Monday, September 9, 2013

When goodwill becomes a capital gain & consolidating multiple S corps to one corp.

James Hamill for the ABQ Journal writes: Question: I am selling my business, which is primarily a consulting business. The buyer’s tax adviser says that most of the purchase price is goodwill and that we will both report to the IRS that goodwill was sold and purchased. He also says this is good for me because I get capital gain treatment for goodwill. When I asked for some proof that this was right he said that he could not give me proof because I was not his client and I needed to check with my own tax adviser. So I went on line and found IRS Publication 544, which supposedly tells what a capital asset is. I can’t understand it. It has a list of what a capital asset is but goodwill is not in the list. It then has a section on “Section 197 intangibles,” which lists goodwill, but it does not say that goodwill is a capital asset. There is also a section on business assets called “Section 1231 assets,” which includes livestock and timber, but no goodwill. I want a definite answer before I sign documents.
Answer: A sale of goodwill will allow you to report a capital gain. Perhaps the confusion comes from the fact that the tax law itself does not say what a capital asset is, it instead says what it isn’t.
A capital asset is anything other than the things the tax law says it is not. Because goodwill is not on the list of non-capital assets, it is then a capital asset.
Because your self-created goodwill was not amortizable by you, it is best classified as a capital asset rather than a Section 1231 asset. Both are entitled to favorable capital gain tax rates.
Q: My wife and I own 7 different real estate properties, with each held in a separate S corporation. We have to file 7 different corporate tax returns every year although all income ends up on our personal tax return. We want to simplify our tax life by putting all the properties in one corporation so we have only one tax return. Can I liquidate 6 of the corporations and just transfer their assets to the one that we keep?
Answer: Well you can, but that’s not the best way to do it from a tax standpoint. The liquidation of an S corporation results in a deemed sale of the corporate assets to the shareholders, and you may create a large taxable gain.
There are two ways to do what you want without a tax issue. Which one you select depends on what your non-tax objectives for having multiple corporations are.
In general, when people do what you and your wife have done the primary motivation is to isolate different properties in different legal entities to create a liability shield. It may continue to be useful to have 7 different entities for this purpose.
If your greatest concern is the 7 different tax returns, you can have one S corporation serve as a holding company that owns all of the stock of the other entities. You and your wife would own the holding company.
The next step is to make elections to treat each corporation owned by the holding company as a qualified subchapter S subsidiary (“QSub” for short). This election is made by filing a Form 8869 for each entity.
The election allows you to pretend that the QSubs have liquidated into the holding company. Unlike the liquidation that you proposed, this liquidation is tax free because the shareholder is itself a corporation.
So you could keep each S corporation alive for state law purposes, yet have only one corporation that must file a tax return (since the others have been deemed to be liquidated).
If you really want to reduce the entities to just one, for both tax and state law purposes, you can merge 6 of the corporations into the one survivor. This will be a tax-free reorganization, either as a type “A” or an “acquisitive D.”
While the specifics can be complicated, the bottom line is that you can achieve what you want (simplified tax filings) but you need to consult with an attorney about what the best structure is for liability protection.
Posted on 5:26 AM | Categories:

I sold I - bond ($10k) which were in my kid's name. How do I file taxes on them? Does the child get exemption? Are there specific forms to be filled out?

At Bogelheads we read: 

I bond tax question

Postby Mrxyz » Sat Sep 07, 2013 6:35 pm
Hi
I sold I - bond ($10k) which were in my kid's name. How do I file taxes on them? Does the child get exemption? Are there specific forms to be filled out?

Thanks
Mrxyz
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Re: I bond tax question

Postby Ice-9 » Sat Sep 07, 2013 7:08 pm
According to IRS Publication 929, if your dependent child earned more than $950 interest in a tax year, (s)he must file.

However, apparently you may be able to elect to report the unearned income on your return if you meet the criteria:

Election to report child's unearned income on parent's return. A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. See Parent's Election To Report Child's Interest and Dividends in Part 2. If the parent makes this election, the child does not have to file a return.


If you were to elect to report your child's interest income on your return, you would need form 8814.
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Re: I bond tax question

Postby Mrxyz » Sun Sep 08, 2013 8:33 am
Ice-9 wrote:According to IRS Publication 929, if your dependent child earned more than $950 interest in a tax year, (s)he must file.

However, apparently you may be able to elect to report the unearned income on your return if you meet the criteria:

Election to report child's unearned income on parent's return. A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. See Parent's Election To Report Child's Interest and Dividends in Part 2. If the parent makes this election, the child does not have to file a return.


If you were to elect to report your child's interest income on your return, you would need form 8814.


Thanks for the information.
So, the interest was less than $950. So, I need to report it under my taxes and not under the child's taxes.

Thanks
Mrxyz
Posts: 179
Joined: 29 Feb 2012

Re: I bond tax question

Postby pshonore » Sun Sep 08, 2013 9:13 am
Assuming the interest was less than $950, your child has no filing requirement and owes no tax. Why would you include it on your return?
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Re: I bond tax question

Postby Mrxyz » Sun Sep 08, 2013 11:26 am
pshonore wrote:Assuming the interest was less than $950, your child has no filing requirement and owes no tax. Why would you include it on your return?


Actually, that's the question I have. But thanks for stating it way better. Ice-9 mentions that I can elect to report the income of my child. But, is it necessary to do so or is it voluntary if the income is below $950?
Mrxyz
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Re: I bond tax question

Postby Ice-9 » Sun Sep 08, 2013 11:42 am
Everything I've read says you must file if unearned income is over $950. It seems like if unearned income is lower (and if your child doesn't have to file for some other reason) then you would only choose to file if your child were due a refund.

From the advice on Nolo's page http://www.nolo.com/legal-encyclopedia/ ... eturn.html

Should a Return Be Filed Even If Not Required?

Even if your child does not meet any of the filing requirements discussed, he or she should file a tax return if (1) income tax was withheld from his or her income, or (2) he or she qualifies for the earned income credit, additional child tax credit, health coverage tax credit, refundable credit for prior year minimum tax, first-time homebuyer credit, adoption credit, or refundable American opportunity education credit. See the tax return instructions to find out who qualifies for these credits.

By filing a return, your child can get a refund.


Edit to add: Good short video from TurboTax on this page https://turbotax.intuit.com/tax-tools/t ... 14501.html
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Re: I bond tax question

Postby Mrxyz » Sun Sep 08, 2013 10:06 pm
Ice-9 wrote:Everything I've read says you must file if unearned income is over $950. It seems like if unearned income is lower (and if your child doesn't have to file for some other reason) then you would only choose to file if your child were due a refund.

From the advice on Nolo's page http://www.nolo.com/legal-encyclopedia/ ... eturn.html

Should a Return Be Filed Even If Not Required?

Even if your child does not meet any of the filing requirements discussed, he or she should file a tax return if (1) income tax was withheld from his or her income, or (2) he or she qualifies for the earned income credit, additional child tax credit, health coverage tax credit, refundable credit for prior year minimum tax, first-time homebuyer credit, adoption credit, or refundable American opportunity education credit. See the tax return instructions to find out who qualifies for these credits.

By filing a return, your child can get a refund.


Edit to add: Good short video from TurboTax on this page https://turbotax.intuit.com/tax-tools/t ... 14501.html


Wow!

Love this forum and all of you wonderful members!!
What a complete answer, with all links attached!
THANKS
Posted on 5:26 AM | Categories: