Tax

What’s your worst tax nightmare? Identity theft? Not having enough money to pay all the taxes you owe? How about this: your CPA, enrolled agent, or other tax preparer has not filed your taxes for three years.

Dr. Lee, a Florida surgeon who earned over $1 million annually, had this sad experience. His CPA completed his tax returns and had Dr. Lee review and approve them for electronic filing, but the CPA never e-filed them with the IRS.

By the time Dr. Lee found out about it and filed his returns late, he had lost a $288,409 estimated tax payment to the statute of limitations and ended up owing the IRS over $70,000 in failure-to-file and failure-to-pay penalties.

Dr. Lee sued the IRS in court, arguing that he shouldn’t have to pay the penalties because he had “reasonable cause” for failing to file: he had authorized and relied on his CPA to electronically file them.

The court rejected Dr. Lee’s argument, stating that all taxpayers are legally obligated to see that their tax returns are filed on time. A taxpayer’s duty to file a return is not excused because he or she relied on a CPA or an attorney to file the return.

This rule has no exceptions—not even for e-filed returns, which taxpayers can’t file themselves. when using a paid preparer.

The lesson of this case is clear: Never take your CPA’s or other tax professional’s word that your return was e-filed. Check with the IRS to make sure that your return was e-filed.

You do this by establishing an online account at irs.gov and requesting a tax account transcript. It takes two to three weeks after your return was supposed to be filed for a transcript to become available. If no transcript is on record, check with your tax preparer.

Alternatively, you can always file your tax return yourself by mail or private delivery service. Taxpayers can’t electronically file their returns themselves—they must rely on a tax preparer (or tax software provider) to do so for them.

To file your return by mail or private delivery service, you must give your tax preparer a hand-signed and dated statement that you choose to file in paper format and that you, not the preparer, will submit the paper income tax return to the IRS. Then, your tax preparer must attach IRS Form 8948 to the tax return you will paper file.

Filing a paper return will significantly slow the IRS processing of your return, which may prove a hardship if the IRS owes you a refund.

If you want to discuss the filing of your tax return, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 26, 2024

When your corporation reimburses you for the business use of your vehicle, you have tax consequences when you sell or trade in that vehicle.

Example 1. You purchased a vehicle for $40,000 and had the corporation reimburse you $40,000 for bonus depreciation. You now trade in the vehicle for a $45,000 vehicle. The dealer gives you $20,000 for the trade-in.

You have a $20,000 gain on the trade-in ($20,000 – zero basis). You report the $20,000 gain on your personal IRS Form 1040 using IRS Form 4797.

Example 2. Same facts as in Example 1, but your C corporation reimbursed you using IRS mileage rates. For the miles that you were reimbursed, the mileage rate depreciation totaled $12,000. At the time of the trade-in, your basis is $28,000 ($40,000 – $12,000).

The dealer gives you a trade-in allowance of $20,000. You have an $8,000 loss that you deduct on your IRS Form 1040 using IRS Form 4797 ($20,000 – $28,000).

Two things to note here.

• To keep the examples straightforward, we assumed 100 percent business use.
• Note that the corporation does nothing—the trade-in is totally on you and your personal vehicle.

If you want to discuss the corporate reimbursements to you for the use of your personal vehicle, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 22, 2024

As a co-owner of a business—whether it’s an existing venture, a new enterprise you’re founding, or a company you’re considering buying into—you must consider the structural and legal frameworks that are crucial to ensuring the stability and continuity of your investment.

One such framework is a buy-sell agreement, an essential tool for managing ownership transitions smoothly and efficiently.

Why Consider a Buy-Sell Agreement?

A buy-sell agreement can transform your business ownership into a more liquid asset, prevent unwanted changes in ownership, and save on taxes while avoiding complications with the IRS. Essentially, it’s a contract that predetermines how ownership interests are bought and sold under certain conditions, providing a clear path forward during times of transition.

Types of Buy-Sell Agreements

Cross-purchase agreement. This is an arrangement among co-owners where, upon a triggering event (such as death or disability), the remaining co-owners must buy out the departing owner’s interest.

Redemption agreement. Here, upon a similar triggering event, the business itself contracts to buy out the departing owner’s interest.

Both of these types of agreements aim to ensure there’s a buyer for every co-owner’s interest when needed, restrict unilateral transfer of ownership, and secure favorable tax results.

Triggering Events and Valuation

Triggering events, such as death, disability, retirement, or even simply a desire to exit the business, are predefined in the agreement. Specifying an acceptable method for valuing ownership interests is vital, as is ensuring that the IRS respects the valuation method for tax purposes.

Funding the Agreement

You will likely want to use life insurance policies to fund the buyouts, because they can provide the necessary liquidity when the most common triggering event occurs: the death of a co-owner. This approach can also offer tax advantages.

Benefits for You and Your Heirs

Implementing a buy-sell agreement offers certainty for your heirs, potentially avoiding market absence for your ownership interest and disputes over valuation for estate tax purposes. It establishes an agreed-upon method for selling your interest, providing liquidity and possibly eliminating estate tax hassles.

Take Action

Given the complexity and the significant implications for your business and personal estates, setting up a buy-sell agreement is not a do-it-yourself project. To tailor an agreement that fits your specific situation and goals, professional legal and tax advice is crucial.

If you want to discuss buy-sell agreements, please don’t hesitate to call my direct number at 408-778-9651.

• By Leon Clinton
• March 19, 2024