Bona fide indebtedness determination lowers hurdle to obtain debt basis.
For S corporation shareholders, borrowing from one company they own to fund another is a common way to inject some cash into a growing business—especially in these days of conservative lending. But previously, if the funded company experienced losses and you wanted to take deductions for those losses on your personal tax returns, you had to meet a high bar to prove that loan increased your debt basis in the company.
As a result of the previous position of the IRS and tax courts, shareholders who borrowed from one related entity in order to loan to another had a particularly hard time defending their debt basis. But thanks to final rules from the IRS, that bar has been lowered and S corporation shareholders are now more likely to qualify for tax deductions for entity losses that have been passed through to them.
Bona Fide Indebtedness Determination
On July 23, the IRS issued final regulations on debt basis determinations for S corporation shareholders (T.D. 9682). These final rules implement a “bona fide” debt basis determination as opposed to the controversial “economic outlay” doctrine that has been developed by the courts over the last several years.
Under the economic outlay doctrine, in order to obtain debt basis an S corporation shareholder must incur a true economic outlay through a transaction, which when fully consummated, left the taxpayer poorer in a material sense.
On the other hand, bona fide indebtedness is determined under general Federal tax principles and depends on all the facts and circumstances. Basically, a bona fide debt is one that creates a true debtor-creditor relationship that is based on a valid and enforceable obligation to pay a fixed or determinable amount of money. This means that shareholders who structure and document their loans to an S Corporation in the correct way can now qualify for debt basis in that S corporation, and as a result, can claim current tax deductions for their share of any losses that S corporation experiences.
This is a win for both the shareholder and the company. The shareholder has potential for additional deductions and the company gets a cash infusion that has potential tax minimizing opportunities for the shareholder.
Previously, the IRS and tax court often used the economic outlay doctrine to deny debt basis to shareholders for funds borrowed from a related entity and then loaned to the S corporation by the shareholder. These transactions are often referred to as back-to-back loans. The reasoning was that, by borrowing from Peter to pay Paul, the shareholder was not considered to be making a true economic outlay.
But with the new debt basis rules, shareholders who structure and document their back-to-back loans to qualify as bona fide indebtedness (see below) are more likely to obtain debt basis—and claim tax deductions—as result of those loans.
The Look-Back Opportunity
While the final debt basis rules were issued with minimal changes to the proposed regulations, one significant highlight is that the final rules did expand their application to open tax years.
What does this mean for you? In addition to the potential tax benefits of restructuring related entity loans going forward, shareholders who have made back-to-back loans in any open tax year and didn’t increase their debt basis now have the opportunity to go back and claim deductions for any previously disallowed losses—if they can demonstrate there was bona fide indebtedness.
Determining Bona Fide Indebtedness
While there is no bright-line test to prove that a debt is bona fide, the key is to demonstrate that there is a true debtor-creditor relationship. Based on federal tax principles, the following steps can help support the determination of bona fide indebtedness:
- Make sure there is documentary evidence of the transaction (i.e. a written loan agreement).
- Both parties should reflect the transaction as a loan in their records.
- Setup a fixed repayment schedule and make efforts to follow the schedule in order to create a history of regular repayments.
- The loan should require interest and the rate should be at least as much as the Applicable Federal Rate (AFR).
- Consider collateral to secure the debt.
- A demand for repayment should be issued if necessary.
- There needs to be intent to create a valid debtor-creditor relationship and the lender must have an expectation of receiving repayment at the time of the loan.
Review S Corporation Financing Strategy
If you are a shareholder in one or more S corporations, work with your tax advisor to review any existing or prospective loans for the opportunity to demonstrate bona fide indebtedness—and therefore obtain debt basis to claim current tax deductions for any entity losses in the future and/or any suspended losses in open tax years.
Going forward, you and your CPA might find that funding S corporations with properly structured back-to-back loans provides a tax-advantaged way to finance a new venture with funds from a more established company.
New York, NY, May 17, 2014 --(PR.com)-- The Knowledge Group/The Knowledge Congress Live Webcast Series, the leading producer of regulatory focused webcasts, has announced today that Samuel C. DiSalvo, Tax Director, Freed Maxick CPAs, P.C. will speak at the Knowledge Group’s webcast entitled: “ASC 740: Income Tax Accounting for 2014.” This event is scheduled for October 16, 2014 from 12:00pm – 2:00pm (ET).
