Archives for November 2013

HOW TO AVOID IRS ASSESSMENTS – S CORP SHAREHOLDER-EMPLOYEE NEEDS TO BE PAID A REASONABLE COMPENSATION

November 26, 2013 by Frank

One of the most significant issues facing S Corporations is whether they pay their shareholder-employee(s) a reasonable compensation. Unfortunately there is no definition of “reasonable compensation” in the Internal Revenue Code or IRS regulations. Thus when reasonable compensation is being discussed in relation to tax preparation or tax planning strategies, tax professionals generally look at court cases for guidance. The recent court cases of Glass Blocks Unlimited (T.C. Memo. 2013-180) and Sean McAlary Ltd. Inc. (T.C. Summ. 2013-62) provide such guidance.

If the IRS is successful in reclassifying distributions and loan payments as wages, not only are there payroll taxes due, but also the interest and penalties associated with the failure to timely remit the payroll taxes.

In Glass Blocks, the court agreed with the IRS that the payments made to the shareholder-employee were properly reclassified as wages rather than as distributions and loan repayments. Although the shareholder had made payments from his personal financial resources to keep the company afloat during the lean years, the IRS found that those payments were capital contributions to equity and not a business loan. The court focused on four factors [Read more…] about HOW TO AVOID IRS ASSESSMENTS – S CORP SHAREHOLDER-EMPLOYEE NEEDS TO BE PAID A REASONABLE COMPENSATION

Best College Savings Plans for 2013

November 19, 2013 by Frank

A favorite tax planning strategy for many families is to contribute to a College Savings Plan. What some donors do is automatically make a contribution to the 529 plan in the state where the recipient resides. While this is convenient, is it the best investment strategy?

Morningstar, a well-known investment research firm located in Illinois, has announced its top 32 College Savings Plans for 2013. Using the Olympics medals standards to rate the 529 plans, Morningstar assigned its Gold-rated plans to the following 4 plans [Read more…] about Best College Savings Plans for 2013

Asset Protection – Auto Insurance Coverage

November 12, 2013 by Frank

We recently were told the following story. Parents bought their son a car as a graduation gift (titled in parents’ names). When the parents called their auto insurance carrier and requested quotes, they learned it was much cheaper to obtain coverage in the parents’ name rather than in their son’s name. Son is driving the car with two female friends as passengers. Unfortunately, he failed to navigate a country road turn going 50-60 MPH and all three occupants were killed. The parents of the female passengers sued the parents of the driver for $6Million each. Needless to say the parents’ auto insurance did not provide this amount of coverage and the parents wound up selling their assets to cover the liability. The legal theory supposedly was that since the parents allowed their son to drive their car, they are legally responsible for his actions.

While we cannot comment on the accuracy of the legal issues of this story, we can attest that this story is not atypical. It is not uncommon that when faced with a financial decision, the decision is based on a single criteria – cost. This reminds us of the Fram oil filter commercial, where the slogan was “You can either pay us now (by having your oil filter changed regularly) or pay us later (when your engine fails due to lack of regular maintenance).”

How many of us would ask the insurance agent (or better yet the family attorney) as to whether the parents’ assets would be better protected if the car and insurance policy were in the names of the parents or the son?

How does this story apply to taxes? [Read more…] about Asset Protection – Auto Insurance Coverage

Why IRS Form W-4 Results in Underwithholding of Taxes

November 5, 2013 by Frank

Every tax season we hear a familiar question: “Why didn’t my employer withhold enough federal income taxes from my paycheck and what can I do about it?” Why am I subject to underwithholding penalties?

What is form W-4 and why does my employer require me to fill it out?

The IRS form W-4 is used by your employer to calculate how much federal income tax to withhold from your paycheck per your instructions to the employer. If you fail to give the employer a W-4 form, the employer is required to withhold as if you were a single taxpayer with no dependents. The form only takes into account your filing status and number of exemptions you claim on this form. Thus, if you are married with two children and you are the sole breadwinner for your family and you fill out your W-4 as married with 4 exemptions, the amount of tax your employer withholds should equal the amount of tax due when you file your tax return.

I filled out the W-4 correctly, but why do I still owe the IRS?

The W-4 is an antiquated form that only takes into account [Read more…] about Why IRS Form W-4 Results in Underwithholding of Taxes