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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Corporation’

Employees and Independent Contactors

Posted by William Byrnes on August 9, 2013


Why is this Topic Important to Financial Professionals? Many small business owners are faced with issues surrounding Form 1099 and how the rules apply to their businesses.  

What are some distinctions of the employees versus independent contractors?

An independent contractor, in general, has a majority of control over the details of his job function and only the end result is dictated by the company or individual who hires.  This is what is commonly known as “the degree of behavioral control.”  Another category used by the IRS and the courts to determine the status of an individual as either an employee or independent contractor is “financial control”.  Financial control involves examining the financial relationship between the parties such as reimbursement, and/or if any materials or space has been provided to accomplish the job.  Other relationship factors such as having a contract or agreement between the parties, as well as the terms of any contract, must also be examined in determining the employment status of the individual.

One of the issues that is often overlooked in the area of an employee relationship instead of an independent contractor relationship is that employees have X number of hours to dedicate to employment each week, whether that number is 40, 50, or anything else that an employment agreement might state.  Independent contracts are often not required to expend a set number of hours to accomplish a task, but instead enough hours to accomplish the task.

Another relevant issue to be considered in determining which of the two employment relations exist is that of termination.  An “At-Will” employee can normally be terminated and generally has no cause for a breach of contract and cannot sue for damages.  An independent contractor cannot usually be terminated without a breach of contract.

Tax Distinctions

Taxation of the two dissimilar positions is significantly different.  Independent contractors essentially work for themselves, and the business that pays them is, in effect, a client.  Generally, and independent contractor will file a tax return as a sole proprietor or closely held corporation, such as a Subchapter S Corporation.  An employee is subject to federal income tax withholding and the employer is subject to payroll taxes, included in the general W-2 process.

Independent contractors, like other businesses, recognize revenue and expenses. The independent contractor usually receives a Form 1099 from the source that pays him.  The Code and Regulations state that when a trade or business pays an individual for certain “services” over $600 that a Form 1099 is required to be filed with the Secretary of the Treasury.[1] And just as other businesses realize “legislative graces of Congress,” such as Section 162 deductions, the sole proprietor too may have expenses that generally qualify as trade or business expenses.

For a detailed analysis regarding independent contractors, see Tax Facts Q 814. How are business expenses reported for income tax purposes?


[1] Internal Revenue Code Section (IRC) 6041, Treasury Regulations (TR) 1.6041-1(a)(1)(i), TR 1.6041-1(a)(2).  

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Limited Liability Companies: A New Best Friend

Posted by William Byrnes on August 5, 2013


Why is this Topic Important to Financial Professionals?  Look in most local business journals that report on the formation of new business entities and you will see 95% of new businesses are formed as an “L.L.C.”  This company structure is the primary one for entrepreneurs, professionals, and small businesses.  However, after twenty years of significant usage, many questions about this form of entity are still novel.  The financial professional should be able to explain to a client the basics of the Limited Liability Company.

What is an LLC?

Limited Liability Companies (commonly called “LLCs”) are state statute sanctioned legal business entities.  The business entity is similar to a limited liability partnership except that it has members and not partners (no need for general partners).  Moreover, some states allow for only one member, known as a single-member LLC, an option not available in partnership entities that require at least two partners.  The members can be persons but may be other business entities, such that an LLC can be a member of another LLC.

The LLC can be established and managed so as to offer the benefits of a corporation such as limited liability and continuation after a member’s death, but without the impact of corporate taxation.

What is the benefit of an LLC?

The LLC properly managed provides for the protection of personal financially liability in connection with the business liability.  Proper management generally includes following the annual requirements of corporation law, such as holding an annual directors and members meeting, and recording corporate minute (this will be discussed in future blogticles).

Additionally, the LLC avoids double taxation because of it can elect to be a “pass-through” entity for federal and state tax purposes – like a partnership or a sole-proprietorship is treated.

Also, most LLCs do not have a restriction on the number of members as S-Corps have (albeit rarely will the number of members or shareholders be an issue for a financial professional’s client).  To learn more details and nuances of each business structure see the AUS Main Section 10. Basics Of Business Insurance, A—Forms Of Business Organization.  More detail on LLCs specifically is provided in AUS Main Section 14.1, I—The Limited Liability Company (LLC).

 

What are some limitations of the LLC?

Aside from the fact that LLCs have essentially developed as a hybrid of older forms of business organizations, and are relatively new in the history of corporation law.  The LLC is not a corporation in the traditional sense of the word.

Sometimes businesses start as an LLC but expand to a point of eventually considering receiving outside equity with the goal of a public offering such as listing on a stock exchange.  The LLC is not suitable for “going public”.  Thus at the stage of soliciting equity investment for a business a client may have outgrown the LLC and should convert into a C-Corporation (a topic that will be addressed in a future blogticle).

The Federal Government allows the business owner(s) of the LLC to choose how the LLC will be characterized for tax purposes.  The LLC may be taxed as a Corporation (both Subchapter C and S), partnership or sole-proprietorship. This process is generally referred to as “Check the Box”.[1] The IRS Check the Box Form is Number 8832[2] and the business owners literally check one of the included boxes on that form and then file the corresponding tax returns.

What are some other uses of LLCs?

