You own a store and you have an opportunity to open a second store in another town. The rent is not bad, there is no competition in that town, and there is a need for your product(s). How do you structure the new business?
There are three possibilities. One, you just open the store as part of your business. This has a simplicity to it. However, by doing so, the debts of the new store inure to the main business as well. So, perhaps you want to set up another corporation or LLC. This brings the final two options. One option is for you to create a subsidiary corporation to your current corporation. This separates liability issues and allows for a consolidated tax return which eliminates all internal transactions. So, if you are pumping cash in from the existing business into the new store, it is ignored for tax purposes. The other option is to set up the corporation as a brother-sister corporation to the existing one. In this case the same owner, owns both corporations. This brings the benefit of keeping the business separate and avoids imputed liability. It also allows the owner to take early losses on his or her personal tax return. The problem with that is that there is a lot of documentation needed when existing store puts cash into the new store. If its a loan, the new store has to make a note to the old store and pay interest. Otherwise, it could be deemed to be a constructive dividend to the owner of both businesses. If the existing store sells product to the new store there needs to be invoices and owner will need to document whether there was a mark-up or not, and if there was how you determined the mark-up. These could be avoided if you had a parent-subsidiary relationship. Likewise in the LLC realm, if you have the old store create the new store, then the new store transactions are imputed tax wise to the old store and you avoid inter-LLC transaction issues.
So, if you are creating a business consider whether or not you will be pumping money from one business to the other or having inter-business transactions. If so, you should weigh whether or not to create a subsidiary entity rather than a stand alone separate entity.
If you Sell the Farm, Sell it to a Farmer.
In The One Big Beautiful Bill, Congress added Section 1062. This section allows a person who sells farmland to a farmer to defer the tax on the gain over 4 years. The election must be made one the due date of the return. There are some restrictions on income levels. Additionally, you must put a covenant in the deed restricting the use to only farming for 10 years. You also must have been using the property for farming (or leasing it to a farmer) for ten years. But if you own a farm and want to sell it, this is a great opportunity to do so.
Trump Accounts – Don’t shoot the messenger
Starting July 1, 2026, if you have a newborn from 2025-2028, that baby gets $1,000 in a Trump account free from the Government. It grows tax deferred and at age 18 its turns into a traditional IRA, if the child doesn’t take it out. You or the grandparents can contribute up to another $5,000 per year to the account. This is a great way to grow money for your children in the future.
Even if you don’t have a newborn, but have a child under 18, you can still open the account and donate up to $5,000 per year. Even that onetime give will grow without tax.
You are limited to specific mutual funds for investments which the Treasury Department designates. So despite the name, this is a good deal for your children. Use it.
No tax Deadlines from January 20, 2020-July 10, 2023
The US Court of Federal Claims ruled that due to COVID pronouncements in conjunction with Section 7508A of the Internal Revenue Code which deals with tolling statutes during disasters. President Trump’s declaration for COVID was made January 20, 2020 and was not removed until done so by President Biden on May 11, 2023. Add 60 days to it and you have July 10, 2023 as the operative date for filing any return during that period. The IRS has not and probably will not acquiesce to this decision. However, if you have a client being audited for 2019-2022 years or paid those taxes late, they might get a break from this decision. You can state that the interest for that period 1/20/20-7/10/23 is unagreed and any penalties are not assessable if accruing during that period of time.
Income in Respect of a Decedent
When a decedent enters into a contract prior to his death, and it settles after his death, there is no step-up in basis. It is considered income in respect of a decedent. In such a case, the old basis is used and decedent’s estate or heirs pay the capital gains tax.
What are some of the solutions? 1. The Buyer defaults on the contract, the decedent’s family keeps the deposit, and a new contract is entered into. In such a case, the old contract is dead and a new contract with a stepped up basis is done. And to make matters worse, the contract is an assets of the estate and will bear estate taxes (if decedent’s estate is worth more than the exemption equivalent for estate taxes). So, this is a huge problem.
Let’s say, family enters into a binding contract whereby they sell a portion of decedent’s closely held corporation prior to his death to New and give New an option to purchase the rest after the death of the decedent. This would cause income in respect of a decedent and if Decedent was over the exemption equivalent there would be an estate tax as well.