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Alternative Minimum Tax Planning – Importance of Controlling Your Income Small Business Owners & the Self-Employed
The degree of control that small business owners and the self-employed have over the timing is much greater than that of employees, and also depends on the structure of their businesses. For example, if a person is small business owner, and thus self-employed, without having formed a legal entity (there would be a Schedule C in your tax return), then the control over the timing of income is based on the business cycle – i.e., providing services or selling goods, and then billing and collecting from customers. For example, delaying year-end billing can shift income from the current year to next year.
Also, incurring and paying the necessary business expenses is controllable, at least to some degree. For example, the use of outside consultants can sometimes be delayed until the following year, unless it is something critical to the current business operations. Note also that certain types of expenses from the business – depreciation, for example, can in and of themselves have an AMT impact. The tax law requires that different methods of depreciation be used for the Regular Tax and for the AMT, but, also, you are given a choice depreciation method to use. This selection of depreciation methods can have a direct impact on your AMT.
If the business is in a legal entity that is a “pass-through” entity (LLC, partnership, Scorporation), then the same principles mentioned in the preceding paragraph apply. Because the net income from the business passes through to the individual for tax purposes, the billing and collecting from customers and incurring and paying expenses will similarly be reflected directly in the taxpayer’s return. Note also that AMT items that are incurred by pass-through entities are reported directly on the individual member’s partner’s or shareholder’s tax returns. These items are shown separately on the K-1 received from the entity.
If a business is incorporated without an S election having been made, or if it is an LLC that has elected to be treated as a corporation for tax purposes, then any Alternative Minimum Tax items do not pass through, but instead are taken into account by the entity itself as its taxes are computed. In this case, income planning for the shareholder or member centers around the cash taken out of the business. This can be in the form of a salary, a bonus, a dividend, or all of these and the AMT effect of each would be as discussed above.
About the Author
George Bauernfeind is with AMT Individual – providing information on Alternative Minimum Tax Planning . He writes articles to help the tax payers to pay less Alternative Minimum Tax. He recommend to use Alternative Minimum Tax Calculator to reduce Alternative Minimum Tax.
Can two people own a single interest in a partnership/LLC as joint tenants?
Can a husband and a wife be treated as joint tenants (as if one partner) in a partnership having several other members and receive only one K-1 or must they be listed as separate partners and each receive a K-1? The issue here is a) simplicity of preparing the partnership return and b) estate planning.
Kudos to you if you can quote tax code to support your position. Thanks in advance!
Let me clarify: It’s a new Maryland LLC that I control. The partnership agreement will be drafted to suit our purposes. The estate issue is simple: if one spouse gets hit by a bus, the interest would become property of the surviving spouse automatically w/o probate, so that that spouse could sign resolutions to sell property and such.
On the K-1, I presume you would list both spouses as JT. Would you include both SSNs or just a Social for one spouse?
Thanks for your help so far.
A husband and wife can generally own partnership interest or LLC membership as joint tenants. The exact answer is a matter of the state law governing the partnership and the partnership agreement or LLC operating agreement.
Most states use the Uniform Partnership Act with certain modifications. There is nothing in the Uniform Partnership Act which prohibits joint tenancy in a partnership. Your state law however may contain such a prohibition although it is not likely.
A partnership should have a carefully drafted partnership agreement and an LLC should have a good operating agreement. Either of these agreements may place limitations on ownership in the entity so they should be carefully consulted.
Some courts have addressed the issue of joint tenancy in partnerships and found that such ownership is permissible. There are two such cases in the source section although these are merely representative and not an exhaustive list. It’s just a couple examples.
As for taxation the issue is slightly different. If it is joint property then each of the joint tenants needs to properly report his or her share. See the CCH Master Tax Guide at Paragraph 709. If you are filing a joint return then that matter is fairly easy. In community property states the IRS has issued regulations regarding separate returns by husband and wife. The regulations are at IRS Reg. 1.702-1(d).
One other are that may shed some light on the matter is the regulations pertaining to partnership interest held by another. When a partnership interest is held by a nominee for someone else then the nominee must submit a statement to the partnership. The rules for this are contained in IRS Temp. Reg. 1.6031(c)-1T.
You make mention of estate planning concerns in question. I would highly advise consulting with a qualified estate planning attorney on these issues. You may accomplish your goals more effectively through other types of planning. You may be able to make use of a nominee, an LLC, various types of trusts, or transfer-on-death designations. The process could actually simplify things and manage to meet your estate planning desires.
OK, for non-probate transfer the joint ownership could work or you could also do a transfer-on-death on separate interest for each spouse. Each would name the other and there would be automatic transfer on the books of the company after death. See the Totten Trust case.
You could also elect to have the LLC managed by a manager rather than the members then the manager could act to sell or sign documents regardless of the membership interest. You could still be the manager you’d just act on behalf of the company as a manager rather than managing member. Its solves the problem of signing documents but not the issue of non-probate transfer.
Do not to forget to also consider the possibility of a Trust. You could also plan for disability of a spouse this way.
The IRS does have special rules relating to spousal interest in partnerships. It’s too much information to include here but it’s in 26CFR301.6231(a)(12)-1. Here’s the link: http://a257.g.akamaitech.net/7/257/2422/01apr20051500/edocket.access.gpo.gov/cfr_2005/aprqtr/26cfr301.6231(a)(12)-1.htm
This section on special rules deals with the treatment of ownership in the partnership and participation in proceedings. It is good information but not directly on point with regard to the K-1 question. I’m sure there is an answer but I’ve not located a perfectly on-point regulation. It appears that you may need to issue the two K-1s even though they will end up on the same joint return. I’ll be interested to see if someone can help us verify this issue. I can see the simplicity in a single K-1 but if they are the same then there shouldn’t be too much difficulty in printing it a second time with a new social security number.
I’ve now found an actual IRS reference to a joint partnership interest with one K-1 but it still does not provide advice on completely the schedule. The reference is in their Audit Technique Guide to TEFRA (Tax Equity & Fiscal Responsibility Act of 1982) partnerships.
The quote is:
A husband and wife, each having their own partnership interest (separate Schedules K-1) are considered one partner, irrespective of their filing status. A jointly held interest (one K-1) also qualifies as one partner for purposes of the count. (Sections 6231(a)(1)(B) & (12) and Reg. 301.6231(a)(1)-1(a)(1) and Temp. Reg. 301.6231(a)(1)-1T(a)(1)).
Terrell Tax and Planning, LLC
Experts Recommend Investing Tax Returns
The Ohio Society of Certified Public Accountants says it recommends that taxpayers take advantage of tax-filing firsts that will allow Ohioans how to invest their 2010 tax returns in new ways.