Do one or more of your children work for your family corporation? Then keep reading. Let's say your son, Jim, works for and, as a practical matter, runs your corporation, Success Co. The family business, an S corporation, is worth about $2 million and you own all the stock. You would like to give Jim five percent of the corporation, a $100,000 gift. Such a large gift has tax consequences. Is there a better way to accomplish this?
A stock bonus can do some neat tax tricks for most business owners with this kind of problem. Suppose Success Co. gives Jim a S 100,000 bonus-not in cash, but in stock of the company. The tax consequences are near perfection. Jim must pay income tax on the $ 100,000. No doubt you can make a gift to Jim of the cash needed to pay this tax. Where will you get the money? Well, the $100,000 stock bonus is deductible by Success Co. That will reduce the corporation's profits and your tax burden. Simply put, Jim pays tax on the $100,000 while you get a deduction (through the S corporation).
Can anything go wrong with this tax plan to get stock and money out of your business? Yes-two things. First, the IRS may attack by saying Jim's compensation is unreasonable. This problem is easily solved by paying out the stock bonus over a period of two or more years.
Second, the IRS may attack the valuation of the shares. Having a competent business appraiser value the shares issued as a Bonus is the easiest way to avoid any conflict with the IRS. And remember, the value of the shares is entitled to two significant discounts: a discount for general lack of marketability and a discount for a minority interest. Combined, these discounts are in the 35 percent to 45 percent range.
One more point. This technique works just as well with a regular taxpaying C corporation, as it does with an S corporation.
Cellular Phones Can Be A Tax Trap
Cellular phones seem to be like mushrooms. They are popping up everywhere. If you're sporting one in your car or elsewhere, think of it as an automobile or as a computer.
Why? Well, in terms of the tax law, those little telephones are subject to the same special depreciation and record keeping rules. Ready! Here are the rules.
Cellular telephones are not eligible for accelerated depreciation unless they are used more than 50 percent of the time in a qualified business use. But you can use straight- line depreciation (5-year life) if you miss the 50 percent target.
No deduction is allowed, even if the phone is used for business, unless the business use is substantiated. No personal use, which would mean 100 percent business use, won't work either, Substantiation will make or break your deduction. It's about keeping a record.
When an employee uses a company phone for business, the employee must pay tax on the value of the use unless the business purpose is substantiated. Careful: This one is a double-edged sword. Suppose you don't provide your employer with the necessary proof (substantiation): First, the employer gets no deduction for even the legitimate business use and second, you get socked with a tax on the value of the entire phone use.
If you are willing to do it, keep a diary of all the business use of your cellular telephone. Mark down the date, time, and business purpose of each call.
You log miles for your company car. Now add logging calls on your company phone.