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Partnership Tax Basics, Part 1: Initial Investment & Operational Framework

Nick Eusanio, Esq., LL.M. Leave a comment

By Nick Eusanio & Jared Boswell

A partnership is one of the most common business structures in the United States because it provides strong flexibility to investors and operators. But that flexibility comes with technical rules that can create unexpected tax outcomes if not structured carefully. This article is the first in our Partnership Tax Basics series, focused on the partnership classification for tax purposes.  Below is an overview of the versatility and governing fundamental U.S. federal income tax principles associated with initial investment in, and operation of, partnerships.

TL; DR Highlights

  • Partnerships are commercially flexible and customizable for investors and operators.
  • Tax is generally paid once—at the partner level.
  • Most contributions are tax-deferred, but exceptions can trigger immediate tax.
  • Liability allocation can directly impact each partner’s tax basis and deductions.
  • Contributions of built-in gain property require special tracking and allocation.

Flexbility of the Partnership Form

A key advantage to the partnership form is the flexibility it affords the parties in structuring the arrangement. Subject to certain tax and legal guardrails, some of these points of flexibility include: investor/partner type (individual or legal entity), contribution type (cash, property, services and minority vs. controlling) and impact (nonrecognition), profit and loss allocations, distributions (timing, type), single level of taxation (partner level only), and exit strategies.

What is a Partnership for Tax Purposes? Entity Classification (Default Rules & Check-the-Box Election)

For tax purposes, a partnership is a flow-through entity. The partnership itself does not pay federal income tax. Instead, income, deductions, and credits flow through to the partners (via reporting on Schedule K-1), who report them on their individual returns.

Generally, if an unincorporated U.S. business entity (i.e., a limited liability company (LLC) or state law partnership) has more than one owner, it is automatically classified as a partnership for federal income tax purposes under the default classification rules of Treas. Reg. § 301.7701-3(b)(1). This is true also for a venture between multiple parties even if the parties have not formed a legal entity to carry on the business. But the owners of an unincorporated U.S. business entity can elect a different classification (e.g., corporation) under Treas. Reg. 301.7701-3(c) than the default by filing Form 8832 with the IRS. The rules governing non-U.S. entities, as well as other available elections (e.g., S corporation status via Form 2553) are beyond the scope of this article.

Section 721(a) – General Nonrecognition Rule

Section 721(a) generally provides that no gain or loss is recognized to a partnership or any of its partners on contribution of property to the partnership in exchange for an interest in the partnership. For example, assume Partner A contributes $1 million and Partner B contributes $10 million to a partnership, and each receives a 50% interest in the partnership. There is an economic mismatch because each partner receives a 50% interest while contributing significantly different amounts of capital. Despite this economic disparity,  Section 721(a) generally dictates that no gain or loss is recognized to the partners or the partnership on this transaction, because cash (property) was exchanged for partnership interests. This flexibility allows investors to negotiate economics freely without triggering immediate tax—even where ownership percentages and capital contributions don’t align. That said, other partnership tax rules (such as those governing maintenance of capital accounts for each partner) operate to align the ultimate economic and tax impacts of such an arrangement.

As another point of versatility, Section 721(a) is by its terms more accessible to investors than similar tax-deferred contribution provisions found elsewhere in the Code. For example, Section 351 is an analogous nonrecognition provision in the corporate context. Section 351 generally requires that a transferor (or group of transferors) of property to a corporation have 80% or more of the ownership of the corporation immediately after contribution to qualify for nonrecognition. Section 721(a) is much more permissive because there is no such control requirement for contributors to a partnership. This framework allows multiple investors to contribute property to a partnership in exchange for a partnership interest on a tax-deferred basis, regardless of the resulting ownership structure. This mechanic facilitates unrelated minority investor contributions without immediate tax impact.

Exceptions to Section 721(a)

Although the general rule of Section 721(a) is nonrecognition, the facts and mechanics of partnership formation and operation can create potential tax issues without careful attention to detail and planning.

  • Definitional Exception – Exchange of Partnership Interest for Services

The general nonrecognition rule of Section 721(a) does not apply to the receipt of a partnership interest in exchange for services, because services are not property. Under Section 83(a) and Treas. Reg. § 1.721-1(b)(1) such a “sweat-equity” arrangement may give rise to ordinary income to the partner at the time the partnership interest is issued. This depends on whether the partnership interest received constitutes a capital interest (taxable as ordinary income / compensation at the time of issuance per Treas. Reg. § 1.721-1(b)(1)) or a profits interest (to which Rev. Procs. 93-27 and 2001-43 and / or a protective Section 83(b) election apply, not taxable at the time of issuance and potential long-term capital gain treatment on subsequent sale of the interest). Stay tuned for more in a future article on this complex topic.

  • Investment Company Exception – Section 721(b):

Section 721(b) provides that the general nonrecognition rule doesn’t apply to a transfer of property to a partnership which would be treated as an investment company within the meaning of Section 351(e), (i.e., a company holding as assets stocks and securities making up 80% of the value of its total assets). In that case, application of Section 721(b) triggers recognition of gain on contribution of the property.

  • Appreciated Property & Related Foreign Partners Exception – Section 721(c):

Section 721(c) may require immediate gain recognition in certain situations where a U.S. transferor contributes appreciated property (i.e., property with a FMV exceeding its basis) to a partnership that includes related non-U.S. partners. The Gain Deferral Method rules (Treas. Reg. § 1.721(c)(3)), if properly followed, can permit the U.S. transferor to defer recognition of such built-in gain over time rather than recognizing it immediately in such a scenario. These rules are intended to prevent the shifting of built-in gain outside the U.S. tax system.

