S Corp dividends will probably be taxed for 2011 and beyond for self employment tax purposes, under House and Senate Bills, currently in Congress, for personal service type S – firms. A personal service type firm would be a CPA , Attorney, Engineer or other service provider type entity.
Currently S – Corp dividends paid to professional service providers are not subject to self employment tax rates. Self-employment tax rates are currently 15.3 % on the first $106,800 of earnings, and 2.9% on the excess. The IRS has contended that this is a tax loop hole for non payment of taxes, since more dividends are paid than W-2 wages, and professional service providers provide only earnings from services and not capital.
Interesting, when you have to invest money for facilities, and computer systems, oh well!
A question remains whether
W-2’s will be issued to owners of the S – Corps, or will quarterly taxes estimates become the preferred method of paying in withholding and self employed taxes.
Thursday, June 17, 2010
Friday, May 14, 2010
Bell and Company Wins 2010 Spotlight Award
We are so proud to announce we won form the Governor's Work-life Balance Award the Spotlight Award. The Spotlight Award recognizes unique programs that address the needs of employees and their families.
We were awarded the award for our motto with emphasizes coming to work with a "healthy mind, body and spirit" we have incorporated bicycle riding into our everyday routine. Providing bikes to employees that want to ride. We are so honored to have received this award from the Governor.
Wednesday, April 28, 2010
Deductibility of Covenants Paid Not to Compete
In a recent ruling, Recovery Group, Inc., v. Commissioner, (TC Memo 2010-76), the tax court answers a common question about the sale of a partnership or corporation interest that involves a covenant not to compete. A common scenario for transferring an owner’s interest when the owner leaves a company is that the remaining owners purchase that interest. A purchase price allocation is made between the value of the partnership or stock interest, goodwill, and a covenant not to compete.
The values assigned to each component are more important than you might think. The value assigned to purchase the partnership interest is usually stepped up, and the assets within the partnership receive new values. In order to properly accomplish this, tax elections must be filed. This usually leads to tax deductible assets for the remaining partners in the form of inventory or fixed assets. If a stock interest is purchased, then the value is not currently deductible, similar to buying stock shares in Walmart, until the stock interest is later sold. If goodwill is purchased, the goodwill asset is amortized over 15 years.
This leaves the question about value assigned to the non-compete agreement, and when and how much is deductible. In the case examined by the tax court, $400,000 of the purchase price was assigned to the covenant not to compete and was deducted over the term of the agreement, the following twelve months. The purchase terms of the departing owner’s interest consisted of a down payment of $200,000 and a note for $600,000 over three years. The tax court disagreed with the twelve month deduction, and ruled that the non-compete was akin to goodwill, i.e. an intangible asset, and should be amortized over 15 years, the amortization life of that asset group.
In reviewing this case, it should be noted that the term of the non compete , one year, and the payment period of the non compete , three years, did not govern the deductibility term. In reviewing the tax side of a proposed purchase transaction, covenants not to compete will be treated like goodwill for deductibility purposes.
If you have questions or comments, please let Pancho or Kelly know call them at 501.753.9700.
The values assigned to each component are more important than you might think. The value assigned to purchase the partnership interest is usually stepped up, and the assets within the partnership receive new values. In order to properly accomplish this, tax elections must be filed. This usually leads to tax deductible assets for the remaining partners in the form of inventory or fixed assets. If a stock interest is purchased, then the value is not currently deductible, similar to buying stock shares in Walmart, until the stock interest is later sold. If goodwill is purchased, the goodwill asset is amortized over 15 years.
This leaves the question about value assigned to the non-compete agreement, and when and how much is deductible. In the case examined by the tax court, $400,000 of the purchase price was assigned to the covenant not to compete and was deducted over the term of the agreement, the following twelve months. The purchase terms of the departing owner’s interest consisted of a down payment of $200,000 and a note for $600,000 over three years. The tax court disagreed with the twelve month deduction, and ruled that the non-compete was akin to goodwill, i.e. an intangible asset, and should be amortized over 15 years, the amortization life of that asset group.
In reviewing this case, it should be noted that the term of the non compete , one year, and the payment period of the non compete , three years, did not govern the deductibility term. In reviewing the tax side of a proposed purchase transaction, covenants not to compete will be treated like goodwill for deductibility purposes.
