What Records Should I Keep?
April 5, 2011 | 
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As you are scrambling to get all your taxes properly filed by April 18th, you may be thinking: “next year, it won’t be like this. Next year, I WILL be more organized.”
Here’s a list of the records you should keep and for how long. Keep these organized and you (and you Advisor) will be glad you did.
- Income Tax Returns and Related Items: Keep all federal and state income tax returns and supporting documents (i.e., those items confirming your income and/or deductions) for a minimum of three years after the return’s filing date. The more prudent route is to keep these returns and documents for six years. Why? The IRS can assess additional taxes within three years of its filing date, but has up to six years in which to make a tax assessment if the IRS determines that a substantial amount of income has been omitted from the return.
- Mailing Receipts: Keep with your file copy of each tax return the U.S. Postal Service receipt — i.e., the registered mail receipt —showing the date the return was mailed. If your return is filed electronically, keep a copy of the electronic filing confirmation with a printed copy of the return. In the event the return is misplaced or lost, this documentation will save you from penalties.
- Residential Property Records: Keep settlement records from all of your home purchases and sales in a safe place. This will help you determine basis for any future sale and gain determination. In addition, keep records of the amounts that you spend for home improvements with this file. These records will provide documentation of your basis in the house if and when it comes time to compute your taxable gain.
- Stock and Bond Records: Keep records of your investment (e.g., stock, mutual funds, and bonds) purchases. Besides providing you with a date for determining the type of gain — long term versus short term — these records establish your basis in the investment and help to compute the gain/loss when you sell. In addition, keep records that show a return of capital on your investments.
- Depreciation Records: For any rental real estate or depreciable business property that you own, keep records of the property’s cost, the purchase date, the method used to calculate depreciation, and a schedule of all depreciation claimed on the property in previous years. Maintain these records until you sell or dispose of the property. Once you sell the property, keep these records with the tax return on which you report the sale.
- Personal Records: Keep a permanent file of personal records — such as divorce agreements, copies of estate and gift tax returns under which you received property, etc. – - since they can provide a basis for determining your tax liability when you dispose of the property.
- Other Records: There are other situations in which you will benefit from keeping records. For example, if you have made nondeductible contributions to an IRA or Roth IRA, maintaining records of these contributions will facilitate proving your tax liability when funds are withdrawn from the IRA.
Converting C Corps to LLCs
March 4, 2011 | Subscribe to our RSS Feed
Owners of a C corporation might consider a conversion to a pass through entity (Limited Liability Corporation) as a means to retain the limited liability and transferability of ownership that the corporate entity provides, while avoiding the double taxation of corporate earnings. Here are some basics.
Why would I convert from a C Corp to an LLC?
- Avoid double taxation: This is an important consideration when the owners of a successful entity want to receive tax-favored distributions of the business profits.
- Retain limited liability protection: Conversion to a general partnership (as opposed to an LLC) may not be the right move.
- Minimize the tax costs of the conversion: As a corporate liquidation is a double-tax event, the conversion can be expensive to the owners. Converting during an economic downturn—i.e., when asset values are depressed and recognized gains are reduced—may be a good move.
- Unused or expiring capital or net operating loss carryovers: The conversion can allow such losses to be used to reduce the tax cost of the transaction. Such tax attributes usually are eliminated upon the liquidation.
- Likely higher future tax rates: Applicable tax rates for C corporations and individual investors almost certainly will increase in the near future, through tax rate changes, an expanded tax base, and/or the expiration of existing tax incentives.
- Higher taxes on dividend income: Also at risk from future legislation is the low tax rate on dividend income. This can be another reason to remove the entity from the double-tax structure of the C corporation.
What are the potential disadvantages?
- Liquidating distribution rules: The liquidation of a C Corporation is a double-taxed event. If the entity holds assets with sizable realized gains, the conversion could trigger significant and immediate income (and transfer) tax costs.
- Self-employment taxes: An LLC member is liable for the full amount of self-employment taxes on any guaranteed payments, plus its share of any passthrough ordinary income. Thus, future federal tax liabilities may increase.
- Goodwill effects: The C corporation may hold large amounts of goodwill, which could increase the gains recognized on the conversion. This may be the case particularly for successful service-oriented businesses.
Planning Considerations:
Deciding to convert from a C to LLC is a detailed, fact-oriented undertaking, but one that the tax professional can complete with good technical knowledge. A few things to consider:
- The present value of tax savings generated by the conversion increases, making the conversion more attractive, as one assumes higher future tax rates and higher asset bases relative to depreciation and amortization deductions.
