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Partnership Tax Lawyers St Paul | Partnerships: Required Taxable Year

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Under the U.S. tax laws, partnership income and expenses flow through to each partner in a partnership, at a partnership’s tax year-end. Generally, the tax year of a partnership must conform to the tax years of its partners. In some situations, however, a partner, or multiple partners, and the partnership itself may have different tax years, there is a potential for income deferral.

While legitimate income deferral is allowed under the U.S. tax laws, the IRS has rules in place to prevent excessive deferral of partnership income. These rules are explained briefly below in three successive steps. A partnership must apply each rule in chronological order, and the first tax year that meets all of the criteria in a specific rule will be the required tax year for the partnership (subject to certain exceptions allowed by the IRS).

Three-Step Analysis

1) Majority partners’ tax year

In general, if one partner owns more than 50% of the partnership capital and profits, then that partner’s taxable year will apply to the partnership. Similarly, if a group of partners have the same taxable year and own more than 50% of the partnership capital and profits, then that shared taxable year will also apply to the partnership. Majority interest is generally determined on the first day of the partnership.

2) Principal partners’ tax year

If step 1 does not yield a majority interest tax year, then the tax year the principal partners who own more than a 5% interest of capital or partnership profits, will be used if they all have the same tax year.

3) Year with smallest amount of income deferred

If steps 1 and 2 do not yield a result, then the “least aggregate deferral rule” is used to determine the weighted-average deferral of partnership income by testing the tax year-ends of the partners. The tax year required to be selected under the test will be whichever tax year-end is calculated to yield the least amount of deferral of partnership income.

Example of the Three-Step Analysis

To illustrate, assume that Adam and Bob are equal partners, each owning a 50% share. Adam’s tax year ends August 31, while Bob uses the calendar year, December 31. Step 1 would determine that there is no majority interest because neither partner owns more than 50%, and Step 2 would show that neither partners have the same tax year (even though they are both considered to be principal partners owning more than 5%). Thus, the least aggregate deferral rule would be applied in this case.
Under the least aggregate deferral rule, to determine the weighted-average product, begin by counting forward from the end of one partner’s tax year to the end of the other partner’s tax year-end, and then vice versa. For example, counting forward from the end of Adam’s tax year (August 31) to the end of Bob’s (December 31) is four months. Then, the number of months is multiplied by the partnership percentage interest, to determine a weighted-average product. Multiplying four by the partnership interest of 0.5 equals a product of two (the aggregate deferral). Counting forward from the end of Bob’s tax year to the end of Adam’s, determines that eight months will be deferred. Multiplying eight by .50 equals a product of four. Since the product of two under Adam’s August 31 tax year is less than the product of four under Bob’s December 31 tax year, Adam’s tax year-end will also be the tax year-end for the partnership itself.

Conclusion

Described above are the basic rules for determining the required tax year for partnerships. In some cases, it may be possible to be granted an exception from the general rules. These options however often depend upon persuading the IRS of the necessity of adopting a different tax year than would be available under the standard rules. Often, complex legal rules and case law are involved, so it is advisable to seek legal counsel. Furthermore , individual partners may need specific guidance relating to partnership taxation scenarios. Sherayzen Law Office can assist you with these matters.

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Fee Agreement Arrangements with Tax Lawyers in St. Paul: 5 Most Important Issues

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In this article, I will discuss five most important issues that you need to know before you sign a fee agreement with tax lawyers in St. Paul.

1. How is the lawyer’s fee paid? There are three main models of payment that lawyers use: hourly fee, contingency fee, and flat fee. The hourly fee is the most common form of tax lawyer compensation and it is fairly simple – the tax attorney is paid only based on the time he spends on the case. If you’re paying your tax lawyer by the hour, the agreement should set out the hourly rates of the tax attorney and anyone else in this attorney’s office who might work on the case. The contingency fee arrangement, where the tax attorney takes a percentage of the amount the client wins at the end of the case, is almost never used by tax attorneys in St. Paul. In the unlikely case that this latter type of fee arrangement is used, the most important issue to understand is whether the tax lawyer deducts the costs and expenses from the amount won before or after you pay the lawyer’s percentage. Obviously, you will pay more in attorney fees if your tax lawyer deducts the litigation costs based on the latter scenario (i.e. after you pay the lawyer’s fee). Finally, in a flat fee arrangement, you pay an agreed-upon amount of money for a project. For example, you pay $3,000 to your tax attorney to file delinquent FBARs (Reports on Foreign Bank and Financial Accounts) for the past five years. While a flat fee arrangement is possible in a small project, it is generally disliked by tax lawyers in St. Paul because it often lacks the necessary flexibility to account for the client’s individual legal situation. Usually, some sort of an additional payment arrangement is built into such fee agreements to make sure that the balance between the client’s legal needs and the tax attorney’s fees is maintained.

Remember, usually, you will have to pay out-of-pocket expenses (e.g. long-distance calls, mailing costs, photocopying fees, lodging, etc.) and litigation costs (such as court filing fees) in addition to your tax lawyer’s fees.