If you have questions or comments, please let Pancho or Kelly know call them at 501.753.9700.
Friday, April 23, 2010
Presidents Tax Return
On 4/15/10 the President released their 2009 tax return. I find it interesting the amounts on this return which reported and AGI of $5.5 million and tax of $1.8 million. President Obama earned $5.6 million in book royalties and made charitable contributions of $329,000 to 40 different charities. The President's return can be downloaded at www.whitehouse.gov/blog/2010/04/15/president-obama-and-vice-president-biden-s-tax-returns.
Monday, January 25, 2010
S Corporations: A Target of Missed Tax Revenue for the IRS?
S corporations are the fasted growing legal entity choice; there are approximately 4 million nationwide. With that, they have attracted the attention of Congress and the IRS to ensure reporting practices meet applicable standards. The IRS conducted audits on 2003 and 2004 S corporation tax returns as part of a “National Research Program.” The result? An estimated 68% of S corporations misreported their net income understating their combined net profits by $85 billion.
Background - Why are S corporations attractive?
• S corporations do not pay corporate income tax. Instead, the earnings or losses are passed through to its shareholder(s), and the taxes are paid at the individual level.
• Opposed to other “pass-through” entities, such as partnerships, S corporation earnings are not subject to payroll taxes (self-employment tax reported on the individual income tax return). “Reasonable compensation” is required to be paid S corporation owners in lieu of payroll taxes on passed through earnings.
Through the Eyes of the IRS - Missed Tax Revenue
If S corporation net profits are understated as reported in the IRS audit results above, those affected shareholders’ individual income taxes are understated as well. Furthermore, if the reasonable compensation requirement is ignored by setting an unreasonably low salary or even no salary at all, the payroll taxes on that amount are missed. As a result of the same IRS audits discussed above, S corporation owners were underpaid an estimated $24 billion in wages in accordance with the reasonable compensation requirement.
What is Congress going to do about it?
Although nothing has been passed to date, there is much discussion of raising payroll taxes to increase tax revenue. A Medicare tax rate increase and raising the Social Security tax on earnings above $250,000 are just a few ideas being kicked around. If payroll taxes are increased, you can bet the effort to enforce S corporations to pay reasonable compensation will likely increase as well.
Already paying a reasonable salary? Well, you still might not be safe. Other ideas that have made the paper: subjecting S corporation owners who perform services (i.e. doctors, accountants, attorney, etc) to Social Security and Medicare taxes on all of their earnings, and imposing payroll taxes on all earnings of any S corporation owner who owns more than 50% of the corporation.
In summary, there is no reason to shy away from forming or maintaining an S corporation. Rather, S corporation owners should make sure they are in compliance with the taxation rules, consult their tax advisors for guidance, and be prepared for increased IRS audits.
Stay tuned for the latest developments!
Background - Why are S corporations attractive?
• S corporations do not pay corporate income tax. Instead, the earnings or losses are passed through to its shareholder(s), and the taxes are paid at the individual level.
• Opposed to other “pass-through” entities, such as partnerships, S corporation earnings are not subject to payroll taxes (self-employment tax reported on the individual income tax return). “Reasonable compensation” is required to be paid S corporation owners in lieu of payroll taxes on passed through earnings.
Through the Eyes of the IRS - Missed Tax Revenue
If S corporation net profits are understated as reported in the IRS audit results above, those affected shareholders’ individual income taxes are understated as well. Furthermore, if the reasonable compensation requirement is ignored by setting an unreasonably low salary or even no salary at all, the payroll taxes on that amount are missed. As a result of the same IRS audits discussed above, S corporation owners were underpaid an estimated $24 billion in wages in accordance with the reasonable compensation requirement.
What is Congress going to do about it?
Although nothing has been passed to date, there is much discussion of raising payroll taxes to increase tax revenue. A Medicare tax rate increase and raising the Social Security tax on earnings above $250,000 are just a few ideas being kicked around. If payroll taxes are increased, you can bet the effort to enforce S corporations to pay reasonable compensation will likely increase as well.
