Form 5471 is an information reporting form the must be filed with a taxpayer tax return when they meet certain ownership amounts of foreign corporations.

Broadly speaking, the form reports who owns the foreign corporation, the current year financial information of the foreign corporation, information related to subpart F and GILTI inclusions (discussed below), and the characterization of earnings impact of the corporation on the U.S. Shareholders.

Who has to file form 5471:

Generally speaking, U.S. Shareholders have to file form 5471. The annual filing requirements depend on how much of the foreign corporation is owned. There are instances where a person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.

Who is a U.S. Shareholder?

A U.S. Shareholder is a U.S. Person (individual, corporation, partnership, trust, estate) who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation.

There is a separate rule when the foreign corporation is an insurance company. In that instance, a person will be a U.S. Shareholder if it owns ANY shares of the foreign corporation.

Do all U.S Shareholders have to file a form 5471?

The fast and terrible answer to this question is: it depends.

The form 5471 is required when a person (again individual, corporations, partnership, trust, estate) meets the requirements of one of several categories of filers for form 5471.

The current form 5471 category filers are broken out into the following categories:

• Category 1a, 1b, 1c
  • Dealing with persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
• Category 2
  • Dealing with U.S. individuals who are officers or directors of a foreign corporation in a year when a U.S. Person acquires 10% of the foreign corporation or acquires enough shares to exceed the 10% ownership threshold to become a U.S. Shareholder (as defined above).
  • Notably, the director or officer does not have to own any interest in the foreign corporation for the filing obligations to exist and mee the requirements of a Category 2 filer.
• Category 3
  • Dealing with U.S. persons when they acquire or dispose of shares in a foreign corporation such that that person becomes a U.S. Shareholder, stops being a U.S. Shareholder or adds 10% to their current holdings. It also covers when someone owing 10% or more becomes a U.S. person.
• Category 4
  • Dealing with U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
• Category 5a, 5b, 5c
  • Dealing with U.S. persons who are U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.

A U.S. person can fall into multiple categories per year.

There is a larger discussion of the category filers in this article (Link to other 5471 article) that also discusses constructive ownership rules.

There are several exceptions to the form filing obligations, so ensure you are taking those into account when making filing determinations.

If you meet one or more category filers, do you have to file every year you own the interest in the foreign corporation?

Not all U.S. Shareholders will need to file a form 5471 every year they are U.S. Shareholders. In any year that you meet the requirements of any of the Category filers, you will likely have a filing obligation if you don’t meet any of the exceptions.

As an example, in year 1 you (a U.S. individual) bought 15% of a foreign corporation. You are the only U.S. person who owns shares in the company. You are not related to any other shareholders. Since you now own more than 10% of the foreign corporation you are a U.S. Shareholder. In year 1 you have a form 5471 filing obligation as a Category 3 filer.

In year 2, you have not bought any more shares, and all the shareholders are the same. In year 2 you do not meet any of the category filer requirements and do not have a form 5471 filing obligation.

In continuation of the above example, if in year 3 you purchase an additional 15% of the foreign corporation (brining your total ownership to 30%) AND two other U.S. persons each bought 15% of the foreign corporation (30% total), you become a Category 1a, 3 and Category 5a filer. Thus, you will have a form 5471 filing obligation in year 3.

If in year 4 none of the facts change and the foreign corporation has three U.S. shareholders owning a collective 60%, the entity is considered a controlled foreign corporation and the form 5471 is required to be filed by U.S. Shareholders.

The important point to remember when owning shares in a foreign corporation is that you must review your holdings and the holdings of other shareholders annually to determine if you have a form 5471 filing requirement.

Why do you have to file form 5471?

The form 5471 is required to be filed as outlined in the U.S. tax code. The information provided allows the IRS to make determinations on a U.S. persons offshore investments and if any income should be included in the taxpayer U.S. tax base.

Broadly speaking, the form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers taxable income. That being said, the form does require the taxpayer to report their proportionate share of Subpart F income and tested income.

What is Subpart F income and what is the point of computing tested income?

A detailed discussion of Subpart F income and tested income are beyond the scope of the article, but each play a key role with respect to form 5471.

Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that is not able to be deferred from U.S. income inclusions by U.S. shareholders. Very loosely, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income.  When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.

Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.

Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.

Do you have to file form 5471 if the entity you own is inactive or loses money?

Yes, mere ownership of the entity creates the filing obligation.

How do you file form 5471?

If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.

If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.

What happens if you don’t/didn’t file form 5471 or you file it late?

Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.

If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.

Other considerations?

If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:

• Foreign Bank Account Reporting (FBAR)
• Form 8938 foreign financial asset reporting
• Form 8865 foreign partnership reporting
• Form 926 contributions to foreign corporations
• Form 8858 foreign branch and disregarded entity reporting
• Form 8992 GILTI reporting
• Form 8621 Passive Foreign Investment Company (PFIC) reporting

Updates on Form 5471

In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.

One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.

Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.

The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.

It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.

Non-recourse debt means that if the debtor defaults, the creditor cannot pursue the debtor personally. Instead, the creditor must seek recovery from the collateral securing the loan. The creditor can file a suit against the borrower if the collateral does not cover the debt. However, if the collateral covers the debt, the lender will likely agree to accept less than the total amount owed.

With recourse debt, the creditor can come after you and your assets if you fail to repay the loan. If you default, the creditor can seize your property, including any real estate you own and sell it to recover the amount owed. Non-recourse debt does not allow the creditor to go after you if you default on an obligation. Instead, the creditor can only get back what he paid for the asset. For example, if you bought a house using a mortgage, the bank cannot come after you for the unpaid portion of the mortgage. However, if you default on the mortgage, the bank can foreclose on the house and sell it to recover its losses.

