Partnerships often involve complex legal and tax issues, so it may be advisable to obtain legal counsel when forming a partnership. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs.

Syndication Costs

Often, the formation of a partnership will involve various costs associated with marketing and selling partnership interests to prospective partners. These fees are termed “syndication” costs. Unfortunately for taxpayers, such costs are neither deductible nor amortizable under Internal Revenue Code Section 709. This will be the case regardless of whether the costs were incurred or actually paid.

Organizational Expenses

Unlike syndication costs, however, certain organization costs connected with forming a partnership may be deductible or amortizable. Under IRC Section 709, organizational costs include expenses that are: “(1) are incident to the creation of the partnership; (2) are chargeable to a capital account; and (3) would be amortized over the life of the partnership if they were incurred for a partnership having a fixed life.” Organizational costs may include certain legal and accounting fees associated with the formation of a partnership.

In general, a partnership may be allowed a $5,000 initial deduction for the organizational costs it incurs in its first year of business. However, if organization costs amount to more than $50,000, the $5,000 deduction will be reduced by any amount that exceeds the $50,000 threshold. Organization costs that are not deductible because of the threshold may be amortizable over a period of not less than 180 months, beginning with the month that the partnership begins operating its business. Note, special rules that are not covered in this article apply to partnerships formed before October 22, 2004.

It is important to also note that not all initial costs a partnership may incur or pay will be treated as organizational costs. Besides syndication costs (covered above), costs associated with acquiring and transferring assets to the new partnership, admitting or removing partners after the initial formation of a partnership, and various other costs may not be treated as organizational costs under these rules.

Startup Costs

Startup Costs are amounts that are paid or incurred after a business is formed, but before business operations actually start. In general, startup costs include pre-operation costs associated with employee training, advertising, promotion and market surveys, and related expenses. Costs associated with investigating the purchase of a partnership interest of a partnership may also be treated as startup costs by partners, provided certain rules are met.

A partnership may deduct $5,000 of startup costs in its initial year of operations. Startup costs that exceed $50,000 will reduce this amount, similar to operating expenses (explained above). A partnership may elect to amortize startup costs that have been reduced by the $50,000 limit over a period of 180 months, beginning with the month the partnership commences its operations. If a business is acquired, the period of amortization will begin the month after the business is purchased.

Contact Sherayzen Law Office for Partnership Organization and Tax Planning

If you are thinking about starting a partnership or your existing partnership is need of a sound tax plan, contact Sherayzen Law Office. Our experienced business and tax attorneys will thoroughly analyze your current situation and create a customized plan to move your business toward achieving your business and tax goals.

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However, this is not always the case. This article will cover several common examples of instances in which a taxable exchange may result at some point.

Disguised Sales

Under Internal Revenue Code Section 707(a), in certain circumstances, the IRS will deem a supposed contribution of property to a partnership in exchange for a partnership interest to be a “disguised sale”. A disguised sale occurs when property that has appreciated in value is contributed, and soon after, the partner receives a distribution from the partnership. The IRS will view the distribution received as a payment for the property contributed.

Recently the IRS issued final regulations regarding disguised sales. In general, contributions and distributions made within a two-year period will be deemed to be sales. A disguised sale may also occur when a partner contributes property to a partnership, and the same property is then transferred to another partner either as a distribution, or as a liquidation of the second partner’s interest in the partnership. Additionally, a contribution may be treated as a disguised sale when, either before or after the contribution, different property is distributed to the contributing property within two years.

Under the regulations, however, if a distribution is made to a partner over two years after property is contributed and the distribution is reasonable in light of a variety of factors, the distribution will generally not be deemed to be a disguised sale.

Pre-Contribution Gain (Built-in Gain)

In general, taxable gains may also occur when contributed property that originally had a fair market value different from its basis (“pre-contribution” or “built-in” gain), and within seven years of the contribution date, the property is distributed to a different partner. In such instances, the distribution will be treated as a sale, and the contributing partner will recognize any net pre-contribution gain on the property. Any gain recognized by a contributing partner will increase his or her basis in the partnership interest.

Additionally, when a partnership distributes any property (besides cash) within seven years to a partner who has contributed built-in gain property, gain will be recognized on the lesser of: (1) the remaining net built-in gain of the contributing partner, or (2) any excess of the fair market value of property distributed over the partner’s adjusted basis in the partnership interest before the distribution. Any gain recognized by the partner will increase his or her basis in the partnership interest.
An exception to these general rules may apply where property is distributed back to the partner who originally contributed it. In such instances, the partner will not need to recognize built-in gain. Instead, the general partnership distribution rules will be applicable.

