Brian Borawski CPA, PC

Archive for October, 2012

November and December is when I normally start sitting down with my clients to talk about what they can do at the end of the year to minimize or defer their taxes.  Everyone’s tax situation is going to be different so the meetings are tailored to the clients but here are some general themes that will come up and that you can use in a discussion with you tax professional.  Keep in mind that a lot of this could change depending on which way the elections go.

1)  Do you pay less now or potentially more later?  Right now, the long term capital gains rate is 15% for those in the top tax brackets.  If Congress does nothing, that rate is going to go up to 20%.  If you’re looking to sell a long term asset, you have a decision to make.  You can sell now and pay the 15% rate, or you can hold off, pay later but pay at the higher 20% rate.

2)  What should I do with my dividend paying stocks?  Right now, dividends are taxed at the long term capital gains rate which maxes out at 15%.  If nothing is done, that rate could go up to as high as 39.6% depending on your marginal rate.  While this could affect what corporations do, if you have large holdings in dividend paying stocks, you’re going to see your tax bill go up if you don’t make any adjustments.  Also keep in mind that you’re going to have to pay medicare tax on unearned income if you’re over a certain threshold ($200,000 if you’re single, $250,000 if you’re married) so you also have to take that into account.

3)  What if I have my own C-Corporation?  If you have your own C-Corporation and you have some excess cash you might want to consider flushing out as a distribution.  You’re probably not going to see rates any lower then 15% and you might even combine this with an S-Corporation election in 2013.  This would also apply if you have an S-Corporation and you have some C-Corporation earnings and profits that you want to get out before rates go up.

4)  Expect your payroll taxes to go up.  A big deal last year, it looks like the payroll tax cut isn’t going to be extended.  If you have your own business where you pay yourself a salary, it might be worth looking into whether you can justify a lower one.

As always, this is general information and you should be discussing these matters with a professional.

A few months ago, I discussed the differences between a stock sale and an asset sale.  In one of the examples, I touch on technical terminations and this concept deserves it’s own post.  Let’s start with an example.

Two friends set up an LLC and buy a piece of real estate with each owning 50% of the LLC,  The company files partnership returns (Form 1065) for several years, buys several new pieces of real estate and ten years later, it holds an apartment building, a commercial property and ten single family residences.  One partner decides he wants to go in another direction so he finds a buyer for his 50% interest, the sale is made, the old partner computes his gain on the sale and the new partner just steps into the old partner’s shoes, right??

Wrong

Code section708(b)(1) discusses two ways that a partnership terminates.  The first way is if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.  So if the partnership isn’t doing anything, it no longer exists.  The other way that a partnership is terminated is if within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits.  That means in our example, the partnership has terminated and this has been called a technical termination because the partnership really continues to operate.

What does this mean?  First off, the partnership will have to file two tax returns in that one calendar year (assuming one technical termination).  If in our example the sale of the partnership happened on June 30, then you have a short period return going through June 30 with all of the normal due dates and then a second tax return from July 1 through the end of the year.

Second, depreciation starts over.  If you have commercial property that you bought for $1 million and over 20 years it’s depreciated, when the technical termination happens, then the new partnership’s cost basis would be the old partnership’s net taxable value (in this case, around $500,000).  The bad news is, the useful life resets so you’d then begin depreciating that $500,000 over a “new” 39 years.

In short, if you’re selling a partnership interest, talk to someone who knows partnerships.  You could do some planning to avoid a technical termination although even if you do fall into one, you have to know what to do with the short period tax returns.