Concerns when Obtaining Property Subject to Non-Recourse Debt

A second concern arises when considering acquiring property subject to a non-recoverable debt. You must first determine if the non-recourse liability is included in the purchase price. If so, you must also consider whether the non-recoverable responsibility is part of the sale proceeds. The cornerstone case for both of these questions comes from Crane v. Commissioner, 331 U.S. 1 (1947), which was decided in 1947 by the United States Supreme Court.

The basis of a property is the price paid for the property when you bought it. If you buy a house for $100,000, the basis is $100,000. You can deduct any increase in the value of the home during the year from your taxable income. For example, if you sell your house for $200,000, you get a capital gain of $100,000 ($200,000 – $100,000) and pay taxes on half of that gain ($50,000), leaving you with a $50,000 net profit. A higher basis means you can claim more significant deductions for depreciation, interest, and other expenses.

Non-recourse debt is usually considered when you buy a house. You must pay back the loan plus interest if you borrow money to buy a home. If you default on your loan, the bank may seize your assets. However, if you own your house free and clear, you won’t owe any money if you fail to repay the loan. You’ll still have to pay taxes on the gain, but there won’t be any penalties for failure to repay the loan.

In general, if you borrow money against your residence, the basis should be the property’s fair market value at the time of the loan. If you borrow money against your business real estate, then the basis should reflect the fair market value of your business real estate at the time of the borrowing. However, there are exceptions to this rule. You may be able to exclude certain types of debt from the basis of your property. For example, if you borrow money to pay for improvements to your property, the amount borrowed does not become part of the basis of the property. Similarly, suppose you borrow money to purchase an asset that is held primarily for sale to customers in the ordinary course of business. In that case, the amount borrowed is excluded from the basis of the asset.

Key Takeaways

A recourse loan is a type of credit instrument where the lender has recourse against the borrower if there is an event of default. A non-recourse loan is a type of loan where the lender does not have recourse against the borrower if the loan goes bad. Non-recourse loans are often associated with real estate lending because real estate is considered a safe asset. However, non-recourse loans are also used in other industries, including finance, manufacturing, and construction.

Non-recourse loans allow borrowers to borrow up to the value of the property. If the borrower defaults, the bank cannot pursue them for the remaining amount. As a result, banks charge higher interest rates on these types of loans to cover the increased economic risk. In the United States, loan-to-value ratios for residential mortgages are generally capped at 80%.

Special Considerations

Non-Recourse debt is an investment strategy involving borrowing money at low-interest rates and then investing those funds in projects that will generate returns later. These investments are made without guaranteeing that the borrower will repay the loan. If the project fails, the lender does not lose anything because they did not put any money down. On the other hand, if the project succeeds, the lender gets paid back plus interest.

For more information speak with a Denver business attorney at The McGuire Law Firm, call 720-833-7705.

A reorganization allows a company to restructure its operations without triggering significant tax consequences. A reorganization is generally considered a change in the form of a corporation rather than a mere change in the place of doing business. For example, suppose a company moves its headquarters from New York City to Los Angeles. In that case, it will likely qualify as a reorganization because the move changes the form of the corporation. However, if a company merely changes its name, it may not qualify as a reorganization. You should consult your accountant or other professional advisors about the potential tax implications if considering a reorganization or B reorganizations.

What Are B Reorganizations?

In B reorganizations, the acquiring corporation acquires all of the target corporation’s shares. The acquiring corporation doesn’t need to pay any money to purchase the target corporation’s shares. Instead, the acquiring corporation pays the target corporation’s shareholders for the acquired shares. This means that the acquiring corporation owns the target corporation’ shares directly.

The acquiring corporation then calculates the basis of the target corporation’s share using the same method as if it had bought the shares. For example, if the acquiring corporation buys 100 shares at $10 per share, the acquiring corporation will calculate the basis of the target shares as if the acquiring corporation owned those shares. If the acquiring corporation paid $100 for the shares, the basis would be $100.

B reorganizations are complex transactions that require careful planning and execution. They must be done correctly to avoid legal issues.

What Are The Control Requirements For B Reorganizations?

In B Reorganizations the control requirement is satisfied if the acquiring corporation possesses at least 80% of the value in all classes of voting stock plus at least 80% of all other classes of stock. If the acquiring corporation acquires 80% of the value from Classes A and B, it will satisfy the control requirement. However, receiving less than 80% of the value may still qualify for a tax benefit. For example, consider five classes of stock – Class A and Class B, with voting rights, Class C, Class D, and Class E, none of which have voting rights.

What Type of Consideration May Be Used In B Reorganizations?

A B reorganization is a type of corporate restructuring that allows companies to move assets out of an insolvent subsidiary and back into the parent company. This corporate restructuring requires a particular form of corporate reorganization called a “B” reorganization. Only certain types of corporations are eligible for a B reorganization, including those whose primary activity consists of owning or operating businesses in the same line of business as the corporation seeking the reorganization. For example, if a company owns a hotel chain, it could seek a B reorganization to transfer all of its hotels to another company. However, if a company owns real estate, it could not pursue a B reorganization unless it also owned a hotel chain.

Can B Reorganizations Occur Over a Series of Transactions?

A reorganization can occur when a company acquires another company. A reorganization occurs when the acquiring company’s shareholders receive all or substantially all of the target company’s shares. Reorganizations can be accomplished via multiple steps. For example, an acquisition could involve the purchase of all outstanding shares of the target company at a price below its fair value. Then, the shareholders of the acquiring corporation could vote to approve the merger. Finally, the acquiring corporation could issue additional shares to the target company’s shareholders.

Will There Still Be Minority Shareholders?

B reorganizations require at least 80% control to be successful. This isn’t the right choice if you’re looking to reduce your share count. A B reorganization doesn’t necessarily mean that you’ll lose any control. You could retain all of your shares if you wanted to. But if you’re looking to reduce the number of outstanding shares, other options are available.