Contact Sherayzen Law Office for Help with Partnership Tax Issues

Partnership formation and operation can involve many complex issues, and it is often a wise idea to seek legal advice. Our experienced tax attorneys will thoroughly review your case, advice you on the available options and implement the customized tax strategy to your business. Contact Sherayzen Law Office to schedule a consultation to discuss your case.

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Under the notice, the IRS requires the employers to implement the 2013 withholding tables as soon as possible, but not later than February 15, 2013. However, the use the 2012 withholding tables is permitted until employers implement the 2013 withholding tables; in such case, the employers should make an adjustment in a subsequent pay period to correct any under-withholding of social security tax by March 31, 2013.

One of the biggest news, of course, is the increase of the employee tax rate for social security to 6.2%. Previously, the employee tax rate for social security was 4.2%. The employer’s tax rate for social security remains unchanged at 6.2%. The social security wage base limit increases to $113,700. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2012. There is no wage base limit for Medicare tax.

The second big news is that the withholding taxes will go up with Additional Medicare Tax for certain high-income wage earners. As described in an earlier article, starting January 1, 2013, Additional Hospital Insurance Tax (Additional Medicare Tax) of 0.9% will be imposed on employees who earn wages above certain thresholds. For the withholding purposes, the IRS requests that an additional 0.9% tax is withheld on wages paid to an employee in excess of $200,000 in a calendar year. The employer is required to begin withholding Additional Medicare Tax in the pay period in which he pays wages in excess of $200,000 to an employee and he should continue to withhold the Additional Medicare Tax each pay period until the end of the calendar year.

Note that Additional Medicare Tax is only imposed on the employee; there is no employer share of Additional Medicare Tax.

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At that point, a Board of Directors of such an organization may start to wonder about whether it is possible to convert the status of an organization, how to do it and whether there are any viable alternatives.  In this article, I will examine the possibility of converting a non-profit organization’s tax-exempt classification, focusing on 501(c)(3) and 501(c)(6) classifications.

General Conversion Process

First, in order to attempt the conversion from one classification to another, a tax-exempt organization will need to change its organizational documents (such as the Articles of Incorporation and the corporation’s Bylaws) to reflect the primary purpose of the new type of tax-exempt organization being sought and to comply with the requirements of such organizations. Usually, the Bylaws or the Articles of Incorporation govern the exact process of approval of the amendment of these important organizational documents. Frequently, these documents will say that a Board of Directors’ resolution is sufficient, but, often, an approval of the majority of members maybe required. If the organizational documents are silent on the amendment process, your state’s statute would need to be consulted on the amendment process.

Amending the documents is usually not enough. Changing the primary purpose of an organization may also entail eliminating, or at least substantially reducing, any prohibited or limited activities under the new desired classification. For instance, if you seek to convert a 501(c)(6) organization into a new 501(c)(3) organization, then, after changing the original organizational documents (and following any necessary rules in doing so) to comply with applicable 501(c)(3) requirements, will also need to limit substantial lobbying activities and any other activities that are prohibited or limited under 501(c)(3) rules. Usually, these activities require a wholesale overview of the organization’s activities by an attorney in order to determine what types of practices need to be modified and how.

Finally, in order to convert, a new form will need to filed with the IRS requesting the grant of the new tax-exempt status, demonstrating compliance with the relevant regulations. For example, in case of conversion to 501(c)(3), Form 1023 will need to filed, demonstrating compliance with IRS 501(c)(3) rules. This, in turn, will require paying an application fee as well as providing any applicable required verification documents. There is no guarantee that the IRS will recognize the new tax-exempt status being sought. This is why it is important for the application to be well drafted, demonstrating adherence to the relevant law and regulations.

Alternatives to Conversion

The motivations for seeking alternatives to full conversion from one classification to another are numerous. Nevertheless, the most popular reason for avoiding such conversion and seeking an alternative is the fact that an outright change in classification of an entity may significantly limit the ability of such organization to achieve their goals.

It is not easy to discuss alternatives to conversion, because the particular circumstances of an organization will determine what alternatives are available and whether they are more desirable than the process of conversion.

