The IRS has issued final regulations modifying reporting obligations for partnerships involved in Code Sec. 751(a) exchanges of partnership interests. The regulations remove the requirement that partnerships furnish transferors with certain information relating to unrealized receivables and inventory items by January 31 following the exchange year. The regulations are effective for returns filed for tax years ending on or after May 20, 2026.

The IRS has issued final regulations modifying reporting obligations for partnerships involved in Code Sec. 751(a) exchanges of partnership interests. The regulations remove the requirement that partnerships furnish transferors with certain information relating to unrealized receivables and inventory items by January 31 following the exchange year. The regulations are effective for returns filed for tax years ending on or after May 20, 2026.

Under Code Sec. 6050K, partnerships must file Form 8308, Report of a Sale or Exchange of Certain Partnership Interests, for transfers involving Code Sec. 751(a) property. The IRS and Treasury Department received comments that many partnerships could not determine the information required for Part IV of Form 8308 by the January 31 furnishing deadline. As a result, the final regulations remove Reg. §1.6050K-1(c)(2) and revise Reg. §1.6050K-1(c)(1) to permit partnerships to furnish Form 8308 completed in accordance with the form instructions.

Although partnerships are no longer required to furnish Part IV information to transferors and transferees by January 31, they must still file a completed Form 8308, including Part IV, with Form 1065. The IRS finalized the regulations without substantive changes from the proposed regulations issued in 2025.

T.D. 10048

The IRS has issued guidance on qualified long-term care distributions from qualified retirement plans. The guidance affects providers of certified long-term care insurance (issuers), plan administrators, and individual participants receiving qualified long-term care distributions. The IRS also extended the general deadline for amending a plan to permit qualified long-term care distributions to December 31, 2027.

The IRS has issued guidance on qualified long-term care distributions from qualified retirement plans. The guidance affects providers of certified long-term care insurance (issuers), plan administrators, and individual participants receiving qualified long-term care distributions. The IRS also extended the general deadline for amending a plan to permit qualified long-term care distributions to December 31, 2027.

Background

The SECURE 2.0 Act of 2022 (SECURE 2.0 Act), permitted defined contribution plans to make qualified long-term care distributions, effective for distributions made after December 29, 2025. The 10 percent additional tax on early distributions would not apply to distributions under Code Sec. 401(a)(39). However, a qualified long-term care distribution would be included in the taxpayer’s gross income.

Disclosure Requirements

The guidance addresses content requirements and procedures for submitting an Issuer Disclosure to the IRS. There is no general deadline for submitting an Issuer Disclosure. However, an issuer must submit an Issuer Disclosure to the IRS before the issuer can file a long-term care premium statement with a defined contribution plan.

Distribution Requirements

Under the guidance, the plan administrator is permitted to rely on the issuer’s statement and the information provided on the long-term care premium statement in making a qualified long-term care distribution. It is optional for a plan to permit qualified long-term care distributions, but the exception to the 10% additional tax only applies if the plan permits qualified long-term care distributions, even if the employee uses a distribution to pay for long-term care insurance. Unlike other permitted distributions, a qualified long-term care distribution would not be eligible for an extended 3-year repayment to a retirement plan.

Reporting Requirements

The payment of a qualified long-term care distribution to an employee must be reported by the payor on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc.

Further, issuers must make a return to the IRS using Form 1099-LPS, Long-Term Care Premiums Paid Statement. The issuer will report the long-term care premiums paid for the calendar year. The Form 1099-LPS must be filed with the IRS no later than February 1 of the calendar year following the calendar year the long-term care premium statement was filed with the plan.

Deadline Extension

The guidance extends the deadline for a plan sponsor of a defined contribution plan that is not a governmental plan, a section 403(b) plan maintained by a public school, or an applicable collectively bargained plan, to amend its plan to permit qualified long-term care distributions from December 31, 2026, to December 31, 2027. The deadlines to amend defined contribution plans that are applicable collectively bargained plans or governmental plans remain as provided in Notice 2024-02. Thus, Notice 2024-2, I.R.B. 2024-2, 316, is modified in part.

Notice 2026-33

The IRS finalized regulations treating income derived by individual members of an Indian tribe from fishing rights-related activities as compensation for purposes of limitations on benefits and contributions under a qualified retirement plan. These regulations are effective for plan years beginning on or after May 4, 2026, and affect participants, beneficiaries, sponsors, and administrators of Tribal plans.

The IRS finalized regulations treating income derived by individual members of an Indian tribe from fishing rights-related activities as compensation for purposes of limitations on benefits and contributions under a qualified retirement plan. These regulations are effective for plan years beginning on or after May 4, 2026, and affect participants, beneficiaries, sponsors, and administrators of Tribal plans.

Fishing rights-related income is exempt from federal income tax and employment tax under Code Sec. 7873. However, proposed reliance regulations would allow contributions to be made to qualified retirement plans based on fishing rights-related income. Also, plans that accept contributions of fishing rights-related income may still use safe harbor definitions of compensation. The IRS finalized this rule as proposed without material modification.

Although the final rule is somewhat limited in scope, the IRS addressed additional issues in the preamble. The IRS clarified that plan contributions attributable to a Tribal employee's fishing rights-related activiity is treated as investment in the contract under Code Sec. 72 . Thus, distributions of the amount contributed would generally be tax-free (subject to basis recovery rules) and distributions attributable to earnings would be taxable. The IRS also indicated that plans that permit designated Roth contributions may allow contributions attributable to fishing rights-related activity to be made on a Roth basis.

T.D. 10046

The IRS has introduced a streamlined option allowing taxpayers to extend the time to challenge disallowed Employee Retention Credit (ERC) claims, reducing the need for immediate refund litigation. The measure applies to taxpayers who received Letter 105-C or 106-C, are awaiting review by the IRS Independent Office of Appeals and have six months or less remaining in the statutory two-year period.

The IRS has introduced a streamlined option allowing taxpayers to extend the time to challenge disallowed Employee Retention Credit (ERC) claims, reducing the need for immediate refund litigation. The measure applies to taxpayers who received Letter 105-C or 106-C, are awaiting review by the IRS Independent Office of Appeals and have six months or less remaining in the statutory two-year period.

Taxpayers generally have two years from the disallowance notice to resolve the claim or file a refund suit, but an administrative appeal does not suspend this deadline. Once the period expires, the IRS cannot issue a refund even if the taxpayer later prevails. To address this, eligible taxpayers may execute Form 907, Agreement to Extend the Time to Bring Suit, provided it is signed by both parties before the limitation period ends.