If you are considering a business sale or acquisition, you may qualify for a tax benefit under Internal Revenue Code Section 368(a)(1)(A) if the transaction meets specific requirements. For example, you must not have shareholders other than yourself, and you cannot transfer all of your assets to another entity. You also need to meet specific financial criteria. If you meet those criteria, you may be eligible for a tax deduction for the amount paid to acquire the company.

Key Takeaways

Bankruptcy is an attempt to turn around a failing business. If a company is insolvent, then it cannot repay its creditors. When a company files for bankruptcy, it must submit a reorganization plan. An insolvent company will often file for Chapter 11 bankruptcy protection.

The plan’s purpose is to restructure the company’s finances and operations to return it to solvency. The goal is to put the company back on track to repay its debts. Insolvent companies often need to cut costs drastically. This includes cutting wages and benefits, laying off employees, closing stores, and selling assets. These actions are called “reorganizing.” A judge usually supervises reorganizations. The judge approves the reorganization plan, and the company emerges from bankruptcy if all goes well.

A Chapter 11 bankruptcy filing allows a company to reorganize its finances while continuing operations. This type of filing is often used when a company needs a period of time to restructure its debt and re-establish its financial structure. It also gives companies breathing room to negotiate with creditors and avoid liquidation. Companies may file for Chapter 11 protection if they cannot pay all of their debts or if they are unable to come to an agreement with their creditors about how to repay them.

Conclusion

If you’re considering a reorganization, you owe it to yourself, your shareholders, and your employees to follow a rigorous plan rather than winging it. You will make better decisions, keep everyone more involved and engaged, capture more value and avoid costly mistakes.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney and learn if your transaction qualifies as a B reorganization for tax deferral purposes.

Reorganization is a term used when a company changes its structure. A reorganization differs from a merger or acquisition because it does not involve merging two companies. Instead, it consists in changing the legal form of a corporation. Reorganization is also different from liquidating a company because it doesn’t involve selling all of the company’s assets. Reorganization is done to change the corporate structure of a company. For example, if a company wants to expand its operations, it may restructure itself by creating a subsidiary instead of growing through mergers and acquisitions.

The article below has been prepared by a Denver business attorney and tax attorney to discuss a few issues related to tax-free reorganizations.

What Are The Types Of Reorganization?

An acquisitive reorganization occurs when one company buys out another. These transactions are often referred to as “acquirers” and “target companies.” Acquirers may acquire target companies through mergers, acquisitions, asset purchases, stock purchases, or other means. Acquisitions are usually motivated by strategic goals such as growth, expansion, diversification, or cost reduction. Acquirers may seek to achieve these goals through organic development, acquisition, divestiture, or other means.

Acquisitive Reorganization

Acquisition deals are often done through mergers or acquisitions. Mergers are when two companies combine to form a single company. Acquisitions are when two companies combine to create a larger company. Both mergers and acquisitions can be made privately or publicly. A private equity firm usually makes private acquisitions. An investment bank usually makes public acquisitions.

A type B reorganization is when an investor buys out a minority shareholder. If the investor owns more than 50 percent of the shares, then the investor must buy out the remaining shares at fair market value.

A type C reorganization is when a company sells all of its assets to another company. Then the seller liquidates (IRC §368(a)(1)(c)). This is called a boot because the buyer gets a cash infusion.

A type D acquisition occurs when a company buys another company. If the buyer controls 80% of the shares of the acquired company, then the acquirer will be called a Type D Acquirer. A type D acquisition is different from a merger because there is not always a change in ownership. For example, if a company sells 10% of its shares to another company, that does not mean that the original owner of those shares sold them to someone else. Instead, the original owner still owns 90% of the claims.

A triangular reorganization is when a company changes its structure by merging with another company, acquiring another company, or selling a division of itself. These types of reorganizations can be classified as triangular reorganization (excluding reorganization type E), depending on whether there is an intermediary party. Type A involves a target corporation, a corporate parent, and a subsidiary, while type B consists of a target corporation, an investor, and a subsidiary. Type C involves a target corporation, two investors, and a subsidiary.

Divisive Reorganization

A split-off is when a company splits itself into two separate companies. The parent company will buy back its stock from the shareholders, giving them a controlling interest in the new company.

A spin-off is when a parent company sells a portion of itself to create a separate company. A spin-off may involve selling an asset or division of the parent company to another company. For example, a company might sell the factory to another company if it has a manufacturing plant. Or, if a company owns a patent, it might sell the patent to another company.

A split-up is when an existing company splits into two or more smaller companies. This happens when the shareholders vote to dissolve the old company and distribute its assets among the shareholders. Each shareholder receives a share of the new company’s stock. If the shareholders agree to form two or more new companies, then each shareholder will receive a percentage of each new company’s stock.

Restructuring Reorganization

Restructuring is an event that changes the legal structure of a company. It may involve changing the number of shares outstanding, the type of ownership, or the amount of debt. For example, if you own 100% of a company, you might sell your shares to someone else. You could buy out the other half if you own 50% of a company. Or, you could change the debt ratio. You could increase the amount of debt, decrease the amount of equity, or even eliminate the deficit.

A type F restructuring is when you change your legal structure. You could change your name, your address, or even your country. If you move your company to another country, you must file an application with the local government. This is called a type F restructuring.

Bankruptcy Reorganizations

A bankruptcy reorganization is when a company transfers its assets to another company. These events are usually triggered when a company cannot pay all of its debts. Bankruptcy reorganizations are often done because companies need time to restructure their finances and become stronger.

How Does An A Reorganization Work?

