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Contents

Illinois LLC

Sorry, Mike, but you are whistling past the graveyard, unless the LLC has elected to be taxed as a C corporation. An LLC taxed as a partnership is a flowthrough entity, and nonresident members are subject to tax on their distributive shares of its Illinois source income. A 1998 survey by the law firm of Baker & McKenzie found that virtually all states (other than those that impose no individual income taxes) assert jurisdiction to tax nonresident members of LLCs on source income, regardless of whether the member is a manager or a passive investor. As for Illinois, see ILCS § 5/305. Since the income arises from Illinois real property, it is clearly Illinois source income.

Your client can opt out of the withholding requirement by providing the LLC with a certificate stating that she will file returns and pay tax on her distributive shares of the LLC's income, and will be subject to personal jurisdiction in Illinois for the collection of taxes, interest and penalties. See ILCS § 5/709.5 [Eff. 1-11-08.].

There is an argument that an LLC is more like a corporation than like a partnership, and that states should not have jurisdiction to tax nonresident LLC members that are not managers but merely passive investors, any more than they tax the dividends paid to nonresident stockholders by Subchapter C corporations. However, so far, as far as I know, nobody has sustained that argument in court, and I doubt that your client wants to litigate the issue (which she would have to do). Withholding provisions such as the new Illinois law not only solve the practical problem of collecting the tax before the earnings leave the state in the form of a distribution, but also make an end run around the jurisdiction issue. States clearly do have authority to require an entity over which the state has jurisdiction to withhold tax on income distributed or distributable to a nonresident; that goes back to the venerable case of Wisconsin v. J. C. Penney, 311 U.S. 435 (1940). KatieJ 02:16, 14 May 2008 (CDT)

Rev Proc 84-35

MWPXYZ - regarding your post on Rev. Proc. 84-35, you noted that in your responses to the IRS, you include a copy of the Commissioner's disagreement with TIGTA's recommendation to remove the 84-35 safe harbor. I was able to find the TIGTA recommendation (reference 2005-30-048). However, I am not able to locate the IRS' official response. Will you provide me with a link to a pdf of the letter that you referred to?

I appreciate your help.

Pcc-cpa 18:07, 13 November 2008 (CST)

Working from home

Hi Mike,

I have worked from home since late 1981. Before that I worked for a few years for another CPA who also operated from a home office, so I have never practiced public accountancy except from a home office setting. At this point I am probably too old to change, and, except for the shortage of storage space, I have no desire to change. I plan to make some adjustments next year so that this office can continue to work for me. I will put in a back-up generator, a new sound-deadening ceiling, and either find more storage space or learn to use a scanner. Everyone's situation is unique, so while this is working for me it may not be great for you. Keeping business life separate enough from family life is difficult at times. My kid was always a distraction, but she is gone now. My husband had knee replacement and has been home for a month. Fortunately he will go back to work on Monday. My house does have a dedicated office with its own entrance, so that helps keep things somewhat separated. And I do have a separate office phone line. On the other hand, because I work alone, I answer the business phone whenever I am here. I take business calls on weekends all the time, but that is by choice. I do not answer the house line when I am working. My dog is allowed in the office but I can easily send him packing if someone is allergic to him or otherwise does not welcome his presence.

I encourage you to try to catch up on CPE and regain your licensed status. Forget about Peer Review and financial statements. I still do it, but there will come a time when I bow out of that part of the business and just be a tax CPA. Right now I do only a handful of compilations and reviews, but one of those clients is important to me. They may grow to the point of needing an audit, at which point they will need someone else for that. When they do I will probably give up the attest portion of accounting. I may be able to keep the tax prep aspect of that gig.

Hope this helps you with whatever concerns you are having about your home office.

CrowCPA

Forfeited Options - Tulsa Atty article

Thx for your contributions to my Option topic. I googled and could not easily find the April 2006 - 1234A article by the Tulsa Attorney. Could you please post a link for it?

Many Thanks,

Ozzie

Tulsa Article

Thanks so much, Mike - I found the Tulsa article!!

PS - I used to be certified in both FL and TX ... now only TX b/c FL required 10-20 hours per year of GAAP CPE ... YUK! I finally gave up FL.