The IRS now permits submission of Form 907 through its Document Upload Tool, with qualifying requests reviewed and confirmed in writing. While the IRS is issuing notices to eligible taxpayers, others meeting the criteria may also apply. The agency indicated that the initiative is intended to preserve taxpayer rights and facilitate administrative resolution of ERC disputes.

The IRS has established a significant issue ruling program for cerain corporate transactions (Rev. Proc. 2026-21). This program would not diminish the availability of letter rulings under existing programs. This procedure modifies and amplifies the ruling procedures provided in Rev. Proc. 2026-1, I.R.B. 2026-1, 1, and Rev. Proc. 2026-3, I.R.B. 2026-1, 143.

The IRS has established a significant issue ruling program for cerain corporate transactions (Rev. Proc. 2026-21). This program would not diminish the availability of letter rulings under existing programs. This procedure modifies and amplifies the ruling procedures provided in Rev. Proc. 2026-1, I.R.B. 2026-1, 1, and Rev. Proc. 2026-3, I.R.B. 2026-1, 143.

The significant issue ruling program allows taxpayers to request rulings on one or more issues that:

• are solely under the jurisdiction of the Associate Chief Counsel (Corporate);
• are significant issues, as defined in section 4.02 of Rev. Proc. 2026-21; and
• involve the tax consequences or characterization of a transaction (or part of a transaction) that is described in Code Sec. 332, 351, 355, 368, or 1036.

Significant Issue Ruling Program

Taxpayers may request, and the IRS may issue, a ruling on part of an integrated transaction described in the above provisions, or a ruling on a particular legal issue under a section of the Code or regulations with respect to a transaction (or part thereof) rather than a ruling that addresses all aspects of that section (or any other section) with respect to the transaction (or part thereof).

In addition, the IRS may rule on the tax consequences resulting from integrated transactions described in the above provisions to the extent that a significant issue is presented under related Code sections that address such tax consequences.

A significant issue generally is a germane and specific issue of law, provided that a ruling on the issue would not be a comfort ruling or the conclusion in such a ruling otherwise would not be essentially free from doubt.

The requests for ruling must contain (1) narrative description of the transaction that puts the significant issue in context; (2) statement identifying the issue; (3) analysis of the solvability of issue; and more.

Effect on Other Documents

Rev. Proc. 2026-1 and Rev. Proc. 2026-3 are modified and amplified.

Effective Date

The significant issue ruling program applies to all letter ruling requests described in section 4.01 of Rev. Proc. 2026-21 postmarked or, if not mailed, received by the IRS after May 5, 2026.

Rev. Proc. 2026-21

Other References:

• Code Sec. 332
• CCH Reference - FED ¶16,052.188

Other References:

• Code Sec. 351
• CCH Reference - FED ¶16,405.48

Other References:

• Code Sec. 355
• CCH Reference - FED ¶16,466.923

Other References:

• Code Sec. 368
• CCH Reference - FED ¶16,753.53

Other References:

• Code Sec. 1036
• CCH Reference - FED ¶29,702.11

The IRS has announced a new time-limited settlement opportunity for eligible taxpayers involved in conservation easement and historic preservation easement disputes with the IRS. The program aims to resolve cases faster and on terms that are generally more favorable than recent Tax Court decisions.

The IRS has announced a new time-limited settlement opportunity for eligible taxpayers involved in conservation easement and historic preservation easement disputes with the IRS. The program aims to resolve cases faster and on terms that are generally more favorable than recent Tax Court decisions. Since 2020, the IRS has settled 405 cases through earlier initiatives, although taxpayers still had to pay penalties and were allowed only limited deductions for certain out-of-pocket costs. More than 1,100 conservation easement cases currently remain pending before the IRS and the Tax Court. Under the new initiative, many eligible partnerships will not have to make an upfront payment to participate. In addition, taxpayers whose earlier settlement offers expired or were rejected may now have another chance to resolve their cases, while some partnerships that were not previously eligible may also qualify. IRS Chief Executive Officer Frank J. Bisignano said Congress created the conservation easement deduction to encourage legitimate preservation efforts rather than tax shelters based on inflated property values.

The IRS said partnerships that accept the offer during the initial 90-day period generally will not be allowed a charitable contribution deduction, but they may qualify for a limited deduction tied to certain out-of-pocket expenses. Those partnerships generally would face a 10 percent gross valuation misstatement penalty, while partnerships settling during an additional 45-day period generally would face a 20 percent penalty. Interest also will continue to accrue as required by law. At the same time, the IRS noted that courts have repeatedly reduced claimed deductions and upheld significant penalties in conservation easement disputes. Certain cases, such as those already tried or currently under appeal, will not qualify for the initiative. The IRS added that eligibility will depend on the status and specific facts of each case.

Following a 2026 tax filing season that was consistent with the 2025 season, the American Institute of CPAs offered legislators a series of recommendations to help improve filing season in the future.

Following a 2026 tax filing season that was consistent with the 2025 season, the American Institute of CPAs offered legislators a series of recommendations to help improve filing season in the future.

“Based on limited and anecdotal information, many practitioners noted that the IRS appeared to operating consistently compared with the prior year’s service,” AICPA said in a recent letter to the Senate Finance Committee’s top leadership following a hearing on the 2026 tax filing season, adding that data currently available shows “tax return processing remained relatively consistent, though the quality of telephone services appeared to vary depending on the hotline.”

AICPA did observe that while Internal Revenue Service modernization efforts have allowed for consistent customer service levels compared to recent prior years, “IRS customer service has not returned to pre-COVID-19 pandemic levels according to IRS data and the AICPA’s most recent annual membership survey.”

With that, the industry organization offered recommendations in the areas of governance and oversight, taxpayer services, and dedicated practitioner services.

In the area of IRS governance and oversight, AICPA recommended the following:

• Requiring a Government Accountability Office review to determine whether a private sector board with sufficient authority to hold the IRS accountable and oversee implementation of key recommendations from advisory groups;
• Re-establish the annual joint hearing review to focus on strategic and business plans, taxpayer service and compliance, technology and modernization, and the filing season; and
• The Joint Committee on Taxation should provide a bi-annual report on the overall state of the Federal tax system.

In the area of taxpayer service, the following recommendations were offered:

• Hire more qualified and experienced professionals from the private sector, adequately train all agency employees, skillfully manage IRS resources, and ensure organizational alignment between Congress, the executive branch, and the IRS;
• Congress should determine what the appropriate level of service is and then ensure that the appropriate resources are allocated to achieve that level;
• Continue to improve the technology infrastructure modernization; and
• Effectively utilize customer satisfaction surveys to assess IRS performance, improve the taxpayer experience, and effectuate modernization efforts or process improvement.

