Tax Law (Questions About Taxes)/tax
Ben Grimm is a 40% partner in We Four, LLC a super-heroing organization. (He does most of the heavy lifting. Reed has 40%, he is the brains. Sue has 10%--they never see her doing anything. Her brother Johnny has the other 10%--he gets too hot under the collar to deal with the customers.)
On 1January 2013, his outside basis in his LLC interest was $125,000. This included his share of liabilities--$75,000. (Reed is always repairing and inventing gadgets—saving the world is expensive.)
In addition to the operating costs, the insurance premiums alone were six figures---you try paying for the cost of cleaning up after a visit from Dr. Doom—they still made a profit. The Company’s a net profit of $300,000 before any payments to partners.
Reed gets a guaranteed payment of $75,000 (a bit of a stretch, but he does invent the impossible) and Ben gets a guaranteed payment of $20,000 as a return on his investment (he used an inheritance form his Aunt Petunia to buy their headquarters). He gets another $30,000 for his services hitting things—this is a labor intensive business. Johnny and Sue each get $10,000.
The partnership made distributions during the year to all of the partners. Ben received:
a. cash of $65,000;
b. inventory with a FMV of $55,000 and a basis of $35,000; and
c. Unrealized receivables with a face value of $25,000 and a basis of $0. These were all of the outstanding receivables as of year-end.
d. An old Fantasti-car worth $45,000 with an inside basis of $25,000.
The distribution of cash and inventory was pro rata amongst all partners. However, only Ben received any receivables, the others received additional cash.
Cash flow was good so the company paid off all of its debt at year end.
Ben has come to you to explain what happened—tax wise. Specifically, he asks:
1. What is he supposed to report on his 2013 return? Income, loss, gain??? (Remember, Ben is strong but doesn’t understand a Thing about taxes).
2. What does he do about the inventory? Reed supplemented their income by selling gadgets to other superheroes (Tony Stark’s equipment is way overpriced). Ben is thinking about using the equipment in a new side business on Yancey Street to be called ‘Clobber This’ where it would be used to help heroes de-stress. (Already he has had inquiries from Frank Castle, Wolverine and Bruce Banner). If the business proves less than fantastic, he plans to sell the equipment.
3. What does he do about the receivables? How will he be taxed and when? How much? He was told he has no tax until he collects.
4. What is his basis in the car? He plans to use it in his business and wants to depreciate it. The company had been depreciating it over 5 years using MACRS. Ben thinks straight line is better; he remembers that from an old accounting course. What can he do?
5. What is his 31 December 2013 basis in the LLC?
6. Ben would like to transfer a 5% interest to his girlfriend, Alicia as a gift—although she can’t see why. However, his last accountant, Debbie T. Credit, said he’ll still get clobbered with the income—what does she mean? Only consider the income tax consequences, not gift tax.
Since this is an LLC, it is disregarded for tax purposes. So the four are just partners, and WE four LLC files a general partnership return 1065. The 1065 attributes all the profits (and much of the expenses to the individuals for them to attempt to deduct it on their personal return) to be calculated on a schedule C attachment to their personal 1040. 100% of the monies and value attributed are subject to Social Security and Medicare. All of this will be itemized on the K-1 distribution form that WE Four LLC gave each partner at the year end.
WE Four, LLC attributed to the owners (as all good passthroughs should) 100% of their net taxable whether or not We Four LLC gave anyone of the quad a quarter.
Yes, Ben will be taxes on money he did AND DID NOT receive. The increase in inventory is taxable. Yes, they will all be paying about as much tax as they possibly could. What does Ben do about the inventory? Well, be ecstatic that if he can sell it he won't have to pay more in taxes on it. Except the inventory that was already sold of course.
Is ben planning to contribute the inventory to Clobber this as Capital? Or is it consigned, or sold to Clobber this?
Receivables? Assuming a cash accounting method, and not accrual, he would not pay taxes until it is collected. Whohoo, way to give it those Federales, not pay them taxes yet.
The LLC attributed the basis in the car the first year, and has been attributing the depreciation. Nothing can be done now. But the tax event comes when the car is sold. If it sell at above depreciated value, then he would have to pay taxes on the recaptured depreciation.
Under MACRS he can only depreciate about $18000 worth of vehicle over the first 4 years. If he wants to use a different depreciation method than the one that is specifically described by the IRS he is free to choose that, but we call those decisions: "Good Til Audit" at which point he would be required to pay all the back taxes, penalties and interest, the amount of penalties would relate to whether the error was intentional or a mistake. So let's go with a higher penalty.
In my mind, trying to beat the IRS out of a few hundred green backs a year, when it will cost you all of those and lots more, PLUS the time to deal with the audit is a disincentive. But Superheroes are motivated by something other than money.
An LLC does not have to pay owners commensurate with their ownership percentage, as you noted in the distro list that you gave.
The IRS does not tax based on ownership percentage, they tax based upon dollars attributed. If Ben gets the same money next year he pays the same tax, regardless any new owners being listed.
If Ben is looking to cut taxes, there are option. Call me and I'll explain the really goods ones, but I'll give you a really easy one right now, in fact we did a lot of research to get this tax cutting program designed. it is the easiest system around and it is virtually unlimited. Traditional tax reduction techniques require huge efforts, you could buy real estate, but then you have to be a night-time plumber and weekend landscaper. Your clients are probably already preoccupied. This simple program is far easier than that. In fact all it takes is three lines of hand written text and a signature and they can have as big a tax write off as they would like. If they wanted a $300,000 tax write off, they can have it. If they wanted a million dollar write off, they can have it. And again it is just a few lines of writing and a signature.
So if the Four really want to pay less in taxes, it can be done. How far would they like to reduce their taxes? Do they want to get down to zero taxes paid?
If so and the net taxable revenue is $300,000, then all Reed has to do is take out a We Four LLC check. On the top right put the date (1 line of text), on the first full line, put Richard Fritzler and $300,000, on the line under that, write Three Hundred Thousand Dollars and No/00. and sign it at the bottom. I'll take care of picking it up and depositing it, so that is work they don't need to do.
Pretty easy huh. And a real deduction. for as much as they want.
Like I said there are better ways, but that one is easy. So call me if you want to know some of the BETTER ways to drastically reduce the tax bite for that business, or your business. 702 792-3392