Post on 21-Dec-2015
Reunion Presentation 2008
Dwight Drake
Federal Payroll Tax
15.3 % of first $102,000 of earned income
2.9% of excess earned income
Reunion Presentation 2008
Dwight Drake
Bottom Line for Middle- and Low-Income America
More Than One in Seven Earned Dollars Taken Off The Top to Feed the Gorilla
} Gorilla Tax
Reunion Presentation 2008
Dwight Drake
Rush Limbaugh Website - “Truth About Taxes”
Only the Rich Pay Taxes!
IRS Latest Data:
- Top 1% Pay More Than 39%
- Top 25% Pay Over 86%
- Top 50% Pay Over 97%
Reunion Presentation 2008
Dwight Drake
Rich vs. Non-Rich Non-Rich Rich
Self employment income 60,000 0
S Corp earnings 0 300,000
Dividends 0 150,000
Capital gains 0 150,000
Total Income 60,000 600,000 10 x
Income taxes 2,546 108,892 42.8 x
Taxes as % of income 4.24% 18.14%
Reunion Presentation 2008
Dwight Drake
Rich vs. Non-Rich Non-Rich Rich
Self employment income 60,000 0
S Corp earnings 0 300,000
Dividends 0 150,000
Capital gains 0 150,000
Total Income 60,000 600,000 10 x
Income taxes 2,546 108,892 42.8 x
Gorilla payroll taxes 9,180 0
Total taxes 11,726 108,892
Taxes as % of income 19.54% 18.14%
Reunion Presentation 2008
Dwight Drake
Savings As % of Household Disposable Income
0
2
4
6
8
10
12
France
Germany
Italy
Netherlands
Japan
U.K
U.S
Reunion Presentation 2008
Dwight Drake
80% of Americans:
Payroll Tax Hit Exceeds Income Tax Hit - Often By Many Times
Source: Congressional Budget Office (January 2002)
Corporate & Partnership Tax - Instructor: Dwight Drake
C Corp
Depr. Ded.
Tax Exemptor foreign
entity
Property
Lease
Sale-In Lease Out (‘SILO”) Corporate Tax Shelter
Debt Service
Lease Payments
Corporate & Partnership Tax - Instructor: Dwight Drake
SILO Simplified Hypothetical Numbers The Deal:
- Property Cost $60 million.
- 30 yr financing @ 5%. Annual debt service $3,840,000. Approx. $3,240,00 interest; 600k principal.
- Lease payments: $3,300,000 a year.
First Year Tax Impact if depreciation 10 yr 150% DDB:
C Corp: Lease income: 3,300,000.
Interest expense: (3,240,000)
Depreciation: (9,000,000)
Tax Loss (8,940,000)
Tax savings @ 35% 3,129,000
Exempt Org Dollar gain & C Corp dollar cost: $540,000 (3,840,000 less 3,300,000)
Corporate & Partnership Tax - Instructor: Dwight Drake
Domestic C Corp
Foreignentity
Foreign Income Corporate Tax Shelter Shift ala UPS
Common Owners
Independent Company
DeductiblePremiums Reinsurance
Premiums
Corporate & Partnership Tax - Instructor: Dwight Drake
C Corp Shelter Attacks1. New Section 470 Anti-SILO Provision: Protection fund less than 20% of basis; min. 20%
equity investment if lease over 5 yrs; lessee not bear risk of loss if lease over 5 yrs; if over 7 yr class life, any lessee option price must be FMV at time of exercise.
2. Expanded information reporting requirements under 6011.
3. Extended statute of limitations for listed transactions under 6501.
4. New failure to disclose penalty under 6707A.
5. New accuracy related penalty for listed and reportable transactions under 6662A.
6. Interest deduction denied on underpayments per redesigned 163(m).
7. New penalties for individuals failure to report, not maintaining investor lists, for tax shelter promoters, failure to report foreign accounts.