AICPA pushed for the passage of the Taxpayer Assistance and Services Act, which it states “would significantly improve IRS services, reinforce fairness and transparency in our tax system, and reduce tax administrative burdens on taxpayers and practitioners, including many critical tax provisions for which AICPA has previously advocated.”

In the area of dedicated practitioner services, AICPA recommended:

• Create consolidated dedicated “executive-level” practitioner services comparable to private sector services that are implemented and adapted based on practitioner feedback solicited periodically; and
• Continue to expand the functionality of a robust and enhanced tax professional account as part of the IRS’s online portal with account access to all of a practitioner’s client information, allowing for IRS to communicate directly with authorized practitioners, enable a centralized login system, and prioritize the protection and privacy of user identities and data;
• Provide practitioners with a robust practitioner priority hotline with high-skilled employees capable of resolving complex technical and procedural issues; and
• Assign customer service representatives to each geographic area to address unusual or complex issues that practitioners were unable to resolve through the priority hotlines.

The letter to the Senate Finance Committee leadership and other AICPA 2026 tax policy and advocacy comment letter can be found here.

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

Q. I am reviewing my portfolio and considering selling some of my stock. How do I determine what tax basis I have in the publicly-traded shares that I own for purposes of determining my gain or loss if I buy and sell multiple shares at different times? Does keeping track of basis really matter?

A. In order to accurately calculate the gain or loss realized on assets you sell, it is important that you keep track of the bases of all of your assets, including stock. However, when it comes to stock--especially lots of stock bought and sold at different times-- it may seem a bit tricky. Fortunately, the rules related to determining the basis of stock sold make the task more manageable.

In general, the basis of stock sold will be determined under one of the following methods: first-in, first-out (FIFO) or specific identification. However, securities held in mutual funds and received as a result as a corporate reorganization may be handled differently.

First-in, first-out (FIFO)

In general, if you buy identical shares of stock at different prices or on different dates and then you sell only part of the stock, your basis and holding period of the shares sold are determined on a first-in first-out (FIFO) basis, based upon the acquisition date of the securities. However, if specific shares sold are adequately identified by the delivery of certificates, by a broker having custody of them, or by a trustee or executor, the basis will be determined by the specific identification method (see below).

The acquisition date for purpose of applying the FIFO method follows the rules for holding period. For example, the acquisition date of securities received by gift takes into account the donor's holding period, and securities received in an estate distribution includes the holding period of the executor or trustee.

Margin accounts. If your shares are held in a margin account, they are considered sold in the order in which they were purchased, rather than the order in which they were placed in the account.

Stock splits or dividends. If you receive shares as a result of a stock split or tax-free stock dividend, they must be allocated among the original lots to which they relate, with the basis of the original shares allocated between the new shares and the old shares based on their fair market values.

Stock rights. If you acquire additional shares by exercising stock rights, your new shares are treated as a separate lot and your basis in them is equal to the amount paid plus the basis of the stock rights.

Multiple contracts. Shares acquired on the same day under several contracts entered into at different times to purchase stock when issued are deemed acquired for the FIFO rule in the same order as the contracts were entered into.

Specific identification

When you are able to identify the securities to be sold, and do so, FIFO will not apply to your basis allocation. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee (usually by CUSP number). Thus, if you have records showing the cost and holding period of securities represented by separate certificates, you can often better control the amount of gain or loss realized by selecting the certificates to be transferred. But be careful: delivery of the wrong certificates is binding, despite your intention to transfer securities from a different lot.

Example: You hold 1000 shares of IBM. You purchased 400 shares (actually 100 shares that split twice) in 2000 for $8,000 (net brokerage commissions). You bought 400 more shares in 2005 at $18,000; and 200 more in early 2007 for $16,000. You want to sell 300 shares now when its value is down to $50 per share. If you do not specify to your broker before the trade to sell the 200 shares purchased in 2007 and 100 shares from the 2005 lot, you will realize $9,000 in long term capital gains instead of $500 in long-term capital gain and a $6,000 short-term capital loss.

Mutual funds

If you own shares in a mutual fund, you may elect to determine the basis of stock sold or transferred from your accounts by using one of two average cost methods: either the double-category method or the single-category method. An election to use one of the average basis methods for mutual fund shares must be made on either a timely filed income tax return or the first late return for the first tax year to which the election is to apply. Different methods may be used for accounts in different regulated investment companies.

Securities received in reorganization

An exception to the FIFO rule applies to securities received in reorganization (such as a merger) and not adequately identified. These securities are given an average basis, computed by dividing the aggregate basis of the securities surrendered in the exchange by the number of shares received in the exchange. If securities in the same corporation are received in the exchange, however, they are divided into lots corresponding with those of the securities surrendered and the FIFO principle is applied, in the absence of adequate identification on a later disposition.

As illustrated in an example above, there can be negative tax effects from the misidentification of stock sold. If you are uncertain how to properly identify stock sold, please contact the office for further guidance.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

While one of the most important keys to financial success of any business is its ability to properly manage its cash flow, few businesses devote adequate attention to this process. By continually monitoring your business cycle, and making some basic decisions up-front, the amount of time you spend managing this part of your business can be significantly reduced.

Manage your cash before it manages you

Why do you need to manage your cash flow? Is it needed to help manage the day-to-day operations, obtain financing for a new project, or to acquire new equipment? Do you plan on presenting it to your banker to secure better financing terms or provide for future solvency? Are you seeking additional investors to help you expand into new markets? While all of these can be valid reasons for keeping on top of your cash flow situation, one of the main reasons to manage it is so it does not manage you. You should know when your business would be cash poor so you can better plan for short term operating loans. Similarly, when it has excess cash, it can be invested temporarily to maximize your return. If you do not do this, your cash flow situation will dictate when you can afford to advertise, when you can expand your business, when you can take on more sales, etc. as opposed to you making those timing decisions.

Once you have determined why cash flow management is important to your business, the next step is to get into action. In order to effectively manage your cash flow situation, you need to forecast your cash flows and once done, develop and implement a cash flow plan.

Step 1: Forecast Your Cash Flows

Forecasting your cash flow is the first step in the process of effectively managing your cash flow. How often you will need to prepare cash flow projections and what intervals to use (i.e. annually with monthly intervals or monthly with daily intervals) will depend on the nature of your business.

Be realistic. A realistic approach to forecasting your cash flows will produce more dependable and effective results. Analyze your operations to know your historical results as well as your projected assumptions. All cash flow from operations, investing activities and financing activities should be considered.

