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Contents

Welcome

Hello Thomas - welcome to TaxAlmanac! My name is Tim Doyle and I serve here in the role of TaxAlmanac Moderator. If you haven't done so already, you might want to review our Quick Start Guide to help you get oriented.

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- Tim Doyle, TaxAlmanac Moderator, Tdoyle 12:04, 18 January 2006 (CST)

PARTNERSHIP GUARANTEED PAYMENT

there doesn't HAVE to be a guaranteed payment, especially if there is still such a loss. But there COULD be, if A promised to fund more money so that B could have an income. That is up to them to negotiate. It might be enough that B gets to own a % of the business for his/her work. Kevinh5

As for claiming domestic partner B as A's dependent, if B lives in the same home the entire year and A is otherwise paying the upkeep, I see no reason why it wouldn't be allowed. B has no income as the partnership still has a loss.

Thanks.

SMLLC/S corp

You asked: Hi JR, I was hoping you could help me with this. (You seem very knowledgeable on S Corps.)

I have a SMLLC on Sch C for 2007. S election effective 01/01/08. Balance Sheet at 12/31/07 is: Equipment (net) $2000, Loan to owner ($10000) and Deficit of $8000. How does this fit into the Form 1120S? What is the shareholder's basis in stock? In debt? I'm lost on this one.

Thanks.

OK, you really don't want to know! What you have there is negative equity, which is taxable income recognition. Wait. What do you mean loan to owner? Not on a Sch. C you don't. So you have assets of 2k and equity of 2k. On 1/1, you merely state the equity as capital stock 1000 and add'l paid in 1k, at least that's conventional in IL...you don't bring on the 'debt'....make sense? Jeff JR1

SMLLC/S corp

You asked: JR, help please.

A SMLLC was formed in 2006 to purchase a pool service & repair business. Purchased occurred 01/02/07. Sch C filed in 2007 showing a $71K profit.

A timely filed S Corp election was made with 01/01/08 effective date. Assets at 12/31/07 were Cash $90K, Inventory $5K, F&E (net) $20K and Goodwill (net) $725K for a total $840K. Liabilities at 12/31/07 were NP to Seller $226K, NP to Owner $543 and RE $71K for a total $840K.

PPC guide for S Corp states: “LLC Converting to S Status Must Conform to S Corporation Rules. Once the LLC has elected S status, the entity is operating as an S corporation and, therefore, must conform to the S corporation rules.”

Does this mean section 351 applies? I think yes but am not 100% sure.

My concern is the large drop in value of the business (i.e. goodwill). The business was purchased 01/02/07 for $825K and then sold 22 months later (11/10/08) for $475K. A $350K drop in value.

So I have all the usual questions. How to handle NP to Owner? Owners basis in stock & debt?

Thanks, Thom Thom 19:46, 12 May 2009 (CDT)

OK, Gee, I don't know, Thom! As you know if you've been here longer than a week, I am NOT a fan of merely checking the stupid box, I call it, and making an LLC an S corp. I've never thought, nor read anyone else's thoughts, about whether 351 is in play on that election. So if you have negative equity, is there income recognition? Who knows? But it might be....that would be my biggest concern I suppose. Post it on the board, and hope that Riley answers it. He and perhaps 2-3 others might know. I should, but just don't check the box, so never had to know. Jeff JR1 14:30, 13 May 2009 (CDT)

Nexus Question

Client is a manufacturer's rep. Reps for several companies in Southwest. Earns commissions. Lives in AZ. Operates his business as an AZ S Corp. All commissions are paid to the S Corp. He gets wages and distributions from S Corp.

It is my understanding that as agent for the manufacturers, the manufactures may have nexus with the various state my client goes into on their behalf, but he does not. All his income is AZ. Is this correct?

He is now moving to TX. His 2010 S Corp still needs to file AZ corporate return, but he will now be a non-resident shareholder. Does the S Corp need to file a TX franchise tax return? What items of proof do I need to be comfortable with the TX residence change? I'm not certain it isn't just a AZ tax avoidance issue.


Your question would be better posted to the tax questions forum for all to see. However ...

Your assumptions are not entirely correct.

The manufacturers for whom your client solicits sales do have due process/commerce clause nexus based on his activities, assuming that they are regular and continuous in nature. As long as the mfr has no connection with a state other than your client's activities, and your client's activities are limited to the solicitation of sales of tangible personal property, where the orders are sent outside the state for approval and the merchandise is shipped from out of state, the mfr is protected from net income taxes by Public Law 86-272. However, the mfr still has nexus for other tax purposes, including use tax collection on any retail sales to customers in the state. If your client's activities go beyond asking for orders or activities entirely ancillary to asking for orders, the mfr is not protected by 86-272. For example, if your client performs credit investigations, collects delinquent accounts, helps design, install or implement the product, etc., the mfr is not protected.

Your client has source income in every state where he performs services for his S corporation. Both he and the corporation must file returns in each of those states. The corporation's net earnings (after his salary) must be apportioned to each state in accordance with its rules, and the income apportioned to each state is taxable to him in that state. In addition, his salary from the S corporation is taxable (pro rata based on time) in every state where he goes to perform services on its behalf. Arizona will give him credit for the tax he pays to the other states on income sourced there, except for California and Oregon, where the credit is allowed by the source state rather than by Arizona.

If your client plans to move to Texas and become a nonresident of Arizona, I would strongly advise him to reincorporate the S corporation in Texas and qualify it to do business in Arizona. The S corporation will be subject to the Texas franchise tax in any event; in fact, if he has been going to Texas to solicit sales on behalf of his clients, it has been subject to the tax all along. The only way to keep the S corporation out of Texas would be to go somewhere else to do everything he ever does on its behalf, which would probably not be cost effective. Also, if that caused him to spend more time in Arizona than required to do his solicitation activities there, it would jeopardize his change of residence.

Arizona defines a resident for tax purposes as a person who is either (a) present in the state for a purpose that is not temporary or transitory, or (b) domiciled in Arizona and absent for a temporary or transitory purpose. Since he presumably will continue to perform some business activities in Arizona after the move, it is essential that he make an effective change of domicile to Texas in order to sustain nonresident status in Arizona. In order to change domicile, generally a person must take all of three steps: (1) move away from the previous domicile; (2) move to and reside in a new location; and (3) intend to reside in the new location permanently or indefinitely. The burden of proof is generally on the party that wishes to show a change of domicile.

Here are some examples of steps to take to create a change of domicile. This is cut-and-pasted from a teaching outline on California taxes; just read Arizona for California. California's statutory definition of a resident is virtually identical to Arizona's.

*********************

a. Sever ties to California.

(1) Sell or give to charity any household goods that are not shipped to the new state.

(2) Sell the California residence, or lease it unfurnished for a period of at least one year, renewable. The lease should be to an unrelated party at a fair market value rental.

(a) Many families wish to continue using their California residence as a vacation home after the change of residence. As long as the home is used only for short periods of time, and a more substantial residence is purchased or leased at the new location, retaining the California home may not defeat a change of residence. However, a better plan is to dispose of it and acquire another, less substantial place if a California vacation home is needed.

(b) The real estate market, particularly in the case of a very substantial California home, may drive the economics of a decision to sell or rent the prior residence, quite apart from any need or desire of the taxpayer to maintain a pied-a-terre in the state. Retaining the California home as an investment or to avoid realizing a nondeductible loss on its sale arguably is not evidence of intent to return there to live.

(3) Notify the County Assessor that the residence no longer qualifies for the homeowner's property tax exemption. This costs approximately $70 to $90 per year in additional property taxes.

(4) Take the family pets along or find new homes for them.

(5) Resign memberships in California church, country club, social and professional clubs, etc., even if the organization does not require or request a notice of resignation, and join similar organizations in the new location. Retain documentation.

(6) Close California bank accounts. If some family members plan to spend business or leisure time in California, or the residence is maintained as a rental property due to market considerations or as an investment, a California account may be retained to handle these items. However, under no circumstances should it be used to pay day-to-day living expenses.

(7) To the extent practical, dispose of California investment property, and sever connections with California business activities. If the taxpayer must continue business activities in California, keep detailed contemporaneous records of time spent in California, at the new residence, and elsewhere, and minimize presence in California. Time spent is a significant element in determining domicile.

(8) Notify the County Registrar of Voters of the move out of the district.

b. In the new location, establish as many connections as are practical under the circumstances, and DOCUMENT them. Examples include:

(1) Purchase or lease a residence in the new location. If the California residence is retained, the new residence should be at least as substantial, and preferably more so.

(2) Take all vehicles to the new jurisdiction and license them there. Obtain drivers’ licenses in the new location. Clients may wish to maintain a vehicle in California for use by family members visiting in the state. Preferably rental cars would be used instead. However, if a vehicle is kept in California it should be, relatively speaking, a "beater" car. In other words, don't take the Fit to Nevada and leave the Ferrari in California.

(3) Join local organizations and participate in the life of the new local community to the greatest extent possible.

(4) Minimize business and personal time spent in California. Under no circumstances should any family member spend more than 6 months in California in any calendar year, with the exception of adult offspring who are college students, etc. Preferably no family member would spend, in the aggregate, more than 3 months in California.

(5) Establish local bank accounts and use them for day-to-day transactions.

(6) Register to vote and actually vote in general and special elections. Vote in person whenever possible, not by mail.

c. When considering whether to take any action either in California or in the new location, think, "Would I do this if I never expected to live in California again?" If the answer is yes, go ahead and do it. If the answer is no, think twice.

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Be careful if you are advising your client on an effective change of residence. When they lose on the residency audit they always blame the adviser. If you give your client a list of steps to take, make sure it is in writing and keep a copy signed by the client acknowledging receipt of it. KatieJ 15:30, 5 May 2010 (CDT)

End of the forum

You may have heard by now that the Tax Almanac ( www.taxalmanac.org ) web site forum is permanently closing its doors effective June 1. Perhaps you have seen the pink bombshell “Important Service Announcement” when logging in.

Long-time TA user ChrisV2 has volunteered to set up a new website where TA users may continue the discussion. The site is up and running now and has an active base of contributors.

We invite you to take a look www.taxprotalk.com and join your fellow TA refugees.

Frankly (TA member and new member of TaxProTalk)

Frankly 05:17, 4 May 2014 (UTC)

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