Do You Know the Tax Implications of Your C Corp.’s Buy-Sell Agreement?

Do You Know the Tax Implications of Your C Corp.’s Buy-Sell Agreement?

Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are important to understand. Buy-sell basics A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used. Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play. Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares. Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first...
Individual Tax Calendar: Key Deadlines For the Remainder of 2017

Individual Tax Calendar: Key Deadlines For the Remainder of 2017

While April 15 (April 18 this year) is the main tax deadline on most individual taxpayers’ minds, there are others through the rest of the year that are important to be aware of. To help you make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Please review the calendar and contact us if you have any questions about the deadlines or would like assistance in meeting them. June 15 • File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States. • Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES). September 15 • Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES). October 2 • If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed. October 16 • File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States). • Make contributions for 2016 to certain...
A Timely Postmark on Your Tax Return May Not Be Enough to Avoid Late-Filing Penalties

A Timely Postmark on Your Tax Return May Not Be Enough to Avoid Late-Filing Penalties

Because of a weekend and a Washington, D.C., holiday, the 2016 tax return filing deadline for individual taxpayers is Tuesday, April 18. The IRS considers a paper return that’s due April 18 to be timely filed if it’s postmarked by midnight. But dropping your return in a mailbox on the 18th may not be sufficient. An example Let’s say you mail your return with a payment on April 18, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn’t cleared. You then refile and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500. Avoiding penalty risk To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as: DHL Express 9:00, Express 10:30, Express 12:00 or Express Envelope, FedEx First Overnight, Priority Overnight, Standard Overnight or 2Day, or UPS Next Day Air Early A.M., Next Day Air, Next Day Air Saver, 2nd Day Air A.M. or 2nd Day Air. Beware: If you use an unauthorized delivery service, your return isn’t “filed” until the IRS receives it. See IRS.gov for a complete list of authorized services. Another option If you’re concerned about meeting the April 18 deadline, another option is to file for an extension. If you owe tax, you’ll still need to pay that by April 18 to avoid risk of late-payment penalties as well as interest. If you’re owed a refund and file late, you...
Saving Tax With Home-Related Deductions and Exclusions

Saving Tax With Home-Related Deductions and Exclusions

Currently, home ownership comes with many tax-saving opportunities. Consider both deductions and exclusions when you’re filing your 2016 return and tax planning for 2017: Property tax deduction. Property tax is generally fully deductible — unless you’re subject to the alternative minimum tax (AMT). Mortgage interest deduction. You generally can deduct interest on up to a combined total of $1 million of mortgage debt incurred to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. But keep in mind that, if home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes. Mortgage insurance premium deduction. This break expired December 31, 2016, but Congress might extend it. Home office deduction. If your home office use meets certain tests, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. Or you may be able to use a simplified method for claiming the deduction. Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible. Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of gain if you meet certain tests. Be...
2017 Q2 Tax Calendar: Key Deadlines for Businesses and Other Employers

2017 Q2 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. April 18 • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is      also the last day to make 2016 contributions to pension and profit-sharing plans. • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes. May 1 • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.) May 10 • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due. June 15 • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.   ©...
Who Can — And Who Should — Take the American Opportunity Credit?

Who Can — And Who Should — Take the American Opportunity Credit?

If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption. The limits The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of post-secondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses. The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range. Running the numbers If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers. Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately). If your exemption is...