Consider your cash inflows and outflows. Your business' cash inflows would include such items as accounts receivable collection, along with unusual and nonrecurring items such as tax refunds, proceeds from a sale of equipment, etc.… Normal cash outflows include recurring items such as purchasing and accounts payable, payroll, loan payments, etc. along with nonrecurring items such as estimated tax payments, bonuses, equipment purchases and others.

Project your cash flow. Once you have determined the appropriate interval for your business (let's assume monthly), you would take the cash at the beginning of the month, add the cash inflows and subtract the cash outflows. This will give you a projected end of month cash balance. Now repeat this for the next 11 months (if your forecast was based on an annual cycle). You now have a cash flow forecast. When you study this, you may notice some months with large cash balances and other months with little, or even negative, cash balances.

Step 2: Develop a Cash Flow Plan

The goal here is to alter the forecasted cash flows into planned cash flows. By doing this, you can smooth out the peaks and valleys and turn your forecast into a manageable plan.

Invest excess cash. For those months with excess cash, you should have automatic investment alternatives set up with your financial institution. Depending on the length of time you have an excess cash situation, you can have a nightly sweep whereby your funds are invested in government bonds or repurchase agreements. Longer periods of excess cash will require more sophisticated alternatives, such as certificates of deposit. The size of the business, along with its cycle, will determine the investment alternatives to choose.

Plan for cash shortages. For the months with little or negative cash, you can first try to adjust these shortages by reviewing your collection policies to find ways to accelerate cash inflows. You can also look at your vendors' terms to consider possible ways to defer your payables. You should always err on the side of conservatism when making these changes. After this exercise, if you are still in a cash poor situation, determine sources of additional financing. You will appear more organized to lending institutions if this can be arranged before the problem arises.

By first forecasting, and then planning your cash flows, you can take advantage of many unique business opportunities, and avoid the pitfalls of unplanned cash shortages. Taking a step towards controlling your cash flow will keep you from having your cash flow take control of you.

If you have any questions about how you can better manage your business' cash flow, please contact the office for a consultation.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

If you are considering selling business property that has substantially appreciated in value, you owe it to your business to explore the possibility of a like-kind exchange. Done properly, a like-kind exchange will allow you to transfer your appreciated business property without incurring a current tax liability. However, since the related tax rules can be complex, careful planning is needed to properly structure the transaction.

Like-kind exchanges: The basics

The tax law permits you to exchange property that you use in your business or property that you hold for investment purposes with the same type of property held by another business or investor. These transactions are referred to as "like-kind" exchanges and, if done properly, can save your business from paying the taxes that normally would be due in the year of sale of the appreciated property.

Instead of an immediate tax on any appreciation in the year of sale, a like-kind exchange allows the appreciated value of the property you're transferring to be rolled into the working asset that you'll be receiving in the exchange. Mixed cash and property sales, multi-party exchanges, and time-delayed exchanges are all possible under this tax break.

What property qualifies?

In order to qualify as a tax-free like-kind exchange, the following conditions must be met:

• The property must be business or investment property. You must hold both the property you trade and the property you receive for productive use in your trade or business or for investment. Neither property may be property used for personal purposes, such as your home or family car.
• The property must not be held primarily for sale. The property you trade and the property you receive must not be property you sell to customers, such as merchandise.
• Most securities and instruments of indebtedness or interest are not eligible. The property must not be stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest, including partnership interests. However, you can have a nontaxable exchange of corporate stocks in certain circumstances.
• There must be a trade of like property. The trade of real estate for real estate, or personal property for similar personal property is a trade of like property.

Examples:

Like property:

• An apartment house for a store building
• A panel truck for a pickup truck

Not like property:

• A piece of machinery for a store building
• Real estate in the U.S. for real estate outside the U.S.

• The property being received must be identified by a specified date. The property to be received must be identified within 45 days after the date you transfer the property given up in trade.
• The property being received must be received by a specified date.The property to be received must be received by the earlier of:
  1. The 180th day after the date on which you transfer the property given up in trade, or
  2. The due date, including extensions, for your tax return for the year in which the transfer of the property given up occurs.

Dealing with "boot" received

If you successfully make a straight asset-for-asset exchange, as discussed earlier, you will not pay any immediate tax with respect to the transaction. The property you acquire gets the same tax "basis" (your cost for tax purposes) as the property you gave up. In some circumstances, when you are attempting to make a like-kind exchange, the properties are not always going to be of precisely the same value. Many times, cash or other property is included in the deal. This cash or other property is referred to as "boot." If boot is present in an exchange, you will be required to recognize some of your taxable gain, but only up to the amount of boot you receive in the transaction.

Example:

XYZ Office Supply Co. exchanges its business real estate with a basis of $200,000 and valued at $240,000 for the ABC Restaurant's business real estate valued at $220,000. ABC also gives XYZ $35,000 in cash. XYZ receives property with a total value of $255,000 for an asset with a basis of $200,000. XYZ's gain on the exchange is $55,000, but it only has to report $35,000 on its tax return - the amount of cash or "boot" XYZ received. Note: If no cash changed hands, XYZ would not report any gain or loss on its tax return.

Using like-kind exchanges in your business

There are several different ways that like-kind exchanges can be used in your business and there are, likewise, a number of different ways these exchanges can be structured. Here are a couple of examples:

Multi-party exchanges. If you know another business owner or investor that has a piece of property that you would like to acquire, and he or she only wants to dispose of the property in a like-kind exchange, you can still make a deal even if you do not own a suitable property to exchange. The tax rules permit you to enter into a contract with another business owner that provides that you are going to receive the property that he or she has available in exchange for a property to be identified in the future. This type of multi-party transaction can also be arranged through a qualified intermediary with unknown third (or even fourth) parties.

Multiple property exchanges. Under the like-kind exchange rules, you are not limited in the number of properties that can be involved in an exchange. However, the recognized gain and basis of property is computed differently for multiple property exchanges than for single property-for-property exchanges.

Trade-ins. You could also structure a business to business trade-in of machinery, equipment, or vehicles as a like-kind exchange.

There are many ways that you can advantageously use the like-kind exchange rules when considering disposing of appreciated business assets. However, since the rules are complicated and careful planning is critical, please contact the office for assistance with structuring this type of transaction.

Incentive stock options (ISOs) give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

ISOs give employees a "piece of the action" while allowing employers to attract workers at relatively inexpensive costs. However, before you accept that job offer, there are some intricate rules regarding the taxation of ISOs that you should understand.

