DANRVAN

Are you saying husband owns corporation and wife owns the rental? I see complications. There would have to be a Section 351 transfer to avoid tax by wife upon transfer. I believe wife would then have to own 80% of stock immediately after transfer. Also any debt assumed by the Corporation could be considered boot paid to wife subject to tax. I would have to think long and hard about it.

So no funds used for educational purposes in the past? Agree earnings fully taxable and subject to 10 penalty. Also your calculation of distributions taxed at your state level is consistent with treatment in my state.

That is a whole different department, and I believe the process is basically automated.

Form 3115 would be used if you were to claim the additional deduction in a later tax year; 2020 on. Good luck on a 1040X, sounds like it might be awhile before it even gets opened up by the IRS.

It depends where you read. Section 1106 of CARES ACT just says nonprofit organization in regards to PPP; no mention of 501(c)(3) or otherwise. Section 1110 only mentions "private nonprofit organizations" in regards to the EIDL Grants. But then the "Intern Final Rule" for PPP says only 501(c)(3) and 501(c)(19).

Of course there could be flip side to this that can work to the sole proprietors advantage. Let's say the year of loss was 2018 and $50,000 of income that was expected in 2018 came in January of 2019. The extra income from the prior year and less expenses for 2019 yields a profit on Schedule C of $125,000. Of that amount, $50,000 was used to payoff the 2018 operating line, $25,000 to pay off an equipment loan and $50,000 was actual draws. In that situation PPP becomes $25,000 thanks to timing of income; and regardless of the fact that only $10,417 was attributed to his 2019 draw. $25,000 divided by 8 weeks means $3,125 can go towards owner's pay per week. Enjoy!

All sorts of possibilities: cyclical business; large repairs; income from major contract tied up in ligation and received in the next year....... Those are just made up numbers. The point is, if the sole proprietor had a loss or low income year, he still had to take out draws to provide for himself, whether that came from cash reserves or an operating loan. The revised "Interim Final Rule" does not take that into consideration.

Under the new guidance of the revised "Interim Final Rule', it appears sole proprietors are not on equal footing with a sole corp owner. The new guidance basically says no SE income + no employees = Zero PPP. Here is an example where a sole shareholder would be better off a. business has 2019 $1,000 loss operating as sole proprietor, no employees and owner takes $50,000 in draws. PPP NOT ALLOWED. b. Same business but sole shareholder paid $50,000 in wage plus $3,800 federal payroll taxes. PPP= 53,800/12*2.5=$11,208. Maybe I am over looking something here but it appears the PPP cards are stacked against the sole proprietor as long as SE earnings are less than what a reasonable wage would be.

The question that came up was how to report ending inventory on Schedule C if the sale of inventory upon liquidation of the business was reported on 4797. IF that were the case, ending inventory would be reported on Schedule C. Otherwise it would be deducted twice: first as cost of sales and secondly as basis on 4797.

That is wonderful for taxpayers who cannot e-file because ex-spouse wrongfully claimed dependent and related tax benefits.

Here is a situation. Partner receives $10,000 of inventory in liquidating distribution of partnership. He in turns sales it lock stock and barrel to a liquidator. It is ordinary income but not SE income, or as reg 1.735-1 says "gain or loss from the sale or exchange of property other than a capital asset". The sale was not to customers in the ordinary course of business, therefore not subject to SE tax. Also consider inventory received by shareholder of corporation. The issue becomes ordinary income vs capital gain, and case law has held that in some situations capital gain or loss was the proper treatment by the shareholder. Going back to TAG's post, I believe there is a case for reporting on 4797 as Catherine mentioned instead of Schedule C. Say the sale of the business was to take effect at midnight on 1/31/18. At that point former owner is no longer in the business of selling inventory to customers. Instead he his is liquidating his remaining inventory in a lump sum. Consider the tax treatment for a client who was forced to close a business due to the pandemic. For example after sitting idle for a couple of months, inventory is sold to a liquidator. Is that transaction in the ordinary course of business? As I see it, there is a parallel in treating the sole proprietor the same as the partner who receives inventory in a liquidation and then turns around and sales it.

Sorry, I did not catch that part. I think there is a good case to put it on 4797 since it was not sold in the normal course of business. Might also save on SE Tax.

Actually John, the section 1110(e)(3) of the CARES ACT says "the amount....shall not be more than $10,000." $10,000 was the upper limit, there was no lower limit set.

That doesn't sound right if you are going to report on 4797. For example: Beg inv = 10,0000 purchases = 20,0000 ending inv = 12,000 goods available for sale = 10,000 + 20,000= 30,000. if we record end inv as zero then cost of sales = 30,000 when in fact it was 18,000. the 12,000 would then become basis for sale on schedule 4797. I don't see why you would report sale on schedule C at all if it is going on 4797.

Sound like there might have been involuntary conversion but I think you will need evidence that he was forced into the transaction. Was there a buy/sale agreement? Was a lawyer involved?

What are your thoughts on self employed showing a loss? That is one scenario I see where owners' draws need to come into play. Health insurance as you mentioned above would be part of that.

As I read it there is a case for basing the the computation on draws by an owner vs strictly by SE net earnings. per section 1102 of the ACT: ‘‘(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from selfemployment, or similar compensation and that is in an amount that is not more than $100,000 in 1 year, as prorated for the covered period;

And I had a call yesterday inquiring about a $300,000 loan.........

You have a long road ahead in obtaining the dependents and related tax benefits for your client. The amended process will add months to the delay under normal circumstances. You will have to prove that your client had custody for more than 1/2 of the year. But that phase will not begin until you file and then receive a letter from the IRS requesting documentation. I have been working on a similar case for two years (for a 2017 return) and recently filed for an appeal. One thing you might have in your favor is that the IRS tends to favor the mother.

That falls under section 2301 of the CARES ACT. Important to note that it can not be used by participants in the PPP.

The decrease in PPP forgiveness by the amount of the EIDL Grant, heard about it but could not find it in the CARES ACT. It is not mentioned in sec 1106 titled "Loan Forgiveness" as I would expect. Instead it is buried deep in the bowels of sec 1110 "Emergency EIDL Grants. sec 1110 (e) (6) UNEMPLOYMENT GRANT.—If an applicant that receives an advance under this subsection transfers into, or is approved for, the loan program under section 7(a) of the Small Business Act (15 U.S.C. 20 636(a)), the advance amount shall be reduced from the loan forgiveness amount for a loan for payroll costs made under such section 7(a).

only for health insurance

Tom, forgiveness of PPP is spelled out in sec 1106 of the CARES ACT, but some parts of it are not clear. Here is my understanding of it: 75% of the PPP must be for "payroll cost". $350,000 is 75% of $466.667, so you can spend the difference of $116,1667 for other qualified purposes. $466,667 is the max available for forgiveness. That amount is reduces by reduction of average FTEE's and for total wages from the base period. So if the FTEE reduction is 20% and the salary reduction is 25%, then it appears the $466,667 could be reduced to $280,000. It is unclear if in fact both the FTEE and AVERAGE WAGE reduction will apply together, but that assumption must be made until we get some guidance on forgiveness as promised by the SBA. it is also unclear if the exception for "restoring" ave FTEE's and wages by June 30 means the employee's must be made whole for the amount of wages in the base period.

Whoops, just realized you are talking PPP instead of EIDL

Me neither. I applied to today for our parish following guidance form our diocese which I have attached. Entered n/a for most ownership and ssn questions. This comes from a Catholic Diocese but that should not make any difference. EIDL Grant Application Notes.pdf