Resolving Partnership Disputes

Resolving Partnership Disputes

Resolving partnership disputes is often contentious and expensive. Sometimes disputes among limited liability company members arise which result in one or more of the LLC members wanting to exit the LLC.  If a member wants to exit the LLC by selling his interest but does not have a ready buyer of his membership interest, the LLC operating agreement may provide that the exiting member will assign his interest to the current members. Therefore, a value must be placed upon this membership interest before it is assigned.

What if the exiting member and the remaining members do not agree on a value?  First, carefully review your LLC operating agreement for provisions regarding the assignment and valuation of membership interests. The operating agreement often provides that a business valuation expert will appraise the value of the member’s interest. In addition, hire a corporate lawyer or business lawyer for advice. Furthermore, each LLC member should retain their own lawyer to advise them regarding the LLC’s operating agreement.

Chicago CPA and small business lawyer Brian J. Thompson can reach an affordable solution and resolve you partnership dispute via negotiated or litigated settlement.  Brian@BrianThompsonLaw.com

Passive Activity Loss Rules

Passive Activity Loss Rules

Passive activity loss rules may limit use of rental real estate losses. Can I deduct losses related to rental real estate for federal income tax purposes?  Maybe.   Losses from rental real estate may or may not be deductible in the current taxable year.  It depends upon the application of the passive activity loss rules to the particular taxpayer’s situation.

General Passive Activity Loss Rule

Generally, the passive activity loss rules permit deduction of passive activity losses to the extent of passive activity gains.   “Passive activity” means any activity— (A) which involves the conduct of a trade or business, and (B) in which the taxpayer does not materially participate.  Material participation means involvement in the operations of the activity on a (A) regular, (B) continuous, and (C) substantial basis. Federal law provides that the term “passive activity” includes any rental activity, except as provided in Section 469(c)(7).

Material Participation Exception

Section 469(c)(7) of the Internal Revenue Code provides the material participation exception.  A taxpayer can materially participate in real estate as a real estate professional if a) more than 50 percent of the personal services performed by the taxpayer are performed in real property trades or businesses in which the taxpayer materially participates, and b) the taxpayer performs more than 750 hours of services within the real property trades or businesses in which the taxpayer materially participates.  The term “real property trade or business” means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

Rental real estate activity is not a passive activity if a taxpayer meets both of the foregoing tests of material participation.  Therefore, deductions for losses related to the rental real estate activity are not subject to the general rule disallowing losses in excess of income from passive activities.

Active Participation Exception

Finally, Section 469(i) of the Internal Revenue Code provides an additional exception to the general rule.  It allows deduction of up to $25,000 of rental real estate losses per tax year related to rental real estate activities if the taxpayer “actively participated” during such taxable year.  Active participation requires less participation than “material participation.”  Active participation may be shown by participating in management decisions such as approving new tenants, deciding on rental terms, approving capital or repair decisions, or similar decisions.

However, the $25,000 passive activity loss deduction phases out by 50 cents per dollar as Adjusted Gross Income exceeds $100,000.  The loss deduction allowance phases out completely at AGI of $150,000.  Carry forward disallowed passive activity losses to the next taxable year.

Report passive activity losses limitations on Form 8582.  Finally, click here for the full text of the section 469 rules.    Retain a Chicago CPA for further advice regarding passive activity loss rules.

Free Business Logo Generator

Free Business Logo Generator

Free business logo generator for small business owners looking to stretch their marketing and advertising budget.  First of all, branding your small business can really help you stand out from your competition.  In addition, hiring a graphic designer is costly.  So, check out this logo generator article from Yahoo!’s small business advisor blog.

Net Investment Income Tax

Net Investment Income Tax

High-income taxpayers could see their tax burdens rise beginning in 2013 due to the Net Investment Income Tax.  Here are some possible explanations:

Increased top marginal tax rate.  For 2013, the highest marginal tax rate increased back to 39.6%.  This applies to taxable income above $400,000 (single filers) and above $450,000 (joint filers).   That’s up from 35%.  The taxable income level at which the 39.6% rate kicks in is indexed to inflation in future years.

Higher rate on investment income.  The tax rate on long-term capital gains and qualified dividends increase to 20% for taxpayers in the top bracket.  Most other taxpayers pay 15% tax rate on this investment income.

Phase out of itemized deductions.  Higher-income taxpayers also face a potential phase out of itemized deductions and personal exemptions as their adjusted gross income (AGI) rises above $250,000 for singles or $300,000 for married couples.