Already paying a reasonable salary? Well, you still might not be safe. Other ideas that have made the paper: subjecting S corporation owners who perform services (i.e. doctors, accountants, attorney, etc) to Social Security and Medicare taxes on all of their earnings, and imposing payroll taxes on all earnings of any S corporation owner who owns more than 50% of the corporation.
In summary, there is no reason to shy away from forming or maintaining an S corporation. Rather, S corporation owners should make sure they are in compliance with the taxation rules, consult their tax advisors for guidance, and be prepared for increased IRS audits.
Stay tuned for the latest developments!
Tuesday, January 12, 2010
No Estate Tax for 2010, real or not?
Last week, at lunch with a tax attorney associate, I posed the question, “The phone must be ringing off the wall, from client inquiries, about their respective wills and trust, the attorney replied, not, yet! Adding, if Congress does not amend the estate tax provisions, and retroact the provision to the first of the year, I will be real busy, revising wills and trusts with the AB provision. Hopefully, this will get the pot stirring when you read this article, leading you to contact your estate attorney or our firm, to discuss the following article, and it s implications to your family and you.
A quick history of estate tax:
For 2009, the estate was free from tax for estates 3.5 million, or less. For estates greater than 3.5 million, the tax was 45% of the amount over 3.5 million. For a husband and wife using the standard A B bypass provisions for a will or living trust, the provision enabled 7 million to be passed to the heirs without estate tax, on the death of both husband and wife. Further, on the death of the first spouse, the marital provision of the will or trust , would absorb any amount above the 3.5 million amount, thus no tax was due from the first spouse to die, thus any tax due would be due on the second spouse death. Further, the surviving spouse and heirs enjoyed a step up to fair market values in the assets passing to them thru the marital and bypass trust, or outright to the heirs, in certain instances, ie life insurance proceeds, annuities, joint property , etc. For estates 7 million and less , with a husband wife, no estate would be due, and the value of the estate assets would pass to the heirs, ie children, etc, tax free , with a new fair market value , at the date of death, if the assets were later sold, for income tax purposes. This was a great tax benefit! Think of the estate distribution provisions, if the B bypass trust, is written to receive all the estate tax free assets, which used to be 3.5 million, and is now unlimited, passes to the kids or grandkids, and leaves the surviving spouse out of the distribution, except for the income interest. I am sure on reading this article the spouse who expects to be the survivor will want to do away with the AB trust provision and have all assets left only to the surviving spouse, sounds like a lot of wills and trust amendments to be done, if this law stays in effect for 2010.
In the Fall of 2009, and pondering the estate tax rules for 2010, most tax attorneys working with the Bell firm, thought that the 2009 rules would stay in effect for 2010 and thereafter, following congressional amendment to the existing law. This amendment did not happen, Think of the lawsuits that will be filed if Congress retroacts this bill to January 1, 2010 , and someone has died with a taxable estate over 3.5 million in the interim, and the IRS , does not allow the estate to pass tax free!
The 2001 tax act , which was a 10 year sunset law, remains in effect, thus for 2010 there is no estate tax, I repeat , for 2010 , there is no estate tax.
Further, for grandparents, there is no generation skipping tax, to consider for 2010. The caveat is that the heirs do not have to pay estate tax, but they receive a limited step up basis in the inherited assets of only 1.3 million. Think of the nightmares this will be for accountants and financial advisors in keeping up with the cost basis of assets, passed on from parent to child or grandchild!
Further, for all who plan on making gifts to children, grandchildren, etc, the annual gift exemption amount is $13.000 , for annual amount above the $13,000 amount per person, allows for a life time gift amount of $1 million per person, and the tax rate is 35 percent, for amounts over 1million of cumulative gifts made to all persons. Think of the planning , a parent could gift property at 35% in 2010, and the same property would be taxed at 55% in 2011, when the 2010 law sunsets and the estate rules revert back to 1 million, as noted below.
For 2011, the “no estate tax” for 2010, reverts back to the law for prior 2001 estate tax law, or an estate tax of 55% for estates greater than 1 million, which would be quite onerous, but would allow for step up in estate values. What a swing from a no tax to a burdensome tax only one year later!
