.  If the reimbursement is employed, the owner-employee pays for the fringe benefit personally. The reimbursement method avoids FICA and Medicare taxes and works for disallowed fringe benefits other than medical benefits.

S corporation owners who do not have previously taxed earnings in the S corporation adequate for a distribution should consider this method.  If you are using the reimbursement method, you need to ensure settlement by December 31 or record the outstanding amount as a loan receivable by the corporation from the owner-employee.

The loss of some fringe benefits with the S corporation status is a component that should be taken into consideration when analyzing which entity structure is best suited for your business needs.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

 

 

 

 

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How to Asses S-Corporation Tax Exposure to Built-In Gains

Built-In gain taxes apply to S Corporations that were once C-Corporations. If you never operated your business as a C corporation, your corporation will not be exposed to built-in gains tax.  Additionally, you face no built-in gains tax when you convert your S corporation to a C corporation since this tax applies only if you convert from C to S

The built-in gains concern many C-corporation owners who want to convert their business to an S-corporation. Built-in gains tax exposure depends on the book and fair market values of the assets in your C corporation. For some businesses, the built-in gains tax will be a big problem, for others it can pose virtually none at all.

If your corporation is exposed to built-in gains tax, your S corporation pays the built-in gains tax at the highest corporate rate. The percent of the gain remaining after payment of the built-in gains tax now comes to the shareholder via the S corporation, where the shareholder pays taxes at his or her personal rate.

The built-in gains tax is designed to prevent C corporation owners from avoiding corporate-level tax on the sale of assets by converting to an S corporation before making the sale.   Lawmakers responded to this strategy by enacting a punitive tax on S corporations that sell assets they owned while they were under C-corporation structure.

If you are going to convert your C corporation to an S corporation, you first need an appraisal, because appreciation that takes place after the conversion is not subject to the built-in gains tax. The burden of proof is on the taxpayer to prove the fair market value at the time of conversion.

The total amount of gain potentially subject to the built-in gains tax is the net unrealized built-in gain on all your C corporation’s assets. To reduce built-in gains taxes, taxpayers often sell built-in loss properties to offset built-in gain properties during the same taxable year.

Taxpayers face potential built-in gains taxes for ten years after the date of conversion from a C-Corporation to an S-Corporation. Another common tax planning strategy is to  wait eleven years to sell the old C-corporation assets to totally escape the built-in gains tax.

Be aware that the built-in gains tax applies if you liquidate your S corporation before the 10-year period expires, since liquidation is treated as a deemed sale of your assets.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

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Avoid Common Mistakes When Converting to an S Corporation

Your business must meet specific requirements when it operates as an S corporation. If you violate any of them, your S-corporation reverts into a C corporation for three years which will result in double taxation and potentially be a costly error:

  • The S corporation must be a domestic corporation.
  • The S corporation must have less than 100 shareholders
  • The shareholders can only be people, estates, and certain types of trusts
  • All stockholders must be U.S. residents
  • The S corporation can have only one class of stock

If you live in a community property state, your spouse may be an owner of the corporation whether the stock is in only one person’s name because of community property law. If your spouse is an owner, your spouse must meet the all the S-Corporation qualification requirements. Your spouse must consent to the S corporation election on Form 2553 and your spouse must be a US resident.

You can create an LLC and then convert that LLC into an S corporation by following “Check and Elect” procedures:

  • File IRS Form 8832 to check the box that converts your LLC to a C corporation
  • Then file Form 2553 to convert your C corporation into an S corporation

Taxpayers can make these elections within the first two months and fifteens days of the next year to have it effective on the first day of the year. In general, your business needs to meet the requirements for S-corporation status on the day it files the S corporation election. For a calendar-year business, this means it must file by March 15 to have the election effective on January 1. The business would be required to meet the requirements for S corporation status for the entire year, even the period before you filed the election. Business owners must also obtain the consent of everyone who held stock in your corporation for that year to complete the election.

Specific types of loans can have negative implications to S-Corporations status with the IRS. If business owners make the wrong type of loan to their S-corporation, the IRS will treat that loan as a second class of stock and disqualify the S corporation. If the loan is less than $10,000 and the corporation has a written promised to repay you in a reasonable amount of time the loan will not be treated as a second class of stock and the S-Corporation will maintain its status.

