Tax

I am writing with some thoughts about your approaching corporate liquidation. There are several tax implications that you need to be aware of.

Complete liquidation of a C corporation is when it ceases to be a going concern, winds up its affairs, pays its debts, and distributes its remaining assets to the shareholder(s). In tax terms, the corporation redeems all its stock, and during the redemption, there can be one or more distributions pursuant to a plan.

Though not mandatory, it’s prudent to have a written plan that establishes a precise date for the start of the liquidation process, marking the difference between regular dividends and liquidating distributions.

Your corporation can achieve liquidation in three ways:

1. Distribute all of the corporation’s assets to the shareholder(s).
2. Sell all its assets and distribute the proceeds.
3. Sell some assets and distribute the resulting sales proceeds and unsold assets.

The bottom-line federal income tax results for all these options are similar for the corporation and the shareholders.

If your corporation distributes property other than cash during liquidation, it must recognize taxable gain or loss as if the distributed property had been sold for its fair market value (FMV).

For you as a shareholder, you treat the liquidating corporate distribution as payment in exchange for your stock. You recognize taxable capital gain or loss equal to the difference between the FMV of the assets received and the adjusted basis of the stock you surrender.

The complete liquidation of a C corporation with appreciated assets often results in double taxation—once at the corporate level and again at the shareholder level. Hence, the timing could be critical depending on your situation and future changes in tax rates. As of 2023, the maximum individual federal income tax rate on long-term gains from a corporate liquidation is 20 percent or 23.8 percent if the 3.8 percent net investment income tax applies.

Once you decide on a complete corporate liquidation, the Board of Directors should adopt a plan and file Form 966 (Corporate Dissolution or Liquidation) with the IRS within 30 days after adopting the liquidation plan. The corporation should then file its final tax returns.

Please note that the above-described tax implications of liquidation are complex and dependent on your situation. I recommend we schedule a meeting to discuss these points in more detail. If you agree, please call me on my direct line (408-778-9651).

• By Leon Clinton
• June 21, 2023

I am writing about a significant opportunity for your business to qualify for the Employee Retention Credit (ERC).

As we are in 2023, you still have the chance to qualify for the ERC for the 2020 and 2021 calendar years and potentially recover a substantial amount of money.

The ERC is a refundable tax credit against certain employment taxes. To claim this credit, you must amend your 2020 and 2021 payroll tax returns, which could seem cumbersome but is well worth it considering the financial upside. For a business with a dozen employees and meeting the qualifications for maximum tax credits, you could be looking at a total of $312,000.

There are two primary routes for qualifying for the ERC:

A decline in gross receipts. The most straightforward route to the ERC is a decline in your gross receipts during 2020 and 2021. COVID-19 did not have to be the cause of the decrease in gross receipts.

Government order causing more than a nominal effect. If a government order caused your business to fully or partially shut down, you might qualify for the ERC for the wages paid during the shutdown period.

The deadline to claim the ERC for 2020—April 15, 2024—is just a little over 10 months away. I strongly recommend that you act promptly to maximize your potential benefits from this program.

We are ready to assist you with amending your payroll tax returns and ensuring your business qualifies for maximum benefits. If you want to pursue this tax credit, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 16, 2023

I wanted to offer some insights regarding an important tax aspect related to the cleaning services at your home office.

As you have a home office that qualifies for a home-office deduction and you employ a cleaning lady—let’s call her Annie—who maintains both your home and your home office, there are a couple of tax considerations to keep in mind.

First, the amount you pay Annie for her cleaning services can affect your taxes. You pay Annie $200 every two weeks, totaling $5,200 annually. Given that your office is 15 percent of your home, you pay Annie $780 to clean your office and $4,420 to clean your home.

Here are two key questions:

• Should you pay Annie through a W-2 or 1099 for the office cleaning?
• Do you need to pay the Nanny Tax for the home cleaning?

The answers depend on whether Annie is considered an independent contractor or an employee.

Given the conditions of Annie’s work—she cleans with little or no direction, provides her supplies, and cleans many other houses—she exhibits the characteristics of an independent contractor.

Accordingly, for the $780 you paid her to clean your office, you should provide her with a 1099-NEC form. On the personal front, you are not liable for the Nanny Tax because Annie qualifies as an independent contractor.

Please note that if you fail to file Form 1099-NEC, you could face an intentional disregard penalty of $630 or more for each missed form.

If you would like to discuss the Nanny Tax or 1099-NEC requirements, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• June 12, 2023