Author: Leon Clinton

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

You may have heard you cannot claim a home-office deduction without business income. That’s not accurate, as I explain below.

Points to Consider

• Claim business deductions with no business income. Even if your business did not generate income this year, you should claim all business deductions. Such deductions might create a net operating loss (NOL), which would carry forward to offset future taxable income.
• Claim the home office with no business income. Claim the home-office deduction even with no business income. The home-office expenses not allowed this year carry over to future years in the separate home-office deduction bucket. And this gets even more important when you consider business miles.
• Loss of business miles. Trips from your home to many business locations are personal miles if you do not deduct your home office as your principal place of business. Establishing that “principal place of business” is easier than it sounds.
• File a tax return. Without business income, you may be exempt from filing a tax return. Forget that. File a return. You need a filed return to claim the benefits above.

Action Steps

• Document your home office. Ensure you have appropriate documentation that proves your home office is your principal place of business.
• Claim all possible deductions. Even in a loss year, claiming all possible deductions is essential.

Conclusion

Your home office can provide significant tax advantages, even when your business income is low or non-existent. Make sure you position yourself to take full advantage of these benefits now and in the future.

If you want to discuss your home office with me, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 31, 2024

As you may know, the IRS requires that anyone claiming the 2020 employee retention credit (ERC) adjust their 2020 wages on their tax returns accordingly. It appears that the IRS has not yet processed your ERC claim.

Despite the uncertainty of the timing of the credit’s approval, it’s crucial to proceed with the amendment to comply with tax laws and avoid potential penalties.

Our records show that the statute of limitations for your 2020 individual federal tax return expires on May 17, 2024. Given this deadline, you should have us amend your return to reflect the 2020 ERC, even though you have not received the funds. This action is necessary to ensure compliance with Section 2301(e) of the CARES Act and IRC Section 280C(a).

Additionally, I recommend filing a protective claim simultaneously to safeguard against the possibility that the IRS might reject your ERC claim or approve a lesser amount. The protective claim ensures a tax refund after the statute of limitations expires for the wages adjusted should the IRS deny or reduce your ERC claim.

Here’s what we need to do for you if you approve:

1. Amend and file your 2020 tax return before the May 17, 2024, deadline.
2. File a protective claim to cover scenarios where the ERC is less than anticipated or denied.

I understand these steps might seem burdensome, especially during uncertain times. But the steps are crucial for ensuring compliance and minimizing potential financial impacts.

Please let me know at your earliest convenience if you want me to amend your 2020 individual tax return and file the protective claim.

• By Leon Clinton
• May 29, 2024