The Tax Court, in Taproot Administrative Services, Inc. v. Commissioner, 133 TC 9 (2009), has ruled that a Roth IRA is NOT an eligible shareholder for an S corporation.
An S corporation, as opposed to a C corporation, taxes its earnings on the shareholder(s) tax returns and is not typically assessed tax at the corporate level. In this case, the sole shareholder of the corporation was a Roth IRA. The IRS issued a notice revoking the S status of the corporation (and thus changing it to a C corporation) due to the “fact” that a Roth IRA cannot be an eligible shareholder (and thus none of the earnings of the S corporation would ever be taxed with this entity set-up). To be an eligible shareholder requires the shareholder to be an individual (US resident), estates, certain trusts and certain exempt organizations. This was a case of first impression with the Court.
The Court noted at the outset that there were no rules which specifically prohibited a Roth IRA from being a shareholder in an S corporation. While there are current regulations to prohibit this (Regulation § 1.1361-1(h)(1)(vii)), there were none back in 2003 (the year at issue in this case). The court relied upon a older IRS Revenue Ruling (passed in 1992) which prohibited a traditional IRA shareholder to be a shareholder in an S corporation as primary authority for ruling against the taxpayer in this case. The rationale of this older Revenue Ruling was basically that an S corporation cannot have any shareholders that are not taxed currently on any profits of the business. In fact, all shareholders, including the eligible trusts previously mentioned, had this attribute.
A Roth IRA, by definition, is not currently taxed on any of its income and, in fact, is never taxed on its income. The court reviewed the facts and Congressional intention to rule that it would not permit a Roth IRA account to be the owner of shares in an S corporation.
Tuesday, November 10, 2009
Friday, October 2, 2009
October Tax Tip
Taxpayers who wish to utilize the mark-to-market election for their trading activities need to make this election no later than April 15, 2010, to be valid for the 2010 tax year.
It is made by attaching an election statement to your 2009 tax return. If you are filing later than this date with an extension, be sure to attach the statement to the extension so that this election is not missed for 2010 taxes. Many active stock traders come out ahead in taxes by making this election.
It is made by attaching an election statement to your 2009 tax return. If you are filing later than this date with an extension, be sure to attach the statement to the extension so that this election is not missed for 2010 taxes. Many active stock traders come out ahead in taxes by making this election.
Thursday, October 1, 2009
Unemployment Tax Breaks
With rising unemployment showing no signs of ending anytime soon, the following will discuss some of the current tax breaks for those who find themselves looking for new employment.
Unemployment Benefits
While these benefits normally equate to taxable income, for 2009 the first $2,400 of unemployment benefits are not taxable.
Job-Hunting Expenses
The costs associated with seeking employment can be deductible, as long as you are looking for employment in the same type of trade or business. These are NOT deductible for first-time job seekers. Deductible expenses include employment agency fees, advertisements, resume costs, job counseling and referral services, postage, travel expenses and automobile costs.
Moving Expenses
If you need to move to obtain employment, the costs associated with the move may be tax deductible. These expenses include travel (but NOT meals) and the costs of moving household goods and personal effects. For purposes of this tax deduction, you must change job sites, move at least 50 miles (computed by calculating the miles from the old house to the new job, which must be at least 50 miles more than the distance from the old house to the old job) and actually work at the new location for at least 39 weeks in the 12 months following the move. For those who are self-employed, the time is doubled to 78 weeks in 24 months.
Education credits
If you need additional education, there are tax credits available to cover some or all of the costs associated with the tuition and related expenses.
Retirement Plan Distributions
You may be able to avoid an early withdrawal penalty (10% in addition to income taxes due) if you tap into retirement plan savings to assist until new employment is found. This issue can be quite complex and many plans differ on what is permitted, so it is usually best to consult with your specific plan to see what is permitted.
Health Insurance
You are permitted to extend your health insurance for up to 18 months under the COBRA program (for yourself and family coverage). Please note, however, that you may be responsible for paying for some of the premiums here.
Unemployment Benefits
While these benefits normally equate to taxable income, for 2009 the first $2,400 of unemployment benefits are not taxable.
Job-Hunting Expenses
The costs associated with seeking employment can be deductible, as long as you are looking for employment in the same type of trade or business. These are NOT deductible for first-time job seekers. Deductible expenses include employment agency fees, advertisements, resume costs, job counseling and referral services, postage, travel expenses and automobile costs.
Moving Expenses
If you need to move to obtain employment, the costs associated with the move may be tax deductible. These expenses include travel (but NOT meals) and the costs of moving household goods and personal effects. For purposes of this tax deduction, you must change job sites, move at least 50 miles (computed by calculating the miles from the old house to the new job, which must be at least 50 miles more than the distance from the old house to the old job) and actually work at the new location for at least 39 weeks in the 12 months following the move. For those who are self-employed, the time is doubled to 78 weeks in 24 months.
Education credits
If you need additional education, there are tax credits available to cover some or all of the costs associated with the tuition and related expenses.
Retirement Plan Distributions
You may be able to avoid an early withdrawal penalty (10% in addition to income taxes due) if you tap into retirement plan savings to assist until new employment is found. This issue can be quite complex and many plans differ on what is permitted, so it is usually best to consult with your specific plan to see what is permitted.
Health Insurance
You are permitted to extend your health insurance for up to 18 months under the COBRA program (for yourself and family coverage). Please note, however, that you may be responsible for paying for some of the premiums here.
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