Succession Planning

It is never too early to start thinking about succession planning.  All business owners eventually reach a point where they want to retire, they want to slow down, they want to try their hand at something new, they want to give the younger generation a chance to show their stuff or they just want to cash out.  In every case, it is a smoother and generally more profitable transition if the owners have taken the time to plan and think through what is required to successfully transition their business.  

Succession planning may involve sale of the business.  But to whom?  To employees?  To family?  To suppliers?  To customers?  To competitors?  And for how much?  Is there a reasonable methodology for setting the value of the business?

Succession planning may involve gifts to spouse, children and grandchildren.  But are they competent to run the business?  Is the management staff competent and loyal enough to work with inexperienced family members while they come up to speed?

Succession planning may involve stock options or deferred compensation or other arrangements with key employees designed to keep them on board after the owners have moved on.  Do you have a group of employees who have the experience and skill to run the business after you are gone?  Have you given them the ownership and/or compensation incentives needed to win their loyalty and keep them on board.

Succession planning may involve employee stock ownership plans and other retirement plan vehicles.  By using these qualified retirement plan vehicles, business owners may be able to create a market for their stock where no market otherwise exists, and may be able to sell their stock in a tax-advantaged away.  But are the possible tax savings worth the cost and administrative complexities inherent in such arrangements?

Will get into more succession planning issues in future blogs.  Please give me a call if you want to discuss succession planning and how we can help you.  Jsenney@pselaw.com or 937-223-1130.

 

AND ONE MORE THING.  I am please to announce that immigration attorney Shahrzad Allen is now working with us.  If you or one of your clients needs assistance with a VISA or other immigration matter, please give me or Shahrzad a call.  Jsenney@pselaw.com or Sallen@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

Material Participation under Passive Activity Rules

Passive losses may be deducted against passive income, but generally may not be deducted against other income, such as wages, portfolio income, or business income.  Active losses may be deducted against income from any source.  A passive activity is any activity in which the owner does not materially participate.  So materially participating in an activity can be very important for tax purposes.

An owner materially participates in an activity if the owner participate sin the activity's operations on a regular, continuous and substantial basis.  Substantial participation includes an owner working more than 500 per year in the activity, or if the owner is the sole worker in the activity, or if the owner works more than 100 hours a year and that is more than any other worker (including non-owners), or the owner materially participates for at least 5 of the last 10 years.  Substantial participation may be met in some other way, and the owner may otherwise meets a facts and circumstances test.  

Give me a call if you want to know more about the passive activity rules.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  Don’t forget to have your owners and employees and independent contractors sign non-compete, non-solicitation and non-disclosure agreements.  Give me a call if you want us to help you draft an agreement.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

Deduction of Suspended Passive Losses

Passive losses may be deducted against passive income, but generally may not be deducted against other income, such as wages, portfolio income, or active business income.  Any unused passive activity losses are suspended and carried forward to be used against passive income in future years.

When a taxpayer disposes of his or her entire interest in a passive activity to an unrelated party in a taxable transaction, suspended passive losses are treated as non-passive and may be deducted against passive and non-passive income.  Unused suspended credits however may not be used against non-passive income when a passive activity is sold.  Unused suspended credits continue in suspense to be used to offset passive income from other passive activities in the future.

If a passive activity is sold in an installment sale, suspended losses from the activity are allowed to be deducted against non-passive income, but only in the ratio that the gain recognized each year bears to the total gain on the sale.

Give me a call if you want to know more about the passive activity rules, or how to utilize suspended passive losses.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  Don’t forget to add non-compete provisions to the employment agreements, bonus arrangements and deferred compensation agreements you sign with your employees. It’s bad enough to have a former employee compete with you.  It’s worse if you are stuck paying him or her bonus, severance or deferred compensation.  Give me a call if you want us to help you draft an enforceable non-compete agreement.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation, Immigration Law

Special $25,000 Allowance for Passive Real Estate Activities

Internal Revenue Code section 469 limits the deductions and credits a taxpayer may claim from an activities in which he or she does not "materially participate". Losses from passive activities generally may not be deducted against non-passive income, such as wages, portfolio income, or business income. Any unused passive activity losses are generally suspended and carried forward to be used against passive income in future years.

An activity is considered a passive activity if it involves the conduct of any business and the taxpayer does not materially participate in the business activity. An individual materially participates in an activity only if he or she is involved in the activity’s operations on a regular, continuous, and substantial basis.

Except for individuals in the real estate business, passive activities include any rental activity, whether or not the taxpayer materially participates Losses from rental real estate activities are allowed against income from other passive activities, but are not generally allowed against other income (ie., active or portfolio).

Nevertheless, the federal tax code permits an individual to deduct annually up to $25,000 of passive activity losses (to the extent such losses exceed passive activity income) that flow from rental real estate activities in which he or she “actively” participates. The special $25,000 deduction exception is available only to individuals (including individuals that conduct the rental activity through an entity taxed as a partnership or “S” corporation) and is not available to “C” corporations or trusts, and only in certain circumstances to estates.

