Month: June 2017

PEO (Professional Employer Organization) and payroll tax liability.

Posted on by Craig Mathias

Reference: Chief Counsel Advice 201724025

An S corporation used a PEO to “lease” its employees with the contracted understanding that the PEO would remit all payroll taxes to the IRS.  The PEO failed to pay those taxes and the IRS concluded that they were still the liability of the S corporation employer in spite of its contract with the PEO.

The CCA did point out that IF the PEO goes through the process of being certified by the IRS, becoming a CPEO, then the S corporation would NOT have been held responsible for the CPEO’s failure to remit the taxes to the IRS.

Take away: If you’re using a PEO for “employee leasing,” be sure that they have gone through the process of being certified with the IRS and are a CPEO.

S Corporation Losses and Shareholder Basis

Posted on by Craig Mathias

Ref: Hargis, TC Memo 2016-232

The recent Hargis case serves as a reminder that losses from an S corporation can be used to reduce tax at the shareholder level only IF the shareholder has basis in that S corporation.  Furthermore,  guaranteeing corporate debt will NOT give rise to shareholder basis.

Simply stated, if the corporation is short of funds, the shareholder should either:

  1. Directly deposit personal funds to the corporation as either Paid in Capital or a formal loan with written documentation OR
  2. If borrowing is required: The shareholder should borrow funds personally and then deposit those funds into the S corporation.

The shareholder has no basis increase for loans to the corporation which he/she guarantees OR loans from other entities which he/she controls.

Qualified Personal Residence Trusts (QPRT)

Posted on by Craig Mathias

Ref; Sec 2702 and Reg 25.2702

QPRT are often used to remove a primary residence from a large estate as well as asset protection.  The rules for establishing are complex and care should be taken to engage an attorney well-versed in their formation.  QPRT are typically more “flexible” that often thought including:

  1. The residence can be sold within the QPRT as long as those proceeds are reinvested in a qualifying residence within time frames established under Regs Sec 25-2702.
  2. QPRT usually qualifies as a grantor trust under IRC Sec 677 and 673. Therefore, the grantor may exclude up to $250k ($500k for married filing jointly) if the requirements of Section 121 are otherwise met.

We can discuss this at length as well as provide referrals to Martindale A-rated attorneys to help in establishing such a trust if it meets your tax needs.