  • Disguised Sales – Section 707(a) & Treas. Reg. § 1.707-3:

The “disguised sale” rules of Section 707(a) and Treas. Reg. § 1.707-3 can also override the general nonrecognition rule of Section 721(a). If a partner transfers property to a partnership and receives cash or other consideration from the partnership in a related transaction, the transaction may be treated as a disguised sale and trigger gain recognition to the partner. Under Treas. Reg. § 1.707-3(c), a transfer occurring within two years of the contribution is presumed to be a sale unless facts and circumstances clearly establish otherwise. But transfers after two years are presumed not to be a disguised sale under Treas. Reg. § 1.707-3(d). So, a transaction whereby Partner A and Partner B are entering the partnership to transfer cash from Partner B to Partner A, is expected be categorized as a disguised sale.

Partner Basis and Liabilities (Section 722 & Section 752)

Basis is important in determining the amount of gain or loss, if any, on a taxable disposition of a partnership interest (outside basis) or partnership assets/property (inside basis).

  • Outside Basis

If a contribution satisfies Section 721(a), the partner is expected to have outside basis consistent with the contribution’s adjusted basis at the time of the contribution under Section 722. Such basis is increased by any gain recognized under Section  721(b) to the contributing partner at the time of contribution, and by the amount of partnership recourse liability assumed by the partner.  In our continuing example, Partner A would have $1 million of outside basis and Partner B would have $10 million outside basis (i.e., basis in their respective partnership interests) on contribution. To the extent Partner A and Partner B are subject to partnership liabilities (such as loans), each partner’s outside basis is increased by the partner’s relative share of such liabilities under Section 752 (assuming the liabilities are recourse liabilities for which the partner assumes the economic risk of loss under Treas. Reg. § 1.752-2).

Whether a liability is recourse or nonrecourse affects how it is allocated for a partnership tax purposes. A recourse liability is allocated to the partner who bears the economic risk of loss with respect to the liability. A nonrecourse liability is allocated among the partners based on their respective shares of partnership minimum gain and Section 704(c) gain, with any residual according to their profit-sharing ratios under Treas. Reg. § 1.752-3.

  • Inside Basis

Under Section 723, the inside basis of a partnership asset is the adjusted basis of such asset to the contributing partner at the time of the contribution, increased by the amount of any gain recognized under Section 721(b) to the contributing partner at that time.

Capital Accounts – Section 704(b) and Treas. Reg. § 1.704-1(b)(2)(iv)

Maintenance of capital accounts for partners is an important requirement set forth in Section 704(b) and Treas. Reg. § 1.704-1(b)(2)(iv). Capital accounts track a partner’s net equity in a partnership and are used to support tax allocations and determine economic rights and tax impacts of distributions, transactions and liquidation. A partner’s initial capital account balance generally matches the partner’s initial contribution. Thereafter, certain adjustments are made to the capital account balance of each partner based on future contributions, allocations of income, loss and deduction, distributions, and other items of the partner or partnership as set forth in the regulations. The rules governing maintenance of capital accounts are complex and beyond the scope of this article. But, generally, these rules aim to ensure that any allocation of income, gain, loss, deduction or other partnership item to a partner has substantial economic effect (loosely meaning that the tax impacts of the allocation align to the economic reality of the arrangement).

Built-In Gain Property and Section 704(c)

The type of property contributed to a partnership can have special impacts to the relevant partner capital accounts. For example, contribution of real property can create differences in the book value versus the tax value of capital accounts (i.e., a book-tax disparity). Adjusting our prior example, assume Partner A contributes $1 million in cash, but Partner B now contributes real property worth $10 million (having an adjusted basis of $5 million) to the partnership, each in exchange for a 50% partnership interest. The general nonrecognition rule still applies, such that no gain or loss is recognized on these contributions. But Partner B’s contribution of real estate having a $10 million FMV and $5 million adjusted basis (i.e., a book-tax disparity from appreciated property) creates built-in gain subject to Section 704(c). This built-in gain is attributable to Partner B and is reduced over time through book and tax depreciation differences. Notably, attribution of the Section 704(c) layer may differ based on the allocation method chosen by the partners in the partnership/operating agreement. Common methods include the traditional method, traditional with curative method, or remedial method. Each method has advantages and disadvantages, which are beyond the scope of this article and should be discussed with a tax professional before deciding which method is appropriate.

Special Deductions: Section 199A for Qualified Business Income

In addition to various points of flexibility, the partnership form now offers the potential to access the special tax deduction set forth in Section 199A. Section 199A was implemented in 2017, as part of the Tax Cuts and Jobs Act (TCJA), to better align effective tax rates of the pass-through business forms (like partnerships) with those of the corporate form (21% since TCJA). The Section 199A deduction is available for eligible partners of domestic partnerships for tax years beginning after December 31, 2017. Section 199A permits individuals, trusts and estates with pass-through business income to deduct up to 20% of qualified business income (QBI) from their taxable income. Importantly, eligibility for the Section 199A deduction is subject to various limitations beyond the scope of this article and should be evaluated with a tax professional.

Closing

The tax-deferred nature of a partnership formation is advantageous to investors and allows broad flexibility in the amount and type of capital contributed, number and type of investors, and the terms governing the partners’ economic arrangement and the partnership’s operations. Legislative changes like Section 199A aimed at achieving partnership to corporate tax rate parity have also improved the economics of the partnership business form. As a result, the partnership tax classification is used frequently by private equity groups investing in operating companies and joint ventures, real estate investors developing their portfolios, and by local entrepreneurs pursuing business ventures. Structural and economic versatility make the partnership tax classification an attractive choice for a diverse investor base.