8. Expanded authority to enjoin material advisors.
9. Confidentiality exception for professionals on tax shelters.
10. Senate attempts at “non-business propose” and “changed economic position” standards. House has refused to play ball. Only a matter of time.
Corporate & Partnership Tax - Instructor: Dwight Drake
Check The Box GamePre – 1997
- Big fear was partnership or LLC taxable deemed
“association” taxable as C corp.
- Two Given Factors:
Associates
Business Objective
- Four Determinative Factors (Must Flunk Two):
Continuity of Life
Central Management
Limited Liability
Free Interest Transferability
Corporate & Partnership Tax - Instructor: Dwight Drake
Check The Box GamePost – 1996
- Corporate Characteristic Test Gone.
- Corporation is taxed as corp – C or S.
- Partnership or LLC taxes as partnership unless elect
to be taxed as C or S corp. Effective up to 75 days
before and 12 months after election.
- Sole owner non-corp is disregarded entity, taxed as
sole proprietorship.
- Pre-97 entities keep status, except for solos.
- No change for 60 months – unless IRS approval or
50% change in ownership.
Corporate & Partnership Tax - Instructor: Dwight Drake
Check The Box Game
Tax consequences of change:
From partnership to C status: Deemed contribution of assets for stock, followed by liquidation with stock distributed to owners.
From C status to partnership: Deemed asset distribution by corp to shareholders (very expensive tax wise), followed by contribution of assets to new partnership.
Corporate & Partnership Tax - Instructor: Dwight Drake
Why Use C Corp? 1. Bracket racquet at low end: $13,750 corporate tax of first $75,000 of
earnings versus $26,250 individual (35%).
2. Tax-free employee benefits for shareholder employees.
3. Tax-free reorganization potential.
4. Corporate year flexibility.
5. § 1045 Rollover potential.
6. § 1202 capital gain exclusion (50%). Deceiving at 28% rate.
7. § 1244 ordinary loss treatment. (50k limit)
8. LTCG treatment on stock gain.
9. Consolidated return convenience.
10. True “Separateness” – “Don’t mess with my return” factor.
11. Auto control for majority.
Corporate & Partnership Tax - Instructor: Dwight Drake
Rate ComparisonsMarried Filing Jointly: C Corps (Inclusive Bubbles)
First 14,300 - 10% First 50k 15%
Excess to 58,100 15% Excess to 75k 25%
Excess to 117,250 25% Excess to 100k 34%
Excess to 178,650 28% Excess to 335k 39% (First Bubble)
Excess to 319,100 33% Excess to 10 mill 34%
Excess 35% Excess to 15 mill 35%
Capital Gain Max 15% Excess to 18.33 mill 38% (Second Bubble)
Dividend Max 15% Excess 35%
C Corp Income Split – 150k
C Corp Pass Thru Entity
C tax on 50k 7,500
Owner income tax on excess 14,236 27,140
Total Income tax 21,736 27,140
Savings of 19.9%
* Assumes payroll taxes a push, married couple with two exemptions, use of standard deduction, and year is 2005.
Copyright 2005 Dwight Drake. All Rights Reserved.Business Planning: Closely Held Enterpriseswww. drake-business-planning.com
Corporate & Partnership Tax - Instructor: Dwight Drake
Fringe Benefit Limitations
1. Three primary employee fringe benefits:
- Section 79 Group Term Life Insurance
- Medical and Dental Reimbursement Plans
- Section 125 Cafeteria Plans
2. C Corp employees get all even if shareholders
3. Partners of partnership may not participate
4. 2% or more shareholders of S Corp may not participate
Corporate & Partnership Tax - Instructor: Dwight Drake
Why Use Partnership-Taxed Entity? 1. Income pass thru – no double tax.
