Our Denver small business attorneys assist small to medium sized partnerships and corporations from formation and entity structure, to the sale of the business or business interests and all transactions while the entity is operating. Our business attorneys understand the nuances of small businesses and thus help the business owners regarding specific tax and business law issues and transactions as well providing insight on practical considerations. This allows the small business owner to make more educated business decisions.

Deducting Business Expenses

Can I deduct my meals as a business expense?  Can I deduct this flight as a business expense?  Can I deduct the cost of my clothes or uniform as a business expense?  As a tax attorney, these are common questions I am asked, and rightfully so as everyone wants to take advantage of all potential deductions allowed by the Internal Revenue Code.  Not only is the deductibility of certain business expenses a hot topic with business owners, it is a hot topic and highly litigated topic with the Internal Revenue Service.  In fact, I recall reading a recent annual report to Congress by the Taxpayer Advocate Service whereby the deductibility of trade or business expenses he been one of the top ten most litigates issues for a very long time.  Furthermore, the same report stated that the courts affirmed the position taken by the Internal Revenue Service (the dissallowance 0f the deduction) in the vast majority of cases and that the taxpayer only prevailed (in full) about two-percent (2%) of the time.  The article below is not intended to be legal advice, but rather to provide general information regarding this issue.

First and foremost, we should start with the current law regarding deductions for business expenses.  Internal Revenue Code (the “Code”) Section 162 allows deductions for ordinary and necessary expenses incurred in a business or trade.  What actually constitutes ordinary and necessary may better be understood through an analysis of the case law, which is significant, surrounding the question.  Generally, the determination is made based upon a court’s full review of all facts and circumstances.

Based upon the black and white law under the Code, what constitutes a trade or business for purposes of Section 162.  Perhaps it is ironic that the term “trade or business” is so widely used in the Code, but yet, neither the Code nor the Treasury Regulations provide a definition for Trade or Business.  Personally, I think it would be quite hard to provide a definition for trade or business, especially under the auspices of income tax.  The concept of trade or business has been refined and defined by the courts more so than the Code.  The United States Supreme Court has held and stated that a trade or business is an activity conducted with continuity and regularity, and with the primary purpose of earning a profit.  Albeit broad, I would agree this definition would be sufficient for the majority of businesses I work and assist.

Now that we have an idea of what may constitute a trade or business, what is “ordinary and necessary?”  Again, the Supreme Court has helped provide definitions for these broad, but important terms.  Ordinary has been defined as customary or usual and of common or frequent occurrence in the trade or business.  Necessary has been defined as an expenses that is appropriate and helpful for the development of the business.  Further, it should be noted that some courts have also applied a level of reasonableness to each expense.

John McGuire is a tax attorney and business attorney at The McGuire Law Firm focusing his practice on issues before the IRS, tax planning & analysis and business transactions from formation to sale.

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Minimum Gain Chargeback Provisions

If you have reviewed partnership agreements or operating agreements for an LLC you have probably read provisions relating to Minimum Gain Chargeback.  That being said, the Minimum Gain Chargeback provisions may have put you to sleep, and may not even be practical based upon the facts and circumstances of the partnership.  However, Minimum Gain Chargeback provisions are important to understand if in fact they were to apply to your situation and circumstances.  The article below has been prepared by a tax attorney and business attorney from The McGuire Law Firm to provide an explanation of Minimum Gain Chargeback.

Minimum Gain Chargeback provisions deal with non-recourse debt and the allocations of non-recourse debt.  Such provisions are mandatory if the partnership wishes to allocate non-recourse deductions to the partners in any manner other than per the member’s pro-rata portion of capital interest in the partnership.  Therefore, it is important to identify when a Minimum Gain may be realized.  Minimum Gain occurs when deductions are claimed on property that decrease the partnership’s book basis in the property below the actual balance of the non-recourse debt on the property.  A situation whereby you may see Minimum Gain is when property is depreciated.  The depreciation will drive the partnership’s book basis of the property below the amount of the loan on the property.  When a partnership does have Minimum Gain, the Minimum Gain Chargeback is an allocation of the gain to the partners or members who have received the benefit of non-recourse deductions, or who may have received distributions from the partnership that can be attributed to the non-recourse loan.   In short, if a partner has received a benefit from the depreciation of property whereby they did not bear the economic risk of the loan to acquire the property (because the debt was non-recourse and not personally guaranteed), the benefit can be “charged back” to the partner.

So when does the “charge back” occur?  The deductions or distributions taken by the partners are charged back when the property that was subject to the non-recourse debt is sold, transferred or otherwise disposed of, or when there is a change in the character of the non-recourse debt.  A change in the character of the non-recourse debt could be the debt converted to a recourse liability or the debt being forgiven.

Now, the million dollar question: What is the amount of the charge back?  The partnership’s minimum gain is generally going to be the excess of the non-recourse liabilities over the adjusted tax basis of the property subject to or securing the non-recourse debt.  Perhaps an example will help illustrate this.   Assume J&J, LLC had purchased property for $200,000 and took $100,000 in depreciation on such property.  Thereafter, J&J LLC obtain non-recourse financing of $250,000.  The minimum gain would be $150,000, which is the non-recourse debt of $250,000 less the adjusted basis of $100,000.