2. Does the agreement include the amount of the retainer? Most tax lawyers in St. Paul require their client to pay a retainer. Retainer can mean two different fee arrangements. First, retainer may be the amount of money a client pays to guarantee a tax attorney’s commitment to the case. Under this arrangement, the retainer is not a form of an advance payment for future work, but a non-refundable deposit to secure the lawyer’s availability. Second, a retainer is simply the amount of money a tax attorney asks his client to pay in advance. In this scenario, the lawyer usually deposits the retainer in a client trust account and withdraws money from it for the work completed according to the fee agreement. The fee agreement should specify the amount of the retainer and when the lawyer can withdraw money form the client trust account (usually, on a monthly basis).

3. How often will you be billed? Most tax attorneys in St. Paul bill their clients on a monthly basis. Sometimes, however, when the project is not large, the fee agreement will specify that you will be billed upon completion of the case. In a flat-fee scenario, it is likely that the client will be obligated to pay either a half or even the whole amount immediately as a retainer. It is wise for a client to insist in paying some part of the fee upon completion of the case to retain a degree of control over the case completion.

4. What is the scope of the tax attorney’s representation? Most tax lawyers in St. Paul will insist on defining their obligations in the fee agreement. The most important issue here is to state what the tax attorney is hired for without defining it either too narrowly or too broadly. Usually, a fee agreement should specify that a new contract should be signed if you decide to hire this tax lawyer to handle other legal matters.

If you are hiring a large or a mid-size law firm, beware that the partners in a law firm often delegate some or all of their obligations to their associates or even their staff. While the partners retain full responsibility for the case, there is a danger that important parts of it may be delegated to far less experienced associates. Besides the potential quality issues, there is also a concern that you would be paying a large hourly fee for a first-year associate’s work. It is important to insist that the fee agreement specifies what, if any, type of work is being delegated to the associates, the corresponding billing rate of each associate involved, and who carries the responsibility for the whole case.

5. Who controls what decisions? Whether this information should be included in the fee agreement really depends on a case and on an attorney. Generally, tax attorneys in St. Paul let their clients make the important decisions that affect the outcome of the case (such as: acceptance or rejection of the IRS settlement offer, commencement of a lawsuit, business decisions, et cetera). All of the decisions with respect to the legal issues (such as: where to file a lawsuit, what motions should be filed, what negotiation tactics should be employed, how to structure a business transaction from a tax perspective, etc.) are usually taken by the tax lawyers. If there are any changes to this arrangement (for example, you want your lawyer to make certain decisions with the respect to the outcome of the case), you should insist that these modifications be reflected in the fee agreement.

Generally, before you sign the fee agreement, tax lawyers in St. Paul will discuss with you many more topics than what is covered in this article. The five issues explained here, however, are crucial to your understanding of how the tax relationship with your tax attorney will work. Before you sign the fee agreement with your tax lawyer, you should ask at least these five questions and make sure that the answers are complete and to your satisfaction.

Business Tax Returns: The Advantages of a Tax Attorney Review

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A lot of businesses simply look at the tax returns as “adding numbers.” Yet, tax returns are so much more than that. A tax return is a result of a long series of decisions made by the business, such as elections, classifications, investment strategies, structuring of business transactions, and numerous other actions and inactions. Dealing with this interior constitution of a business tax return from a legal perspective (rather than from a more rudimentary accounting view) is the superior advantage of a business tax attorney.

The advantages of the legal approach to tax returns can be grouped in three classifications. First, an attorney will review a business tax return from a structural perspective, taking into account the temporal element of a business transactions (i.e. comparing the effect of a business strategy throughout different time periods – prior years and future projections) and non-tax business and legal goals. This structural overview is especially effective in advantageous positioning of a tax strategy into the overall legal structure of a business.

This first approach necessarily leads to the second advantage – a business tax attorney will explore an alternative treatment of a given business and/or tax issue and will strive to find a legal solution to a taxation matter. Armed with a deeper understanding of other legal and non-legal goals of a business client, a tax attorney may engage in re-classification of certain business transactions to take better advantage of the contemporary provision of the Internal Revenue Code. In certain situations, an attorney review may even result in filing amended tax returns for prior tax years in an attempt to recapture tax benefits (i.e. receive tax refunds), which were unavailable or overlooked in the past.

Finally, an overview of a business tax return by a business tax lawyer is likely to lead to comprehensive tax planning for the future. In some situations, an overview of a business tax return by a business tax lawyer will result in a recommendation of a complete re-structuring of business transactions in a more tax-advantageous matter while seeking to achieve the same business goals. In others, a business tax lawyer may implement tax deferment and tax reduction strategies centered around purely legal and tax concepts.

Whether your business is small or large, growing or maturing, local or international, retaining the services of a business tax lawyer to overview your business tax return should become your annual practice. The benefits of such overview are usually substantial. In addition to the direct advantages of a better current tax strategy and future tax planning, an overview of a business tax return by an attorney may lead to completely unexpected and important discoveries about the legal and tax situation of your business – the legal issues that were overlooked in the past, but could have grown into severe problems in the future had it not been for their timely discovery.

Sherayzen Law Office can help you review your business tax returns and create responsible and tax effective strategies for the current and future tax years. Call NOW to discuss your business tax return(s) with an international business tax lawyer!