C Corporation Rental Agreements

The IRS may challenge the following rental situations between shareholders and a corporation:

1. If the rent has the character of a distribution of profits from the corporation (i.e. variable rate rent that minimized the profitability of the corporation)
2. If the rent is paid to an employee, IRS may attempt to recharacterize the payments as wages
3. A self rental rule blocks taxpayers from offsetting passive losses with income from rental property
4. Payments made to employees for equipment that is required as a condition of employment are taxable wages, unless the amount is paid under an accountable plan
5. Rental of personal property must be clearly segregated from employment activities

While rents can be used by taxpayers to gain income from property rented to a wholly owned C corporation, the IRS is cautious to minimize the advantage of self interests in rental agreements.

Meal and Travel Expenses

Most usually, meal expenses are limited to 50% of the expense. When providing meals and entertainment to clients the following rules apply.

1. entertaining clients must be directly related to or associated with the active conduct of business such as discussing deals before, during or after the meals
2. the taxpayer or employee must present when the meal or entertainment occur
3. if a group or business acquaintances take turns picking up the tab whether business activity occurs or not, the expense cannot be deductible
4. lavish or extravagant meals and entertainment are not deductible
5. only the cost of face value of a ticket is deductible

Travel primarily for business outside the United States is prorated on the expense for personal and business. If all travel is for business then the entire expense is deductible, however, if some is for personal purposes, then that % is a nondeductible expense. For instance, if a taxpayer travels outside the US for 30 days and 15 days are for business purposes, then 50% of the trip cost is deductible.

Nontaxable Transfers - IRC Section 351

In a Section 351 transfer no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation, and immediately after the exchange such person or persons are in control - as defined in Section 368(c) - of the corporation.

Control of the corporation is defined as ownership of 80% of more of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation. IRC 368(C).

One or more persons may include individuals, trusts, estates, partnerships, associations or corporations. Money is treated as property for purposes of Section 351. Services do not qualify as property for purposes of Section 351.

Transfers in bankruptcy do not qualify for the Section 351 treatment.

If a transferor receives boot in the exchange, the gain is realized to the extent of the money or property received (boot).

Group control in a Section 351 exchange must include substantial contributions by shareholders. For instance two shareholders cannot contribute to meet the 80% control test if the contribution by either shareholder is less than 10% of fair market value of stock and securities already owned by the person.

Liabilities contributed in a Section 351 exchange reduce the basis of the shareholders stock. If the liability contributed exceeds the basis, the excess is treated as gain.

Controlled Groups

In order to minimize an owner or groups of owners from dividing one corporation in multiple corporations for the sole purpose of lowering tax liabilities, IRC Section 1561 limits the benefits to equalize as if multiple corporations under that same ownership were one corporations.

The types of controlled groups are:

1. Parent - subsidiary group: one or more chains or corporations connected through stock ownership with a common parent

2. Brother -sister group: two or more corporations owned by the same five or fewer shareholders

3. Combined group: three or more corporations, each of which is a member of a parent-subsidiary or brother - sister group and one of which is a common parent and also included in a brother - sister group.

4. Consolidated group: members of a parent subsidiary group that file a consolidated tax return.

C Corporations which are part of a controlled group, must file a Schedule O Form 1120 under regulation Section 1.561-1T(a).

Guaranteed Payments

Guaranteed Payments are payments made from a partnership to a partner regardless of the partnerships profitability. Guaranteed payments are deducted from partnership income in determining the distributive share of partnership gain or loss for the year. Guaranteed payments are a partnerships form of payments to partnership, similar to wages in an corporation. For instance, if a partnership earns $800,000 for the year, with two partners, and each partner receives guaranteed payments of $150,000, the distributive share of partnership profits would be $500,000 ( $800,000 profit - $150,000 to each partner). The partners would receive $400,000 each, $150,000 in guaranteed payments subject to SE tax, and $250,000 of distributive profit, subject to SE tax if both partners are general partners.

Single Member LLC to Multiple Member LLC

A single-owner LLC is a "disregarded entity" assuming it has not made the election to be taxed as a corporation. If the single-owner LLC brings on a new member, the entity ceases to be a disregarded entity and a partnership is created for federal tax purposes. If the new owner pays the old owner for an interest then a deemed sale of assets occurs and the old owner recognizes gain or loss. If the new owners contributes money, then the adjusted basis changes for the old owner to reflect the new percentages of ownership.

S Corporation Conversion to LLC

An S-Corporation convert to an LLC - that elects to be taxed as a corporation - with a tax free reorganization. With IRC Section 368(a)(1)(F) a reorganization can take place if the basis and holding periods of the assets in the new LLC were the same as in the S-Corporation before the reorganization takes place.