It is important to remember that a partner is not subject to a charge back for monies they contribute to repay a non-recourse debt, and it is possible for the partnership to request a waiver of the chargeback under certain circumstances.

John McGuire is a tax attorney at The McGuire Law Firm whose practice focuses primarily on tax matters before the IRS, business transactions and tax issues as they apply to his individual and business clients.  In addition to his law degree, John holds an advanced degree in taxation (LL.M.).  Please feel free to contact John with any questions.

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Initial Considerations Regarding a Corporate Acquisition

In any corporate acquisition, there are tax and non-tax issues, multiple business considerations and goals of the parties involved with the transaction.  The tax planning that is involved before, during and after the acquisition process may include many options and alternatives to achieve the tax and non-tax wishes and goals of the parties.  Thus, one of the most important steps in the planning process of a corporate acquisition is to discuss and review the party’s intentions and goals, which may include short term matters and long term matters.

First, we need to identify the parties.  In any corporate acquisition you will have the buyer who is looking to acquire one or more businesses that are operated and owned by another business.  The seller, which may be referred to as the “target” or “target-corporation” may wish to be disposing of the business in exchange for some type or form of consideration, or merge in some way with the buyer.  Broadly stated, the buyer may wish to purchase the stock of the target corporation, or acquire the assets of the corporation.  Thus, in general, you can consider the purchase options to be a stock purchase or asset purchase of the target.  Furthermore, there is the possibility that the acquisition could be a hostile acquisition.  A hostile acquisition involves the acquisition of a publicly held company, like Wal Mart.  The acquisition begins without any agreement between the purchaser and the target corporation.  It is possible that through a hostile acquisition, the target may not even wish to be acquired or purchased by the buyer.

It is likely that the single most important factor in an acquisition will be the consideration to be paid or consideration received by target (property, stock and other items could be used as consideration).  Thereafter, an important issue to consider and understand is whether the shareholders of the target corporation plan to or wish to have an equity ownership in the combined entity after the acquisition is completed, or if such shareholders wish to sell their entire ownership interest in exchange for a cash payment or other financial benefit.  This issue will likely dictate the overall consideration involved and will, in many respects, control the overall structure of the transaction as well as the characterization of the transaction for tax purposes (taxable versus tax free).  For example, if the parties wished to have a tax free reorganization, a common theme in a tax free reorganization is continuing ownership interest in the combined business by the previous shareholders of the target business.  The transaction may only be able to qualify as a tax-free reorganization if a substantial portion of the consideration paid is the stock of acquiring corporation, or perhaps the stock of the acquiring corporation’s parent.  Thus, consider whether or not the target shareholders receiving shares of the acquiring corporation would be practical if in fact the some or all of the target shareholders wished to receive cash consideration for their ownership interests.  This example illustrates how the goals and wishes of the parties involved can dictate the transaction structure and thus the tax implications to the parties.

The above article has been prepared by John McGuire of The McGuire Law Firm.  As a tax and business attorney, Mr. McGuire’s practice is focused on tax planning, tax matters before the IRS and business transactions from business start-ups & formation, to business contracts & acquisitions.  You can schedule a free consultation with a business attorney at The McGuire Law Firm by calling 720-833-7705.

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What is Collateral?

What is collateral?  Typically, collateral would be property pledged as security for a loan or note.  For example, if a bank loaned me $25,000 I may use a car or house as collateral to secure the loan.  The video below discusses collateral.

You can contact The McGuire Law Firm to speak with a tax attorney and business attorney in Denver, Colorado or Golden, Colorado.

Asset Purchase Video by Denver Business Attorney

When a business is purchased or sold, the acquisition could be through an asset purchase agreement.  Under an asset purchase agreement, the actual assets of the business are purchased.  This could include the inventory, accounts receivable, furniture, equipment, fixtures and intangible assets such as copyright or trademark rights, or patent rights & licenses.  An asset purchase also has tax implications to both the seller and purchaser, which you may want to discuss with your business attorney and/or tax attorney.

The video below has been prepared by a business attorney and tax attorney from The McGuire Law Firm.  If you are considering selling your business or buying  a business, consult with a business attorney or tax attorney regarding your specific issues.

The McGuire Law Firm provides a free consultation for all potential clients.

What is a Parent Corporation?

In general, a parent corporation is a corporation that would own the stock or interests in another corporation or business such that the entity can control the other business.  As a business attorney, I am often asked, what is a parent corporation?  Further, many business owners will inquire as to whether a business structure with a parent corporation could be beneficial to their business for tax purposes, business purposes and/or asset protection purposes.

The video below has been prepared by a Denver business attorney to provide information regarding a parent corporation.  You can contact The McGuire Law Firm to schedule a free consultation with a Denver business attorney.

Call 720-833-7705 to schedule a consultation with a business attorney in Denver or Golden Colorado.