How are ISOs taxed?

An incentive stock option is an option granted to you as an employee which gives you the right to purchase the stock of your employer without realizing income either when the option is granted or when it is exercised. You are first taxed when you sell or otherwise dispose of the option stock. You then have capital gain equal to the sale proceeds minus the option price, provided that the holding period requirement is met.

Note. The IRS has temporarily suspended collection of ISO alternative minimum tax (AMT) liabilities through September 30, 2008.

How long do I need to hold ISOs to get capital gain treatment?

To obtain favorable tax treatment, the stock acquired under an incentive stock option qualifies for favorable long-term capital gain tax treatment only if it is not disposed of before the later of two years from the date of the grant of the option, or one year from the date of the exercise of the option. If this holding period is not satisfied, the portion of the gain equal to the difference between the fair market value (FMV) of the stock at the time of exercise and the option price is taxed as compensation income rather than capital gain. In this case, you may be subject to the higher rate of income imposed on ordinary income.

For example, your employer granted you an incentive stock option on April 1, 2006, and you exercised the option on October 1, 2006, you must not sell the stock until April 1, 2008, to obtain favorable tax treatment (the later of two years from the date of the grant or one year from the date of exercise).

What key dates should I remember?

Because of the importance of receiving capital gain treatment, it is important that you keep in mind key dates such as the date of grant of the ISO and its date of exercise. These periods are measured from the date on which all acts necessary to grant the option or exercise the option have been completed. Therefore, the date of grant is treated as the date on which the board of directors or the stock option committee completes the corporate action which constitutes an offer of stock, rather than the date on which the option agreement is prepared. The date of exercise is the date on which the corporation receives notice of the exercise of the option and payment for the stock, rather than the date the shares of stock are actually transferred.

Will I be subject to alternative minimum tax?

The effect of the alternative minimum tax (AMT) on ISOs can amount to a potential trap for the unwary. This is because under the regular tax there is no tax until the stock is sold or otherwise disposed of. Under the AMT, however, the trap takes place when the ISO is exercised, since alternative minimum taxable income includes the difference between the FMV of the stock on the date the ISO is exercised and the price paid for the stock (the "ISO spread").

If you pay AMT, you are given a credit against regular income tax for the portion of the AMT attributable to ISOs and other tax preference items that result in deferral of income tax. The credit is taken in later years when no AMT is due, and may be taken to the extent that regular tax liability exceeds tentative minimum tax liability. The effect of this is that the AMT is a prepayment of tax, rather than an additional tax.

Since the AMT only applies if it is higher than your regular income tax, one strategy is to time the exercise of ISOs each year to come under the AMT exemption levels. Purely from a tax standpoint, the ideal situation is to exercise ISOs each year that would result in AMT equal to your regular tax. Of course, other factors, such as market conditions, financial needs, etc. may play a greater role in deciding when to exercise an option. If you pay high property tax or state income tax, you may find it more challenging to calculate the optimum exercise of ISOs in relation to the AMT, since both of these deductions are counted against their annual AMT exemption.

ISOs can be a nice additional employee benefit when considering a job offer. However, because the tax implications surrounding certain key trigger events related to ISOs can have a significant impact on your tax liability, we suggest that you contact the office for additional guidance.

Business travel expenses are not created equal - some special rules apply to certain types of expenditures. Before you pack your bags for your next business trip, make sure that you have planned ahead to optimize your business travel deductions.

Business travel expenses are not created equal - some special rules apply to certain types of expenditures. Before you pack your bags for your next business trip, make sure that you have planned ahead to optimize your business travel deductions.

The basic rule for the deductibility of business travel is relatively simple--travel expenses incurred while you are away from home in pursuit of a trade or business are deductible so long as they are not lavish or extravagant. Business travel can take many different forms, however--conventions, educational seminars, cruise ship meetings and foreign travel, in addition to the run-of-the-mill business trip--and each has its own special rules which you should know about prior to departure so that optimum use is made of the business travel deduction.

The basic rules

Taxpayers who travel away from their tax home on business may deduct the expenses they incur, including fares, meals, lodging, and incidental expenses, if they are not lavish or extravagant. A business trip is considered travel away from home if you may reasonably need sleep or rest to complete a round trip. Your tax home is generally your principal place of business or your residence if you are temporarily employed away from the area of your residence.

To be deductible, traveling expenses must be incurred in pursuit of an existing trade or business. If the expenses are in connection with acquiring a new business, they are not deductible. Of course, there is no rule that prohibits you from enjoying yourself or from pursuing some recreational activities during your travel, but the primary purpose of the trip must be related to the taxpayer's trade or business.

Travel expenses of your spouse, dependents or other individuals are only deductible if the person accompanying you is an employee of the company, the travel is for a bona fide business purpose, and the expenses are otherwise deductible.

Special rules apply

Because special rules may apply, the following types of business travel may require some additional planning in advance in order to maximize your business travel deduction:

Foreign travel

Foreign travel expenses are subject to special rules that are not applicable if the business trip is within the United States. If your travel overseas takes longer than a week, or if less than 75 percent of the time is spent on business, expenses are allocated between business and leisure activities on a day-to-day basis. Each day is either entirely a business day, or it is considered to be a nonbusiness day. A day counts as entirely for business if your principal activity on that day was in pursuit of your trade or business. Travel days are counted as business days, as are days when events beyond your control prevent the conducting of business. Saturdays, Sunday, legal holidays, and other reasonably necessary stand-by days also count as business days.

Educational travel

Although the Tax Code prohibits deducting expenses for travel as a form of education, a recent Tax Court decision allowed a schoolteacher to deduct her travel and tuition costs for two university courses overseas. The court decided that the reason for taking the courses went beyond mere travel and helped the teacher maintain and improve skills needed in her employment.

Conventions and seminars

If there is a sufficient relationship of the convention to your trade or business, expenses for both self-employed persons and employees to attend a convention in the United States may be deducted. A special rule prohibits the deduction of costs of attending seminars or conventions for investment purposes.

Cruises

Although the IRS does not look favorably on cruise ship conventions, a limited deduction is available (to a maximum of $2,000 annually) if you can satisfy some rigorous reporting requirements, and the cruise ship is of US registry, all ports of call are in the US or its possessions, and the meeting is directly related to your trade or business. Reporting requirements include written statements by both you and the officer of the sponsoring organization, containing information as to the number of hours of each day of the trip devoted to scheduled business activities, and a program of the activities of each day of the meeting.