Yet, one can identify two general trends (which may or may not apply to a particular organization), which I will state here in their ideal form. First, some organizations attempt to create a hybrid organization which contains completely separate components – one that strictly follows the rules of a 501(c)(3) and another that adheres to the 501(c)(6) rules. This alternative will require separate application forms and fees, but it may give the most flexibility to the Board of Directors (assuming the IRS grants the requested status).

On the other hand, as a second alternative, a lot of organizations opt to create a new organization altogether in order to avoid legal complications. The idea here is that the members of the Board of the old corporation will form the majority of the members of the Board of the new corporation. Beware, while this alternative may solve one type of legal complications, it may actually bring a host of others.

Conclusion

Conversion from one tax-exempt classification to another can be very complex and usually requires an in-depth knowledge of the Internal Revenue Code, IRS regulations and case law. Therefore, you will need to consult an experienced attorney familiar with both business and tax aspects of these issue.

If you have any questions concerning tax-exempt classifications of non-profit corporations, contact Sherayzen Law Office for legal help. Our experienced attorneys can assist you in resolving any problems in this area of law.

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In this article I will briefly explain the basic differences between two common types of tax-exempt organizations, 501(c)(3) and 501(c)(6).

General Rules of Tax-Exempt Organizations

In general, net earnings may not inure to the benefit of individuals or private shareholders under either a 501(c)(3) or a 501(c)(6). Form 990 (Return of Organization Exempt From Income Tax) is the standard annual return required to be filed (and other forms, such as Form 990-EZ may be filed, depending upon size or characteristics of the organization).

In order to be granted tax-exempt federal income status, organizations must demonstrate when applying to the IRS that they meet various applicable tests. The rest of this article will explore some of the basic differences between 501(c)(3)’s and 501(c)(6)’s when it comes to these rules, such as the general purpose, and common interest requirements, as well as the advantages and disadvantages such organizations may have when it comes to tax deductions and influencing legislation through lobbying.

General Purpose – 501(c)(6)

Typically, a 501(c)(6) organization must demonstrate that improvement of business
conditions is the general purpose of the organization (this information should be included with the application form). The improvement of business conditions should relate to one or more “lines of business”, rather than the performance of “particular services” for individual persons. A line of business commonly refers to either a certain geographic area’s entire industr, or to all of its components of an industry, but would not include a group comprised of businesses that market a particular brand within an industry. Performance of particular services such as advertising that carries the name of members, interest-free loans, assigning exclusive franchise areas, operation of a real estate multiple listing system, or operation of a credit reporting agency, are examples of what would not be sufficient to show an improvement in business conditions.

General Purpose – 501(c)(3)

In contrast, 501(c)(3)’s include entities organized for charitable, educational, religious, literary, scientific, or other limited (such as amateur athletic organizations, or prevention of cruelty to children or animals) purposes.

Common Interest – 501(c)(6)

A 501(c)(6) organization must be able to show in the application documents that a common business interest of the community, or the conditions of a particular trade, will be advanced. Some examples as noted by the IRS of a common business interest would be: promotion of higher business standards and better business methods and encouragement of uniformity and cooperation by a retail merchants association; education of the public in the use of credit; establishment and maintenance of the integrity of a local commercial market; and encouragement of the use of goods and services of an entire industry. Some examples of membership associations include chambers of commerce, real estate boards, boards of trade, or professional sports leagues. Form 1024 is filed to apply for tax-exempt status for such organizations.

Common Interest – 501(c)(3)

Unlike a 501(c)(6), owners of a 501(c)(3) generally do not need to share a common interest. Form 1023 is filed to apply for tax-exempt status for such 501(c)(3) organizations.

Tax Deductions for Donations – 501(c)(6)

Contributions to 501(c)(6) organizations are not deductible as charitable contributions on a donor’s federal income tax return. However, donations may be deductible provided that they are ordinary and necessary trade or business expenses in the conduct of the taxpayer’s business.

Tax Deductions for Donations – 501(c)(3)

In contrast to 501(c)(6) organizations, taxpayers may deduct gifts, cash, or other items as charitable deductions to 501(c)(3) organizations on their federal income tax returns.

Lobbying – 501(c)(6)

501(c)(6) organizations are allowed to engage in substantial lobbying activities in order to attempt to influence legislation. However, 501(c)(6) organizations may need to disclose to their members the percentage of annual dues paid related to lobbying.

