Reasons for S corp switch

Changing from a C corporation setup to the S corporation setup can be beneficial, but there are numerous factors to consider. With the March 15, 2011 deadline for 2011 fast approaching, you should seek guidance for your situation.

Basic benefits of a switch: If a C Corporation owner elects S corp status, the corporation’s income and deduction items are passed through to the owner, reported on his or her 1040 and taxed at personal rates. Significantly, switching to S status would avoid any threat of double taxation on: (1) future corporate operating profits and (2) future appreciation in corporate assets that occurs after the switch.

As you may know, double taxation occurs when a C corporation pays corporate-level tax on its income and gains. Then the owner pays tax again at the shareholder level when those income and gains are distributed as taxable dividends.

In contrast, a business owner is only taxed once under the S corp form of doing business, while retaining other benefits such as corporate protection from personal liability.

Basic drawbacks to a switch: The decision to switch isn’t always a slam-dunk. If the owner has substantial income from other sources or if the company is quite profitable, he or she may be forced to pay the 35% maximum rate on most or all of the incremental income passed through. Rule of thumb: With the current tax brackets in effect, the owner often fares better if the company generates annual profits of less than $100,000.

In addition, beware of the onerous “built-in gains” (BIG) tax. It comes into play if the corporation owns appreciated assets when it switches from C to S status. When this corporate-level tax applies, the rate is 35%.

We can help you with this determination. Contact us at 562-868-6333 to discuss your situation.

Real Estate

Preserve Section 1031 exchanges

The IRS has recently announced that it will be scrutinizing “Section 1031 exchanges” of real estate to ensure that such exchanges comply with all the tax law requirements in this area. Nevertheless, you can still avoid current tax by following the rules to the letter.

Under Section 1031 of the tax code, you may defer taxable gains when exchanging properties that are similar in nature, except to the extent that you receive cash or other “boot” as part of the transaction. In that case, you must pay current tax on the gain up to the amount of boot received. Otherwise, you owe no tax until you sell the newly acquired property.

This is one of the rare instances when the tax law lets you off the hook for a disposition of appreciated property.

To qualify as a like-kind exchange, both the property being relinquished and the property being acquired must be investment or business property. You can’t swap personal property tax-free under Section 1031.

“Like-kind” refers to the property’s nature or character. Tax regulations provide a liberal interpretation of this standard. Examples: You can swap improved real estate for raw land, a shopping mall strip for an apartment building, a marina for a golf course. But you can’t swap real estate for personal-property assets such as equipment or vehicles.

The tax law also imposes timing restrictions on Section 1031 exchanges. You must identify (or actually receive) the replacement property within 45 days of transferring legal ownership of the relinquished property. Also, the title to the replacement property must be transferred within the earlier of 180 days or your tax return due date, plus extensions, for the tax year of the transfer.

Obviously, this is a complex area of the tax law. If you are considering a like-kind exchange of real estate, we can help address your personal situation. Call 562-868-6333 to arrange a meeting with an experienced tax professional.

Year-end tax moves for individulas for 2010

Dear Friends of Our Firm,

It’s difficult to formulate a year-end plan in the current political environment. Nevertheless, following are seven sensible tax strategies for individual taxpayers in 2010. Caution: Tax rates are scheduled to go up next year, so consider the long-term implications of any year-end moves.

1. Generate energy tax credits. If you install certain energy-saving devices, you may qualify for the “residential energy credit.” The credit for 2010 is 30% of qualified expenses up to a maximum credit amount of $1,500 (reduced by any credit claimed for 2009).

2. Audit-proof charitable gifts. A recent tax law change requires you to substantiate all monetary gifts to charity. Keep all the records required by the IRS now instead of trying to resurrect them at tax return time.

3. Harvest losses from securities sales to shelter previous capital gains. On the other hand, if you’re showing a net loss for the year, you may trigger some capital gains before year-end. The earlier losses can shelter later gains from taxes.

4. Have a child trigger capital gains. For 2008 through 2010, the normal 5% rate for individuals in the regular 10% and 15% tax brackets is reduced to a rock-bottom 0%. But don’t forget about potential “kiddie tax” complications.

5. Review alternative minimum tax (AMT) liability. You may be able to reduce or eliminate the damage by postponing tax preferences to 2011. However, if you definitely will pay the AMT in 2010, you might accelerate taxable income into this year if the extra income will be taxed at a lower rate than your normal rate.