2. Loss pass thru – still have basis, at-risk and passive loss hurdles.
3. Passive income potential.
4. Special allocation potential.
5. Outside basis adjustments.
6. Easy cash and property bail-outs.
7. Inside basis adjustment – 754.
8. Tax-free profits interest.
9. Transfer-for-value exception.
Corporate & Partnership Tax - Instructor: Dwight Drake
S Corp Eligibility Requirements (§ 1361)
1. Eligible Corps – no banks or insurance companies, affiliated group member only if “Qualified Subchapter S Subsidiary” – 100% owned by S corp and election to disregard QSSS as tax entity.
2. Shareholder number: 100 max. Married couple count one. Families (6 generations deep) may count as one. If fiduciary holds, look thru to beneficiaries.
3. Eligible shareholders: No corps, partnerships, nonresident aliens, or ineligible trusts. Estate’s, qualified pension trusts and some charitable trusts OK.
4. One Class of Stock. Voting differences only allowed.
Corporate & Partnership Tax - Instructor: Dwight Drake
Trusts That Work With S Election
1. Voting trusts
2. Grantor trusts
3. Testamentary trusts that were grantor trusts – for 2 years following death of grantor.
4. Testamentary trusts that receive S corp stock under will – but only for 2 years following death.
5. “QSST” - Qualified Subchapter S Trusts. Requires: Only one beneficiary; all income distributed annually to US citizen or resident; Elect QSST status and treated as owner of S corp stock for tax purposes. QTIP Trust classic example.
6. “ESBT” – Electing Small Business Trust. Requires: All beneficiaries qualified S corp shareholders; all interests received by gift or bequest, not purchase; trust S corp income taxed at highest individual marginal rates. Advantage: allows multiple Bs and income sprinkling.
Corporate & Partnership Tax - Instructor: Dwight Drake
Straight Debt Huge Safe Harbor 1361(c)(5)
1. Unconditional promise to pay on demand or at specified time.
2. Interest rate and payments not contingent on profits or discretion.
3. No convertibility
4. Creditor actively and regularly engaged in lending money or is individual, estate or trust that would be eligible S corp shareholder.
Note: If safe harbor met, excess interest may still not be treated as interest for tax purposes.
Corporate & Partnership Tax - Instructor: Dwight Drake
Why Use S Corporation? 1. Income pass thru – no double tax.
2. Loss pass thru – still have basis, at-risk and passive loss hurdles. Basis hurdle tougher.
3. Passive income potential.
4. Outside basis adjustments.
5. Bail-outs – easier than C, harder than partnership.
6. Tax-free reorg potential.
7. Full capital gains benefit on stock sale.
8. Easier self employment tax planning.
9. Multiple entity consolidation with QSSS.
10. Auto majority control potential.
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(a)
Z Corp
99 Individuals
A & B Brothers JT
1 Share Each
21 Shares
Valid S Corp. 100 Shareholder Requirement Satisfied Per Family Provision of 1361(c)(1).
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(b)
Z Corp
99 Individuals
A & B Spouses
1 Share Each
21 Shares
Valid S Corp. 100 Shareholder Requirement Satisfied Per Family Provision of 1361(c)(1).
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(c)
Z Corp
99 Individuals
A & B Spouses
1 Share Each 21 Shares
S election good so long as shares held in A’s estate. Once transferred to F, 100 shareholder requirement flunked. S election ends, with short S year and short C year.
F Friend
A Dies, SharesTransferred
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(d)
Z Corp
99 Individuals
Voting Trust
1 Share Each 21 Shares
Voting trust permissible S shareholder, but 100 shareholder requirement flunked because now have 102 shareholders.
3Beneficiaries
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(e)
Z Corp
99 Individuals
Revocable Living Trust
1 Share Each 21 Shares
Grantor trust permissible S shareholder, and 100 shareholder requirement not flunked because only one beneficiary.
OneBeneficiary
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(f)
Z Corp
99 Individuals
QTIP Trust
1 Share Each 21 Shares
QTIP trust may qualify as “qualified subchapter S trust” under 1361(d) if beneficiary makes election under 1361(d)(2).