LLCs are used in many transactions by high-net worth client.  Sometimes clients use an LLC in place of a trust in the irrevocable life insurance trust (commonly called an “ILIT”) structure.  By example, in a situation where a client wants less restriction on the direction of the assets of the vehicle, the LLC is a more popular choice than the ILIT.  As a result, the LLC has become a common tool for the financial planner.  A detailed discussion of one of these transactions is examined in the AUS Main Section 14.1, I-The Limited Liability Company (LLC). “LLC as an Alternative to a Life Insurance Trust”.

For a detailed analysis of the tax and non-tax Advantages of a Close Corporation see AdvisorFX Main Library Section 14. Close Corporations I—The Limited Liability Company (LLC) http://www.advisorfx.com/articles/f14_1_2_2080.aspx?action=13

Tomorrow’s blogticle will address Accounting for Corporations and Limited Liability Companies and How it Relates to Insurance.


[1] Treasury Regulations Section §301.7701-3.

 

[2] Internal Revenue Service Form 8832, http://www.irs.gov/pub/irs-pdf/f8832.pdf.

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LLC Taxation

Posted by William Byrnes on March 8, 2011


A Limited Liability Company (LLC) is a business structure allowed by state statute.  LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC.  Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

Owners of an LLC are called members.  Since most states do not restrict ownership, members may include individuals, corporations, other LLCs and foreign entities.  There is no maximum number of members.  Most states also permit “single member” LLCs, those having only one owner.

A few types of businesses generally cannot be LLCs, such as banks and insurance companies. Check your state’s requirements and the federal tax regulations for further information.  There are special rules for foreign LLCs.

Read the analysis at AdvisorFYI

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“Wage” War: Round One

Posted by William Byrnes on February 24, 2011


The topic Self-Employment Tax on wages versus distributions has reared its head again – as shown by the recent Federal District Court case involving David E. Watson.

The C.P.A. recently disputed and lost to the Government’s position which recharacterized dividend and loan payments from David E. Watson, P.C. (a Subchapter S corporation) to its sole shareholder and employee, David E. Watson.  The IRS assessed additional employment taxes, interest and penalties against Watson for each of tax years in which Watson’s salary was significantly lower than his total distributions.

Read the analysis at AdvisorFYI (sign up for a 2 week online free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

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Some Clarity Brought to Uncertain Tax Positions

Posted by William Byrnes on February 11, 2011


Recently, in a series of Announcements the Internal Revenue Service stated that it was developing a schedule requiring certain business taxpayers to report uncertain tax positions on their tax returns.

Now the new requirements have been finalized, businesses and wealth managers have a better idea of the direction of Uncertain Tax Position reporting.

Reported under Schedule UTP for Form 1120 series, the Uncertain Tax Position reporting currently applies to a select number of corporations (however phase-in provisions will change this by 2012 and 2014).

Who must file a Schedule UTP?

The class of organizations that must file is limited (for now).   Generally, for 2010 tax year returns most small businesses will not be included in the reporting, but that will probably change.    Nevertheless, a corporation must file Schedule UTP with its 2010 income tax return if:  To read this article excerpted above, please access AdvisorFYI

 

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Life Insurance in Qualified Pension Plans

Posted by William Byrnes on November 17, 2010


Why is this Topic Important to Wealth Managers?  Presents the general treatment of life insurance purchased through qualified pension plans.  Discusses a common scenario where life insurance premiums may be deductible by an employer aw well as the consequential income tax effect on plan participants. 

Suppose your client is the sole shareholder and president of a closely held corporation.  The business generates significant positive income and cash-flow on a steady basis. Assume the client himself may have an insurance need without the funds personally to cover the obligation.    Assuming further the business has a qualified pension (defined contribution or defined benefit) plan, one consideration may be to purchase life insurance through the qualified pension plan. [1]  Assume this option, up to an insurable interest limit, was also offered to all employees participating in the qualified plan. 

Since employer contributions to qualified plans are sometimes deductible, amount used to purchase life insurance may be also, subject to the incidental limitation. [2]  First though, “[t]o qualify for deduction as a contribution to a qualified plan, the employer’s contribution must first qualify as an ordinary and necessary business expense within the limits of reasonable compensation.” [3] As a general rule, so long as the amount of the insurance is no more than 25% of the total cost of the plan the amount may be deducted as an incidental benefit to the plan. 

Read the entire blogticle at AdvisorFYI.

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Offshore Planning’s Impact on Calculation of U.S. Income Tax Liability

Posted by William Byrnes on October 5, 2010


Why is this Topic Important to Wealth Managers? Discusses how international planning can impact clients’ tax position domestically.  Provides discussion on a number of common international tax concepts as they relate to U.S. taxpayers.

In previous blog this week, it has been briefly discussed that there may be a number of reasons a client may consider offshore planning, generally.  Today we will focus on one major component of offshore considerations, the impact of world-wide income on U.S. taxpayers. It is generally accepted that U.S. taxpayers are expected to pay income taxes on income earned from sources worldwide.  This concept is commonly referred to as “outbound” taxation.

It is the case that many sovereign nations will also have taxes on personal and/or corporate income that an individual or corporation could become subject to, creating in effect “double taxation.”  And some foreign nations choose to have very low or no tax rate on certain types of income, or on corporations in general, thus allowing foreign income to potentially escape foreign taxation (and current U.S. taxation in the year that it is earned).

What are some rules that that Congress has attempted to avoid double taxation or subject foreign income to U.S. taxation?

Check out the full blogticle at AdvisorFYI.

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