Coming Next

Partnership Tax Basics, Part 2: Sale of a Partnership Interest: In our next article, we’ll examine the tax consequences of sale of a partnership interest to both the partnership and the partners.

Connect with Nick Eusanio, Tax Planning & Compliance Partner at DBL Law and Jared Boswell, Tax Planning & Compliance Associate at DBL Law, to learn how proper investment or transaction structure and tax planning can help you achieve the desired outcome.

Business Sale Basics, Part 3: Align Team, Finance, & Industry Factors

Nick Eusanio, Esq., LL.M. Leave a comment

Employees, financing, and industry / regulatory factors can make or break a business sale. Learn how to address these critical elements in Part 3 of our Business Sale Basics series on Aligning these Factors.

Business sales are more than numbers on a balance sheet. Employees, financing, and industry-specific regulatory considerations play a critical role in the success of a transaction. Well-prepared sellers project credibility and value by aligning these items in the deal. This article serves as a continuation of Part 2 of our series (Structure the Sale), as each of these factors is important in structuring the transaction.

1. Employee & Management Factors

Retaining key employees and ensuring the business isn’t overly tied to the selling owner are often key factors for buyer confidence and demonstrating value. A thoughtful seller should align these factors in the deal by considering the items below.

  • Invest the necessary training time and resources to improve management team business / technical capabilities and integration with operations personnel and customers to reduce dependency on the owner.
  • Document steps to accomplish the above and ideally matching metrics to substantiate the value retained or created, for sharing with the buyer team.
  • Ensure key management and operations team members are valued in the deal by negotiating appropriate provisions for continuing employment including roles and levels of salary, benefits and bonuses. Don’t forget to provide for any special items like remote versus on-site work, parking, company phones and cars, or similar benefits.

2. Financing the Transaction

Understanding the buyer’s funding method for the deal is important to both timing and negotiations. Below are some key points to consider with respect to financing, timing and related negotiations.

  • Bank / 3rd party financing versus seller financing.
  • For seller financing, a well-crafted promissory note and security agreement with appropriate collateral are key considerations.
  • Be aware of potential covenants or guarantees, particularly any ‘earn-out’ provisions.

3. Industry and Regulatory Factors

Various industries have unique licensing, permitting, regulatory or other compliance requirements that can impact a sale. Heavily regulated industries like health care, financial services / banking, or insurance may require specific disclosures or approvals. Below are some key items to consider from an industry / regulatory perspective.

  • Review licensing, permits, and regulatory compliance requirements for your industry.
  • Understand other regulatory frameworks that may apply based on the type (e.g., cross-border transaction, involvement of sensitive information or data, etc.) or value of the transaction (for instance, anti-trust, securities, cybersecurity and infrastructure security, export control system, foreign investments, etc.).
  • Ensure necessary additional documents or agreements are prepared and negotiated as part of the sale based on applicable regulatory regimes.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.

Business Sale Basics, Part 2: Structure the Sale (Legal & Tax)

Nick Eusanio, Esq., LL.M. Leave a comment

Avoid costly mistakes in selling your business. Learn the key legal and tax tips and traps to avoid in Part 2 of our Business Sale Basics series: Structure the Sale.

Selling a business comes with both opportunities and potential pitfalls. The structure of your sale can dramatically influence both your liability exposure and tax outcome. Choosing the right approach and understanding common issues can protect your proceeds and mitigate future risk.

1. Legal Considerations

Structuring the deal as an asset sale versus a stock sale is first a legal consideration (as well as tax, to follow) affecting liability and risk allocation. Buyers often prefer an asset sale to limit liability exposure, while sellers tend to prefer a stock sale for the same reason (as well as for tax purposes, to follow). The deal landscape is a balancing act, especially concerning risk allocation. A wise seller should consider the following items in structuring the sale.

  • Understand the difference between asset and stock sales from a risk / liability allocation standpoint.
  • Review the pieces that should have been prepared in initial seller due diligence (see our prior article: Prepare the Pieces, the first in this series).
  • Carefully evaluate representations, warranties, indemnification, and mandatory dispute resolution clauses.
  • Consider representations and warranties insurance if financially prudent.

2. Tax Considerations

Tax planning is central to structuring the sale. In an asset sale (or stock sale treated as an asset sale for tax purposes), how the purchase price is allocated—between tangible assets, intangible assets, goodwill, and inventory—affects the type and amount of tax you pay. In a stock sale, generally expect capital gains tax treatment assuming appropriate holding requirements are met. Consult with your tax advisor on the following to structure the sale to achieve the intended tax impact.

  • Asset, Stock, or Stock (treated as Asset for tax purposes) sale tax impacts.
    • For an Asset or Stock (treated as Asset for tax purposes), purchase price allocation and related tax implications (e.g., amount subject to ordinary tax / rate treatment vs. capital gains tax / rate treatment).
    • IRS §§ 338(h)(10) or 336(e) elections.
    • Tax gross-up provision in the purchase agreement.
  • Tax compliance considerations (short and final year returns, additional required transactional reporting forms and statements, etc.).
  • State and local tax considerations (are the impacts aligned to federal income tax outcomes / conformity? Or are there significant differences?).

3. Common Traps to Avoid

Certain oversights can erode buyer trust and reduce the purchase price, destroy the deal, or trigger post-closing disputes and liabilities. Smart sellers should anticipate and consider the below items to improve transparency and trust in the process (most of which should be caught in the Prepare the Pieces stage).