Lobbying – 501(c)(3)

In contrast, lobbying activities are significantly limited for 501(c)(3) organizations. If it is determined that an organization engages in a substantial part of its activities in lobbying, it may risk the loss of its tax-exempt status. An organization will be considered to be attempting to influence legislation, “[I]f it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation.”

Depending upon the facts, it may be possible for a tax-exempt organization to have a separate components (such as entity having separate 501(c)(3) and 501(c)(6) components) in order maximize allowable lobbying, or other, activities. But both components would need to go through separate application processes in order for this to occur.

In future articles, we will cover the possibility of converting a tax-exempt organization into a different type of tax-exempt entity. However, this process, like the application process can be complex, and an experienced attorney is often necessary.

Contact Sherayzen Law Office for Tax and Business Questions About 501(c) Organizations

Due to the complexity of the topic, this article only provides a very general background to the differences about these two common types of 501(c) organizations, and it should not be relied upon to make a decision in your particular situation. If you have any further questions with respect to 501(c) organizations, you should contact Sherayzen Law Office for legal and tax help.

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Criminal Penalties

If taxpayer does not file the required information, criminal penalties may apply in certain circumstances. The penalty provisions are 26 U.S.C. § 7203 (“Willful failure to file return, supply information, or pay tax”), 26 U.S.C. § 7206 (“Fraud and false statements”), and 26 U.S.C. § 7207 (“Fraudulent returns, statements, or other documents”).

Failure to file information required under section 26 U.S.C. § 6038(a) (Form 5471 and Schedule M)

A $10,000 penalty will be imposed for each annual accounting period of each foreign corporation if the necessary reporting information is timely not filed. If the IRS sends the taxpayer a notice of a failure to file, an additional $10,000 penalty (per foreign corporation) will be charged for each 30-day period (or fraction thereof), during which the failure continues after the 90-day period in which the notification occurred, has expired. This additional penalty is limited to a maximum of $50,000 for each failed filing.

Additionally, if all of the required information is not timely reported or filed, a taxpayer may be subject to a 10% reduction of certain available Foreign Tax Credits. A further 5% reduction may be applied for each 3-month period (or fraction thereof), during which the failure to timely report or file continues after the 90-day period of IRS notification has expired. (26 U.S.C. § 6038(c)(2) places certain limitations on this penalty).

Failure to file information required by 26 U.S.C. § 6046 and related regulations (Form 5471 and Schedule O)

Taxpayers who fail to file or report all of the information under 26 U.S.C. § 6046 will be subject to a $10,000 penalty for each failure, for each reportable transaction. Additionally, if the failure to report or file continues for more than 90 days after the date the IRS mails notice of this failure, an additional $10,000 penalty will apply for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired. This additional penalty is limited to a maximum of $50,000.

Further, taxpayers who have another person file required Form 5471 and Schedule J, M, or O for them may be subject to the above-cited penalties if the other person does not correctly file the required form and schedules.

Contact Sherayzen Law Office NOW For Legal Help With The IRS Form 5471

Do you have questions regarding Form 5471 reporting issues, or concerns that you may be neglecting to report required information and schedules that can lead to substantial penalties? Sherayzen Law Office is here to assist you in all of your international tax needs. Call now at (612) 790-7024 to discuss your tax situation with an experienced business tax lawyer.

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Penalties for failure to comply with the IRS provisions can be substantial, so taxpayers and purchasing agents should be aware of these rules if they are involved in such transactions.

The FIRPTA Withholding Tax

The FIRPTA income tax withholding provisions (IRC Section 1445 and related sections) require purchasers or agents acquiring U.S. real property interests (“USRPI)” from foreign persons to withhold 10 percent of the amount realized on the disposition, subject to certain exemptions.  In general, a USRPI is any direct interest in parcels of real property located in the U.S., and any interests in a U.S. corporation (such as shares, but not including solely a creditor interest).

The IRS defines “disposition” for this provision to include disposition for any purpose of the Internal Revenue Code, including but not limited to: sales or exchanges, liquidations, redemptions, gifts, transfers, and similar transactions.  “Foreign” persons are broadly defined by the IRS, and include nonresident alien individuals, foreign corporations, partnerships, trusts, estates, and foreign branches of U.S. financial institutions if the foreign branch is a qualified intermediary.  The “amount realized” generally means the sales or contract price of the property (see IRS rules for more detail).