A merger occurs when two companies combine forces to form a single company. Mergers usually happen when there is a need for growth or expansion. A merger can also arise when a company wants to acquire another company. When a company merges with another company, the shareholders of each company receive shares of stock in the resulting company. After the merger, the shareholders of the acquired company become shareholders of the acquiring company.

What Are The Requirements Of An A Reorganization?

There are two main reasons why a company might need to restructure itself. One reason is when the company needs to merge with another company. Another reason is when the company wants to change its focus. For example, a company might want to focus more on technology or manufacturing instead of selling products. If the company continues to operate after the restructuring, it will still have the same owners and employees.

In a corporate acquisition, the acquiring company pays the target company a purchase price equal to at least 40 percent of the value of the acquired company’s shares outstanding. The acquiring company does not need to own any of the acquired company’s stock to satisfy the 40% rule. Instead, the acquirer can pay cash or debt to buy the target company’s shares. If the acquirer buys all of the target company’s shares, the acquirer will have to pay at least 40 percent of its equity capital. However, suppose the acquirer buys less than 100 percent of the target company’s stock. In that case, the acquirer must pay at least 40 percent out of its equity capital plus the amount of the difference between what the acquirer pays and the minimum percentage required. For example, if an acquirer pays $10 per share for a target company with 200 million shares outstanding, then the acquirer needs to spend at least $40 per share ($20 + $20 $40) to meet the 40% requirement.

Example

In the above scenario, company A acquires company B for $150,00. At least $60k must be stock of A, and the remaining $90k could be anything. Company B receives the money from A and then liquidates it. The consideration provided by A is distributed to the shareholders in a tax-free transaction. Depending on whether $90k is stock or other property, there may be tax consequences for the shareholders of B.

When you consider a tax-free reorganization, keep in mind that there are different types of considerations that may qualify for tax-free treatment. For example, if you are going through bankruptcy, you will not be able to claim any tax-free treatment. However, if you want to sell your company, you might be able to claim tax-free treatment. 

Still Have Questions? Call Us

Speak with an experienced Colorado Business Attorney or Tax Attorney about what options are available to you. Contact The McGuire Law Firm at 720-833-7050 to discuss your situation.

When buying a company, you have two options: buy all its shares or just the company’s assets. If you’re looking to sell your company, you may also choose to sell all of its shares or just its assets. There are pros and cons to stock sales or asset sales options. For example, if you own 100% of a company, you will receive all the proceeds from any future company sales. However, you’ll get less money if you sell only the company’s assets. It would be best to consider both types of transactions when making an investment decision.

An acquisition is a purchase of shares in a company. An asset transaction is when you buy something like a house or car. A stock transaction is when you buy shares in a company. When you buy shares in a corporation, you become a shareholder. You get all the rights that come along with that. If you buy 100 shares of XYZ Corporation, you will receive one share of XYZ Corporation. That means you own 1/100th of the company. You also get all the rights that accompany owning a piece of the company. For example, if the company owns a factory, then you get access to the factory. 

This article has been prepared by a Denver business attorney and tax attorney to discuss section 338(h)(10) of the Internal Revenue Code.

Stock sales

In a stock sale, the company sells its shares to another company. The buyer buys all the shares owned by the sellers. The buyer also takes on all the debts and obligations of the company. The buyers gain full ownership of the company and become responsible for paying any debt or obligation incurred by the company. If the company does not have enough money to pay back the debts, the buyer must either sell off other assets or borrow money to pay them back.

Buyers should consider whether they are willing to assume the risks of buying a company’s stock. When selling a company, the seller must disclose any material facts about the company’s financial condition. 

For example, if a company faces legal challenges, there could be a lawsuit against the company. If the company is facing environmental problems, the company could face fines or penalties. Employees could strike or go on strike if the company faces labor issues. All of these situations could cause the price of the company’s stock to drop significantly.

A stock sale will allow the owners to retain control of the company while still allowing them to sell shares to investors. If the company has many copyrights or patents or has significant government or corporate contracts that are difficult to assign, then a stock sale may be a better choice. A stock sale also allows the owners to reduce the risk of losing those contracts.

Sellers often prefer to sell stocks because all the proceeds are tax-free. Sellers also avoid paying taxes on any income earned while holding the shares. For example, if you sold your stock at $100 per share, you’d pay $20 in federal income taxes. If you held onto the stock until it reached $150 per share, you’d owe $50 in federal income taxes. But if you sold the stock worth $100, you’d owe nothing on the sale.

A deal structure can greatly impact the future of both the buyer and the seller. Other factors, including the company’s structure and industry, can also affect the decision. Buyers and sellers need to consult with their business intermediary, legal counsels, accountants, and others early in the process to ensure that all necessary information is gathered and understood before making a final decision.

Asset Sale

When selling an asset, the seller remains the legal owner of the entity while the buyer purchases individual assets. For example, when selling a car, the seller keeps ownership of the vehicle while the buyer buys the engine, transmission, tires, etc. A typical asset sale does not involve buying the seller’s cash or paying off debts. Instead, the buyer pays for the assets individually. An asset sale is often called “cash-free” and “debt-free.”

Net Working Capital is usually included in an Asset Purchase Agreement. It includes items like Accounts Receivable, Inventory, and Accounts Payable.

Selling a corporation can have significant tax consequences for both the buyer and seller. Generally, sellers of corporate entities prefer to engage in a stock sale rather than an asset sale, while buyers choose to engage in an asset sale. However, it is not impossible to satisfy both parties to the transaction with a §338(h)(10) election.

Asset Purchase

If a purchaser pays for a target company’s stock, they receive a cost basis under §1012 for the value of the stock itself. On the other hand, buyers prefer an asset purchase over a stock purchase to increase their basis for depreciation purposes. The underlying assets held by the selling corporation retain the same basis as before, which does not create a benefit for the purchaser in terms of depreciation.

Asset Purchase Example

For instance, consider a corporation that holds a machine that costs $500. In years one and two, the corporation depreciates the machine by $100 per year, so the adjusted basis under §1012 is now $300. This also assumes that the seller holds the stock with a basis of $500, the total fair market value of the entity is $1,000, and there are no liabilities.

If the corporation engages in a stock sale, the purchaser will pay $1,000 for the stock since that is the fair market value. The buyer’s basis in the stock will be $1,000 under §1012. However, the machine retains the $300 basis. There is no adjustment to this underlying asset. The seller enjoys capital gains treatment on $500 of gain from the stock sale, which is the difference between the amount realized of $1,000 and the adjusted basis of $500 (§1001). Even though the buyer purchased the stock for $1,000, he may only use the machine’s basis of $300 for depreciation purposes. There is no step-up in basis allowed for underlying assets absent the §338 elections.

Limitations to Asset Purchases

Note that there are some limitations to asset purchases that make stock purchases more favorable. These include limitations built-in by contracts and other legal obligations. There could also be other liability issues that prevent sellers from engaging in an asset sale.

For these reasons, section 338 may provide an attractive alternative to satisfy both the buyer and seller in a business sale. Please discuss any specific business or tax matters directly with your business attorney or tax attorney.

To speak with a Denver business attorney or tax attorney, please contact The McGuire Law Firm at 720-833-7705.

When you start an LLC business, you are usually excited about what lies ahead. You might even dream about all the possibilities of starting a new venture. However, when you close down your business, you might feel like you need to get rid of any unfinished projects before moving on to the next thing. However, several legal requirements must be met before officially dissolving your LLC. Filing paperwork with the state and informing creditors are two of those requirements. These steps will protect you from personal liability if something goes wrong during the closing period. A Denver business attorney has prepared this article to provide additional information on dissolving an LLC in Colorado. 

Why Should You Dissolve an LLC?

To start a business, you must register your company name with the Secretary of State. You also need to file articles of incorporation with the state. If you are doing business in another state, you may need to file a similar document. Once you registered your company name, you must notify the IRS and other relevant tax authorities. You should also keep records of all payments made to yourself and the corporation. When you dissolve the company, you stop paying taxes and filing returns.

Dissolution is a legal procedure that ends the existence of a corporation. A company can dissolve itself if its owners agree to do so. Suppose the owners of a dissolved corporation wish to continue operating under another name. In that case, they must file articles of incorporation under the state’s general corporation law. Dissolving a corporation does not affect any contracts entered into before the dissolution. A corporation may also be dissolved voluntarily by filing Articles of Dissolution with the Secretary of State. Dissolution of a corporation does not mean that the corporation ceases to exist. Instead, it dissolves the corporate entity and returns all assets to the individual shareholders. When a corporation dissolves, the directors and officers remain liable for any debts incurred before dissolution.

Vote to Dissolve the LLC

The first thing you need to do when dissolving a company is to get all the members to agree to dissolve the company. You will then need to follow the procedures set out in the organizational documents. If there are no specific procedures, you must follow the general procedure outlined in your state’s business laws. Once the company is dissolved, you must keep track of any outstanding debts or liabilities.

File Your Final Tax Return

When you dissolve your corporation, you must notify your state tax agency of your intent to dissolve. If you fail to do so, you could face fines and penalties. Once notified, the state tax agency will send you a notice indicating whether you need to pay additional taxes. If you have already paid all of your taxes, then there is nothing else to worry about. However, if you have not yet filed your taxes, you should still contact the state tax agency to let them know you intend to dissolve your corporation.

You must file your final tax return at the end of every calendar year. You may need to file quarterly instead of annually if you are self-employed. You will also need to file an annual report with the IRS. You must file your final employment tax returns within 90 days after the end of each quarter. Failure to file timely means you could face penalties.

File the Proper Dissolution Forms

Next, go to your state’s Secretary of State or Corporations Division website to find the dissolution forms. You will need to provide basic information about yourself and your company. Some states require additional information, such as proof of payment of outstanding taxes. Fees vary by state but generally range from $10-$50. Check the form instructions for the exact requirements.

You need to get an official Certificate of Dissolution from the state. You can do this online at the Secretary of State website. Once you receive the certificate, you must file it in your LLC record books. Be sure to include your LLC number, name, and other information. Make sure you also include the filing fees, if any. There may be additional requirements depending on what type of entity you are forming. For example, you must pay taxes if you are forming a corporation. If you are forming a partnership, you must register with the IRS.

Settle Outstanding Debts

It would be best if you let your creditors know about the dissolution. You can send them a letter via certified mail and return the receipt requested. If unsure what kind of creditor you have, check with your attorney or contact your state’s Secretary of State’s office. Your state’s law will specify the proper procedure. Usually, you must provide notice within 30 days of the dissolution. Any claim filed against you after the deadline will be dismissed if you fail to provide notice.

It’s important to keep track of your debts and credit card balances. If you’re unsure whether you need to send out notices to creditors, check your credit report first. A free copy of your credit report can be found at annualcreditreport.com. You can also get one every four years through AnnualCreditReport.com. Once you’ve checked your report, you should consider sending out notices to creditors.

Distributing Assets

You may need to pay your creditors before distributing any money to your LLC members. You will also need to allocate assets among your LLC members. These allocations are usually based on an owner’s share of the company. For example, if you have three owners with a 40-30%-30% ownership split, each owner gets 30% of the company’s total value. However, you can change the distribution of your LLC’s assets at any time. Doing so will require a special meeting of your LLC’s board of directors.

Take Care of Your Employees

Employment taxes. If you have one employee, you must pay them any final wages or compensation owed. You also need to make final federal tax deposits. The trust fund recovery penalty may apply if you don’t deduct or deposit employee income, social security, and Medicare taxes.