  • Deferred compensation or bonuses.
  • Ongoing liabilities, like employee benefits.
  • Proper due diligence documentation and clearly and accurately stating facts.

4. Build Your Professional Advisory Team for a Smooth Sale

Engaging the right professional advisory team early (ideally in the Prepare the Pieces diligence phase, but certainly no later than the Structuring phase) is vital to a smooth, clean deal. Below are some considerations for structuring your deal-team and related processes.

  • Engage legal, business, financial, and tax advisors early (e.g., attorneys, accountants / CPAs, valuations professionals, investment bankers, and wealth advisors).
  • Identify and communicate your key goals and objectives, and chief ‘deal-killer’ items, to your professional advisory team.
  • Communicate clearly with buyers.
  • Follow standardized processes to streamline due diligence.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome

Business Sale Basics, Part 1: Prepare the Pieces

Nick Eusanio, Esq., LL.M. Leave a comment

Learn the essential steps to get your business ready for sale, from organizing financials to planning for taxes, in this first installment of our Business Sale Basics series: Prepare the Pieces.

Preparation is the foundation of any successful business sale. Owners who take the time to get their company “deal-ready” often sell faster, for more money, and with fewer surprises and snags. This post covers key steps to prepare your business before putting it on the market.

Key Steps to Prepare

1. Organize Financials & Records

Accurate and well-organized financials are critical. Buyers generally want to review at least three years of statements, so savvy sellers should review and organize the following items (ideally in a centralized digital data room or diligence binder).

  • Accounting records (P&L, Balance Sheet, etc.) in current, accurate, and reconciled form (preferably with assistance of a professional accountant / CPA).
  • Corporate documents: articles, bylaws, operating agreements, meeting minutes and resolutions.
  • Contracts, leases, permits, licenses and intellectual property documentation in a centralized file.

2. Identify & Address Risks & Liabilities

Buyers are highly sensitive to hidden liabilities and risks. A smart seller should conduct a fresh risk assessment for potential yet-uncovered issues, as well as identifying and listing known disputes, litigation, and liabilities. Below are some key areas for review and assessment. Once identified, a prepared seller should form a plan to resolve or address each item of risk or liability.

  • Confirm company and asset (real estate, operating assets, intellectual property, permits, licenses, etc.) ownership records reflect reality.
  • Resolve disputes with minority owners.
  • Review buy-sell agreements and stock restrictions, as well as employment agreements and restrictive covenant (nondisclosure / noncompetition / non-solicitation) agreements for key personnel.
  • Evaluate tax accounts (federal, state and local).
  • Consider any zoning, environmental, or other industry-specific regulatory issues.

4. Optimize Operations & Team Readiness

Buyers are often acquiring more than the business – they may also be taking the team that’s in place. As with all team-based pursuits, performance and value is heavily dependent on each team member and the process in place. A strong seller should take the steps below to improve the company’s team and methods prior to sale.

  • Invest in management team business / technical capabilities and integration with operations personnel and customers to reduce dependency on the owner.
  • Review key customer and vendor contracts to align the proper internal personnel and processes for continued success.
  • Identify (and improve, where necessary) and document processes and systems to demonstrate stability.

5. Plan for Taxes Early

The tax structure of a sale can significantly impact a seller’s net proceeds. Early planning allows you to evaluate whether an asset sale, stock sale, or other structure is most favorable. A savvy seller should begin by considering the following tax matters.

  • Alternative deal structures and impacts on taxes (asset sale, stock sale, or stock sale treated as an asset sale for tax purposes?)
  • Evaluate potential tax elections as relevant (e.g., IRC §§ 338(h)(10) or 336(e)).
  • Consult with a tax advisor to identify potential tax issues and opportunities, and improve tax efficiency of the deal.

Thinking about selling your business? Start with a pre-sale consultation to evaluate your company’s readiness and identify strategies to preserve and maximize value. Connect with Nick Eusanio, Tax & Compliance Partner at DBL Law, to learn how proper tax planning and deal structure can help you achieve the best possible outcome.

Common Tax Traps for Entrepreneurs, Startups & Small Businesses

Nick Eusanio, Esq., LL.M. Leave a comment

Federal tax audits or examinations don’t just happen to big corporations. Founders and small businesses are often hit the hardest. This is sometimes because growth outpaces compliance, and sometimes because the rules themselves are complex. Here are some key areas where trouble tends to strike, and what you can do to mitigate risk.

1. Worker Classification: Independent Contractors vs. Employees

Issue: Misclassifying workers can lead to payroll tax assessments, penalties, and even personal liability for owners.

Consider: The IRS applies a multi-factor test focused on control. If you dictate hours, tools, and how the work is done, odds are the worker is an employee.

Action: Use written contracts with contractors. Review relationships annually. Consider preparing and filing IRS Form SS-8 if classification is unclear.

2. Payroll Tax Compliance

Issue: The IRS treats unpaid payroll taxes as one of the most serious violations. Missed deposits, late filings (Form 940 and Form 941), or failure to remit tax withholdings can trigger the Trust Fund Recovery Penalty (TFRP). Under the TFRP, the IRS can collect directly from “responsible persons”—owners, officers, or even bookkeepers.

Consider: Red flags like:

  • Borrowing from payroll tax withholdings to cover operating expenses.
  • Repeated late deposits.
  • Incomplete or inaccurate Forms 940 or Forms 941.

Action: Use an outside payroll provider if you don’t have in-house talent. Always confirm deposits are made, even if a third-party processor is used.

3. Deductibility of Expenses

Issue: The IRS often challenges whether claimed deductions are truly “ordinary and necessary” under IRC § 162. Startups and entrepreneurs are particularly at risk because personal and business expenses sometimes blur together.

Consider:

  • Startup vs. operating expenses: Generally, pre-opening costs must be capitalized and amortized under IRC § 195. There is a limited first-year immediate deduction of $5,000 in startup costs and another $5,000 in organizational costs. But this deduction is subject to limitations and phase-out.
  • Meals, travel, and vehicles: Require strict substantiation with logs and receipts. Note applicable limitations like 50% of meals. Identify clear business purpose.
  • Home office deductions: Often challenged unless the space is used exclusively and regularly for business. Evaluate applicable safe harbor rules and remember deduction recapture rules on sale of your home.

Action: Keep meticulous records. A clean ledger with contemporaneous notes, mileage logs, and calendar entries are key in audit defense.

4. Entity Structure & Elections

Issue: The choice of entity—and whether elections are properly filed—drives tax mechanics and impact, reporting compliance, and controversy.

Consider:

  • Entity Classification Election (Form 8832): What is the default tax classification of the entity? Is the entity eligible to elect a different tax classification? Options are: association taxable as a corporation, partnership, or entity disregarded from its owner for federal income tax purposes. A late or erroneous election can have significant consequences. These mistakes can impact applicable tax mechanics and rate(s) and reporting obligations. Often, an election mistake leads to other incorrect or missed filings and more tax, interest and penalties.
  • S Corporation Election (Form 2553): If filed late or incorrectly, the IRS treats the company as a C corporation. This creates unintended double taxation. As above, impacts can also include other incorrect or missed filings, more tax, interest and penalties.
  • Reasonable Compensation: S Corp shareholders who underpay themselves and take most income as “distributions” risk IRS reclassification. This reclassification often triggers more payroll tax liabilities.
  • Conversions and Reorganizations: Changing from an LLC with partnership or disregarded entity tax classification to a corporation (or vice versa) can trigger unanticipated tax consequences. As before, this often leads to more tax, interest, and penalties if not carefully planned.

Action: Confirm your entity elections are on time, appropriate, and as intended. Keep written records of salary determinations and supporting research. Consult tax counsel before making any structural changes or elections.

5. Qualified Business Income (QBI) Deduction (IRC § 199A) Complexities

Issue: The 20% deduction can be huge—but the rules are highly technical. The IRS closely examines whether a business is a “specified service trade or business” (SSTB), how wages are calculated, and whether property is properly classified.

Consider:

  • Is your business type listed as a SSTB?
  • How are wages and property allocated?
  • Do income thresholds limit your deduction?

Action: Model the deduction annually to confirm eligibility, and document how wages and property are allocated. Careful planning around compensation, entity choice, and property ownership can preserve or improve the benefit.

6. Sale, Exit & Mixed-Character Transactions

Issue: When it’s time to sell, how you structure the deal often impacts whether proceeds are taxed as ordinary income or capital gain.

Consider: Impact to character (ordinary or capital gain) of gain, tax rate, and timing from:

  • Stock / equity sale (legal) treated the same for tax purposes,
  • Asset sale (legal) treated the same for tax purposes OR Stock / equity sale (legal) treated as an asset sale for tax purposes (available elections / requirements)
    • Allocation of purchase price to asset classifications (e.g., accounts receivable, inventory, goodwill, etc.)
  • Installment sale treatment
  • Foreign Investment in Real Property Tax Act (FIRPTA) for foreign investors selling an interest real property or a real-property rich entity.

Action: Get tax advice before signing the letter of intent. Once the framework structure is agreed upon, the tax impact of the final deal is often limited unless flexibility was built in.

7. Recordkeeping & Documentation – IRS Audit

Issue: The IRS doesn’t always take your books at face value. If records are thin, the IRS can use indirect methods to recreate your P&L. This can include bank deposit analysis, percentage markup analysis, or lifestyle audits (looking at cash and credit card expenditures and assets).

Consider / Action: Keep separate business and personal accounts and reconcile monthly. Save receipts and invoices. Prepare clear schedules for deductions. Save other relevant supporting documentation from third parties.

8. Penalties & Interest

Issue: The tax bill is only part of the pain. Late filing, late payment, and accuracy-related penalties can quickly snowball.

Consider:

  • IRC § 6651 penalties for failure to file/pay.
  • IRC § 6662 accuracy-related penalties for negligence or substantial understatement.
  • Other IRC provisions imposing penalties for failure to file related to certain informational returns.

Action: Keep a tax compliance calendar with entries and recurring reminders for all tax filing and payment due dates and amounts. Task a responsible employee (or a third-party consultant) with monitoring and managing all tax obligations to ensure timely reporting and payment.

Final Word

For entrepreneurs and small businesses, tax controversies often arise not from intent but from oversight, rapid growth, or technical missteps. Minding entity classification elections and payroll tax obligations, documenting deductions, and involving tax counsel early in transaction planning, can help small businesses avoid many of the most common IRS challenges.

Often a short consultation with a tax attorney can save you from years of penalties, interest, and costly disputes. If you’re facing an IRS notice of audit or examination, notice of proposed adjustment, or IRS collection action, don’t delay. Now is the time to contact tax counsel with experience in tax controversy matters. Prompt action with a tax attorney in your corner can improve results. Potential benefits can include avoiding or releasing tax liens and levies, reducing tax, interest and penalties, or settling tax debts for less than the amount owed.

