Two new things I heard today from a CPA

[BulldogTom]

I was on a conference call with the corporate CPA today and he mentioned two things I did not know or hear about. Looking for some help finding out if these items are true, partially true, or "it depends" items.

1. If you are self dealing with your rents (own the building that your corporation rents from you), the income from that activity is NOT subject to the Net Investment Tax.

2. If you accrue bonuses at the end of the year an pay them within the 2 1/2 month window, but your policy is not to pay employees that leave the company before the payment date, none of the accrued bonuses can be deducted.

Any of you heard these things?

Thanks.

Tom

Hollister, CA

[Lee B]

Actually both of these issues were discussed during a tax update that I attended mid January.

He is correct

[jklcpa]

I don't have a quick answer on the part about the tax on NII, but #2 is true. Bonuses accrued to a group or pool of employees that are paid within 2.5 months after year-end would be deductible in the year accrued if the forfeited bonus is reallocated to the others remaining in the pool. But, if the bonus requires that an employee still be employed on the date of the payment, then the "all events test" isn't met until that date that the bonus is paid, which would be in the following year.

Here's a good article from the AICPA that covers it pretty well.  Bonus Deduction Timing - Finding the Correct Tax Year

Also, CPA is correct that bonuses to related parties can't be accrued. They are deductible in the year paid. It's part of code sec is 267 that puts limits on related party transactions and converts those transactions to a cash basis so to match the transaction in the same reporting period as the cash basis owner. A quote taken from another source: "The related party rules under IRC S. 267 require the matching of income and deductions arising from transactions between related parties. Related parties include individuals owning more than 50% in value of the outstanding stock of the company. The law requires that even if all events have occurred to fix the liability and the economic performance rules are met, the deduction may not be claimed until the year in which the related party recognizes the income. Thus, in the instance of a bonus payment to a greater than 50% shareholder, the amounts will not be deductible by the company until the period in which the income is recognized by the shareholder."

Edited April 30, 2015 by jklcpa
added link to article instead of pdf upload

[BulldogTom]

Thanks, I knew about the related party rules. I learned something new today.

Tom

Hollister, CA

[michaelmars]

^{self rental is not a passive activity, its treated the same as if you rented tool or cars. without being subject to fica. in other words self rental income or losses can not be used to or offset other passive income or losses.}

[michaelmars]

now that you brought up NII, has anyone considered all the ramifications. Rent is passive but not for a Real Estate Professional. But what if that professional put some of the property into a trust for his kids, as trustee he is still a professional but does it count enough to make it active. This weeks seminar by a panel of tax attorneys said "who knows till the courts decide". What if the self rental discussed above is the building the active business is in but there is a subtenant? Do you look at deminimous, do you allocate, and if so how, by rent, by square feet etc.? What if the building is in an llc with the spouse or children?

the problem with this tax is that it is a tax on income but they tried to calculate it using passive loss allowance rules and the 2 don't mesh.

Now if you assume the trustee in the first case qualifies to exempt the income and 5 years from now the courts rule against that, you might have preparer and taxpayer penalties to eat. If you pay the tax and the courts uphold the exemption past the time you can amend then you face telling the client you paid taxes that didn't apply.

Common consensus is to lay out both sides and arguments to your client and let them pick, IN WRITING, how they want you to handle it. Of course when you ask a client they say, what do you think?

This tax is going to be very difficult to handle correctly until ruling come down. You get a K-1 from an active business that also has interest income on it, do you pay the tax? What if the interest was from CD in the company, what if the interest is on receivables? Does that change your handling of it?

For the more major clients where this tax is significant we are putting them on extension so we can get more info than a 3 hour seminar [which my whole staff attended]. The bulk of our practice is real estate professionals.

[BulldogTom]

Michael, those are all good points.

Tom

Hollister, CA