Month: January 2026

If your business pays a large lump-sum commission to terminate a salesperson or vendor, the tax treatment matters. In many cases, you can deduct the full payment in the year you pay it rather than spreading the deduction over many years.

Consider a common situation: You operate an investment advisory firm that uses the cash method of accounting. Clients pay you an annual fee based on assets under management, and you split a portion of those fees with a salesperson or vendor. Your agreement requires you to pay a termination amount equal to the last three years of commissions if you end the relationship. In your case, that payment totals $225,000.

The tax law generally allows a current deduction. You pay this amount to settle an existing contractual obligation tied to services already performed. You do not acquire a new asset, a customer list, or an ongoing right. The payment functions like a catch-up commission or severance payment. Section 162 allows a full deduction for ordinary and necessary business expenses, including compensation for past services.

You do not need to capitalize this payment under Section 197 because you did not acquire an intangible asset in connection with a business purchase. You also avoid capitalization under Section 263 because the payment does not create or enhance a separate and distinct asset. Instead, it eliminates a liability that already existed under your agreement.

The IRS sometimes argues that a termination payment produces a long-term benefit, such as increased future profitability. That argument carries limited weight when the payment merely ends a contractual relationship and does not create a transferable or enforceable right. Courts and IRS guidance consistently treat severance-style payments as current deductions even when the business benefits afterward.

To protect the deduction, you should document the payment carefully. Your agreement and termination documents should clearly show that the payment settles a preexisting obligation for prior services. Avoid language that suggests you purchased goodwill, clients, or future rights.

The bottom line remains straightforward: A $225,000 termination commission is typically deductible as a business expense in the year paid. With proper documentation, you can deduct the full amount now and avoid unnecessary capitalization.

If you want to discuss termination payments, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 30, 2026

Many taxpayers assume that tax law looks only at the stock they actually own. Section 318 proves that assumption wrong

The Section 318 attribution rules can treat you as owning business interests you never purchased, simply because of family relationships, entity ownership, or even stock options. When that happens, your tax results can change dramatically.

Section 318 matters because many tax rules depend on ownership thresholds. Ten percent, 50 percent, or 80 percent ownership often determines control, related-party status, and reporting obligations. Through constructive ownership, a taxpayer who believes they own only a small interest may suddenly cross one of these thresholds.

Section 318 also changes how transactions are taxed. Stock redemptions, related-party sales, and similar transactions often turn on whether the parties count as related. Attribution can convert what looks like a capital gain into a taxable dividend or disallow a loss entirely. Sales involving family members or family-owned entities create the highest risk.

The rules also trigger reporting obligations. Several high-penalty regimes, including foreign-corporation reporting, rely on Section 318 ownership. A small direct interest can balloon into deemed control once family and entity ownership applies. Missed filings in these areas can produce severe penalties even when no tax is due.

Section 318 works through several channels. Family attribution pulls in stock owned by your spouse, parents, children, and grandchildren—regardless of age. Entity attribution moves stock owned by partnerships, corporations, trusts, or estates up to owners and beneficiaries. Attribution also flows downward from individuals to entities they control. Option attribution treats unexercised options as actual ownership.

These rules operate more broadly than the controlled-group rules under Section 1563. Whereas Section 1563 focuses on retirement plans and controlled groups, Section 318 appears throughout the tax code, affecting S corporation benefits, redemptions, foreign corporations, and related-party rules.

Practical examples highlight the risk. Family attribution can force S corporation health insurance into wages. Attribution can turn a family stock redemption into a dividend. Family ownership can convert a small foreign stake into controlled foreign-corporation status with extensive reporting.

If you own interests alongside family members, operate through multiple entities, or hold options, you should map both direct and constructive ownership. A clear attribution map often prevents unexpected tax bills, denied deductions, or penalty notices.

If you want to discuss the Section 318 attribution rules, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 27, 2026

Serious real estate investors rely on the Section 1031 exchange because it allows them to grow wealth faster while legally deferring federal income taxes. 

When you sell rental property without using a 1031 exchange, capital gains tax and depreciation recapture immediately reduce the cash you can reinvest. A properly structured exchange keeps all sale proceeds working for you.

With a 1031 exchange, you can sell appreciated rental property, reinvest every dollar, and move into larger or higher-performing assets. Many landlords use exchanges to trade single-family rentals for multifamily properties, consolidate management, and increase cash flow. You can repeat this process over decades without triggering federal tax.

Consider a simple illustration. An investor buys a rental for $100,000, sells it years later for $175,000, and reinvests the proceeds through a 1031 exchange. He repeats that process multiple times and builds a portfolio worth $10 million. During his lifetime, he pays no federal income tax on any of those sales. 

At death, his heirs inherit the properties with a step-up in basis to fair market value, which eliminates the deferred tax entirely.

To start a successful exchange, you must engage a qualified intermediary before you close on any sale. The intermediary holds the proceeds and guides you through the required steps. You should select this firm carefully and involve your tax advisor early.

Most investors use a forward 1031 exchange. In this structure, you sell your existing rental first and then purchase a replacement property. You must identify replacement properties within 45 days and complete the purchase within 180 days. The process is straightforward and relatively inexpensive, but missed deadlines will destroy the exchange.

Some investors choose a reverse 1031 exchange when they need to buy first. In that case, the intermediary parks the new property in a temporary entity while you sell your existing rental. This approach costs more and requires additional planning, but it solves timing and inventory problems.

The 1031 exchange remains one of the strongest tools for long-term real estate growth. With careful planning, strict attention to deadlines, and the right intermediary, you can defer taxes indefinitely and pass substantial wealth to the next generation.

If you want to discuss 1031 exchanges, please call me on my direct line at 408-778-9651  

• By Leon Clinton
• January 23, 2026