I hope I have the pot stirring, what a scenarios of what if and estate planning to be done, contact your attorney, or give me a call if we can help!
A quick history of estate tax:
For 2009, the estate was free from tax for estates 3.5 million, or less. For estates greater than 3.5 million, the tax was 45% of the amount over 3.5 million. For a husband and wife using the standard A B bypass provisions for a will or living trust, the provision enabled 7 million to be passed to the heirs without estate tax, on the death of both husband and wife. Further, on the death of the first spouse, the marital provision of the will or trust , would absorb any amount above the 3.5 million amount, thus no tax was due from the first spouse to die, thus any tax due would be due on the second spouse death. Further, the surviving spouse and heirs enjoyed a step up to fair market values in the assets passing to them thru the marital and bypass trust, or outright to the heirs, in certain instances, ie life insurance proceeds, annuities, joint property , etc. For estates 7 million and less , with a husband wife, no estate would be due, and the value of the estate assets would pass to the heirs, ie children, etc, tax free , with a new fair market value , at the date of death, if the assets were later sold, for income tax purposes. This was a great tax benefit! Think of the estate distribution provisions, if the B bypass trust, is written to receive all the estate tax free assets, which used to be 3.5 million, and is now unlimited, passes to the kids or grandkids, and leaves the surviving spouse out of the distribution, except for the income interest. I am sure on reading this article the spouse who expects to be the survivor will want to do away with the AB trust provision and have all assets left only to the surviving spouse, sounds like a lot of wills and trust amendments to be done, if this law stays in effect for 2010.
In the Fall of 2009, and pondering the estate tax rules for 2010, most tax attorneys working with the Bell firm, thought that the 2009 rules would stay in effect for 2010 and thereafter, following congressional amendment to the existing law. This amendment did not happen, Think of the lawsuits that will be filed if Congress retroacts this bill to January 1, 2010 , and someone has died with a taxable estate over 3.5 million in the interim, and the IRS , does not allow the estate to pass tax free!
The 2001 tax act , which was a 10 year sunset law, remains in effect, thus for 2010 there is no estate tax, I repeat , for 2010 , there is no estate tax.
Further, for grandparents, there is no generation skipping tax, to consider for 2010. The caveat is that the heirs do not have to pay estate tax, but they receive a limited step up basis in the inherited assets of only 1.3 million. Think of the nightmares this will be for accountants and financial advisors in keeping up with the cost basis of assets, passed on from parent to child or grandchild!
Further, for all who plan on making gifts to children, grandchildren, etc, the annual gift exemption amount is $13.000 , for annual amount above the $13,000 amount per person, allows for a life time gift amount of $1 million per person, and the tax rate is 35 percent, for amounts over 1million of cumulative gifts made to all persons. Think of the planning , a parent could gift property at 35% in 2010, and the same property would be taxed at 55% in 2011, when the 2010 law sunsets and the estate rules revert back to 1 million, as noted below.
For 2011, the “no estate tax” for 2010, reverts back to the law for prior 2001 estate tax law, or an estate tax of 55% for estates greater than 1 million, which would be quite onerous, but would allow for step up in estate values. What a swing from a no tax to a burdensome tax only one year later!
I hope I have the pot stirring, what a scenarios of what if and estate planning to be done, contact your attorney, or give me a call if we can help!
Thursday, March 26, 2009
IRS Relase Long-Awaited Report on Hospital Pay and Services
IRS Releases Long-Awaited Report on Hospital Pay and Services
By Grant Williams
Washington
The Internal Revenue Service today released findings from a much-anticipated study of nearly 500 nonprofit hospitals that is sure to raise controversy over how much compensation hospitals pay to top officials and how hospitals set that compensation.
The 178-page report also looks at another controversial topic: How much hospitals do to provide charitable services to people in the neighborhoods where they are located in order to qualify for a federal tax exemption.
The IRS said the average total compensation that hospitals that responded to a questionnaire paid to their top management official was $490,000; median compensation was $377,000.
At 20 hospitals that the IRS selected for closer inspection through audits, the average total compensation paid to a top management official was $1.4-million; median compensation was $1.3-million. (The hospitals were audited because the institutions reported paying greater compensation amounts relative to their size and type.)