For further details, please visit: http://theknowledgegroup.org/event_name/asc-740-income-tax-accounting-for-2014-live-webcast
About Samuel C. DiSalvo
Samuel C. DiSalvo is a Director with Freed Maxick’s Tax Practice. Prior to joining the Firm, Sam spent over 25 years in the accounting profession with both Big Four firms and private industry. During this time, he gained significant experience with mergers and acquisitions, corporate taxes and compliance, and financial statement tax accounting.
Sam is responsible for providing day-to-day tax advisory services, coordinating, and supervising the preparation of the corporate income tax returns, and reviewing the annual and quarterly provisions for income taxes for both publicly held and privately held corporations. Sam concentrates his practice on joint venture tax matters, merger and acquisition issues, and corporate taxes as well as ASC 740 issues such as purchase accounting, valuation allowances, and international issues. He also has significant experience in identifying tax opportunities in connection with the due diligence reviews of companies’ prior year tax returns.
About Freed Maxick CPAs, P.C.
Freed Maxick CPAs, P.C. is one of the largest accounting and consulting firms in Upstate New York and a Top 100 largest CPA firm in the United States. Serving SEC companies, closely held businesses, governmental and not-for-profit clients across New York as well as nationally and internationally, Freed Maxick mobilizes high-performance professionals to guide client growth, compliance, and innovation. They specialize in the healthcare, manufacturing, real estate, banking, agribusiness and private equity sectors and have more than 280 professional and administrative personnel, with offices in Buffalo, Batavia, Rochester and Syracuse, New York. Freed Maxick’s Tax Practice is the largest of any accounting firm in Upstate New York with over 110 personnel, including 12 tax directors. Freed has built a significant SEC Practice through years of experience in auditing a wide variety of companies and has extensive knowledge in handling public and private capital transactions.
In this two-hour Live webcast, a panel of distinguished professionals and thought leaders will help Finance Executives, CPAs, Attorneys, Enrolled Agents, Tax Practitioners, and other related professionals understand the important aspects of this significant topic. They will provide an in-depth discussion of the significant issues related to tax accounting rules and latest developments in ASC 740. Speakers will also offer best practices in developing and
implementing an effective income tax accounting strategies.
Key topics include:
− An overview of ASC 740: Income tax accounting
− Review issues/considerations on significant areas including valuation allowances, business combinations and uncertain tax positions
− Guidelines and best practices
− Latest tax accounting and regulatory developments and a lot more.
About The Knowledge Group, LLC/The Knowledge Congress Live Webcast Series
The Knowledge Group, LLC was established with the mission to produce unbiased, objective, and educational live webinars that examine industry trends and regulatory changes from a variety of different perspectives. The goal is to deliver a unique multilevel analysis of an important issue affecting business in a highly focused format. To contact or register to an event, please visit: http://theknowledgegroup.org
On March 31, 2014, New York State enacted comprehensive corporate franchise tax reform with the passage of the 2014-2015 NY budget legislation. This legislation includes new rate structures, new rules for banks, changes the economic nexus rules, changes the rules on combined reporting, revises the net operating loss provisions, and changes sourcing of income and apportionment.
The changes take effect over multiple years and this legislation will result in planning for the most advantageous entity structure for N.Y. State purposes for both existing and new businesses.
Unfortunately, these changes will negatively impact utilization of non-refundable N.Y. State income tax credits by qualified NY manufacturers.
Check out our educational alert, providing an overview of the corporate franchise tax reform.
If you have additional questions, or need assistance with N.Y. State entity structuring to maximize utilization of tax incentives under the new corporate tax regime, CONTACT US today.
President Obama renewed his call for expanding child, family and education tax credits in his fiscal Year (FY) 2015 budget proposals as well as for curbing some tax preferences for higher income individuals and businesses. Many of the proposals are familiar from past budgets, but for FY 2015 the White House is placing special emphasis on passing tax reform for families and lower income individuals.
To learn more, check out this SPECIAL REPORT.