Denver Business Start Up Attorney

As a Denver business attorney, John McGuire has assisted many businesses as start up businesses.  Multiple issues and concerns should be considered when starting a business.  The video below provides additional information regarding starting a business.  You can contact The McGuire Law Firm to speak with a Denver business attorney.

Schedule a free consultation with a business attorney in Denver- 720-833-7705

Personal Goodwill by Denver Business Attorney

Typically the sale of a corporation through an asset sale will result in two levels of tax when dealing with a C Corporation.  There is likely to be taxable gain to the corporation, and a taxable distribution to the shareholders of the corporation.  Hence, the term “double taxation” that has been used to describe the corporation paying income tax and shareholders being taxed on the distributions.  There is a potential strategy that shareholders of a corporation (likely a closely held corporation) can use to avoid this double taxation.  This strategy would involve the shareholder taking the position that a portion of the price paid (the purchase price) is for personal goodwill.  Because this portion being paid is for personal goodwill, it should be taxed as capital gain to the shareholder.  Thus, the amount allocated as personal goodwill is not taxed as corporate income, and receives capital gain treatment.  This sounds too good to be true, and in many instances it may be, or can be reviewed, scrutinized and challenged by the IRS.  Thus, it is very important that the shareholder(s) consult with their tax attorney, business attorney and/or another tax professional prior allocating a portion of the purchase price as personal goodwill.  The article below has been prepared by a tax attorney in Denver at The McGuire Law Firm to provide additional information regarding personal goodwill.

The idea or concept of personal goodwill is based upon the notion that a certain portion of the businesses success can be attributed to an individual or individuals.  For example, perhaps the individual shareholder has wonderful relationships with clients, and thus a good deal of the businesses success may depend on this individual.  Further, the relevant court cases display that covenants not to compete and the asset purchase agreements play important roles in determining personal goodwill.  In general, the more recent cases have held that if a taxpayer (shareholder) enters into some form of employment agreement or a covenant not to compete with the corporation, the personal goodwill would likely be transferred to the corporation, and thus a corporate asset as opposed to an asset of the taxpayer (shareholder).  Furthermore, it is very important that the parties properly document the personal goodwill in the negotiations and the asset purchase agreement. The court is likely to review the communications between the parties and the purchase agreement to check for the existence of the personal goodwill, which likely would or should be discussed and included within the agreement if in fact a portion of the purchase price is being allocated to personal goodwill.  In addition to reviewing the related documents to the transaction, it may be wise to obtain a third part valuation to establish the personal goodwill and value of such personal goodwill.

The above article has been written by John McGuire, a tax and business attorney in Denver, Colorado and the founding partner of The McGuire Law Firm.  You can contact Mr. McGuire at 720-833-7705 or John@jmtaxlaw.com.

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S Corporation Stock and Debt Basis General Matter

Why do shareholders in an S Corporation care about their stock basis and debt basis?  A shareholder’s basis in the S Corporation stock or debt is very important for multiple reasons.  The article below has been prepared by a tax attorney and business attorney at The McGuire Law Firm to provide additional information regarding the above issue.  Please remember to always consult your tax or business attorney regarding your specific issues.

S corporation shareholders may be limited to the amount of loss they can claim.  Even if the K-1 issued to the shareholder shows a loss, this does not necessarily mean the shareholder can claim the loss on their 1040 individual income tax return.  There are three loss limitations to a shareholder of an S corporation.  These loss limitations are as follows: 1) At risk limitations; 2) Stock Basis and Debt Basis Limitation; and. 3) Passive Activity Loss Limitations.  Each limitation must be met, starting with a shareholder’s stock basis and debt basis in the S corporation stock for a shareholder to claim a pass through loss.  This article will discuss stock and debt basis.

Unlike a C corporation, a shareholder of an S corporation will recognize an increase or a decrease in their stock basis each year based upon the operations of the corporation, which is related to the K-1 that is issued to the shareholder.  The shareholder is responsible for tracking their S corporation stock basis, not the corporation.  The K-1 that is issued to the taxpayer will show the amount of non-dividend distributions that the shareholder has received, but does not state the taxable amount of the distribution.  The taxable amount of a distribution is dictated by the shareholder’s basis stock basis.  If a shareholder receives a non-dividend distribution from an S corporation, the distribution can be tax free to the extent of the shareholder’s stock basis.  If the shareholder has a stock basis in excess of the non-dividend distribution, the distribution may be tax free.

If a loss is allocated to the shareholder, the shareholder must have sufficient stock basis (or potentially debt basis) to claim the loss or deduction on their 1040 individual income tax return.  Thus, a shareholder’s stock and/or debt basis in the S corporation can dictated whether or not or how much of a loss or deduction can be taken by the shareholder and is why a shareholder should care about their basis.  Furthermore, such basis also provides the amount by which the shareholder can take a non-dividend distribution tax free. In later articles, we will discuss how such stock basis is computed and other related issues.

If you have questions related to your S corporation you can speak with a Denver tax attorney and business attorney by contacting The McGuire Law Firm.  A free consultation is provided to all potential clients.

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