6. Seek a tax underpayment shelter. To avoid an “estimated tax” penalty for an underpayment, meet one of these three safe-harbor rules.

• Pay at least 90% of the current year’s tax liability.
• Pay at least 100% of the prior year’s tax liability (110% if your AGI for that year exceeded $150,000).
• Pay installments under a special annualized basis. This option is only available if you receive more income on a seasonal basis.

7. Sell real estate on the installment basis. As long as at least one payment is received in the year after the year of the sale, you’re taxed on just the portion of each payment attributable to the gain for each year, plus the interest.

These are only seven potential tax moves to make at the end of the year. Others may be appropriate for your situation. Contact our office at 562-868-6333 to discuss the possibilities.

Very truly yours,

Emil Estafanous, CPA

P.S.  Every situation is different. To develop a comprehensive year-end tax plan tailored to your particular circumstances, schedule a meeting by calling us at  562-868-6333.

Tax Break in small business law

Dear Friends of Our Firm,

The Small Business Jobs and Act of 2010, signed by President Obama on Sept. 27, 2010, includes a bevy of tax breaks for small business owners. Here are the highlights of this important new legislation.

Section 179: For tax years beginning in 2010 and 2011, your business can immediately write off up to $500,000 of qualifying assets (including purchased software). The new $500,000 maximum allowance doubles the previous $250,000 maximum deduction. More good news: The threshold for the Section 179 deduction phase-out rule jumps from $800,000 to $2 million, for tax years beginning in 2010 and 2011. Also, for tax years beginning in 2010 and 2011, up to $250,000 of qualified real property costs can also be deducted under Section 179. Previously, real property costs did not qualify for Section 179 deductions.

Bonus depreciation: The new law retroactively reinstates 50% first-year bonus depreciation for qualifying new (not used) assets placed in service by Dec. 31, 2010.  This tax break had officially expired after 2009, but it’s now been resurrected for qualified assets placed in service by year-end.

Qualified small business stock: Previously, you could exclude up to 75% of the gain from qualified small business stock (QSBS) acquired between Feb. 18, 2009 and Dec. 31, 2010 if you held the stock more than five years. The new law increases the potential gain exclusion to 100% for QSBS acquisitions made between Sept. 28, 2010 and Dec. 31, 2010. For these shares, the new law also removes the QSBS gain exclusion from the list of items that count as income for alternative minimum tax (AMT) purposes.

BIG tax: When a C corporation converts to an S corporation, it may be liable for a “built-in gains” (BIG) tax on gains recognized in its first 10 years of operation. First, the 10-year recognition period was reduced to seven years for built-in gains recognized in tax years beginning in 2009 and 2010. Now the new law cuts the recognition period to five years for gains in tax years beginning in 2011.

Start-ups: The new law increases the maximum deduction for qualified start-up expenditures to $10,000 for tax years beginning in 2010 (up from $5,000). The threshold for the start-up deduction phase-out rule increases from $50,000 to $60,000, but only for tax years beginning in 2010.

AMT: Normally, general business credits can’t offset the AMT. But the new law allows an “eligible small business” an AMT offset for general business credits arising in tax years beginning in 2010. Also, the business can carry back general business credits arising in tax years beginning in 2010 for up to five years.

Health insurance deduction: For 2010 only, a self-employed individual can reduce his or her self-employment income by deductible health insurance premiums when calculating the self-employment tax.

Cell phones: Cell phones and similar devices used for business will no longer be subject to super-strict recordkeeping requirements for business versus personal use, retroactive to tax years beginning after 2009.

Retirement accounts: Several provisions help facilitate transfers from 401(k), 403(b) and 457 retirement plans to designated Roth accounts.

This is only a brief summary of several key provisions in the new small business law. Contact our office at 562-868-6333  for more details.

Very truly yours,

Emil Estafanous, CPA

P.S.  It’s not too late to develop year-end tax strategies based on the new small business law. Call us at 562-868-6333 as soon as possible to schedule a meeting.

Collection Appeals Program (CAP)

If you choose to go through this CAP process then you cannot go to Court on the Appeals’ decision.

CAP procedures are available to you if you’ve received any one of the following notices:

• Notice of Federal Tax Lien
• Notice of Levy
• Notice of Seizure
• Denial or Termination of Installment Agreement

CAP Procedures

If your only collection contact has been a notice or telephone call:

• Call the IRS telephone number shown on your notice
• Explain why you disagree and that you want to appeal the decision
• Be prepared to offer a solution
• Before you can come to Appeals you will need to first discuss your case with a Collections manager.