By: Sandra DeSimone, CPA, Manager
If your organization is considering applying for tax exempt status with the Internal Revenue Service (IRS), you may want to consider doing it on-line.
Peter Lorenzetti, the IRS Northeast Exempt Organization Exam Manager, recently presented at the New York State Society of Certified Public Accountants Exempt Organizations Conference. The presentation discussed the September 2013 IRS launch of the much anticipated interactive on-line Form 1023 Application for Recognition of Exemption under 501(c)(3) of the Internal Revenue Code.
The online version of the form 1023 was designed to make the application process more efficient and user friendly. When the application is being filled out on-line, there are pop-up boxes with instructions and information to assist the user. According to Lorenzetti, since its launch, 166 applications for tax exempt status have been completed using the new interactive Form 1023 and the comments from users have been positive.
How long will it take for an application to be approved?
Recently, the IRS has come under scrutiny for long wait times of application approvals. Lorenzetti noted the average application takes six months to be approved. Some causes for delayed applications are submission of incorrect user fee, and/or inaccurate or incomplete applications. Key wording also needs to be targeted in the narratives, to demonstrate the mission of the organization. It is suggested that the application be thoroughly reviewed before submitting it to the IRS.
We suggest your organization obtain professional advice with your organization’s application for tax exempt status. Freed Maxick CPA’s is an expert in the process. We can either prepare your application or review it before it is submitted. Contact Us today to get connected to a professional who can help.
By: Amanda Roth, Senior Tax Manager
Halloween is a signifier of many things. It brings to mind the fall season, children running around in costumes, carving pumpkins, baking apple pies, and eating candy. Few look at the picture at right and think about paying sales tax. But sales tax applies to many things- including Halloween items. Here are a few sales tax facts to consider this Halloween.
In New York State, sales of pie pumpkins, gourds, and other items sold in supermarkets that are used by a purchaser in cooking pies, cakes, breads, cookies, etc., are exempt from New York sales tax because they constitute food sold for human consumption. However, decorative and carving pumpkins (including decoration gourds) are not being marketed or sold in their normal or intended use for human consumption. Thus, decorative pumpkins and gourds, and carving pumpkins, whether sold in supermarkets, farm stands, nurseries, or other businesses, are not sold as “food” and constitute tangible personal property subject to sales tax. So if you are buying a pumpkin which you will use to bake a pie then it is exempt from New York sales tax. However, if you are buying a carving pumpkin to carve a jack-o-lantern, that pumpkin is subject to New York sales tax.
In addition, generally, food, food products, beverages, dietary foods and health supplements sold for human consumption are not subject to New York sales tax. However, the exemption does not apply to candy and confectionery. Therefore, Halloween candy is subject to New York sales tax.
Also, beginning April 1, 2012, there is an exemption from New York state sales and use tax for clothing, footwear, and items used to make or repair clothing, costing less than $110 per item or pair. This exemption does not apply to locally imposed sales and use taxes unless the county or city imposing those taxes elected the exemption. For purposes of the exemption, the term "clothing and footwear" is defined to mean: clothing and footwear to be worn by human beings. This does not include costumes or rented formal wear; fabric, thread, yarn, buttons, snaps, hooks, zippers and like items that are used or consumed to make or repair such clothing (other than costumes or rented formal wear) and become a physical component part of the clothing. Therefore, the pants you buy to take you child “trick or treating” are exempt from New York sales tax but your child’s Halloween costume is subject to New York sales tax.
New York state sales tax is complicated and most areas are not straight forward. Sometimes the use of an item dictates whether and item is subject to sales tax. If sales tax is this complex for Halloween items, imagine how complicated they can be when considering whether your business needs to collect sales tax.
For information about how Freed Maxick can help guide and manage your individual or business tax strategies, contact us to learn more.
2013 may be the last opportunity for taxpayers to take advantage of bonus depreciation, an enhanced Code Section 179 expensing deduction, and Code Section 179D deduction for energy efficient improvements to commercial buildings.
