Are you aware of the 2016 tax return due date changes for certain federal and state income tax returns? The changes will have the greatest impact on flow-through entities including S corporations and partnerships, as well as C corporations. Individual income tax return due dates are not impacted. The legislation signed into law by President Obama last year, also known as the Highway Act (P.L. 114-41), generally affects returns with tax years beginning after December 31, 2015. For your convenience, the Aronson tax team has summarized the changes below.
Partnership return due dates have shifted from April 15, to March 15, or the fifteenth day of the third month after a fiscal year-end. This should facilitate timely preparation of Schedule K-1s for individuals and organizational owners or partners whose returns are due on April 15. S corporation income tax returns will remain due on March 15.
Corporate taxpayers’ income tax return is now due on April 15, a month later than the previous March 15, deadline. Corporate income tax returns for fiscal year taxpayers will be due on or before the fifteenth day of the third month following the close of the fiscal year. Certain exceptions apply to C corporations with taxable years ending on June 30.
State Income Tax Returns
Most states have changed their rules to conform to the federal due date modifications, or have existing due dates that do not require changing the rules in order to conform. There are a handful of states that have not conformed to the new federal C corporation return due dates. Notably, Illinois and Massachusetts still have a March 15, deadline for C corporations. Aronson is actively monitoring developments in these jurisdictions and will issue an update early next year.
Other Important Due Date Changes
Other federal due date changes from the Highway Act include:
Adjusting to the new deadlines may be a challenge for some taxpayers. Please feel free to contact Grant Patterson, Michael L. Colavito, Jr., or your Aronson tax advisor at 301.231.6200, if you have any questions or concerns related to these changes.
The most recent M&A Shop Talk highlighted the major tax advantages of completing a leveraged ESOP buyout transaction as an exit strategy for S corporation structured small businesses with no liquidity except its workforce. Now, we’ll cover a parallel discussion in the context of a C corporation target.
Currently, IRC Section 1042 tax provisions allow owners with at least 30% ownership stake in a qualifying C corporation selling target to complete a leveraged ESOP transaction, and invest their entire net cash proceeds received from the transaction into a qualifying replacement property (QRP). Thereby deferring 100% of the underling gain until such QRP is subsequently liquidated. In order to carry out this exit strategy, the following criteria must be met.
In addition to the described IRC Section 1042 gain deferral provision, qualifying C corporation businesses can also take advantages of the following favorable tax provisions that are not available under an S corporation transaction format as discussed here.
First tax provision, dividend distributions received by the ESOP constitute an additional pension contribution fully deductible to arrive at the regular corporate taxable income. This is not deductible from the alternative minimum tax calculation by the qualifying C corporation target. Accordingly, this contribution is subject to the normal 25% aggregate employee compensation limitation and overall pension contribution ceiling limitation per eligible ESOP employee participant under IRC Section 415.
Second, the cash contribution portion used by the ESOP to satisfy the interest expense portion with respect to the leverage buyout loan is generally not subject to the aforementioned overall 25% aggregate employee compensation limitation. Further, it is not counted as an employer contribution for purposes of the aforementioned IRC Section 415 tax provisions provided that less than 1/3 of the current year employer contributions are credited to highly-compensated employees.
If you are a small business and your workforce is your most valuable asset, the described leverage buyout sales transaction via an ESOP might be the ideal exit strategy for you. If you have any questions or need additional information, please contact Jorge Rodriguez at 301-222-8220 or email@example.com.
Still thinking about selling your business? Do you have the proper techniques and structures in place? I’ll discuss the ins and outs in this week’s M&A Shop Talk.
Generally, one of the most powerful planning techniques to structure a tax efficient sales transaction of your business is the installment sale reporting method under IRC Section 453. However, there are some complexities and inherit limitations that requires an experienced M&A tax planning professional to work around in the context of an S corporation target.
This blog discusses in general broad terms the complexity of installment sale reporting in the context of an F reorganization involving the sale of an S corporation target. For background information on the benefits of an F reorganization involving an S corporation selling target, please visit my previous blog on M&A Shop Talk from Monday, March 28.
Installment sale reporting doctrine generally supports the proposition that there will not be a tax on the portion of the selling proceeds that you have not constructively received regardless of your overall tax method of accounting. However, keep in mind that the term constructive receipt is very broad and it includes deemed consideration constructively received (i.e., assumed liabilities by the buyer party) and it excludes any portion of the purchase price allocated to hot assets that do not qualify for installment sale treatment.
Under the current rules and regulations, there are tremendous planning opportunities when combining installment sale reporting in the context of an F reorganization. However, if this powerful combination of techniques is not fully understood and properly coordinated, it can yield unintended, devastating tax ramifications to you.
For example, under current law, the S corporation target has the ability to distribute the collection of its outstanding installment sale obligation to its selling shareholders without triggering any taxable gain at the entity level. The selling shareholders will be able to step into the shoes of the S corporation and report the remaining, outstanding installment sale obligation as collected. This planning tax provision is generally referred to as the “H Rule” and is not available unless the installment sale obligation stems from a sales transaction, transacted after the S corporation has adopted a plan of liquidation under the 12 months rule pursuant to Section 331.
Now in the context of an S corporation selling target that is undergoing an F reorganization and converting to an LLC status prior to completing the contemplated sales transaction, the described H Rule provision is not appropriate if it involves an equity rolled-over portion consideration. In this particular circumstance, because the selling S corporation will not be liquidated within 12 months after completing the sales transaction, the H rule is not applicable and the distribution of the installment sale obligation to any selling shareholder would constitute an immediate taxable event.