Upon advance request, the IRS has the authority reduce the 10 percent withholding tax to an amount that will cover the estimated tax liability due, if it is determined that the collection of the amount due under applicable IRS provisions will not be jeopardized by the reduction.

Note that special rules apply for distributions of USPRIs by foreign corporations, partnerships, trusts, or estates, and by certain domestic corporations to foreign shareholders.

Penalties

In general, various penalties may be imposed under the applicable FIRPTA provisions.  Penalties apply for failure to file the required Form 8288 when due and for failure to pay the withholding when due.  Additionally, any tax required to be withheld under Section 1445 may be collected, plus interest on the unpaid amount, if the taxpayer fails to do so.  Further, a criminal penalty of $10,000 or five years in prison may be imposed under Section 7202 for willful failure to collect and pay over the required tax.  Corporate officers or other responsible persons may face separate penalties under Section 6672.

Contact Sherayzen Law Office

This article is intended to give a brief summary of some of the issues concerning, and should not be construed as legal or tax advice.  If you have further questions regarding these matters as it pertains to your own tax circumstances, Sherayzen Law Office offers professional advice in all of your tax and international tax needs.  Call now at (612) 790-7024 to discuss your tax situation with an experienced business tax lawyer.

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Taxpayers can claim the self-employed health insurance deduction if the insurance plan is established under their business and if any of the following are true:

a) They were self-employed and had a net profit for the year,
b) They used one of the optional methods to figure net earnings from self-employment on Schedule SE, or
c) They received wages from an S corporation in which the taxpayer was a more-than-2-percent shareholder.

Sherayzen Law Office’s Minneapolis tax lawyers can help you properly plan your tax strategy to take advantage of the Internal Revenue Code.

Contact Us Now!

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Selected General Deadline Reminders for Individuals: December 31, 2010

Traditional IRA to Roth IRA Conversion. Last date for taxpayers to convert a traditional IRA to a Roth IRA for the tax year 2010 (provided a taxpayer meets the other applicable criteria).

Keogh plan deadline. Keogh plans must be established by the last date of the year (December 31, for calendar year basis taxpayers) in order for contributions to be deductible for the tax year 2010.

Capital Gains and Losses. Capital gains and losses for individual taxpayers are determined by the last trading date of the tax year. This is the case even though the settlement date (the date the shares-sold are actually exchanged and cash is received by the broker) may be several days later. Thus, even though the settlement date may occur in early 2011 for shares sold on the last trading date of 2010, the capital gains and/or losses will be established in 2010.

Short Sale Gains (But not Losses). Gains on shares sold short are also determined by trading date because of an IRS ruling treating the transaction as a constructive sale. Thus, shares sold short for gain on the last trading date of 2010 will be treated as capital gains for the tax year 2010, even though actual delivery of the shares may occur in 2011. Note, however, that for losses on shares sold short, the losses are not deductible until the shares are actually delivered to a broker. Taxpayers should plan accordingly if a loss is anticipated.

Marital Status. Taxpayers should note in general that marital status as of the last date of the year will determine the status for the entire tax year 2010.

General Tax Calendar Deadlines and Information (From IRS Publication 509)

December 10: Employees who work for tips. If you received $20 or more in tips during November, report them to your employer. You can use Form 4070.

December 15: Corporations. Deposit the fourth installment of estimated income tax for 2010. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.

Selected Tax Deadlines for Employers Based on Monthly Deposit Rule

Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in November by December 15, 2010.

Non-payroll withholding. If the monthly deposit rule applies, deposit the tax for payments in November by December 15, 2010.

Employer’s Tax Deadlines: Payroll Due Dates for Deposit of Taxes for 2010 Under the Semiweekly Rule

Excise Tax Deadlines

December 10: Communications and air transportation taxes under the alternative method. Deposit the tax included in amounts billed or tickets sold during the first 15 days of November.

December 14: Regular method taxes. Deposit the tax for the last 15 days of November.

December 28: Communications and air transportation taxes under the alternative method. Deposit the tax included in amounts billed or tickets sold during the last 15 days of November.

December 29: Regular method taxes. Deposit the tax for the first 15 days of December.

Have more questions about tax deadlines, or need help in planning for your year-end tax decisions? Call Sherayzen Law Office to discuss your tax situation with an experienced tax lawyer!

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