Author: Leon Clinton

The IRS in its repair regulations gives you a partial disposition election that benefits you when you replace a structural component such as a roof on your office building or rental property.

Previously, when you replaced a structural component such as a roof, the old roof’s remaining depreciation continued on your books, an ugly result. But now, say thank you to the IRS.

Beneficial Change in IRS Policy

The IRS allows property owners to elect a “partial disposition” deduction. Using this election means when you replace an old roof, you can deduct the undepreciated basis of the old roof rather than continue depreciating it. This change simplifies your financials and provides an immediate tax benefit.

Advantages of the Partial Disposition Election

1. Immediate deduction. With the election, you claim an immediate tax deduction for the undepreciated basis of the old component.
2. Beat the recapture tax. When you eliminate the old component, you avoid the capital gains recapture tax of up to 25 percent (technically known as “unrecaptured Section 1250 gain”) when you sell the property. 

Example

If you replace an old roof that initially cost $100,000 and has $40,000 of depreciation remaining, you can deduct this $40,000 immediately, rather than depreciating it over the remaining useful life.

You also avoid paying the unrecaptured Section 1250 gain tax on the $60,000 of depreciation you have already taken.

If you plan to replace a building component and want my help ensuring the best tax benefit, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 7, 2024

When you own and operate a business, you must exercise vigilant oversight, including watching over your payroll taxes. Here’s an example of why.

Rodney Taylor entrusted his corporation’s accounting and bookkeeping to Robert Gard, CPA. Over several years, Mr. Gard embezzled between $1 million and $2 million, including payroll taxes.

Despite Mr. Gard’s wrongdoing, the ultimate responsibility to settle the payroll taxes with the IRS fell on Mr. Taylor as the business owner and “a responsible party” under tax law.

The Taylor case highlights a crucial lesson: while delegation of duties is a part of business, you cannot transfer your responsibility for compliance with the tax laws. Here are two proactive steps to protect your business:

• Direct oversight. Ensure payroll reports are delivered directly to you, allowing you, a responsible party, the first review.
• Regular verification. Periodically check the IRS electronic federal tax payment system (EFTPS) to confirm that the IRS received payment for the payroll taxes.

By implementing these two simple measures, you significantly mitigate the risk of embezzlement and maintain compliance with tax obligations while safeguarding your financial interests and those of your company.

If you need my assistance setting up safeguards, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 5, 2024

As you consider winding down your partnership, here’s a concise overview of what you might expect under three typical scenarios of partnership dissolution.

Scenario 1: One Partner Buys Out the Others

If one partner buys out the others and continues the business, the exiting partners will likely recognize a capital gain or loss on the sale of their partnership interests. For the remaining partner, the assets acquired become the basis for their new business structure, whether that continues as a sole proprietorship or a different entity form.

Scenario 2: Partnership Liquidation with Asset Sale

Should the partnership decide to liquidate by selling all assets and distributing cash, each partner must report their share of any gains or losses passed through on Schedule K-1. It’s essential to consider how these gains might be taxed, whether as long-term capital gains or ordinary income, depending on the asset type and the depreciation recapture rules.

Scenario 3: Partnership Distributes All Assets to Partners

The most complex scenario involves the partnership distributing all assets directly to the partners. This approach can lead to varied tax outcomes based on the type of assets distributed and each partner’s basis in the partnership. Gains may arise if the distribution includes “hot assets” such as appreciated inventory or receivables.

General Considerations

• Tax forms. Regardless of the scenario, you must file a final partnership tax return (IRS Form 1065) and issue a final Schedule K-1 to each partner.
• State taxes. Be aware of any state tax obligations that might arise from these transactions.
• Passive losses. When you liquidate the partnership, any suspended passive losses may become deductible.

Next Steps

Given the complexity of these scenarios, especially with variations in asset distribution and individual partner circumstances, I strongly advise scheduling a consultation with us. We can provide a detailed analysis tailored to your situation to ensure you manage the dissolution process as efficiently as possible while minimizing your tax liabilities.

If you want to schedule such a consultation, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 3, 2024