Month: March 2024

As a co-owner of a business—whether it’s an existing venture, a new enterprise you’re founding, or a company you’re considering buying into—you must consider the structural and legal frameworks that are crucial to ensuring the stability and continuity of your investment.

One such framework is a buy-sell agreement, an essential tool for managing ownership transitions smoothly and efficiently.

Why Consider a Buy-Sell Agreement?

A buy-sell agreement can transform your business ownership into a more liquid asset, prevent unwanted changes in ownership, and save on taxes while avoiding complications with the IRS. Essentially, it’s a contract that predetermines how ownership interests are bought and sold under certain conditions, providing a clear path forward during times of transition.

Types of Buy-Sell Agreements

Cross-purchase agreement. This is an arrangement among co-owners where, upon a triggering event (such as death or disability), the remaining co-owners must buy out the departing owner’s interest.

Redemption agreement. Here, upon a similar triggering event, the business itself contracts to buy out the departing owner’s interest.

Both of these types of agreements aim to ensure there’s a buyer for every co-owner’s interest when needed, restrict unilateral transfer of ownership, and secure favorable tax results.

Triggering Events and Valuation

Triggering events, such as death, disability, retirement, or even simply a desire to exit the business, are predefined in the agreement. Specifying an acceptable method for valuing ownership interests is vital, as is ensuring that the IRS respects the valuation method for tax purposes.

Funding the Agreement

You will likely want to use life insurance policies to fund the buyouts, because they can provide the necessary liquidity when the most common triggering event occurs: the death of a co-owner. This approach can also offer tax advantages.

Benefits for You and Your Heirs

Implementing a buy-sell agreement offers certainty for your heirs, potentially avoiding market absence for your ownership interest and disputes over valuation for estate tax purposes. It establishes an agreed-upon method for selling your interest, providing liquidity and possibly eliminating estate tax hassles.

Take Action

Given the complexity and the significant implications for your business and personal estates, setting up a buy-sell agreement is not a do-it-yourself project. To tailor an agreement that fits your specific situation and goals, professional legal and tax advice is crucial.

If you want to discuss buy-sell agreements, please don’t hesitate to call my direct number at 408-778-9651.

• By Leon Clinton
• March 19, 2024

Nobody wants to spend their whole life looking over their shoulder, wondering if the IRS will audit them. Luckily, there is a statute of limitations on IRS audits and tax assessments. Once the limitations period expires, the IRS can’t audit your return or assess any additional tax.

You may have heard that the statute of limitations on audits is three years. That’s generally the case, but not always. Depending on the circumstances, the IRS could take far longer to audit your return—and sometimes forever.

Unless another limitations period applies, the IRS has a maximum of three years to audit your return and impose a tax assessment. The three-year period starts to run on the later of

• the due date of the return (usually April 15 or March 15 for calendar-year taxpayers), or
• the day you file your return.

As a practical matter, the IRS usually audits returns 12 to 18 months after taxpayers file them.

But the IRS has much more time to audit your return if you engage in certain bad conduct.

For example, the IRS has six years to audit your return if you underreport your gross income by more than 25 percent or fail to report more than $5,000 in foreign income.

A five-year limitations period applies to certain employers who claimed the Employee Retention Credit (ERC) during 2021. H.R.7024, which passed the House 357-70, could extend the ERC audit time to six years.

There is no limitations period if you fail to file a return, or if you file a false or fraudulent return with the intent to evade tax. This is true even when your tax preparer, not you, committed the fraud.

If you’re under audit, the IRS will ordinarily ask you to agree to extend the limitations period long before it ends. You do this by signing a consent form. Most taxpayers agree to do this. If you don’t, the IRS will close the audit and typically impose an immediate assessment.

If you want to discuss IRS audits or the statute of limitations, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 12, 2024

When you rent a bedroom in your home and that rental unit creates a tax loss, can you deduct the loss?

Yes, if you meet the four technical requirements listed below:

1. You used the bedroom as a hotel unit because it was regularly available on a vacation rental site like Airbnb for occupancy by paying customers and you never used it for any personal purpose during the year (or after conversion to rental use).
2. Your average rental period is for seven days or less, making it a hotel room because you rented the bedroom to what the tax code calls “transients.” (For example, if you rented the unit 25 times for a total of 77 days during the year, that’s an average rental of 3.08 days. You rented to transients.)
3. Your rental unit is not a tax code-defined rental property because the average period of customer use of the unit is for seven days or less.
4. You did all the work on the bedroom rental, and no other person helped you. Therefore, you materially participated in the hotel unit rental activity.

You rented your bedroom as if it were a hotel and materially participated in the rental. Assuming you were in this activity to make a profit, you qualify to deduct all of your expenses of rental against the rental income. If that creates a loss, you deduct the loss against all your other income.

If you want to discuss the tax implications of bedroom rentals with me, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• March 8, 2024