Stay tuned for the next M&A shop talk when will cover the use of Section 351 to achieve stepped-up basis tax treatment to the buyer party. In the meantime, please feel free to schedule a consultation with Jorge Rodriguez, CPA. Jorge is a Tax Director and part of Aronson’s Financial Advisory Services Group. Jorge can be reached by email at firstname.lastname@example.org or (301) 222-8220.
The “F reorganization” has become the tax planning structuring technique of choice in today’s middle market M&A world. So, what does it mean to you as a seller?
First, F reorganization is only applicable in the context of corporations not LLCs. Second, in the middle market M&A world, which is still controlled by S corporation’s seller target, it means legally converting your existing S corporation to an LLC before selling.
The basic conversion process should be tax-free and it generally consists of the following sequence of steps:
Step 1: Form a new corporation hereafter referred to as “HoldCo”.
Step 2: All the S corporation shareholders (with no exception) will contribute 100% of its ownership to HoldCo. Need to apply for a separate employer identification number (EIN).
Step 3: Pursuant to IRS Revenue Ruling 2008-18, the old S election of the S corporation will automatically revert to HoldCo.
Step 4: Effective the same date as Step 2, convert the S corporation to a Qualified Subchapter S corporation (QSub) by filing IRS Form 8869 within 75 days. Entity will retain old EIN.
Step 5: Convert the QSub still a legal entity for state tax purposes, to an LLC via a formless conversion. Entity will retain old EIN.
In some cases, there may be additional steps required beyond the scope of this blog. For example, if the S corporation is not organized under a state that permits formless conversion process to LLC form. Further, any S corporation that is subject to unrecognized Net Unrealized Built-in Gains (NUBIG) tax under IRC Sec 1374, will not be triggered upon such conversion process but it will become the legal responsibility of the newly formed Hold Co.
The two major tax benefits to the seller are as follows:
The major tax benefit to the buyer is to achieve a stepped-up basis transaction that can be amortized over 15 years with absolute minimum tax exposure. The buyer via the transaction described has legally transferred all income tax-related exposure to the HoldCo shareholders.
Now, the major drawback of the F reorganization with respect to a partial tax deferral transaction as described above, is the elimination of the 12 months favorable liquidation rule provisions in the context of installment sale obligation scenario. Stay tuned for the next M&A shop talk when we will cover this important topic. In the meantime, please feel to schedule a free consultation with Jorge Rodriguez, CPA. Jorge is a Tax Director and part of Aronson’s Financial Advisory Services Group. Jorge can be reached by email at email@example.com or (301) 222-8220.
As December signals the close of the year, one of the most frequently asked questions I receive is, “What fringe benefits do you need to include on a W-2 for a greater than 2% shareholder?” A common concept that is widely misreported on form W-2, fringe benefits paid on behalf of a greater than 2% S-Corp shareholder can result in missed deductions and a potentially higher tax liability on the shareholder’s personal return if not prepared and calculated correctly.
Pursuant to IRS Notice 2008-1, premiums paid for a greater than 2% shareholder’s fringe benefits, such as health and dental insurance, are deductible at both the corporate and shareholder level only if reported on the shareholder’s form W-2. Withholding for fringe benefits can be tricky. Premiums paid for health and accident insurance are unique in that they are taxable, but are only subject to federal and state withholding taxes and not employment taxes (i.e. FICA, FUTA, and Medicare). All other fringe benefits are subject to employment taxes.
What Is Classified as a Fringe Benefit?
Aside from the premiums paid for health and dental insurance, other fringe benefits that maybe taxable are: the cost of up to $50,000 in group term life-insurance, short-term/long-term disability premiums, long-term care premiums, and even qualified transportation expenses, including personal use of company automobiles.
Impact to 2013 Taxes
Since outlined in IRS Notice 2008-1, inclusion of fringe benefits on the W-2 of a greater than 2% shareholder always held important tax implications regarding the deduction of such benefits. In 2013, this rule has the potential to negatively impact the taxes of many shareholders if not closely followed. At the beginning of 2013, we saw the expiration of several tax breaks, including the 2.0% FICA tax discount and the return of personal exemption phase-outs (starting at $250,000 for single taxpayers, $300,000 for married couples filing joint). Not only did the personal exemption phase out return, the rules for claiming itemized deductions for medical expenses not covered by insurance now require that these expenses exceed at least 10% of your adjusted gross income (AGI). This is up from 2012, which only required that expenses exceed 7.5%.
How does this all relate to reporting fringe benefits on form W-2? For starters, if not done correctly (or at all), the corporation cannot deduct the premiums paid as business expenses. The more negative consequence from failure to file correctly is that the shareholder will not be able to claim the self-employed health insurance deduction and will instead have to claim the premiums as itemized medical and dental expenses subject to the 10% of AGI rule. This translates into choosing between an above-the-line deduction that reduces taxable income or itemized deductions subject to AGI phase-out rules and limitations.
Ultimately, when preparing 2013 form W-2s, it is necessary to keep in mind all components that are subject to the rigorous reporting requirements of the IRS. Failure to comply can have especially significant impacts to the 2013 personal tax returns of many S-Corp shareholders, so it is important to have a discussion regarding tax-planning with your tax advisor before the close of the year to ensure there are no negative tax implications to start off 2014. Fringe benefits and their impact on form W-2 can be a tedious and complex subject, so please contact your Aronson LLC tax advisor at 301.231.6200 if you need additional information on this topic or the preparation and presentation of form W-2.