- In the analysis, include projections of both corporate and individual tax rates, for income and payroll taxes, at the federal and state/local levels. Also include reasonable estimates of future price level increases, especially concerning depreciable assets.
- Payroll taxes will increase as the owners make up a larger portion of the entity’s workforce and as they take larger compensation amounts.
- Take into account any costs associated with the conversion itself, including legal and consulting fees, transfer taxes, and sales/use taxes on the deemed liquidation.
Questions?
10 Tips to Avoid Findings and Questioned Costs for Multifamily HUD Projects
February 21, 2011 | Subscribe to our RSS Feed
HUD’s Multifamily programs provide mortgage insurance to HUD-approved lenders to facilitate the construction, substantial rehabilitation, purchase and refinancing of multifamily housing projects and healthcare facilities. If your project receives a HUD loan, here are a few suggestions to help you avoid Findings and Questioned Costs:
- Determine all expenses paid are “reasonable and necessary” to the Project.
- Obtain HUD approval before assuming any new debt.
- Submit audited financial statements with 90 days after the end of the fiscal year through electronic submission to the Real Estate Assessment Center (REAC).
- Determine that your HUD project bank account is in the name of the Project and that it is federally insured.
- Avoid commingling of Project cash with other projects or other entities.
- Perform your surplus cash calculation at a semiannual or annual fiscal period depending on your regulatory agreement. Any owner distributions should be paid as of or subsequent to the surplus cash calculation date. Do not pay owner distributions if you do not have surplus cash!
- Use amounts withdrawn from the replacement reserve only for the purpose authorized by HUD.
- Without HUD approval do not change the amount of management fees or lease payments (leased nursing homes).
- If you do not have surplus cash do not make any payments to related parties– its just easier. Remember these amounts are disclosed to HUD in the electronic filing and there’s a good chance HUD will ask you to explain what the payments are for.
- Remember, taking cash or any other assets from the Project can be construed as a Distribution by HUD. If you did make an unauthorized distribution or paid a questioned cost, it may be in your best interest to return the funds to the HUD Project asap.
For more information, visit the U.S. Department of Housing and Urban Development’s Multifamily Housing site. You can also contact our resident HUD project expert, auditor Jennifer Verch at jennifer.verch@glassjacobson.com.
Proposed Increase in R&D Credits
February 15, 2011 | Subscribe to our RSS Feed
Yesterday, President Obama visited Parkville Middle School to discuss the federal budget and investments in math and science. His proposed spending on R&D across the federal government is pegged at $148 billion.
This includes funding for basic research at the National Science Foundation, the Department of Energy’s Office of Science and the National Institute of Standards and Technology labs. Those agencies conduct research into clean energy technologies, advanced manufacturing processes and cyber security, among other things.
Also part of the proposal is $32 billion in funding for biomedical research at the National Institutes of Health, an increase of over $700 million. The focus will be on moving drugs and other therapies from the research to deployment stage.
The budget also calls for making the research and experimentation tax credit for companies permanent, and increasing it by 20%.
We will follow this budget proposal and keep the blog updated. Make sure you understand if your company qualifies for R&D credits!!
Questions?
A Wise Investment
January 26, 2011 | Subscribe to our RSS Feed
It is the day after Johnny or Sally’s sixth birthday and they are bored and moping around the house saying there is nothing to do. Sit them down, look them in the eye and tell them, “My child it is time to go to work in my dental office.” If they don’t look right back at you and say, “Mom (or Dad) you are crazy”, then something is wrong. But let’s look at why it is not a crazy idea at all and can benefit both parent and child.
You can have your child do some menial tasks around the office for a couple of hours a week. Maybe they can straighten the waiting area or help with filing. Pay them a salary just below the wage level that requires them to file a tax return and look what happens: You have gotten a tax deduction at your tax bracket and your child has gotten income that is taxed at 0%.
Better yet take their earnings and invest it in a Roth IRA. Five thousand dollars invested for ten consecutive years, from six years old to 15 years old with no additional investments made, with an 8% annual return would yield a whopping, drum roll please, $2,500,000 when your child turned 60 years old. You read that right, that $50,000 investment turned into, two million five hundred thousand dollars. That is quite a tidy sum. Ah, the power of compounding.
This is truly a win-win situation for everyone involved. What are you waiting for? The time has come to put your children to work in your dental office. As always, discuss this with your accountant to see if this is the right strategy for you.
Questions for Larry the Accountodontist?
larry.goldberg@glassjacobson.com