Yes, I did blow it

Yeah, I blew it, and I feel doubly bad because it came out during the campaign that Palin had her taxes done at Block, not Liberty.CrowJD 16:26, 13 January 2009 (CST)

They are too smart

I think Philia and Natalie are too smart for me. They have some suspicion that I may not be a legitimate artist! CrowJD 16:53, 13 January 2009 (CST)

The ladies in question

Being from New Hampsha, you probably haven't seen too many of the Southern church ladies. Let's just say that they don't miss too many of the Wednesday night suppers over to the Church, if you get my meaning. They get prickly heat on their inner thighs, and I usually tell them to make ice cubes out of Hawaiian Punch, and keep their legs iced down to prevent the rash. CrowJD 10:36, 25 February 2009 (CST)

I wish I could

Mike, I wish I could practice medicine! I think they are enjoying a profit margin now that we can only dream about. It's not good for the Country though, as so many are uninsured. However, I do practice on myself, I keep a few (legal) herbal remedies on hand. Take care!CrowJD 18:09, 25 February 2009 (CST)

I agree

There's some debate on exactly what Jesus thought of himself. There seems to be some evidence that he thought the Kingdom of God would come in his lifetime. As you probably know, there is still some debate on what he meant by "Son of Man", etc., etc..

At any rate, I agree with you that Jesus certainly thought he had a unique relationship with the Father. It seems that Jesus had a personal relavation of his status over his lifetime.

Oh, by the way, you probably know that all the Gospels were written some time after Jesus died. The writers had a better sense of who Jesus was when they were written. Luke is my personal favorite. As you know, he was a friend of Pauls', and he wrote Acts also. So, you are very much seeing Jesus filtered through Paul in the Gospel of Luke.

Of course, I wasn't there to know exactly what Jesus said, and the Gospels paint somewhat different accounts, and reasonable people can disagree! CrowJD 11:44, 9 April 2009 (CDT)

Thank you very much for your comments.

Bramblett

I don't know much about the Bramblett scenario nor have I been through an audit involving that issue. My real estate clients either hold multiple residential rentals, malls or other commercial properties. The most complex thing they do is use 1031 exchanges. I also assist both tenants and landlords with triple net billings. I've never had a developer client. KathiJud 20:19, 4 November 2009 (CST)

Deer?

No, Mike, we went to Mexico! Someone has to stimulate the economy! We went for our 25th last year, and said, what the heck...let's go for our 26th! One of our deer partners dropped four by himself a couple weeks back, we were giving him ammo since we share meat! Next round in two weeks. But the wolves are back, so not hopeful if they stick around.

And then, and then...the frickin' tidal wave breaks again. Well, it's money, right? Where do you hunt? Jeff

S-corp distribution

Hi MWPXYZ,

I read the thread entitled "S-corp distribution return of capital" in which you commented on the OP with a lengthy example (I have attached your reply below). I appreciated your input but had a couple of questions as I ran your scenario in my Proseries tax software. If you don't mind here are my questions: I listed the $5,000 distribution in year two and reduced "capital stock", line 22 by $5,000; my retained earnings, however, was not <$9,000> as you suggested. The program combined both year's losses of $9,000 with the distribution of $5,000 to arrive at "retained earnings" of <$14,000>. I didn't see where this could be adjusted. Second, the AAA is now <$4,000> reflecting the distribution in excess of basis. The basis is however $0 due to the fact that the taxpayer paid capital gains tax on the excess distribution. In year number 3, which you did not account for, the AAA will begin with a negaive balance of $4,000, right? Does the AAA ever get adjusted besides with the profit or loss of the business? It seems like it's just a running total of the company's profitablitiy from one year to the next? Lastly, in your example, the shareholder started with $10,000. But in year two, he took out more than that between the losses and the distribution. Accordingly, the missing items in year two would be a cash asset of $0 and some type of other capital infusion (ie. a loan) for $4,000 correct. Just trying to wrap my mind around this and I think I got it pretty much.

Thank you very much for your time and expertise...

Gwh33

Since you aren't familiar with "S" corps and the "deadline" is near and I happen to have had to write a client in excruciating detail about this issue I offer the following adopted from a client letter: For example: Assuming stockholder started corporation with $10,000 investment. Corporation managed to have a tax loss of $3,000 in first year (2008) and lets’s assume $6,000 loss in 2009.