An individual is not “actively” participating in a rental real estate activity if he or she has an interest that is less than a 10 percent interest in the activity at any time during the year. But having a 10-percent (or greater) interest does not create a presumption of active participation.  The active participation requirement does not requires as much participation as the  “material participation" standard that applies to non-passive activities.  More about the level of participation required in a future blog.

The $25,000 allowance for passive losses from real estate rental activities is phased out ratably as a taxpayer’s adjusted gross income (determined without regard to passive activity losses) increases from $100,000 to $150,000.

Please call or email if you want to know more about the $25,000 alllowance for passive rental real estate activities.  Jsenney@pselaw.com or 937-223-1130. 

AND ONE MORE THING.  How long has it been since you had a Legal Audit?  The Business attorneys at PS&E would like to meet with you and do a FREE legal audit of your business.  As part of the legal audit, we will work through a checklist with you and identify areas where you may be at risk.  If you would like to schedule a free Legal Audit with one of the PS&E attorneys, please send me an email or give me a call.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

What is Passive Income and Loss?

 Passive income or loss are earnings or losses of an individual derived from a rental property, limited partnership or other activity in which the individual is not actively involved. Passive income and loss are treated differently than non-passive income or loss for tax purposes.   

There are three main types of income: active income, passive income and portfolio income. Passive income does not include active income such as earnings from wages or active business participation.  Passive income also does not include portfolio income such as income from dividends, interest or capital gains. 

Passive and non-passive income are generally taxable.  Passive losses can be deducted from passive income for tax purposes.  But passive losses generally cannot be used to offset active income or portfolio income.

It is important to know what type of income and loss is being generated by your business and investment activities.  It does you little good to hold investments that are producing passive losses if you have no passive income to offset the losses against.  You should review your business and investment portfolio with your tax or investment advisor from time to time to make sure you have the right mix.  Call or email me if you have any questions about passive income or loss. Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  When "C" corporations sell assets, the corporation pays tax on the gain, and then the shareholders pay tax on the money distributed to them.  This double tax effect can be eliminated if the selling corporation is an “S” corporation rather than a “C” corporation.  So owners of a “C” corporation who are considering selling their business in the future should consider converting to an “S” corporation.  If you want to know more “S” corporations or built-in gain, please give me a call.  Jsenney@pselaw.com or 937-223-1130.

Serving Dayton, Serving You

Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation

Converting a “C” Corp to an “S” Corp.

S corporations can provide significant tax advantages over C corporations in the right circumstances.  But there are a number of potential tax problems that you should assess before making a decision to convert. Below is a summary of the most significant of these for you to consider.

Built-in gains tax. S corporations generally are not subject to tax. But those that were formerly C corporations may be subject to tax on unrealized "built-in" gains that the C corporation has at the time the S election becomes effective.  These built-in gains are subject to tax if those gains are recognized within 10 years (7 years for tax years beginning in 2009 or 2010; 5 years for tax years beginning in 2011) after the corporation becomes an S corporation. Recognition of built-in-gain generally is unfavorable, but there can be situations where making an S election can produces a better overall tax result despite the built-in gains tax.

LIFO inventories. C corporations that use LIFO inventories have to pay tax on the benefits they derived by using LIFO if they convert to S corporation status. The tax can be spread over four years. This cost must be weighed against the potential tax savings from converting to S corporation status.

Passive income. S corporations that were formerly C corporations are subject to a special tax if passive investment income (dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If this tax is owed for three consecutive years, the corporation's election to be an S corporation terminates. This tax can be avoided by distributing the accumulated earnings and profits as taxable dividends to the shareholders or by avoiding recognition of passive income.

Unused losses. If a C corporation has unused net operating losses, the losses cannot be used to offset its income as an S corporation, and cannot be passed through to shareholders. If the losses cannot be carried back to an earlier year, it is necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the conversion to S status.

There are other factors to consider in switching from C corporation to S corporation status.  For example, shareholder/employees of S corporations can't get the full range of tax-free fringe benefits that are available with a C corporation.  All of these factors have to be considered to understand the full effect of converting from C to S status.

Please give me a call or email if I can help you evaluate whether you should convert your C corporation to an S corporation.  Jsenney@pselaw.com or 937-223-1130.

AND ONE MORE THING.  Many businesses have been improperly classifying employees as independent contractors. The reason? Classifying workers as contractors rather than employees can save an employer 20-30% of its labor costs.  The IRS has voluntary worker classification program that will allow businesses to reclassify their workers as employees, and pay only a small amount to cover past payroll taxes.  However, the IRS also announced plans to aggressively audit and look for worker misclassification in the future.  Give me a call if you have any questions about whether your workers can or should be treated as employees or independent contractors.  Jsenney@pselaw.com or 937-223-1130.

 Serving Dayton, Serving You

 Pickrel, Schaeffer & Ebeling Co., LPA, 2700 Kettering Tower, Dayton OH 45423

www.pselaw.com

 Tax, Business, ERISA, Employee Benefits, Real Estate, Construction Law, Private Placement Security Law, Employment Law, Workers Compensation, Probate, Estate Planning, Succession Planning, Bankruptcy, Creditors Rights, Immigration Law, Litigation, Arbitration, Mediation