Foreign conventions

While the rule for stateside conventions (and those in Canada, Mexico, a US possession, or the Trust Territory of the Pacific Islands) merely require that your business be related to the agenda of the convention, you are held to a higher standard for conventions held overseas. You must show that the meeting is directly related to the active conduct of your business and that it is as reasonable to be held overseas as it would have been to hold it in the US.

Stayovers

Sometimes costs can be decreased if you stay over at the out-of-town location on Saturday night, even though business was wrapped up on Friday. This occurs when, due to airline pricing policies, the additional lodging expense is more than offset by lower airfare. When this is the case, the additional meal and lodging expenses will still be deductible.

If you have any questions regarding the deductibility of business travel expenses or the related reporting requirements, please contact the office for more information and guidance.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break.

For homeowners, the exclusion of all or a portion of the gain on the sale of their principal residence is an important tax break. The maximum amount of gain from the sale or exchange of a principal residence that may be excluded from income is generally $250,000 ($500,000 for joint filers).

Unfortunately, the $500,000/$250,000 exclusion has a few traps, including a "loophole" closer that reduces the homesale exclusion for periods of "nonqualifying use." Careful planning, however, can alleviate many of them. Here is a review of the more prominent problems that homeowners may experience with the homesale exclusion and some suggestions on how you might avoid them:

Reduced homesale exclusion. The Housing Assistance Tax Act of 2008 modifies the exclusion of gain from the sale of a principal residence, providing that gain from the sale of principal residence will no longer be excluded from income for periods that the home was not used as a principal residence. For example, if you used the residence as a vacation home prior to using it as a principal residence. These periods are referred to as "nonqualifying use." This income inclusion rule applies to home sales after December 31, 2008 and is based on nonqualified use periods beginning on or after January 1, 2009, under a generous transition rule. A specific formula is used to determine the amount of gain allocated to nonqualifying use periods.

Use and ownership. Moreover, in order to qualify for the $250,000/$500,000 exclusion, your home must be used and owned by you as your principal residence for at least 2 out of the last 5 years of ownership before sale. Moving into a new house early, or delaying the move, may cost you the right to exclude any and all gain on the home sale from tax.

Incapacitated taxpayers. If you become physically or mentally incapable of self-care, the rules provide that you are deemed to use a residence as a principal residence during the time in which you own the residence and reside in a licensed care facility (e.g., a nursing home), as long as at least a one-year period of use (under the regular rules) is already met. Moving in with an adult child, even if professional health care workers are hired, will not lower the use time period to one year since care is not in a "licensed care facility." In addition, some "assisted-living" arrangements may not qualify as well.

Pro-rata sales. Under an exception, a sale of a residence more frequently than once every two years is allowed, with a pro-rata allocation of the $500,000/$250,000 exclusion based on time, if the sale is by reason of a change in place of employment, health, or other unforeseen circumstances to be specified under pending IRS rules. Needless to say, it is very important that you make certain that you take steps to make sure that you qualify for this exception, because no tax break is otherwise allowed. For example, health in this circumstance does not require moving into a licensed care facility, but the extent of the health reason for moving must be substantiated.

Tax basis. Under the old rules, you were advised to keep receipts of any capital improvements made to your house so that the cost basis of your residence, for purposes of determining the amount of gain, may be computed properly. In a rapidly appreciating real estate market, you should continue to keep these receipts. Death or divorce may unexpectedly reduce the $500,000 exclusion of gain for joint returns to the $250,000 level reserved for single filers. Even if the $500,000 level is obtained, if you have held your home for years, you may find that the exclusion may fall short of covering all the gain realized unless receipts for improvements are added to provide for an increased basis when making this computation.

Some gain may be taxed. Even if you move into a new house that costs more than the selling price of the old home, a tax on gain will be due (usually 20%) to the extent the gain exceeds the $500,000/$250,000 exclusion. Under the old rules, no gain would have been due.

Home office deduction. The home office deduction may have a significant impact on your home sale exclusion. The gain on the portion of the home that has been written off for depreciation, utilities and other costs as an office at home may not be excluded upon the sale of the residence. One way around this trap is to cease home office use of the residence sufficiently before the sale to comply with the rule that all gain (except attributable to recaptured home office depreciation) is excluded to the extent the taxpayer has not used a home office for two out of the five years prior to sale.

Vacation homes. As mentioned, in order to qualify for the $250,000/$500,000 exclusion, the home must be used and owned by you or your spouse (in the case of a joint return) as your principal residence for at least 2 out of the last 5 years of ownership before sale. Because of this rule, some vacation homeowners who have seen their resort properties increase in value over the years are moving into these homes when they retire and living in them for the 2 years necessary before selling in order to take full advantage of the gain exclusion. For example, doing this on a vacation home that has increased $200,000 in value over the years can save you $40,000 in capital gains tax. However, keep in mind the reduced homesale exclusion for periods of nonqualifying use.

As you can see, there is more to the sale of residence gain exclusion than meets the eye. Before you make any decisions regarding buying or selling any real property, please consider contacting the office for additional information and guidance.

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

Q. The recent upturn in home values has left me with quite a bit of equity in my home. I would like to tap into this equity to pay off my credit cards and make some major home improvements. If I get a home equity loan, will the interest I pay be fully deductible on my tax return?

A. For most people, all interest paid on a home equity loan would be fully deductible as an itemized deduction on their personal tax returns. However, due to changes made to tax laws governing home mortgage interest deduction in 1987, there are limitations and special circumstances that must be considered when determining how much of your home mortgage interest expense is deductible.

Mortgages secured by your qualified home generally fall under one of three classifications for purposes of determining the home mortgage interest deduction: grandfathered debt, home acquisition debt, and home equity debt. Grandfathered debt is simply home mortgage debt taken out prior to October 14, 1987 (including subsequent refinancing of that debt). The other two types of mortgage debt are discussed below. A "qualified home" is your main or second home and, in addition to a house or condominium, can include any property with sleeping, cooking and toilet facilities (e.g., boat, trailer).

Home Acquisition Debt

Home acquisition debt is a mortgage (including a refinanced loan) taken out after October 13, 1987 that is secured by a qualified home and where the proceeds were used to buy, build, or substantially improve that qualified home. "Substantial improvements" are home improvements that add to the value of your home, prolong the useful life of your home, or adapt your home to new uses.

In general, interest expense on home acquisition debt of up to $1 million ($500,000 if married filing separately) is fully deductible. Keep in mind, though, that to the extent that the mortgage debt exceeds the cost of the home plus any substantial improvements, your mortgage interest will be limited. Mortgage interest expense on this excess debt may be deductible as home equity debt (see below).

