Author: Leon Clinton

Do you have a question about how to apply the tax law to a potential transaction? Wouldn’t it be great if you could get the IRS to give you an answer in advance of filing your tax return?

You may be able to do so by obtaining a private letter ruling (PLR) from the IRS.

You get a PLR by filing a request with the IRS National Office. The IRS is ordinarily bound by the answer it gives a taxpayer in a PLR. But PLRs may not be relied on by other taxpayers.

This sounds great in theory—but in practice, seeking a PLR is usually not a good idea.

There are many reasons why:

• PLRs are expensive. The filing fee is $3,000 for the smallest businesses. Larger businesses must pay as much as $38,000. You’ll also need professional help to prepare a detailed PLR request.
• A PLR may not be necessary. The IRS has automatic or simplified methods for obtaining its consent without a PLR for many common situations, including late S corporation elections, late IRA rollovers, and various changes in accounting method.
• PLRs are unavailable for many types of tax questions, including those that are under IRS examination, were clearly answered in the past, or are too fact intensive.
• PLRs can take a long time to obtain—six months or more for complex questions.
• PLRs can backfire. Even if the IRS issues a favorable PLR, you will now be on the agency’s radar, which may increase your chances of an audit.

Given all these drawbacks, you should seek a PLR only when a cheaper alternative is unavailable—for example, when you need to do a late IRA rollover and don’t qualify for the streamlined IRS procedure.

In some instances, it’s wise to seek advance IRS approval of complex transactions involving substantial money. Obtaining a favorable PLR in such a case would assure you the transaction passes IRS muster. These instances, however, are rare.

If you have any questions or need my assistance with getting an answer from the IRS, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 9, 2021

Do you own any of your employer’s company stock inside your employer’s 401(k), ESOP, profit sharing plan, or other retirement plan? 

Has it gone up in value since you got it? If so, you should start thinking about what to do with the stock when you retire or leave your employer. Your decision can have big tax consequences.

Most people roll company stock into an IRA when they retire or leave. When you do this, no tax is due. 

But there’s a downside: when you later sell the stock, you’ll have to pay tax on the proceeds at ordinary income tax rates, which can be as high as 37 percent (and could be going higher).

You have another alternative: electing net unrealized appreciation (NUA) treatment for your company stock. This way, whenever you sell the stock, you pay tax on your NUA at long-term capital gains rates, which are 15 percent for most people. 

The tradeoff: you have to pay tax on your tax basis in the stock at ordinary income rates for the year you transfer it. You may also have to pay the 10 percent early withdrawal penalty on your shares’ cost basis if you take your lump-sum distribution before reaching age 59 1/2. 

Any additional appreciation in the stock at the time of sale also receives capital gains treatment—it will be taxed at the long-term capital gains rate if you hold the stock for more than one year from the distribution date.

To qualify for NUA treatment, you must transfer all your vested employer retirement plan assets as part of a lump-sum distribution made after you reach age 59 1/2, leave your employer, or die.

Because the stock is not in a retirement plan, it is not subject to the required minimum distribution rules. You can keep it in your account until you die. Your heirs then get a stepped-up basis above the NUA amount for the appreciation in the stock during the time you held it in your taxable account.

Net unrealized appreciation treatment isn’t for everyone. It works best for older employees who have substantial appreciation in their company stock and want the money soon while paying the lowest taxes.

If you have any questions or need my assistance with this or any matter, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 5, 2021

As a business owner, you are in partnership with the IRS, like it or not.

You share your net profits with the IRS according to your partnership agreement (known to you as the Internal Revenue Code).

To make sure you are sharing fairly, the IRS can audit your tax return. You have to hate the idea of an IRS audit.

But your big audit worry is not about the potential bills for unpaid taxes, interest, and penalties. No, your big worry is the additional time the audit will take.

Tax audits can go on for months or even years. Time and resources spent preparing for and participating in an IRS audit are time and resources that are not available for you to run your business.

So, you should consider two things here:

1. How can you spend less time in an IRS audit?
2. How can you pay the IRS nothing extra, or at least as little as possible, in an audit?

You need to get ready for the audit every day, because you are in business. The major chunk of records you need for the audit are the records that help you run your business.

Keeping the minor additional records you need to prove certain tax deductions for your vehicles, entertainment, and travel takes only minutes a day.

Planning point. Keep good records every day.

If you would like my help with your records, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• October 1, 2021