By: Jennifer A Birkemeier, CPA
Senior Manager, CSP360
Taxpayers considering making significant capital investments in property in the near future should consider making such investments by December 31, 2013 to enjoy these lucrative tax benefits. These tax benefits may allow the entire cost to be expensed for the 2013 tax year instead of a deduction claimed over a period of years under the MACRS depreciation rules. Given the tax increases and new taxes effective beginning with the 2013 tax year, the ability to deduct capital investments in property could result in a significant tax savings.
Bonus depreciation, as defined in Code Section 168(k), was first introduced in 2001 and has been extended & enhanced several times over the past 12 years. This tax incentive allows for a percentage of an asset’s basis, currently 50%, to be expensed immediately while the remaining basis is depreciated over the MACRS recovery period. If the law is not extended, bonus depreciation will not be available for property placed in service after December 31, 2013. To qualify for bonus depreciation, the asset must qualify as new property that has not been previously used by another taxpayer.
Code Section 179 currently allows a taxpayer to expense up to $500,000 of qualifying property placed in service during the 2013 tax year. The property must be personal property and the maximum amount of qualifying property that a taxpayer may place in service during 2013 is $2,000,000 before the deduction begins to phase out. Beginning with the 2014 tax year, the Code Section 179 deduction will be lowered to $25,000. The ability to expense up to $500,000 has helped many taxpayers decide to proceed with asset acquisitions in 2013.
Taxpayers have the opportunity to receive immediate tax deductions for energy efficient improvements that they have made to a building since 2006. Code Section 179D provides a deduction of up to $1.80 per Square Foot for energy efficient lighting, HVAC and building envelope improvements that a taxpayer has placed in service by December 31, 2013. There is also an opportunity to review improvements since2006 and claim deductions that a taxpayer may have missed. There are several requirements to receive the Code Section 179D deduction that include receiving a specific certification from a qualified individual. In addition, for government owned buildings the deduction can be allocated to the architect or engineer who is primarily responsible for the design of the energy efficient improvements.
CSP360 is a subsidiary of Freed Maxick, CPAs in Buffalo NY. Freed Maxick CPAs is a Top 100 accounting Firm, and one of the leading providers of Cost Segregation and consulting services. Our philosophy is to offer clients a 360 approach to a taxpayer’s fixed assets; pairing engineering and LEED specialists with accountants for a truly unique tax advisory team. Since 1995, our in house team has provided specialty studies to CPAs in a private label arrangement. Products include Cost Segregation, Code Section 179D Energy Studies and Code Section 263(a) repair studies. CSP360 is Circular 230 compliant and has proven methodologies that are sustainable in the event of an IRS examination. To learn more about our unique approach click here.
While the IRS has reported on repairs regulations before, this is the first time they are issuing them in final form. The IRS reports that the final repair regulations will affect all taxpayers that acquire, produce, or improve tangible property. The final regulations provide a lot of technical information that taxpayers have to comprehend and incorporate into their accounting systems. While this may be tedious and feel overwhelming, the regulations do provide some positive benefits for taxpayers. The Treasury has included some of the comments they received into the final regulations in an attempt to reduce the time required to comply with the new regulations.
New safe harbor for routine maintenance for buildings
The 2011 temporary regulations provided that the costs of performing certain routine maintenance activities for property other than a building or the structural components of a building are not required to be capitalized as an improvement. Due to the comments received by Treasury, the final regulations contain a safe harbor for routine maintenance for buildings.
The final regulations use 10 years as the period of time in which a taxpayer must reasonably expect to perform the relevant activities more than once.
Routine maintenance can be performed any time during the life of the property, provided that the activities qualify as routine under the regulations.
For purposes of determining whether a taxpayer is performing routine maintenance, the final regulations remove the taxpayer’s treatment of the activity on its applicable financial statement from the factors to be considered.
The final regulations clarify the applicability of the routine maintenance safe harbor by adding three items to the list of exceptions from the routine maintenance safe harbor:
Amounts paid for a betterment to a unit of property
Amounts paid to adapt a unit of property to a new or different use
Amounts paid for repairs, maintenance, or improvement of network assets
The good news for taxpayers
The final regulations do not provide a bright line test when determining whether improvements need to be capitalized or expensed. Meaning- the IRS regulations give examples but no hard numbers. While some taxpayers like the subjective nature of the rules; many taxpayers do not want to burn up resources training their staff, or have to battle the IRS regarding expenditures that have to be capitalized upon an examination. The inclusion of a “safe harbor” for repairs and maintenance on buildings should alleviate some of these difficulties when applying the improvement standards for restorations to building structures and systems.