“Amounts reported appear high but also appear supported under current law,” the IRS said. “For some, there may be a disconnect between what, as members of the public, they might consider reasonable and what is permitted under the tax law.”
The IRS said nearly all hospitals in the study followed “important elements of” a set of federal rules in setting compensation. Those rules provide a series of steps — including the use of data to compare salaries earned by executives at similar charities and for-profit institutions — by which charities can establish that they have done everything possible to set a reasonable salary. Federal rules call that threshold a “rebuttable presumption” of reasonableness. Organizations that are found to pay excessive compensation are forced to pay fines, called excise taxes.
Of the audited hospitals, 85 percent met the requirements of the rebuttable-presumption process, the IRS said, putting the burden of proof on the tax agency to show that compensation was not reasonable. The IRS concluded that among this group of audited hospitals, none paid excessive compensation under the law and thus did not owe excise taxes.
IRS officials said in an interview that, among the 15 percent of hospitals that did not use the rebuttable-presumption process, at least one hospital was found by the tax agency to have paid excessive compensation.
40-Year-Old Ruling
The IRS study also looked at how nonprofit hospitals are following the current “community benefit standard,” which the tax agency uses to determine a hospital’s eligibility for tax-exempt status. Under a 40-year-old IRS ruling, hospitals must show that they provide benefits to the people and neighborhoods in the region they serve.
“Uncompensated care was the largest reported community benefit expenditure for each of the study’s demographics, other than for a group of 15 hospitals reporting large medical-research expenditures,” the IRS said. The IRS questionnaire was sent to hospitals in the 26 largest urban areas; other urban and suburban hospitals; and two types of rural hospitals.
“Over all, the average and median percentages of uncompensated care as a percentage of total revenues were 7 percent and 4 percent respectively,” the tax agency said. ““Uncompensated care accounted for 56 percent of aggregate community benefit expenditures reported by the hospitals in the study.”
The IRS said the next largest categories of community benefit expenditures were for medical education and training, research, and community programs.
“No correlation was found between community benefit expenditure levels and per capita income levels of the hospital’s surrounding area,” the IRS said. “However, community benefit expenditure levels generally increased as uninsured rates of the hospital’s surrounding area increased.”
The IRS said the data on community benefits has limitations. “For example, although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the [hospitals’] discretion,” the tax agency said.
The IRS concluded that the standards for reasonable compensation and community benefit “have proved difficult” for the revenue service to administer. “Both involve application of imprecise legal standards to complex, varied, and evolving fact patterns,” the IRS said. “Some have suggested that these standards need to be revised. As these discussions occur, and despite the limitations described [in the report], the study provides important information.”
In a statement, Sen. Charles E. Grassley, Republican of Iowa, said he was “disappointed that the IRS didn’t provide guidance to the hospitals on how to define community benefit and uncompensated care, so the numbers are likely to be overstated in some cases.”
Mr. Grassley, the senior Republican on the Senate Finance Committee, said he was also disappointed that the study does not include data on for-profit hospitals’ level of uncompensated care and other community benefits and compensation. “That information is necessary to understand how nonprofits are different from for-profits,” he said. “I intend to ask the IRS to conduct a study like that so we’ll have a full picture.”
Mr. Grassley said that “neither the IRS nor Congress has done a very good job when it comes to establishing the criteria” for nonprofit hospitals since the IRS adopted the community benefit standard in 1969. That standard modified an earlier IRS ruling that based the tax-exempt status of hospitals primarily on the provision of charity care.
“The Treasury Department could do a lot of good, and probably more quickly than Congress, by re-establishing those charity-care requirements,” said Senator Grassley. “And if it looks like that can’t get done, then Congress will have to step in.”
By Grant Williams
Washington
The Internal Revenue Service today released findings from a much-anticipated study of nearly 500 nonprofit hospitals that is sure to raise controversy over how much compensation hospitals pay to top officials and how hospitals set that compensation.
The 178-page report also looks at another controversial topic: How much hospitals do to provide charitable services to people in the neighborhoods where they are located in order to qualify for a federal tax exemption.
The IRS said the average total compensation that hospitals that responded to a questionnaire paid to their top management official was $490,000; median compensation was $377,000.
