Masonry Magazine June 1988 Page. 9
TAX MATTERS
Irving L. Blackman is the most published CPA in the country and spreads his tax knowledge as a dynamic speaker. Mr. Blackman specializes closely held business and will consult with readers of this column. He is a partner in Blackman Kallick Bartelstein, a Chicago-based accounting and business consulting firm. Direct your questions to 300 S. Riverside Plaza, Chicago, IL 60606, or call (312) 207-1040.
Penalty-Free IRA Withdrawals
Before tax reform, when people asked if they could take money out of an IRA before age 59% without paying a 10% penalty, there was but one answer: No way, no how. Sure, death or disability was and still is an exception, but that's a high price to pay.
Things are different now. It can be done, but there's only one way. You must convert your account balance to an annuity. You can get the money in a series of equal payments over either (a) your life or life expectancy, or (b) over the joint lives of you and your spouse (or other beneficiary). Payments must be made at least as often as once a year. In addition, payments cannot be discontinued before five years, nor can they be changed to another form. Any variation will cause the 10% penalty to be applied retroactively to all the amounts you received.
This is an opportunity to start getting a regular flow of funds without penalty or waiting to reach age 59%. If the need exists, do it.
A Warning To All Businesses:
Don't Mess With Payroll Taxes
Other countries marvel over the American way of collecting taxes. Our system is basically voluntary. A prime example is how the government relies on businesses to act as unpaid tax collectors for taxes withheld from employees' paychecks.
Payroll taxes are considered "trust funds" in the hands of the employer, which means the employer has no right to use this money for anything other than payment to the U.S. Treasury. Nonpayment is a no, no. The law provides for a 100% penalty for failure to remit all or any portion of the trust funds.
The penalty is designed to clobber any offenders. And get this not one penny paid by an offender is deductible. So, who might be an offender? Unfortunately, the law has been interpreted to apply to almost anyone who played a role in the misuse of payroll trust funds.
Consider this situation. A company has an office manager who signs checks, but the sole owner is the guy in charge. The manager prepared a check to remit the payroll taxes, but the owner held it up because some major suppliers were screaming for their money. He told the manager to pay the suppliers. This went on for months, until an IRS collection agent arrived. When the agent found there was no money to pay the back taxes, he invoked the penalty-against the office manager. "Just following the boss' orders," he protested, and added added that he would have been fired if he had refused. The court sided with the manager, noting that the fear of losing his job saved him from willfully failing to pay, the measuring rod for determining liability. If the manager had failed to make the payments on his own, he would have been stuck with the penalty.
In another case, a husband and wife were assessed separately for unpaid payroll taxes. Both were officers and could sign checks, but they were not paid for their services. The court found that the husband was in control of the business and therefore personally liable for the unpaid taxes-the 100% penalty. But the wife was off the hook, since she wasn't involved enough in the business to be responsible for willfully failing to remit the payroll taxes. She only signed three checks and had neither managerial responsibility nor any role as a financial decision-maker (Kielisch vs. U.S., 86-2 USTC 9631).
Remember, the IRS has a lot of muscle when it comes to collecting payroll taxes. Anyone with a hand in failing to pay may be personally liable for the full amount. A way out: Don't risk personal liability and being forced to pay a nondeductible penalty. Instead, consider loaning the company the money needed. If it can't pay you back, at least you'll have a bad debt deduction.
Transferring Your Business
To The Kids
The typical owner/founder of a closely held business is a one-man gang. But sooner or later this entrepreneur realizes he cannot go on forever. The time has come to pass the business reins to the next generation. But how?
Now the task is tougher than ever. The new tax law killed an old friend-recapitalization. No longer can you freeze the value of your business for estate tax purposes by creating and retaining preferred stock while giving the growth common stock to the kids. But all is not lost. There are still other ways to get the job done. This article discusses the more important methods.
Gift. Immediately begin an annual gift-giving program of your stock to the younger generation. You can give $10,000 ($20,000 if married) to each donee (the person receiving the gift) per year. So, if you're married and have two children, you can give $40,000 (2 x $20,000) every year to your kids with no gift tax consequence. The future growth and income of these the shares are immediately removed from your estate.
Sale. You can sell all or a portion of your stock to your kids. The sale will result in a capital gain, which allows you to recover your cost tax free and to use the gain to offset any capital losses. Usually an installment sale will be your best bet, allowing you to defer the capital gain until the year in which you actually receive the money.
Redemption. When a corporation buys its own shares from a shareholder, it is called a "redemption." In general, you can only get a capital gain if the corporation redeems all the shares you own. In most cases, if you are not entitled to capital gain treatment, the full amount received from the corporation is a dividend. But that's not as bad as it sounds. Since capital gains and ordinary income, like dividends, are taxed at the same rate, redeeming only part of your shares can make good tax sense. Tax rates are probably as low as they will ever get during our lifetime. Think redemption.