You must pay quarterly federal income tax on all wages paid during the year. You also must pay the estimated tax if you expect to owe more than $1,000 at the end of the year. Failure to pay the required due amount may be subject to penalties and interest.

You must complete an annual return if you paid wages during the calendar year. Suppose you paid wages to any employee during the calendar year. In that case, you must report the total wages paid to all employees. You must also report the total amount of FICA taxes withheld from wages paid to all employees, including those who did not receive wages. You must attach a copy of Form W-2 to the return. For more information about reporting wages, see Publication 1546, Reporting Employee Compensation and Benefits.

If your company receives tips, you must file Form 8027, “Employer’s Annual Information Return,” to report the final tip income. You also need to allocate tips to each employee. If you don’t, you may face penalties.

Conduct Other Wind Down Processes

A proper conclusion to your business involves closing out your accounts, including your business bank account, federal employer identification number (FEIN), and any state tax ID number, if applicable. You should also cancel any contracts and leases that may still be active and let your customers know when your last day of business will be.

Further Steps

If you register an LLC, you will automatically get a tax ID number in many states. You need to keep track of this number and update it when you change your name or state of incorporation. If you fail to do this, you may not be able to claim certain deductions or credits.

When you close your LLC, you’ll file your federal and state income taxes. You’ll also need to file any employment taxes owed. The IRS has a checklist of tax-related actions you need to take when dissolving an LLC. You’ll help avoid future fees, obligations, and lawsuits when you dissolve your LLC.

Contact The McGuire Law Firm to discuss your business questions and issues with a Denver business attorney. 

Section 338 Election of the Internal Revenue Code provides a way to treat stock purchases as asset acquisitions for tax purposes only. In other words, under Internal Revenue Code §338(h)(10), the selling corporation will bear the tax associated with the transaction, but there will only be one level. This single layer of taxation is based on the inherent gain in the assets held by the entity, but there is no tax on the subsequent stock sale. Section 338 Election of the tax code can help resolve some of the issues created in stock sales to benefit both buyers and sellers. This article has been prepared by a Denver business attorney and tax attorney to discuss the specific problems in greater detail.

Requirements for Section 338(h)(10)

Section 338(h)(10) elections require that both the buyer and the seller be corporations, and both parties must agree to make the election (see §338(a)). Unlike section 338(g), where the purchaser bears the tax burden, the seller pays the tax from the asset sale, so this requires agreement between the corporate parties.

Additionally, 338(h)(10) requires a qualified stock purchase. Section 338(d) defines a qualified stock purchase as one where the transaction occurs within a 12- month acquisition period and also satisfies the elements of §1504(a). Section 1504(a)(2) requires purchasing 80% of the vote and value of the target entity. For purposes of §338(h)(10), the 12- month acquisition period is not limited to a calendar year.

If a 338(h)(10) election has been properly made, the transaction is essentially treated as an asset sale followed by liquidation, with the tax liability flowing to the selling party. Mechanically, the purchasing target corporation is

 deemed to create a new target entity. This new entity’s sole purpose is to purchase the assets of the original entity. This allows an asset purchase while maintaining the stock sale characteristics for legal purposes. In other words, the asset sale is only considered for tax purposes, not other legal aspects. Note, the asset sale does trigger gain to the selling corporation, but there is no subsequent tax from the stock sale, thus eliminating the second level of taxable income. Treating the sale as a stock purchase may benefit the purchaser, such as maintaining specific contracts, permits, licenses, and other corporate attributes that could be lost from an asset purchase agreement.

The Tax Perspective

From a tax perspective, the purchasing party is satisfied because the transaction has been treated as an asset sale that provides a stepped-up basis for the assets. The seller is satisfied because there has only been one level of tax from the sale of the assets. This increases depreciation deductions which may be used to offset ordinary income in the future. Additionally, if the selling party has any losses, then depending on the character of the gain, these may be offset by the deemed asset sale.

Overall, §338 transactions provide a way for buyers and sellers to structure a transaction to maximize the benefits of both stock sales and deemed asset sales while reducing tax liabilities to each party. You should discuss the elements and implications of a section 338 transaction with your business attorney or tax attorney.

You can schedule a free consultation with a Denver business attorney or tax attorney by contacting The McGuire Law Firm at 720-833-7705.

As small business owners, we know that you do your best to keep costs to a minimum. One way to save money that many business owners overlook is tax deductions. Tax deductions that sole proprietors, partnerships, and LLCs may be able to take add up to a significant amount of savings. Understanding which deductions you can take for your small business will ensure that you don’t miss out on a potential tax write-off.

Here is what you need to know about optimizing your taxes for your small business. How do business tax deductions work? What can be written off as business expenses? What is a 100 percent tax deduction? Can you write off previous years’ taxes?

Getting help from a Denver tax professional can ensure that you claim the proper deductions on your tax return. 

What’s A Tax Deduction?

Tax deductions are expenses that are subtracted from your taxable income. Deductions take certain expenses into account in calculating the amount of taxes you’ll have to pay, allowing for a lower tax bill. But, the IRS has guidelines for tax deductions that you’ll need to follow. 

Small businesses have many ways to reduce their taxes. One of them is through writing off certain expenses as tax deductions. These deductions can be taken advantage of when filing your taxes each year. 

Business Meal Tax Deductions

As a sole proprietor, you can deduct 50% of your meals and drinks purchased during the year. If you’re a partnership, LLC, or corporation, you can deduct 100%. You must also keep records of any business relationships at the time of purchase.

The total costs of the meal. The best way to track business meal costs is to keep your receipts and write down notes on the back of them about the details of the meals.