At 20 hospitals that the IRS selected for closer inspection through audits, the average total compensation paid to a top management official was $1.4-million; median compensation was $1.3-million. (The hospitals were audited because the institutions reported paying greater compensation amounts relative to their size and type.)
“Amounts reported appear high but also appear supported under current law,” the IRS said. “For some, there may be a disconnect between what, as members of the public, they might consider reasonable and what is permitted under the tax law.”
The IRS said nearly all hospitals in the study followed “important elements of” a set of federal rules in setting compensation. Those rules provide a series of steps — including the use of data to compare salaries earned by executives at similar charities and for-profit institutions — by which charities can establish that they have done everything possible to set a reasonable salary. Federal rules call that threshold a “rebuttable presumption” of reasonableness. Organizations that are found to pay excessive compensation are forced to pay fines, called excise taxes.
Of the audited hospitals, 85 percent met the requirements of the rebuttable-presumption process, the IRS said, putting the burden of proof on the tax agency to show that compensation was not reasonable. The IRS concluded that among this group of audited hospitals, none paid excessive compensation under the law and thus did not owe excise taxes.
IRS officials said in an interview that, among the 15 percent of hospitals that did not use the rebuttable-presumption process, at least one hospital was found by the tax agency to have paid excessive compensation.
40-Year-Old Ruling
The IRS study also looked at how nonprofit hospitals are following the current “community benefit standard,” which the tax agency uses to determine a hospital’s eligibility for tax-exempt status. Under a 40-year-old IRS ruling, hospitals must show that they provide benefits to the people and neighborhoods in the region they serve.
“Uncompensated care was the largest reported community benefit expenditure for each of the study’s demographics, other than for a group of 15 hospitals reporting large medical-research expenditures,” the IRS said. The IRS questionnaire was sent to hospitals in the 26 largest urban areas; other urban and suburban hospitals; and two types of rural hospitals.
“Over all, the average and median percentages of uncompensated care as a percentage of total revenues were 7 percent and 4 percent respectively,” the tax agency said. ““Uncompensated care accounted for 56 percent of aggregate community benefit expenditures reported by the hospitals in the study.”
The IRS said the next largest categories of community benefit expenditures were for medical education and training, research, and community programs.
“No correlation was found between community benefit expenditure levels and per capita income levels of the hospital’s surrounding area,” the IRS said. “However, community benefit expenditure levels generally increased as uninsured rates of the hospital’s surrounding area increased.”
The IRS said the data on community benefits has limitations. “For example, although the IRS designated the general categories of activities that could be reported as community benefit for purposes of the study, determining what was treated as community benefit (for example, bad debt or Medicare shortfalls) and how to measure it (cost versus charges) was largely within the [hospitals’] discretion,” the tax agency said.
The IRS concluded that the standards for reasonable compensation and community benefit “have proved difficult” for the revenue service to administer. “Both involve application of imprecise legal standards to complex, varied, and evolving fact patterns,” the IRS said. “Some have suggested that these standards need to be revised. As these discussions occur, and despite the limitations described [in the report], the study provides important information.”
In a statement, Sen. Charles E. Grassley, Republican of Iowa, said he was “disappointed that the IRS didn’t provide guidance to the hospitals on how to define community benefit and uncompensated care, so the numbers are likely to be overstated in some cases.”
Mr. Grassley, the senior Republican on the Senate Finance Committee, said he was also disappointed that the study does not include data on for-profit hospitals’ level of uncompensated care and other community benefits and compensation. “That information is necessary to understand how nonprofits are different from for-profits,” he said. “I intend to ask the IRS to conduct a study like that so we’ll have a full picture.”
Mr. Grassley said that “neither the IRS nor Congress has done a very good job when it comes to establishing the criteria” for nonprofit hospitals since the IRS adopted the community benefit standard in 1969. That standard modified an earlier IRS ruling that based the tax-exempt status of hospitals primarily on the provision of charity care.
“The Treasury Department could do a lot of good, and probably more quickly than Congress, by re-establishing those charity-care requirements,” said Senator Grassley. “And if it looks like that can’t get done, then Congress will have to step in.”
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