The Kentucky Red Tape Reduction Initiative: Top 3 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

Nick Eusanio, Esq., LL.M. 1 Comment

Governor Matt Bevin’s Kentucky Red Tape Reduction Initiative, formally announced on July 6, 2016, is further evidence that Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors. This is third article in this Biz&TaxHax series focused on key Kentucky-based programs, initiatives, credits, and incentives that benefit Kentucky small businesses, start-ups, entrepreneurs, and investors. Our prior posts in this series summarized the Top 5 Benefits of the Kentucky Small Business Tax Credit and the Top 5 Benefits of the Kentucky Angel Investment Tax Credit. In addition to those tax credit programs, Governor Bevin’s Red Tape Reduction Initiative is a strong pro-business step that Kentucky companies and business owners have desired for decades. This Kentucky Red Tape Reduction Initiative aims to provide the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. Review, Identify, and Remove Burdensome Kentucky Business Regulations.

Governor Bevin began the Kentucky Red Tape Reduction Initiative by commissioning cabinet secretaries to begin a thorough review of Kentucky regulations currently in place, and has also asked Kentucky companies to weigh-in with their thoughts as to which regulations may be overly burdensome or unnecessary. Through the process, the state has determined that there are over 4,700 regulations currently on the books in Kentucky. In fact, Governor Bevin recently cited a report of findings in a study of the number and breadth of Kentucky administrative regulations, which shows that Kentucky administrative regulations increased by 250% between the years 1975 and 2015. This statistic is further proof of the problem that Governor Bevin is trying to remedy – that Kentucky has been one of the most highly regulated states in the U.S.

As a breath of fresh air for Kentucky small businesses, start-ups, entrepreneurs and investors, the Red Tape Reduction Initiative has already generated over 14,000 visits to the program’s website and over 500 suggestions from business owners to be evaluated. This is in addition to the review work that the Governor’s own staff members are conducting. By all outward appearances, it seems the Governor and his administration are committed to reducing the regulatory burden that has plagued Kentucky entrepreneurs, start-ups, and business owners for too long. This is a strong step in the right direction, and we’ll look forward to continuing updates that hopefully demonstrate progress in eliminating unnecessary and over-burdensome government regulation in Kentucky.

  1. Transform Government Regulators into Regulation Managers with an Attitude of Efficiency and Effectiveness.

The Governor’s above-noted call to current action for review, identification, and removal of unnecessary and over-burdensome Kentucky regulation was not his only directive. Governor Bevin is also encouraging regulators that are part of his Kentucky government administration to adopt a more pro-business attitude. Through this instruction, the administration hopes to create an environment of regulation managers who are focused more on the intent, efficiency, and effectiveness of Kentucky’s various regulatory frameworks and individual regulations as practically applied to the real here-and-now Kentucky businesses and issues they face. This is a key positive aspect of the Kentucky Red Tape Reduction Initiative. If Kentucky regulators maintain a pro-business attitude in the future, it will certainly help Kentucky entrepreneurs and start-ups get off the ground and small businesses expand, and should encourage investors to offer more capital, more frequently, to Kentucky companies.

  1. Encourage Job Creation and Investment.

A key stated purpose of the Kentucky Red Tape Reduction Initiative is to spark investment in existing Kentucky companies as well as new Kentucky business ventures, bringing additional jobs to the Commonwealth. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. Along with the Kentucky Small Business Tax Credit and Kentucky Angel Investment Tax Credit, the Red Tape Reduction Initiative provides additional incentive for: (i) Kentucky entrepreneurs, start-ups, and small businesses to expand their ventures and hire new employees in Kentucky; and (ii) investors to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses. Not only should these initiatives and credits increase business growth and profits, but they should also lead to reduced costs to consumers, who often times pay increased rates for goods and services as a result of companies passing-through their internal costs of compliance with over-burdensome state regulations.

As always, for investors, entrepreneurs, start-ups, and small businesses dealing with Kentucky regulations, it is best to consult an experienced Kentucky business attorney. A Kentucky business lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky regulatory compliance and planning needs.

The Kentucky Angel Investment Tax Credit (KAITC): Top 5 Benefits to Kentucky Investors, Entrepreneurs, Start-Ups, and Small Businesses

Nick Eusanio, Esq., LL.M. 1 Comment

As noted in Biz&TaxHax’s prior article, outlining the Top 5 Benefits of the Kentucky Small Business Tax Credit, Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. The second of this series, this article highlights the top 5 benefits the Kentucky Angel Investment Tax Credit provides for Kentucky investors, entrepreneurs, start-ups, and small businesses. The Kentucky Angel Investment Tax Credit has wide-ranging application, offering the following key benefits to Kentucky investors, entrepreneurs, start-ups, and small businesses:

  1. The KAITC Incentivizes Investment in Kentucky Start-Ups and Small Businesses.

The stated purpose of the Kentucky Angel Investment Tax Credit is to encourage qualified individual investors to make capital investments in Kentucky small businesses, create additional jobs, and promote the development of new products and technologies in Kentucky. Obviously, for entrepreneurs, start-ups, and small businesses seeking to grow, obtaining necessary capital is a key goal and access to capital can be a significant hurdle. The KAITC provides additional incentive for investors, both in Kentucky and those in other states, to invest their capital in Kentucky entrepreneurs, start-ups, and small businesses.

  1. Broad Eligibility: The Requirements for a Qualifying Investor, Qualified Investment, Qualified Small Business, and Qualified Activity Encompass a Wide Base.