If you have been contacted by a Revenue Officer:

• Call the Revenue Office you’ve been dealing with
• Explain why you disagree and that you want to appeal the decision
• Be prepared to offer a solution
• Before you can come to Appeals you will need to discuss your case with a Collections manager.
• Complete Form 9423, Collection Appeals Request
• You have 2 days from your conference with the Collections manager to submit Form 9423 to the Revenue Officer.

For more information please refer to:

• Form 9423, Collection Appeals Request
• CAP Frequently Asked Questions

Appealing Collection Issues

Before you prepare a request for Appeals, refer to the Appeals homepage to decide if Appeals is the place for you. Select the appropriate appeal procedure for specific instructions on preparing your request for Appeals.  If you decide you want to present your dispute to Appeals, you will need to prepare a request for Appeals and mail it to the office that sent you the decision letter. Make sure you discuss this appeal process with a tax professional.

Our office represented hundreds of  clients on their appeals with the IRS. Please contact us at 562-868-6333 to see if Appeals would be the best approach for you.

Collection Appeals Program (CAP)
Collection Appeals Program (CAP) is generally quick and available for a broad range of collection actions. However, you can’t go to court if you disagree with the Appeals decision.

Collection Due Process (CDP)
Collection Due Process (CDP) is available if you receive one of the following notices:
Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (Lien Notice), a Final Notice – Notice of Intent to Levy and Notice of Your Right to A Hearing, a Notice of Jeopardy Levy and Right of Appeal, a Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing (Levy Notices), and a Notice of Levy and Notice of Your Right to a Hearing. If you disagree with the Appeals decision, you may be able to take your case to court.

Offer in Compromise (OIC)
An Offer in Compromise (OIC) is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed.

Trust Fund Recovery Penalty (TFRP)
If you are a person responsible for withholding, accounting for, or depositing or paying specified taxes including non-resident alien (NRA) withholding and employment taxes, and willfully fail to do so, you can be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be an owner or officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.

Letters and Notices Offering an Appeal

 

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Examination Letters

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Letter 525 – General 30 Day Letter
This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 531 – Notice of Deficiency
This letter is notice of the Commissioner’s determination that you owe additional tax or other amounts for the tax year(s) identified in the letter. The Internal Revenue Code authorizes the Commissioner to send this notice. The letter explains how to dispute the adjustments in the notice of deficiency if you do not agree. To dispute the adjustments without payment, you file a petition with the Tax Court within 90 days from the notice date.

Letter 692 – Request for Consideration of Additional Findings
This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 15 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 1153 – Trust Funds Recovery Penalty Letter
This letter explains that the IRS’s efforts to collect the federal employment or excise taxes due from the business named on the letter have not resulted in full payment of the liability. Therefore, the IRS proposes to assess a penalty against you. If you agree with this penalty for each tax period shown, you are asked to sign Part 1 of the enclosed Form 2751 and return it to the person/office that sent you the letter. If you do not agree you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how you file a protest. You need to file your protest within 60 days from the date of the letter in order to appeal this decision with the Office of Appeals.

Letter 1389 – 30 Day Letter, Tax Shelter Activity
This letter accompanies a report giving you a computation of the proposed adjustments the IRS made to your tax return because of your tax shelter activity. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how you file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3016 – IRC Section 6015 Preliminary Determination Letter (30 Day)
This is a preliminary letter giving you 30 days to appeal the determination for innocent spouse relief under IRC Section 6015. The letter explains that if you do not agree with the determination you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter explains how you file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3391 – 30-Day Nonfiler Letter
This letter advises you the IRS believes you are liable for filing tax returns for the periods identified in the letter. It includes a report giving you a computation of the proposed adjustments to your tax return and explains the adjustments. The letter explains that if you agree with the adjustments, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3727 – 30-Day Letter Notifying Taxpayer No Change to Original Report Disallowing EIC Based on Failure to Meet Residency Test for Children Claimed
This letter explains why the IRS will not allow your earned income credit (EIC). The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publication explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3728 – 30-Day Letter Notifying Taxpayer No Change to Original Report Partially Disallowing EIC Based on Failure to Meet Residency Test for 1 Child
This letter explains why the IRS can only give you part of your earned income credit (EIC). The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publication explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

 

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Collection Letters

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Letter 11 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing
This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the proposed action with the Office of Appeals.