Many taxpayers are turning to experts in the field in an attempt to maximize their tax deductions and reduce the total burden of complying with the regulations. This is where a Cost Segregation Analysis is beneficial. Cost Segregation analyses include a thorough review of the property to accurately depreciate the assets and accelerate tax deductions. They also include an intensive review of all blueprints and site visits to verify the assets and determine the quality of those assets. The professionals performing these analyses have an intimate knowledge of the building and building systems and will provide valuable insight when examining repair and maintenance costs to determine if they must be capitalized or expensed.
CSP360 is a subsidiary of Freed Maxick, CPAs in Buffalo NY. Freed Maxick CPAs is a Top 100 accounting Firm, and one of the nation’s leading providers of Cost Segregation and consulting services. Our philosophy is to offer clients a 360 approach of a taxpayer’s assets; pairing engineering and LEED specialists with accountants for a truly unique tax advisory team. Since 1995, our in house team has provided specialty studies to CPAs in a private label arrangement. Products include Cost Segregation, 179D Energy Studies and 263a Repair and Maintenance Review. CSP360 is Circular 230 compliant and has proven methodologies that are sustainable on IRS examinations.
To learn more about our unique approach click here
FASB reaches Consensus and Ratifies EITF Issue No. 13-C
On June 26, 2013 the Financial Accounting Standards Board effectively ratified the guidance provided by the Emerging Tax Force Issue No. 13-C. The following is a summary of the consensus:
Unrecognized tax benefits should be netted against tax losses or credit carryforwards from the same jurisdiction that could be utilized to offset the UTB. The UTB would reduce the deferred tax asset established for these losses or credits and would not be recorded as a separate liability.
The new standard requires prospective adoption but allows optional retrospective adoption (for all periods presented).
For public companies, the standard must be adopted in years beginning after December 15, 2013 (and in interim periods).
For private companies the standard must be adopted in years beginning after December 15, 2014 (and in interim periods).
No new disclosures are required. However, if the gross amount of the loss or credit (i.e. the amount listed on the income tax returns as-filed) is disclosed, then further explanation may be needed to explain the difference on the returns versus the amount in the financial statements.
At this time, it appears as if the SEC requirements for the disclosure of UTBs will not change. Therefore, the gross amount of UTBs would still appear in the footnote disclosure.
It will still be important to continue to track the UTBs. For example, there could be an adjustment to the UTB presentation if the position on the UTB changes, or if the loss or credit carryforwards are used. Similarly, if the loss or credit has a full valuation allowance against it, then the VA could change as well if the UTB is no longer necessary.
When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. To us, tax time is all the time. We’re sticklers about deadlines and compliance, but our larger goal is tax management. So we keep a year-round eye on federal, state and local tax laws, including those pending. We alert you to any changes that may affect you and help you respond in a timely way.
We have no doubt that we bring a level of in-house tax expertise second to none in Upstate New York. We have the experience and resources necessary to resolve all your tax issues no matter what the complexity, including:
Capitalization vs. Repair
Cost Segregation Services
Foreign Bank Account Report Compliance
International Tax Services
New York (NY) State Excelsior Jobs Program
Personal Tax Services
Research & Development (R&D) Tax Credits
State and Local Tax Services
State Tax Analysis & Resolution
Tax Planning and Consulting
Transfer Pricing Analysis – Study
Tax Planning and Consulting
CONTACT US Freed Maxick CPAs is Western and Upstate New York’s (NY) largest public accounting firm and a Top 100 firm in the U.S. Freed Maxick provides audit, tax and consulting services to closely-held businesses, public (SEC) companies, not-for-profits and governmental entities in Buffalo, Rochester, Syracuse, Albany and NYC, New York.
The Supreme Court’s decision on DOMA and Prop 8 is not only a civil rights win for same sex couples- it’s a financial win for many.