Medicare surtax on net investment income.  Under the Affordable Care Act, this 3.8% tax on net investment income kicks in when a taxpayer’s modified AGI exceeds certain threshholds.  The 3.8% surtax applies to the net investment income of singles when modified adjusted gross income exceeds $200,000 and to the net investment income of married couples when modified adjusted gross income exceeds $250,000 if filing jointly (applies to married couples filing separately who individually earn more than $125,000).  Investment income includes interest, dividends, royalties, rents, capital gains and passive activity income.

Additional Medicare tax of 0.9%  Additional Medicare tax of 0.9% on income from wages and self-employment for single taxpayers earning more than $200,000 and joint taxpayers earning more than $250,000.

 

Illinois State Income Tax

Illinois State Income Tax

The Illinois state income tax is back up, it’s just a matter of when and how much it will rise.  Will Illinois implement a progressive state income tax like California?  Maybe so if Illinois House Speaker Michael Madigan has his way.  According to Crain’s Chicago Business, House Speaker Madigan plans to introduce legislation calling for a vote in November on a constitutional amendment to allow a progressive state income tax in Illinois.  Specifically, Madigan proposed a 3 percent surcharge on individual income above $1 million.  On the other hand, Senate President John Cullerton may be seeking a progressive state income tax on a lower income threshhold:

http://www.chicagobusiness.com/article/20140320/BLOGS02/140329980/madigan-moves-for-millionaire-surcharge?r=6778C2146356E5Z

 

Severance Pay Held Taxable

Severance Pay

The U.S. Supreme Court ruled severance pay is taxable income.  Lower courts issued divided rulings on the issue.  However, it should not come as a surprise that the Supreme Court recently ruled that severance payments to laid off workers are subject to Social Security, Medicare and federal income tax.  Therefore, recipients of severance pay should retain a CPA to understand the tax implications of severance pay.  Also, get full details of the ruling in U.S. v. Quality Stores:

http://www.accountingtoday.com/news/supreme-court-rules-severance-pay-taxable-income

Governor Quinn Proposes Lowering Illinois LLC Filing Fee to $39

In what may be good news for those planning to start a small business in Chicago or Illinois generally, Gov. Pat Quinn said in his recent address to the State that he will introduce legislation to reduce the filing fee to create an Illinois limited liability company from $500 to $39:

http://www.wbez.org/news/gov-quinn-addresses-business-yearly-speech-109598

Mortgage Forgiveness Debt Relief Act

Mortgage Forgiveness Debt Relief Act

The Mortgage Forgiveness Debt Relief Act recently extended to cover tax years 2015 and 2016.  https://www.nar.realtor/news-releases/2015/12/national-association-of-realtors-applaud-passage-of-tax-extenders-package

Does the cancellation of a debt result in taxable income?  Yes, if you owe a debt  to someone and they cancel or forgive that debt, the canceled amount may be taxable income to you.   Some exceptions to this general rule were set forth in my earlier blog post on this subject. The taxpayer should receive a 1099-C Cancellation of Debt.  This cancellation of debt is also reported to the IRS.

However, there is some good news for homeowners who have gone through a mortgage foreclosure or short sale.  In December 2007, Congress enacted the The Mortgage  Forgiveness Debt Relief Act of 2007.   Generally, the Act allows taxpayers to exclude income from the discharge of debt on their principal residence as the result of a mortgage modification, mortgage foreclosure or short sale. The Act applies to  up to $2 million of mortgage debt ($1 million if married filing separately) forgiven in calendar years 2007 through 2013. Subsequently, Congress extended the Act to mortgage debt forgiven in tax year 2014.

Contact Chicago CPA and attorney Brian J. Thompson for legal advice re the Mortgage Forgiveness Debt Relief Act.

Form 1099-C Cancellation of Debt

IRS Form 1099-C

Did you receive a Form 1099-C this year?  Chicago CPA and business lawyer Brian J. Thompson wants you to know that Form 1099-C is used to report Income from Cancellation of Debt.

The general rule is if you owe a debt to someone else and they cancel or forgive that debt, the canceled amount may be taxable income.

There are some exceptions to the general rule.  The most common circumstances when cancellation of debt income is not taxable involve:

  1. Qualified principal residence indebtedness:  This is the exception created by the Mortgage Debt Relief Act of 2007; it applies to most homeowners.
  2. Bankruptcy:  Debts discharged through bankruptcy are not considered taxable income.
  3. Insolvency:  If you are insolvent (i.e., your total debts are more than the fair market value of your total assets) when the debt is canceled, some or all of the canceled debt may not be taxable income to you.
  4. Non-recourse loans:  A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral.  In other words, the lender cannot pursue you personally in case of default.  Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
  5. Certain farm debts.

Brian J. Thompson, CPA & Attorney