Letter 1058 – Final Notice Reply Within 30 Days
This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 1085 – 30-Day Letter Proposed 6020(b) Assessment
This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 3172 – Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320
This letter is to notify you the IRS filed a notice of tax lien for the unpaid taxes. If you do not agree you can request appeals consideration within 30 days from the date of the letter. The letter and publications explain how to request a hearing from Appeals. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your lien notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Notices

CP 90 – Final Notice of Intent to Levy
CP 90 notifies you of your unpaid taxes and that the IRS intends to levy to collect the amount owed. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 92 – Notice of Levy upon Your State Tax Refund
CP 92 notifies you that the IRS levied your state tax refund to pay your unpaid federal taxes. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 242 – Notice of Levy upon Your State Tax Refund
CP 242 notifies you that the IRS levied your state tax refund to pay your unpaid federal tax. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 523 – IMF Installment Agreement Default Notice
CP 523 notifies you that the IRS intends to terminate your installment agreement in 30 days. You have the right to request an appeal if you do not agree by following the instructions in the notice.

CP 2000
You receive this letter when the IRS receives income, deduction or credit information that does not match your return. You are provided a computation of the proposed adjustments to your tax return based upon this information. If you agree, you sign and return the agreement forms. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Publications and Forms About Your Appeal Rights

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Publications

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Publication 1, Your Rights As a Taxpayer
Informs taxpayers of their rights, and includes information on the examination process and the collection process. It is included in selected first-contact examination and collection notices.

Publication 5, Your Appeal Rights and How to Prepare a Protest If You Don’t Agree
Provides information on your examination appeal rights and how to prepare a protest if you disagree with the findings of an Internal Revenue Agent in an examination report.

Publication 594, What You Should Know About The IRS Collection Process
Explains the steps the IRS may take to collect overdue taxes. It includes a summary of your rights and responsibilities related to the paying of federal taxes.

Publication 1660, Collection Appeal Rights
Advises taxpayers of their appeal rights concerning the Collection Due Process & Collection Appeal Program. It further explains the collection issues that can be appealed and how to appeal them.

Publication 3498 & 3498A,The Examination Process
These publications explain the audit process from the initiation of the examination through the overview of the collection process, including appeals options.

Publication 4165, An Introduction to Collection Due Process Hearings
Describes the Appeals Mission, Expectations for Appeals and responsibilities of Taxpayers requesting Collection Due Process (CDP) hearings, and what Appeals considers in CDP hearings.

Publication 4167, Appeals – Introduction to Alternative Dispute Resolution
Describes the Fast Track Mediation, Fast Track Settlement and Post-Appeals Mediation programs.

Publication 4227, Overview of the Appeals Process Brochure
Explains the mission, overview, and expectations of the appeal process to the taxpayers.

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Forms

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Form 656, Offer in Compromise
A Form 656 is used to make an offer to compromise your liability for payment of less than the full amount owed.

Form 843, Claim for Refund and Request for Abatement
A Form 843 is submitted to claim a refund (or abatement) of certain overpaid (or over-assessed) taxes, interest, penalties, and additions to tax.

Form 2751, Proposed Assessment of Trust Fund Recovery Penalty
A Form 2751 is used to show the corporate liability data for a proposed trust fund recovery penalty assessment.

Form 8836, Qualifying Children Residency Statement
A Form 8836 is filed with the IRS to show that you and your qualifying child meet the residency test for the earned income credit (EIC).

Form 9423, Collection Appeal Request
A Form 9423 is used to appeal a collection action. Using this form, you may request an appeal of the following actions: notice of federal tax lien, levy, seizure, or termination of an installment agreement.

Form 12203, Request for Appeals Review
This form can be used to request an Appeals review of a proposed IRS adjustment of $25,000 or less per tax year or period.

Form 12153, Request for a Collection Due Process Hearing
A Form 12153 is used to request a collection due process hearing under IRC 6320 and IRC 6330.

Form 12509, Statement of Disagreement
You can use this form to explain why you disagree with the Internal Revenue Service (IRS) Determination concerning relief from joint and several liability for a joint return under Internal Revenue Code sections 6013(e), 6015(b), 6015(c), or 6015(f) in the letter you received with this form.