Business Insurance Tax Deductions

You can deduct the insurance cost from your taxes if you own a home office or rent an office space. You can also deduct the cost of your renters’ insurance if you use a portion of your house to run your business.

Home Office Tax Deductions

Under new IRS guidelines for home office deductions, small businesses and freelancers will be allowed to deduct $5 per square foot of their home used for business purposes, plus 25 percent of any costs related to using the space. The amount of space that qualifies for a deduction depends on whether the taxpayer lives in a house or apartment. For example, single-family home with two bedrooms and 1,500 square feet of living space could qualify for a deduction of $15,000. However, a studio apartment with 200 square feet of living space would only be eligible for a deduction of $2,500.

Office Expenses Tax Deductions

Business expenses are deductible if they relate to your job. If you buy office supplies like pens, paper, and computers, you can deduct those expenses as long as you use the items for business purposes. You can also deduct postage and shipping costs related to sending documents to clients. Keep track of all receipts for business expenses for proof.

Phone and Internet Tax Deductions

You can deduct the costs of a phone and internet connection if you use them primarily for business purposes. You can also deduct the percentage of the total cost for your business use. For instance, if you spend $100 per month on phone and internet services, and 50% of those bills go towards your business use, you can deduct $50 per month.

Business Interest and Bank Fees Deduction

If you lend money to someone else, you will get paid back plus interest. If you borrow money to invest in a business, you may be able to deduct the interest you pay on the loan. You can also deduct any other fees or charges associated with using your business credit card.

Services From Outside Professionals Tax Deductions

Professional services expenses are deductible if they are related to your trade or business. These expenses include costs incurred to obtain advice, counsel, expert testimony, accounting services, bookkeeping services, legal services, advertising, marketing, research and development, travel, and other similar activities. If you use accounting software for your business, you may also deduct those expenses.

Salaries and Wages Tax Deduction

You may deduct your business expenses, including salaries and wages if you own a business. Salaries and wages are deductible if they are reasonable and necessary for running the business. You must keep records to prove the expense incurred while operating the business.

Charitable Contributions Deduction

If you donate money to qualified charities, you may be able to claim deductions for those contributions on your federal income taxes. You must itemize deductions on Schedule A of Form 1040 if you want to deduct any charitable contributions. Charitable contributions are not deductible on your state income tax returns.

Energy Efficiency Expenses Deduction

You can get a tax credit for installing solar panels on your roof. If you install a solar panel system, you may be eligible for a federal tax credit worth 30% of the total cost of the installation. The IRS site provides further information about the tax credits available for homeowners.

Investments Tax Deduction

If you invest your own money in an investment fund, you can write off any dividends or capital gains you earn. However, you cannot claim the interest paid on the loans if you borrow money to invest. If you pay back the principal, you may be able to deduct the interest. But if you default on the loan, you will not be able to write off the interest.

Client and Employee Entertainment Deduction

You can deduct 50% of the cost of entertaining clients if you talk about business while doing it. If you entertain your employees at a company function, you can deduct 100% of the costs.

Moving Expenses Deduction

You must meet two requirements. First, your move must be primarily due to a change in employment. If you’re moving because of a change in employment, you may be able to deduct all expenses associated with the move. Second, your new job location must be at least 50 miles further away from your old job location than your previous home was from your previous residence. If both conditions are met, you may be able to deduct 100% of the moving expenses.

Child and Dependent Care

If you’re married and your spouse is not working, you may be eligible for an additional deduction if you pay for childcare expenses. You can deduct any amount spent on childcare for your kids under age 13. Childcare expenses for older kids are also deductible. You can deduct the cost of childcare at a center that provides education and training for preschoolers through high school students. Costs for childcare centers that provide preschool programs are generally higher than those for centers that offer elementary school programs.

Property Taxes Deduction

You can deduct up to $10,000 annually on your federal income tax return. State and local property taxes are deductible on your federal tax return. State and local sales taxes are deductible on your federal income tax returns. These taxes are not included in the $10,000 limit.

Retirement Contributions Deduction

Contributing to an Individual Retirement Account (IRA) can help reduce your tax bill. You can deduct any amount you contribute to an IRA account. For example, if you contributed $4,000 to an IRA last year, you could claim a deduction of $2,000. If you’re under age 50, you can deduct up to $5,000 ($6,500 if you’re married and filing jointly).

Business Startup Costs Deduction

In the United States, if you start a new business in the current tax year, you may be eligible for an income tax deduction of up to $5,000 in expenses related to getting started. These expenses include advertising, legal fees, accounting services, office supplies, rent, utilities, insurance, and other miscellaneous items. You can also write off any equipment purchased to get your business going.

How Do Tax Deductions Work?

Tax deductions work by lowering your tax bill. You can deduct expenses related to running your business from your taxes if you’re self-employed. A McGuire Tax Law Denver business attorney will help you determine what kind of business expense is deductible and how to properly claim them.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney or Denver Tax attorney. 720-833-7705 or John@jmtaxlaw.com

When gifting property, gift and estate taxes are two different types of taxes applied to wealth transfers. A gift is when someone gives away property without getting anything back in return. An example of a gift is giving your car to your friend. Estate taxes apply to the transfer of assets after death. The recipient of the asset pays these taxes. The gift tax is a tax that the giver of the asset pays. It is usually charged at a rate of 35 percent. The estate tax is generally set at a higher rate, depending on the size of the estate. For example, estates worth $5 million or more are taxed at 40 percent. Estates worth $10 million or more are taxed 50 percent. This article has been drafted by John McGuire, a Denver tax attorney at The McGuire Law Firm, to discuss tax matters related to gifting.

Gift Tax vs. Estate Tax?