The stockholder’s basis in the stock is now $1,000. And you may have $10,000 on Schedule L line 22 and ($9,000) on line 24 (and M-2 line 8).

During 2009 let’s say there as a distribution/expenditure/cash withdrawal of $5,000. The 1120-S instructions say one cannot reduce AAA below 0 with a distribution/expenditure/cash withdrawal, but one must reduce capital accounts. According to the instructions you may reduce Schedule L Line 22 by $5,000.

Schedule L amounts are sometimes kept on a financial statements basis of accounting; but more often, for small corporations, kept on a tax basis of accounting. That being the case, Line 22 (and 23 and 25 for that matter) does not represent any legal capital amount, or stated capital, or original investment but merely tracks activity in the capital accounts. In a simple situation the accounts may track basis. But in the example above they do not. For in the example above the $5,000 distribution is in excess of the stockholder’s basis by $4,000 and this creates a capital gain that is reported on the stockholder’s Form 1040. Even though the stockholder believes he is getting a mere return of capital, the required use of prior losses have reduced his basis in his investment in the corporation.

Now he has a Line 22 of $5,000 and a Line 24 of ($9,000) BUT his basis is $0. This is due to the fact that his reporting a gain on the “distribution” increases his basis in the corporation by the amount of the gain. The capital section of the balance sheet no longer tracks basis.

A step further: If the distribution/expenditure/cash withdrawal above were $11,000, you run out of capital accounts to reduce so you have a negative amount on line 22 (and/or line 23). Intuitively, most accountants could not bring themselves to report such a thing and it would look odd and, perhaps, raise a red flag. I have a few personal opinions on the possibilities here.

One is report a negative amount. There I nothing in the instructions that forbid this. Remember, that the capital accounts do not represent basis or any legal amount such as stated capital etc..

A second alternative is toss the negative amount on line 25. This line appears to be for those who report Schedule L on a GAAP financial statement basis and need a place to put the “comprehensive income” items. Toss a negative amount on this line and perhaps the IRS computer will think the return was prepared by a very sophisticated preparer. Or, maybe not.

As JR1 alluded to, maybe this distribution/expenditure/cash withdrawal could be considered a loan to the stockholder. This avoids the capital gain treatment and the basis disconnect. However, if this account continually grows over the years, other problematic issues may come about during an IRS audit.

I have a client in the same situation as yours. However, on the GAAP financial statements the corporation has retained earnings. This makes the dividend treatment logical. The stockholder already owed the corporation a significant amount and we wanted to reduce that red flag. So the corporation had a distribution (that paid down the stockholder’s debt) that was less than retained earnings but was substantially in excess of basis. In this particular case my primary concern was not having the NH department of revenue declare the distribution as a dividend. So I reduced the AAA account, well below zero, by the distribution (and my software, UltraTax “lets” you do that). I must remember in the future that the negative AAA does NOT precisely represent losses unused due to basis limitations. BTW, the stockholder is in the 15% tax bracket, the capital gain is taxed at 0%, the basis in the stock is increased by the gain, and a troublesome stockholder loan is reduced without income tax or FICA tax liabilities.

A final alternative could be to report Schedule L on a GAAP basis.

BTW, if the corporation borrowed money to fund a “distribution” some of the interest may not be deductible by the corporation. See Notice 89-35.

If you keep these clients (stockholder and corporation), you should read Subchapter S and the regs and take a course in “S” corporations. You will need to track basis in the future.

North to Alaska

We bought a 31 foot Class C RV and are heading to Homer to catch the ferry to Kodiak Island where wife's grandson serves on the US Alex Haley out of that port....and who lives there with girlfriend/fiancee. We've been given times like 98 hours of driving.....on the way back it will be longer as we hope to see some country....leaving sometime in early to mid-July....he embarks Sept 1st....we would only stay with him perhaps 4-5 days. He wants to take us halibut fishing.

The RV is so we can take the dog, 80 lb Watson....we just came from AAA today with all sorts of guides

Death&Taxes 17:44, 27 April 2010 (CDT)

Hey Mike, thanks..

...for your help in the husband/wife/SMLLC restaurant discussion.