The KAITC is available to Qualified Investors making Qualified Investments in Qualified Small Businesses that are conducting Qualified Activities. That sounds like a lot of qualifiers. But, in reality, the definitions of the terms are not overly restrictive. Below is a summary of the relevant qualifiers:

Qualified Investor: (1) an individual, accredited investor according to Reg. D of the U.S. Securities and Exchange Commission, who (2) holds no more than 20% ownership in and is not employed by the Qualified Small Business prior to making a Qualified Investment in the business, (3) is not the parent, spouse, or child of someone who would fail to satisfy requirement # 2, (4) seeks a financial return on the Qualified Investment, and  (5) has become a Kentucky Economic Development Finance Authority (KEDFA) certified Qualified Investor.

Qualified Investment: (1) a minimum cash investment of $10,000 made by a Qualified Investor in a Qualified Small Business, (2) offered and executed in compliance with all applicable state and federal securities laws and regulations, (3) in exchange for equity interest in the Qualified Small Business, (4) having been pre-approved by the KEDFA as a Qualified Investment.

Qualified Small Business: (1) a legal entity registered and in good standing with the Kentucky Secretary of State and otherwise maintaining all state licenses and other permits required, (2) comprised of 100 or fewer full-time employees, (3) actively and primarily conducting (or planning to conduct upon receiving a Qualified Investment) a Qualified Activity within Kentucky, (4) maintaining more than 50% of its assets, operations, and employees within Kentucky, that (5) either (a) has a net worth of $10 million or less, or (b) has had $3 million or less in net income after federal income taxes for each of the two preceding fiscal years, which (6) has not received investments qualifying for more than $1 million in total angel investor tax credits, and (7) has been pre-certified as a Qualified Small Business by the KEDFA.

Qualified Activity: A knowledge-based activity related to the Office of Entrepreneurship focus areas that include, but are not limited to: Bioscience; Materials Science and Advanced Manufacturing; Environmental and Energy Technology; Information Technology and Communications; and Health and Human Development.

If you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there is a good chance your company could become a Qualified Small Business eligible to receive a Qualified Investment from a Qualified Investor. An experienced Kentucky tax lawyer or Kentucky tax consultant can help you navigate the process of applying to become a Kentucky Qualified Small Business, opening your company up to a larger pool of capital sources. Additionally, if you are an investor wishing to invest in Kentucky small businesses, a Kentucky tax attorney or Kentucky tax consultant can help you apply to become a Qualified Investor and take advantage of the Kentucky Angel Investment Tax Credit.

  1. Generous Credit Rate and Up to $200,000 in Credit Each Year.

The Kentucky Angel Investment Tax Credit provides Qualified Investors a credit of up to 50% (in enhanced incentive counties) or up to 40% (all other counties) of their Qualified Investments. Depending on the amount of the Qualified Investment and the location of the Qualified Small Business, the KAITC can provide up to $200,000 of tax benefit per calendar year.

  1. Carryforward of Unused Credits.

A credit approved under the KAITC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the Qualified Investor may carry forward the remaining amount of credit to offset against tax due for up to the next 15 years. This is important, as often times entrepreneurs, start-ups, and small businesses may not have significant taxable income and tax liability in initial years. This 15 year carry forward enables a Qualified Investor in a Kentucky Qualified Small Business to recognize the benefit of the Kentucky Angel Investment Tax Credit in later years when their investment may be generating more taxable income and thus the investor may have more tax liability.

Biz&TaxHax Tip: The KAITC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to 15 years.

The KAITC is transferrable for out-of-state investors, meaning investors who are located outside Kentucky, who may not have Kentucky tax liability, can still reap the benefit of this tax credit. To do so, a nonresident/out-of-state Qualified Investor may sell its Kentucky Angel Investment Tax Credit to a Kentucky taxpayer and that Kentucky taxpayer may use the credit to offset Kentucky tax liability.

Biz&TaxHax Tip: A nonresident Qualified Investor who wishes to transfer the KAITC to a Kentucky taxpayer must follow certain procedures outlined by the Kentucky Department of Revenue. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper transfer of the Kentucky Angel Investment Tax Credit.

As always, for investors, entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Angel Investment Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky tax compliance and planning needs.

The Kentucky Small Business Tax Credit (KSBTC): Top 5 Benefits to Kentucky Entrepreneurs, Start-Ups, and Small Businesses

Nick Eusanio, Esq., LL.M. 2 Comments

Kentucky is a great state for entrepreneurs, start-ups, small businesses, and investors alike. This article, focused on the Kentucky Small Business Tax Credit, is the first in a series of Biz&TaxHax articles that will outline some of the key benefits that exist in Kentucky for entrepreneurs, start-ups, small businesses, and investors. The Kentucky Small Business Tax Credit has broad application to Kentucky companies, providing the following top five benefits to Kentucky small businesses, start-ups, and entrepreneurs:

  1. Broad Eligibility: Many Companies Can Qualify for the Kentucky Small Business Tax Credit.

Assuming other requirements are met, the KSBTC is available to for-profit companies with 50 or fewer full-time employees. Additionally, this tax credit includes businesses in the retail, service, construction, manufacturing, and wholesale industries. This means that if you are a Kentucky entrepreneur, own a Kentucky start-up, or run a Kentucky small business, there’s a good chance you could qualify for the Kentucky Small Business Tax Credit.

  1. Rewards Investment in New Kentucky Jobs and New Kentucky Equipment and Technology.

Entrepreneurs and start-ups that are on their way to becoming established small businesses, and small businesses that are growing into larger ones, are continuously purchasing additional technology and equipment and hiring new team members. The good news is, the Kentucky Small Business Tax Credit rewards Kentucky entrepreneurs, start-ups, and small businesses for those very actions: hiring new employees and buying new technology and equipment.

