Month: May 2022

You have heard the horror stories about mail sent to the IRS that remains unanswered for months. Reportedly, the IRS has mountains of unanswered mail pieces in storage trailers, waiting for IRS employees to process them.

Because the understaffed IRS is having so much trouble processing all the documents it receives, you need to protect yourself when you send an important tax filing due by a specific deadline.

If you can file a document electronically, do so. The IRS deems such filings as filed on the date of the electronic postmark.

If you must file a physical document with the IRS, don’t use regular U.S. mail, Priority Mail, or Express Mail.

Why not?

When you mail a document with these methods, the IRS considers it filed on the postmark date, but only if the IRS receives it. What if the U.S. Postal Service doesn’t deliver it or the IRS loses it? You’ll have no way to prove the IRS got it—and the IRS and most courts won’t accept your testimony that it was timely mailed.

Don’t take this chance. Instead, file physical documents by certified or registered U.S. mail, or use an IRS-approved private delivery service (generally, two-day or better service from FedEx, UPS, or DHL Express). When you do this, the IRS considers the document filed on the postmark date whether or not the IRS receives it.

Make sure to keep your receipt.

If you have questions about sending any forms or documents to the IRS, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 5, 2022

The generally favorable partnership federal income tax rules are a common reason for choosing to operate as a partnership with multiple partners instead of as a corporation with multiple shareholders. The most important partnership tax rules can be summarized as follows:

• You get pass-through taxation.
• You can deduct partnership losses (within limits).
• You may be eligible for the Section 199A tax deduction.
• You get basis from partnership debts.
• You get basis step-up for purchased interests.
• You can make tax-free asset transfers with the partnership.
• You can make special tax allocations.

Partnership taxation is not all good stuff. There are a few important disadvantages and complications to consider:

• Exposure to self-employment tax
• Complicated Section 704(c) tax allocation rules
• Tricky disguised sale rules
• Unfavorable fringe benefit tax rules

Limited partnerships are obviously treated as partnerships for federal income tax purposes, with the generally favorable partnership taxation rules mentioned above.

Limited partners generally are not exposed to liabilities related to the partnership or its operations. So, you generally cannot lose more than what you’ve invested in a limited partnership—unless you guarantee partnership debt.

So far, so good. But you must also consider the following disadvantages for limited partners:

• Limited partners usually get no basis from partnership liabilities.
• Limited partners can lose their liability protection.
• You need a general partner.

On the plus side, limited partners have a self-employment tax advantage.

Since your partnership will have multiple partners, multiple issues can come into play. You’ll need a carefully drafted partnership agreement to handle potential issues even if you don’t expect them to arise. For instance, you may want to include

• a partnership interest buy-sell agreement to cover partner exits;
• a non-compete agreement (for obvious reasons);
• an explanation of how tax allocations will be calculated in compliance with IRS regulations;
• an explanation of how distributions will be calculated and when they will be paid (for instance, you may want to call for cash distributions to be made annually in early April to cover partners’ tax liabilities from their shares of partnership income for the previous year);
• guidelines for how the divorce, bankruptcy, or death of a partner will be handled;
• and so on.

Key point. No type of entity (including a limited partnership in which you are a limited partner) will protect your personal assets from exposure to liabilities related to your own professional malpractice or your own tortious acts.

If you would like to discuss partnerships, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 1, 2022