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to build a new addition to your home, your mortgage interest would be fully deductible.

Home Equity Debt

Home equity debt is debt that is secured by your qualified home and that does not qualify as home acquisition debt. There are generally no limits on the use of the proceeds of this type of loan to retain interest deductibility.

The amount of mortgage debt that can be treated as home equity debt for purposes of the mortgage interest deduction is the smaller of a) $100,000 ($50,000 if married filing separately) or b) the total of each qualified home's fair market value (FMV) reduced by home acquisition debt & debt secured prior to October 14, 1987. Mortgage debt in excess of these limits would be treated as non-deductible personal interest.

Example: You have a home worth $400,000 with a first mortgage of $200,000. If you get a home equity loan of $125,000 to pay off your credit cards (you really like to shop!), your mortgage interest deduction would be limited to the amount paid on only $100,000 of the home equity debt.

In addition to the above limitations, there are other circumstances that, if present, can affect your home equity debt interest expense deduction. Here are a few examples:

As illustrated above, determining your deduction for mortgage interest paid can be more complex than it appears. Before you obtain a home equity loan, please feel free to contact the office for advice on how it may affect your potential home mortgage interest deduction.

Ask someone whether they've created a long-term financial plan and they are likely to answer, "Not me...I'm not rich enough, old enough, etc..." While most people realize the importance of financial planning, there still exist several misconceptions about who it can benefit and how to get the most out of it.

Ask someone whether they've created a long-term financial plan and they are likely to answer, "Not me...I'm not rich enough, old enough, etc..." While most people realize the importance of financial planning, there still exist several misconceptions about who it can benefit and how to get the most out of it.

Myth #1: Only wealthy people should develop financial plans. Financial planning is for anyone who wants to achieve either short-term or long-term financial goals, such as retiring, attending college, buying a home or leasing a car.

Myth #2: Financial planning is just about investing. While investing your money as you strive to reach your financial goals makes good sense, keep in mind that financial planning also involves the proper handling of your taxes, insurance, retirement, budgeting, estate planning, and life goals. A comprehensive financial plan should coordinate often competing financial aspects of your life while developing strategies and objectives that enable these aspects to work together effectively to meet your goals.

Myth #3: Financial planning is for older people. If you want to meet your financial goals, you need to start now, no matter what your age. Waiting until you are older limits your financial opportunities and your ability to bear some risk. For example, every ten years you wait to save towards retirement, you must save three times as much per month in order to reach the same size retirement account. If you wait too long, many financial strategies will become useless or less effective for you.

Myth #4: You only need to create a financial plan once. While implementing a financial plan is important, just as important is the maintenance of your plan. Financial planning is a life long process. Every time your financial situation changes, such as getting married, moving or having children, you must review and update your financial plan. Changing markets and personal needs may dictate an adjustment of your financial plan. Changing tax laws may also require additional adjustments.

A little planning now for your financial goals will save a lot of grief and panic in the future. If you are interested in finding out more about how you can benefit from financial planning, please contact our office.

We've all heard the basic financial planning strategy "pay yourself first" but paying yourself first doesn't simply mean stashing money into your savings account - debt reduction and retirement plan participation also qualify. Paying yourself today can result in a more comfortable and prosperous future for you and your family.

We've all heard the basic financial planning strategy "pay yourself first" but paying yourself first doesn't simply mean stashing money into your savings account - debt reduction and retirement plan participation also qualify. Paying yourself today can result in a more comfortable and prosperous future for you and your family.

Here are some easy ways to "pay yourself first":

Pay off your credit card debt and student loans. Paying off your debt will probably give you one of the highest returns for your money compared to any investments, and it is guaranteed! If you are carrying a $1,000 debt at 17 percent, by paying it off, you will get a comparable 17 percent return.

Pay a little extra on your monthly mortgage. By paying just $20 to $50 extra per month on your mortgage payment, you can not only shave months or even years of payments off your loan, you can also save a substantial amount of money on interest. Contact your lender regarding the easiest way to do this.

Pay off your car loan. Just because you have a five-year loan, doesn't necessarily mean you have to take five years to pay it off. Check your agreement for any prepayment clauses, and if you have the extra cash, consider paying it off sooner.

Sign up for the 401(k) plan at work. If your company offers a 401(k) plan and you can afford it, contribute up to your company's matching point to maximize your dollars. This can be a great way to save and can decrease your taxes at the same time. Be sure to read and understand all plan material, especially matters related to investment options and any penalties for early withdrawals.

Have money automatically deposited into your savings account. You won't miss it and you will be surprised at how quickly it accumulates. Put aside as much as you can each pay period and don't touch it. Consider it a present to yourself.

If you would like more information, as always, we are here to help you set up a realistic financial plan. Feel free to contact us for more savings ideas.

For some taxpayers, investing in a small start-up business may be a lucrative place to put your money. But, as with any other investment, there are risks. Fortunately, the Internal Revenue Code also provides some relief from the inherent risk of investing in a small business. If executed properly, investors in small businesses can deduct losses from Section 1244 stock far in excess of the $3,000 per year limit on capital losses.

For some taxpayers, investing in a small start-up business may be a lucrative place to put your money. But, as with any other investment, there are risks. Fortunately, the Internal Revenue Code also provides some relief from the inherent risk of investing in a small business. If executed properly, investors in small businesses can deduct losses from Section 1244 stock far in excess of the $3,000 per year limit on capital losses. They can also pay less capital gains tax when the business becomes successful.

Losses. Under Section 1244 of the Internal Revenue Code, taxpayers are allowed to write off a loss of $50,000 ($100,000 if married filing joint return) on qualifying small business stock in any one year. The loss is allowed in the year the business fails or when the taxpayer sells his stock. This provision applies to both C corporations and S corporations, whether the taxpayer is active in the business or not.

Without Section 1244, a taxpayer realizing a loss from the disposition of the stock of a small corporation would only be able to use the loss to offset capital gains from other investments or ordinary income up to $3,000 per year. In addition to the $50,000 ($100,000 for joint filers) first year loss allowed, any excess losses from Section 1244 stock (over the $50,000/$100,000) can be carried forward and claimed in future years (although in future years, the $3,000 per year limit will apply).

"Qualifying small business stock" defined. In order for losses from the disposition of small business stock to qualify under Section 1244, the following requirements must be met:

• Total original capitalization less than $1 million. When the corporation was formed, the total money or property it received for stock must have been less than $1 million in order for the stock to be Section 1244 stock.

• Business must be active business. The business must be "largely an operating company" with greater than 50% of its gross receipts in the previous five years coming from nonpassive sources.