Harry Boscoe

notices on past years business tax for installment sale of NH business

Hi,

I have a client who sold a restaurant back in 2002 under the installment method. The selling price was 188K. The old tax preparer didn't tax them for the years that they received the installment payments based on the idea that the payments were under 50K. I realize that was probably not the most accurate way to handle things and that it is based on the original selling price ( or at least I believe that is how it done- perhaps you can clarify).

the client in question received some assessments from the state of NH.

My problem is in tryiing to answer these "billed unaudited assessments" correctly.

In reading the instructions on the forms it seems that you are entitled a a deduction for compnsation for personal services. and that in the case of a installemt sale or sale of business assets that part of this deductible compensation is 15% of the sales price as shown on forms 4797 or 6252 (provided you acted as the broker or agent and no other broker or agent was involved).. etc


in the case of an installemt sale do you get a 15% deduction for the total amount of the payments paid each year? HOw does that work?

Thanks in advance

Ted


Edited by Trillium to add this note: here's a link to discussion where this question was also posted: Discussion:NH- 1040 - and a note that the question just above was, of course, posted by user:TAX CAT. Trillium 10:06, 4 November 2010 (CDT)


Just want to say thank you for saving me about 30 extra minutes of work this morning! RE: http://taxalmanac.com/index.php/Discussion:Hiring_yourself_and_HIRE_act

Penalty Abatement Request

Hi Mike- I shared your fabulous form letter for penalty abatement with my online newsgroup. Can you possibly send me a link or a copy of the TIGTA report and the Commissioner' s disagreement memo (the one you mention in your letter?). That's the only document I couldn't find online. Thanks! Tax Writer 17:26, 24 January 2011 (UTC)

TIGTA/IRS memo

Hi Mike, sorry about that-- yes, please contact me though my profile/ website. I know that the e-mails will come through fine that way. I really appreciate it. Tax Writer 07:19, 26 January 2011 (UTC)

Partnership Late filing fee

Mike,

I am new to this website. I have found a wealth of information. I am currently doing taxes/bookkeeping/payroll part-time for about 9 years but am getting ready to quite possibly make it full-time in January. I was reading the forum on late filings for partnership returns and was wondering if you would have the list of documents you mentioned in a reply. If you would share them with me I would greatly appreciate the help. My e-mail address is madewelltaxservice@gmail.com. Thanks for any help you could provide. Have a great day.

Thanks Michael Madewell

Where to find the discussion on IRS audits w/questions about prior year S-corp flow-through items/basis

You recently participated in a discussion that needed to be relocated for administrative purposes. If you generally use the "my contributions" link (op right corner of your screen) to get back to your prior posts, you will not find the new location there.

You can get back to it via this link: Discussion:IRS_Audit_-_questioning_prior_year_S-corp_flow-through_items_&_basis#OCTOBER_2011_posts.

Trillium 21:48, 23 October 2011 (UTC)

Closing Construction Corps

Hey Mike, I got your message. With regards to the bonding issue-- I don't really know the answer to that one. At my current firm, we only have one major construction client that is affected by it. I will say, however, that when I was working for a larger firm, there were rumors that the bigger construction clients did some pretty shady stuff, and the larger the client, the more likely it was that the managing partners would "see no evil." I'm a big fan of lowering audit risk, though, and closing a messy corp is a great way to limit that kind of liability.--Tax Writer 23:25, 6 April 2012 (UTC)

Signing an amended W-2 and W-3

Aloha Mike, You mentioned that you have amended such forms prepared by a PEO or others. When you do that, who signs the W-3C - the PEO, the client or you? Thanks for your help. Paula Actionbsns 19:01, 9 September 2012 (UTC)

Thank you Mike.

appreciate your taking Roy's suggestion one step further.

provided good clarity for me.

thanks again, zl

162(k)

Mike, while I was re-thinking this Discussion:Does 162(k) apply to this acquisition?, I came across this one of yours from 2012 Discussion:Buy LLC interest and non-compete. In it, you asked whether 162(k) applied in your facts. I think not, but I am curious whether you feel your question was answered, and what exactly mad you raise it. Thanks. Podolin 01:53, 21 July 2013 (UTC)

Thanks for the reply

The rate of change in "income" tax laws exceeds my ability to create new brain cells. Join the club. Podolin 15:21, 22 July 2013 (UTC)

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