Gift taxes apply to gifts given throughout your life. Estate taxes apply to gifts you give after you die. Both types of taxes are essential for many reasons. For example, you’ll owe gift taxes if you give away $10,000 worth of property while alive. If you give away $10 million worth of property after you die, the government will receive that money as income. That means you’ll owe estate taxes on that amount. These taxes are significant because they affect what you can leave behind for loved ones after you pass away.

Gift Tax Policy

The gift and estate taxes were initially designed to discourage people from transferring wealth to heirs at death. However, many people still try to avoid paying the estate tax. For example, people may give gifts to relatives instead of selling property. Or they may transfer property ownership to shell companies not subject to taxation. These actions allow them to pass on their wealth while avoiding the estate tax.

Estate Taxes

The federal estate tax applies to property transfer at death in the United States. The estate tax is imposed on the first $11.58 million of an individual’s estate. The estate tax rate is 40%. The combined estate and gift tax threshold for married couples filing jointly is $22.4 million.

Real Estate Gift Tax

However, the basis is a little trickier regarding a property with loss. When the donor has a basis in property greater than the fair market value and chooses to transfer it as a gift, the donee does not simply take the donor’s basis. This is a situation where there is a built-in loss at the transfer time. In other words, if the donor has a basis higher than the actual value at the time of the gift, more basis concerns must be considered upon the following disposition.

For instance, if the donor has a basis in the property of $50,000 and the fair market value at the time of the gift is $40,000, the donee will wait until the latter disposes of the property to determine his basis for gain or loss purposes. If the donee later sells the property for $30,000, then under §1015, the donee will take a basis equivalent to the fair market value of $40,000. This would allow the donee to recognize a loss of $10,000 rather than $20,000 if he had taken a basis equivalent to the donor’s basis.

The Capital Gains Tax Over The Long Term

For example, Joe’s parents bought the house when he was born. He will inherit the house if his parents die before him. But, because the house was purchased at a discount, Joe will get less money than his parents paid.

Joe will receive a gift when he sells his house. If he doesn’t give away the house, he will owe taxes on the difference between what he sold the house for and what he gave away. He will also get a larger tax deduction if he gives away the home.

Stay Informed About Gifting

When you give someone else your property, you may not realize there could be unexpected taxes or other financial implications. Before giving away anything, consider what happens when you pass away. You might need to pay inheritance taxes if you leave behind a large amount of money. Or you might need to pay capital gains taxes if you sell the item. If you plan, you can avoid any problems.

You can speak with a Denver tax attorney and Denver business attorney by contacting The McGuire Law Firm.

When businesses acting as the seller or purchaser are going through the acquisition process, there is likely to be discussion as to whether the acquisition will be structured as an asset purchase or a stock purchase. There are advantages and disadvantages to an asset purchase and a stock purchase for both the seller and purchaser. 

However, there may be a means to treat a stock purchase as an asset purchase and receive the best of both worlds. The article below has been prepared by a Denver tax attorney and Denver business attorney to discuss certain tax matters. Still, please always discuss your specific issues with your attorney and check for current laws and regulations that may have changed.

A Stock Purchase

A stock purchase is relatively simple as the seller or target corporation’s stock is purchased. The buyer obtains control of the target corporation’s assets with no other action by owning all of the stock. This being said, the buyer may also inherit liabilities of the target corporation as the business continues and is exposed to prior matters. An asset purchase transaction may be more complex in that the buyer is purchasing the assets and not the stock, thus requiring the transfer of title to each asset, which depending upon the facts and circumstances, could begin to amount to significant time and cost etc. Further, if the target corporation has special licenses and permits, these may not be transferable to the buyer and could create additional issues under an asset purchase.

An Asset Purchase

As it is good and bad with both structures, a buyer, from a tax perspective, will generally prefer an asset purchase because the buyer, after the asset purchase, can step up the basis in purchasing assets. Therefore, the asset’s stepped-up basis will lead to more significant depreciation to lessen taxable income and thus tax at the corporate or personal level. In comparison, when the stock is purchased, the buyer will receive a basis in the stock at the purchase amount. The realization of the tax benefit may not come until the buyer sells the stock using the basis in the stock to offset a capital gain. Thus, the buyer will likely not “realize” the tax benefit of the stock purchase until a later date than they would under an asset purchase agreement.

There is a means under Internal Revenue Code Section 338 for the buyer to make an election treating a qualifying stock purchase as an asset purchase for federal income tax purposes. Under 338, if the transaction qualifies and the election is made, the transaction is treated as if the buyer purchased the target corporation’s assets for the purchase price of the stock. Therefore, the buyer will receive a more advantageous step-up based on the assets.

Section 338 Election

The buyer acquires the seller’s stock at a discount in a stock acquisition transaction. Suppose the buyer makes a qualifying stock purchase within 60 days of the date of transfer. In that case, it must elect to treat the transaction as an asset acquisition for federal income tax purposes. This is known as a “step-up” election.

If the buyer makes a Sec. 338 election, it treats the transaction as a stock purchase for legal purposes. Hence, it continues to acquire the seller’s liabilities, including outstanding debt, shares of capital stock, and certain contingent obligations. However, the buyer does not acquire the seller’s assets. Instead, it steps up the basis of those assets to the purchase price paid for the stock. At the end of the period, the buyer reports the transaction as a sale of stock and recognizes ordinary income equal to the difference between the purchase price and the adjusted cost basis of the stock.

The buyer can choose to allocate the excess of the purchase price over the adjusted cost basis to goodwill. Goodwill represents the purchased excess over the adjusted cost basis of intangible assets such as customer relationships, brand recognition, and patents.

Making the 338 elections is a means to structure an acquisition as a stock sale, which may have benefits, but allow the buyer the tax advantage of an asset purchase agreement.  John McGuire, a Denver tax attorney and Denver business attorney at The McGuire Law Firm, has prepared this article.