• Must be original issue stock. Only the original purchaser of the stock is eligible to take advantage of the provisions under Section 1244. The stock must be purchased from the company on original issue to qualify.

• Stock must be issued for money or property only. The stock must be issued in exchange for money or property (other than stock or securities) only. Stock received in exchange for services to the business will not qualify as Section 1244 stock. Also, contributing a note to the corporation in exchange for stock will not qualify.

• Stock must actually be issued. The corporation must actually physically issue stock certificates for the money or property contributed. It is not required that this be done when the corporation is initially capitalized; a corporation can issue additional stock at a later date.

Example: Bob and Mark incorporated ABC Inc. Both of them contributed $100,000 and were issued 10,000 shares of stock. During the year, both of them need to make an additional capital contribution of $50,000 to cover operating expenses. Although the additional capital contribution hasn't changed their respective ownership percentages in the corporation, the corporation must issue additional shares in order for any potential loss related to the contribution to qualify as Section 1244 stock. Without the actual issuance of stock certificates, the $50,000 would just be an additional capital contribution to the corporation and will not qualify as Section 1244 stock.

Gains. Under the American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act), investors may exclude up to 75 percent of the gain from the sale of certain small business stock acquired and held for more than 5 years. The increased exclusion applies only to stock acquired after February 17, 2009 and before January 1, 2011. For purposes of the temporary incentive, a "small business" in this case can have assets up to $50 million and must conduct an "active trade or business."

Reporting requirements. In the year of a loss, a statement must be included with your individual tax return stating that you are taking a loss pursuant to Section 1244. If audited in subsequent years, be prepared to provide additional information about the corporation that issued the stock such as physical address, # of shares outstanding, etc...; how the stock was acquired and what consideration was paid; and, the fair market value (FMV) of any property and your basis in the property at that time, if the stock was acquired for property instead of cash.

It's crucial that the requirements for deducting a loss pursuant to Section 1244 be met before a loss is claimed. Failure to meet the requirements of Section 1244 may result in a loss being reclassified as a regular capital loss, limiting your loss against ordinary income to the $3,000 capital loss annual limit. A disallowed loss claim discovered in a subsequent year could result in a very large tax bill.

If you are contemplating an investment in a small business and think that Section 1244 may apply to you, please feel free to contact our office for assistance.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

An LLC is a legal entity existing separately from its owners that has certain characteristics of both a corporation (limited liability) and a partnership (pass-through taxation). An LLC is created when articles of organization (or the equivalent under each state rules) are filed with the proper state authority, and all fees are paid. An operating agreement detailing the terms agreed to by the members usually accompanies the articles of organization.

Choosing the LLC as a Business Entity

Choosing the form of business entity for a new company is one of the first decisions that a new business owner will have to make. Here's how LLCs compare to other forms of entities:

C Corporation: Both C corporations and LLCs share the favorable limited liability feature and lack of restrictions on number of shareholders. Unlike LLCs, C corporations are subject to double taxation for federal tax purposes - once at the corporate level and the again at the shareholder level. C corporations do not have the ability to make special allocations amongst the shareholders like LLCs.

S Corporation: Both S corporations and LLCs permit pass-through taxation. However, unlike an S corporation, an LLC is not limited to the number or kind of members it can have, potentially giving it greater access to capital. LLCs are also not restricted to a single class of stock, resulting in greater flexibility in the allocation of gains, losses, deductions and credits. And for estate planning purposes, LLCs are a much more flexible tool than S corporations

Partnership: Partnerships, like LLCs, are "pass-through" entities that avoid double taxation. The greatest difference between a partnership and an LLC is that members of LLCs can participate in management without being subject to personal liability, unlike general partners in a partnership.

Sole Proprietorship: Companies that operate as sole proprietors report their income and expenses on Schedule C of Form 1040. Unlike LLCs, sole proprietors' personal liability is unlimited and ownership is limited to one owner. And while generally all of the earnings of a sole proprietorship are subject to self-employment taxes, some LLC members may avoid self-employment taxes under certain circumstances

Tax Consequences of Conversion to an LLC

In most cases, changing your company's form of business to an LLC will be a tax-free transaction. However, there are a few cases where careful consideration of the tax consequences should be analyzed prior to conversion. Here are some general guidelines regarding the tax effects of converting an existing entity to an LLC:

C Corporation to an LLC: Unfortunately, this transaction most likely will be considered a liquidation of the corporation and the formation of a new LLC for federal tax purposes. This type of conversion can result in major tax consequences for the corporation as well as the shareholders and should be considered very carefully.

S Corporation to an LLC: If the corporation was never a C corporation, or wasn't a C corporation within the last 10 years, in most cases, this conversion should be tax-free at the corporate level. However, the tax consequences of such a conversion may be different for the S corporation's shareholders. Since the S corporation is a flow-through entity, and has only one level of tax at the shareholder level, any gain incurred at the corporate level passes through to the shareholders. If, at the time of conversion, the fair market value of the S corporation's assets exceeds their tax basis, the corporation's shareholders may be liable for individual income taxes. Thus, any gain incurred at the corporate level from the appreciation of assets passes through to the S corporation's shareholders when the S corporation transfers assets to the LLC.

Partnership to LLC: This conversion should be tax-free and the new LLC would be treated as a continuation of the partnership.

Sole proprietorship to an LLC: This conversion is another example of a tax-free conversion to an LLC.

While considering the potential tax consequences of conversion is important, keep in mind how your change in entity will also affect the non-tax elements of your business operations. How will a conversion to an LLC effect existing agreements with suppliers, creditors, and financial institutions?

Taxation of LLCs and "Check-the-Box" Regulations

Before federal "check-the-box" regulations were enacted at the end of 1996, it wasn't easy for LLCs to be classified as a partnership for tax purposes. However, the "check-the-box" regulations eliminated many of the difficulties of obtaining partnership tax treatment for an LLC. Under the check-the-box rules, most LLCs with two or more members would receive partnership status, thus avoiding taxation at the entity level as an "association taxed as a corporation."

If an LLC has more than 2 members, it will automatically be classified as a partnership for federal tax purposes. If the LLC has only one member, it will automatically be classified as a sole proprietor and would report all income and expenses on Form 1040, Schedule C. LLCs wishing to change the automatic classification must file Form 8832, Entity Classification Election.

Keep in mind that state tax laws related to LLCs may differ from federal tax laws and should be addressed when considering the LLC as the form of business entity for your business.

Since the information provided is general in nature and may not apply to your specific circumstances, please contact the office for more information or further clarification.