If you have a larger loan, your loan is not considered a second class of S if it meets the following requirements

  • The loan is in writing.
  • There is a firm deadline for repayment of the loan
  • You cannot convert the loan into stock
  • The repayment instrument fixes the interest rate so that the rate is outside your control

 

S-Corporations can have separate classes of stock, as long as the only difference between them is the voting rights of each class For example, you can create both voting stock and nonvoting stock, as long as all other aspects of the stock are the same.  This is useful if you want to give someone distributions but not let that person have any control over business decisions.  Nonvoting stock can be very useful tax planning tool if you want to give money to someone in a lower tax bracket, such as your retired parents. We cover this strategy in more detail in later articles.

If you previously operated your business as a C corporation, you face special issues when you convert to an S corporation. These can be complicated, and will be covered in later articles.

Below are some issues to keep in mind:

  • Built-in gains tax
  • Loss of tax attributes.
  • LIFO recapture.
  • Passive investment income

 

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.

Contact us today for financial and tax planning and get your finances in orderhttps://www.camusocpa.com/contact/#/

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Is S-Corporation Structure Right for Your Business?

Your choice of entity and tax treatment for your business is one of the first decisions that you will make regarding your company, and it should be with care. Like any business decision, the key to making the right choice is having the right information.

The first major step in choosing your tax treatment is selecting a business entity for your operations. You have four main choices:

  • Sole proprietorship
  • Partnership
  • C corporation
  • S corporation

To determine whether the S corporation is the right entity structure for your business, you have to know how it compares to your other options. The two main benefits of operating your business as an S-Corporation is relief from double taxation, and savings on employment taxes. If you are simply looking for liability protection, then single member LLC can be a less costly and complicated alternative.

If you own a C corporation, the government taxes both you and your corporation. First, the corporation pays income tax at corporate rates.  Second, you as a shareholder pay tax on the dividend you receive from the corporation.  S corporations pay taxes only once.  An S corporation is a pass-through entity, which means that the S corporation does not pay taxes.  Instead, the income, deductions, and tax credit items skip the layer of corporate tax and flow through to taxpayers via a K-1, onto their individual tax returns.

The main reason businesses or individuals choose an S-corporation tax structure is to realize tax savings on employment taxes. When you operate your business as an S corporation, you are both a corporate employee and a shareholder. As an employee, you receive a wage or salary to compensate you for the work you perform.  As a shareholder, you receive distributions for your ownership stake in your S corporation. The salary paid to you as an employee is subject to employment tax. Your shareholder distributions are not.  Since you set your own salary as the owner of the S-Corporation, you determine how much of the income generated by your business is subject to employment tax.

Tax planning and industry financial expertise is critical in this area. Setting your salary too low exposes you to risk of IRS examination which can result in payment of unpaid employment taxes and hefty penalties and interest.  Setting your salary too high leads overpaying taxes.  Over the course of your business’ life, the overpayments of tax and lost investment opportunities can cost you hundreds of thousands of dollars.

Monthly clients at Camuso CPA receive an annual in depth analysis of reasonable compensation.  Our team of CPA’s is constantly gathering support from every level of legislative and administrative tax authority. This is essential and should be offered by the CPA advising you. More on reasonable compensation studies here: http://bit.ly/CamusoRC

 

S corporations offer significant tax benefits to business owners and investors, but impose extra costs onto owners which must be considered when assessing the S-Corporation tax structure for your business.  To obtain the tax benefits of an S-corporation structure, you will have to work closely with a CPA during the year on tax planning to ensure you are taking the correct measures to minimize your taxes. As previously mentioned, an annual in depth analysis of reasonable compensation is required to substantiate your wage levels in the corporation. Additionally, S corporation tax returns are more time intensive and complex than a personal tax return and S corporations create extra tax-related paperwork each time you take money out of the corporation, so this is an additional administrative cost to consider.

All too often, we acquire clients at Camuso CPA who were oversold on the tax benefits of an S corporation, unaware of the additional associated costs, and are rushed into a costly entity structure. Be sure that your CPA or advisor can specially explain the costs and benefits to you before electing S corporation status for your business.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients.  Contact us today for financial and tax planning and get your finances in order: https://www.camusocpa.com/contact/#/

 

 

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