In an unprecedented event last week, the Supreme Court ruled that the 1996 Defense of Marriage Act (“DOMA”) singled out same-sex marriage and treated same-sex couples "as living in marriages less respected than others." This week’s ruling will now give same-sex couples many of the same benefits (and in some cases, drawbacks) as any other married couple in the eyes of the law. Married same-sex couples in a dozen states and the District of Columbia will now be eligible for more than “1,000 spousal benefits previously off limits under DOMA.” And the court's other decision on Wednesday, striking down California's Prop 8, paves the way for same-sex marriages to resume in that state.
Key Aspects of the DOMA Ruling Include:
Income tax: Same-sex couples will now be able to file their federal income taxes jointly. For many couples -- especially those where one person earns significantly more than the other -- merging incomes for tax purposes will result in big savings. In addition, many education benefits, such as the American Opportunity Tax Credit and Lifetime Learning Credit, are now available to the spouse in a same-sex marriage where one spouse pays for qualified expenses of the other.
Health insurance: Some same-sex couples pay income tax on imputed income for the medical benefits one partner receives through the other's health insurance plan; this will now likely change. Meanwhile, many federal employees will likely be granted spousal benefits like partner health insurance.
Estate and Gift tax: Same-sex couples will also be exempt from gift tax when transferring assets to each other. Under DOMA, any gift between same-sex spouses of more than $14,000 (the 2013 annual gift tax exclusion) began utilizing the lifetime exclusion limit of $5.25 million-- after which tax was assessed on gifts exceeding the exclusion. Opposite-sex couples have never been subject to that tax. Same-sex couples will also be eligible to “split” gifts to take advantage of a doubled annual gift tax exclusion ($14,000 above x 2 married individuals or $28,000 for 2013) In addition, the unused lifetime exclusion of the decedent spouse is now portable and will allow the estate of the surviving spouse to utilize it.
Social Security benefits: Same-sex couples will now be eligible for the same federal tax treatment and Social Security benefits as opposite-sex couples in the event that one spouse passes away. This means a surviving spouse will be eligible for Social Security survivor’s benefits and will be exempt from the federal estate tax on assets exceeding $5.25 million. Note: In states where same-sex marriage is banned, this issue still has to be sorted out as the Social Security Administration has based these benefits on the state of residence.
While many will receive the benefits of this ruling; they will also receive its downside. For example, same-sex couples who divorce may be subject to the federal gift tax when dividing assets, or be partially responsible for the back taxes of the divorcing partner. Also, same-sex married couples will now have to file as either married filing joint, surviving spouse or married filing separate. Thus, the “marriage penalty” will impact some same-sex couples.
What the decision doesn't do: While many specifics of the Supreme Court's ruling are still blurry, it appears that couples must be married at a state level for all of these federal benefits to apply -- meaning domestic partnerships and civil unions don't qualify. It's also unclear whether federal benefits will apply to same-sex couples who marry in a state where same-sex marriage is legal but move to a state where it's not recognized.
To learn more check out this special report detailing Post DOMA Tax Implications
We may be based in New York State, however Freed Maxick CPAs provides tax services to business all over the U.S., no matter your location: Alabama, AL; Alaska, AK; Arizona, AZ; Arkansas, AR; California, CA; Colorado, CO; Connecticut, CT; Delaware, DE; Florida, FL; Georgia, GA; Hawaii, HI; Idaho, ID; Illinois; IL; Indiana, IN; Iowa, IA; Kansas, KS; Kentucky, KY; Louisiana, LA; Maine, ME; Maryland, MD; Massachusetts, MA; Michigan, MI; Minnesota, MN; Mississippi, MS; Missouri, MO; Montana, MT; Nebraska, NE; Nevada, NV; New Hampshire, NH; New Jersey, NJ; New Mexico, NM; New York; NY, North Carolina, NC; North Dakota, ND; Ohio, OH; Oklahoma, OK; Oregon, OR; Pennsylvania, PA; Rhode Island, RI; South Carolina, SC; South Dakota, SD; Tennessee, TN; Texas, TX; Utah, UT; Vermont, VT; Virginia, VA; Washington, WA; West Virginia, WV; Wisconsin, WI; Wyoming, WY. We Serve all 50 States.
Contact us to learn more about our tax services