November 30, 2011
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Recently at Texas and Michigan alarm association meetings the topic was buying and selling alarm accounts and the issue of what tax consequence is there for a C Corp and how can you avoid it. I am not a tax expert but the below information was sent to me and caught my eye and I thought I'd pass it along. If you are a C Corp and considering selling your business I suggest you consult with a tax expert [definitely not me].
Also below, because I'd like to take care of and get rid of two tax articles at the same time, is information from Mitch Reittman, who is a tax expert and also an alarm business expert. His number is below.
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Favorable Tax Treatment for C-Corp Asset Sales
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Tax-Deferred Capital-Gain Treatment for Selling Shareholders When the Corporation [C Corp] Sells Its Assets
When a corporation sells its business assets, the shareholders should consider selling their shares to a 'collateralized installment sale' dealer, in tandem with a simultaneous but independent loan to the shareholders from a third-party lender introduced by Matheson Partners.
Subject to due diligence and qualifying facts, the selling shareholders may achieve these results:
1. An all-capital-gain installment sale of the stock with the tax deferred for as long as 30 years, with no net tax cost for that entire period;
2. No tax at the corporate level; and
3. Immediately available non-taxable loan proceeds, with loan repayment funded by the installment payments received, at no net cost to the shareholders for the loan.
For the buyer of the assets:
Treatment as a purchase of assets, rather than the purchase of shares of stock. The purchase is made from an independent dealer who has previously acquired the business assets of the company.
Feel free to forward this email.
Regards,
Kurt Reibling
R&A Management Company, LLC
800 Stone Creek Parkway, Suite 1
Louisville, KY 40223
KReibling@reibling-llc.com
502-855-3901
KReibling@Reibling-LLC.com
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The IRS is Offering You a Break
By Mitch Reitman
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The IRS has announced the Voluntary Classification Settlement Program (VCSP),a new program that allows eligible employers to voluntarily reclassify workers as employees, rather than independent contractors, for future tax periods. In exchange, the employers liability for past payroll tax obligations will be reduced to only a minimal payment.
Employee vs. Independent Contractor Issue
As I have pointed out in this column in the past, many alarm companies misclassify their employees as 'independent contractors' to avoid payment of payroll taxes. If the IRS determines that workers have been improperly classified as independent contractors rather than employees, the employer can be subject to significant back taxes, interest and penalties.
According to the IRS, one of the main factors determining whether a worker is an independent contractor is whether the employer has the right to control or direct only the result of the work as opposed to also controlling the details of how the work is performed.
The IRS already offered the Classification Settlement Program (CSP), which allows qualified employers to prospectively reclassify workers as employees. However, the CSP is available only to employers undergoing an audit. The VCSP allows voluntary reclassification outside of the audit process and without the need to go through the normal administrative correction processes.
VCSP Eligibility
The VCSP is available to employers that currently treat their workers, or a class or group of workers, as independent contractors or other nonemployees. To be eligible, the employer must have consistently treated the workers as nonemployees and have filed required Form 1099s for the workers for the previous three years.
The employer cannot currently be under audit by the IRS or under audit concerning the classification of workers by the Department of Labor (DOL) or a state governmental agency. Employers that were previously audited by the IRS or DOL on classification issues are eligible for the VCSP only if they complied with the audit's results.
The employer isn't required to reclassify all of its nonemployee workers as employees. But after an employer chooses to reclassify some of its workers, all workers in the same class must be treated as employees.
So, What Is In It For You?
In exchange for reclassifying workers as employees, the employer's liability for past payroll obligations is cut to 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under Section 3509 of the Internal Revenue Code. There are certain additional limitations and conditions, so check with your tax advisor. Employers that qualify won't be liable for any interest or penalties and won't be subject to an employment tax audit on the classification of the workers in prior years. Again, there are some additional considerations and limitations, so consult with your tax advisor.
Why Would You Want to 'Volunteer' to Pay Taxes?
Just days before announcing the VCSP, the IRS signed an agreement with the Department of Labor (DOL) to improve the coordination of their efforts to prevent employee misclassification by sharing information and law enforcement. Labor commissioners and other agency leaders from seven states signed similar agreements with the DOL, and four other states are also scheduled to sign agreements.
With these agencies swapping information on employee misclassifications, your company must take greater care than ever to properly classify workers, because one agency investigation could easily trigger another. So the time to review your worker classifications is now. If your company needs help determining how to properly classify employees, please give us a call. We can also help you decide whether you could benefit from the VCSP.
Mitch Reitman is an associate member and is Managing Principal of S.I.C. Consulting. He can be reached at 817-698-9999.