OneBeneficiary
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(g)
Partnership
S Corp 100 Shr’s
S Corp 100 Shr’s
Partner Partner
S election permitted per Rev. Rule 94-43. Rationale: 100 limit was for administrative simplicity, which is not adversely effected by partnership.
S Corp100 Shr’s
Partner
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(h)
S Corp
Shareholder
VotingCommon
NonvotingCommon
S election works. Voting and nonvoting still considered one class per 1361(c)(4). Preferred would kill S if issued, but no effect if unissued.
UnissuedPreferred
Shareholder
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(i)
S Corp
Shareholder
CommonStock
Common Stock
Agreement gives shareholders with large tax burden larger distributions. Two classes of stock per Reg. 1.1361-1(l)(2)(v). No S election permitted.
Shareholder
Tax Distribution Agreement
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 694(j)
S Corp
Shareholder
Debt & Stock 25 to 1 Ratio
Shareholder
Debt & Stock 25 to 1 Ratio
Clearly bonds may be equity, but not kill S if “straight debt”
per 1361(c)(5)(A). Neither subordination nor high rate
prevent “straight debt”, but excess interest may not be
deductible as interest.
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 699(a)
S Corp
A B C D
300 Shrs 100 Shrs 100 Shrs 100 Shrs
Operations began October 3
(a) Who must consent to S? All shareholders, including nonvoting. 1362(a)(2).
If B sold to G, both B & G would need to consent because both shareholders during
first year. If B refused, then election good for second year.
If B partnership which transfer to individual, election not good for first year because
B (ineligible shareholder) owned for part of first year. Election good for year 2.
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 699(b)
S Corp
A B C D
300 Shrs 100 Shrs 100 Shrs 100 Shrs
Operations began October 3
(b) When election required? By 15th day of third month. 1362(b)(1)(B). Begin
Oct 3, so election due by Dec 17. New corp year begins when corp has shareholders,
acquires assets or begins business, whichever is first.
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 699(c)
S Corp
A B C D
300 Shrs 100 Shrs 100 Shrs 100 Shrs
Operations began October 3
(c) What taxable year allowed? “Permitted year” is calendar year or natural
business year. 25% last two month gross reciepts test of Rev. Proc. 87-32. Also,
444 election and 7519 deposit game allowed. Since ski resort, should meet 25% test.
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 699(d)
S Corp
A B C D
300 Shrs 100 Shrs 100 Shrs 100 Shrs
Operations began October 3
(d) Who can revoke? Those owning more than half all stock outstanding,
including non-voting. Reg. 1.1362-2(a). A would need one additional shareholder.
If revocation by 15th day of 3rd month, effective on first day of year. Otherwise,
effective for next year. 1362(d)(1)(C).
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 699(e)
S Corp
A B C D
300 Shrs 100 Shrs 100 Shrs 100 Shrs
Operations began October 3
(e) C sells to nonresident alien? S termination immediately. 1362(b)(1)(C).
Current year divided into short S year and short C year. 1362(d)(2)(B) & 1362(e).
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 699(f)
S Corp
A B C D
300 Shrs 100 Shrs 100 Shrs 100 Shrs
Operations began October 3
(f) Only 5 shares to Olga and C had no knowledge? 1362(f) permits
cure for inadvertent termination. Olga’s sale would need to be rescinded
and C recognizes income otherwise allocable to Olga. “Inadvertent” burden
of proof on corporation. Fact that corp had no knowledge of sale “tends to
establish” proof of “inadvertence”. Reg. 1.1362-4(b) and -5.
Corporate & Partnership Tax - Instructor: Dwight Drake
Problem 699(g)
S Corp
A B C D
300 Shrs 100 Shrs 100 Shrs 100 Shrs
Operations began October 3
(g) What if 45% gross receipts from rentals, dividends and interest? No problem
with S election because no C corp earnings and profits – 1362(d)(3) termination
for 25% passive income not apply. Before ’82, there was 20% lid on passive income
for all S corps, but no more. Now passive termination threat exists only if C corp E & P,
which will never exist for corp that has always been S corp.