Biz&TaxHax Tip: It is great the KSBTC focuses on rewarding expenses that Kentucky companies are already incurring, but it is important to note that there are specific requirements and thresholds for qualification relating to: (1) eligible employees hired (must be new, full-time position; certain requirements for wages paid and hours worked); (2) qualifying equipment and technology (does not include real property, consumable supplies, or inventory (generally); expenditure of at least $5,000); and (3) the timing of the new hires and equipment/technology expenses (generally, a company must have hired an employee for at least one new full-time position and invested at least $5,000 in qualifying new equipment or technology in the past 24 months), to name a few. An experienced Kentucky tax attorney or Kentucky tax consultant can help navigate these specific requirements to determine if your company is eligible for the Kentucky Small Business Tax Credit.

  1. Up to $25,000 in Credit Each Year.

The KSBTC provides a credit against tax liability for each calendar year that a Kentucky entrepreneur, start-up, or small business qualifies. Depending on the number of eligible new positions created and the amount of investment in qualifying technology or equipment, the Kentucky Small Business Tax Credit ranges from $3,500 up to $25,000 per calendar year.

Biz&TaxHax Tip: Given the timing requirements noted in the tip to #2 above, it is a good idea to discuss your hiring and investment plans with your business attorney or tax lawyer early and often. If your timing for hiring and investment is flexible from a business standpoint, your tax attorney or business lawyer can help you plan for maximizing the Kentucky Small Business Tax Credit in a particular year or over a period of years.

  1. Carryforward of Unused Credits.

A credit approved under the KSBTC program is first applied against any tax due on the return for the calendar year for which the credit was granted. But, if the credit is not fully utilized in the award year, the taxpayer may carry forward the remaining amount of credit to offset against tax due for up to the next five years. This is important for entrepreneurs, start-ups, and small businesses, as often times in the initial years they are in expenditure and growth mode, and may not have significant taxable income and tax liability. This five year carry forward enables small businesses, start-ups and entrepreneurs to recognize the benefit of the Kentucky Small Business Tax Credit in later years when they may generate more taxable income and have more tax liability.

Biz&TaxHax Tip: The KSBTC is a non-refundable credit, meaning that a taxpayer cannot obtain a cash refund for the difference between the credit and the taxpayer’s tax liability for a particular year. Rather, as noted above, the taxpayer may carry forward any unused portion of the credit for offsetting future tax liability, for up to five years.

  1. Broad Applicability to Different Tax Liabilities.

The KSBTC may be used by a taxpayer to offset tax liability on a Kentucky individual income tax return, limited liability entity tax return, or corporation income tax return. So, the KSBTC’s broad applicability benefits a wide range of taxpayers, from entrepreneurs and pass-through entity owners who may be primarily concerned with the individual income tax and limited liability entity tax, to small businesses that may be subject to the corporation income tax.

Biz&TaxHax Tip: Depending on a particular taxpayer’s structure (such as sole proprietor, partnership, limited liability company, S corporation, C corporation) and other factors, the taxpayer may be subject to one or more of the taxes noted in #5 above. So, it is best to consult an experienced Kentucky tax lawyer or Kentucky tax consultant to ensure proper tax compliance and utilization of the Kentucky Small Business Tax Credit.

As always, for entrepreneurs, start-ups, and small businesses considering eligibility for the Kentucky Small Business Tax Credit and related planning, as well as Kentucky tax reporting and payment obligations, it is best to consult an experienced Kentucky tax attorney or Kentucky tax consultant. A Kentucky tax lawyer or Kentucky tax consultant can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your Kentucky tax compliance and planning needs.

Should My Small Business Accept Credit Cards? What Can I Do to Offset the Credit Card Processing Fee the Network Charges?

Nick Eusanio, Esq., LL.M. Leave a comment

Generally, your small business should accept credit card payments; it just makes business sense.

Many small business owners and entrepreneurs ask the question: “Should my small business accept credit cards?” Generally, from a pure business/financial standpoint, the answer is yes, for these reasons:

  1. Don’t Lose Business – By not accepting credit card payments, a business risks losing customers. A customer who wants to pay by credit card may not want or be able to pay by any other method. Perhaps the customer doesn’t carry cash or checks, or just deems paying by credit card more convenient or secure. It simply does not make sense to turn away a would-be paying customer, just because the credit card company will charge a fee to process the transaction.
  2. Convenience = ^ Sales – Second, those same customers who value the convenience of paying by credit card are likely to buy more, and/or more often from your company.
  3. Recurring/Automatic Payments – Related to the second reason, accepting credit cards enables setting customers up for recurring/automatic payments if they use your company’s goods or services regularly.
  4. Cash Flow – From a cash flow standpoint, a credit card payment is immediate like cash, but doesn’t carry the risk of a personal check that could bounce for insufficient funds. Also, as noted above, not all customers carry cash or want to use cash, and many will buy more if they can use credit.
  5. Accounting & Record-keeping – Credit card payments can be easily integrated and synchronized with your bookkeeping software, increasing accuracy and ease of accounting and documentation while minimizing costs for additional labor to do so.

In some instances, credit card processing fees can be strategically offset or recouped.

Often, despite the above reasons, small business owners and entrepreneurs remain hesitant to accept credit card payments because of their aversion to paying the transaction fee to the credit card network. This concern has led many start-up founders and small business owners to consider what they can do to offset the credit card processing fees that the network charges. To do so, numerous small businesses have creatively tried to pass the credit card processing fees along to the customer. But, are small businesses allowed to pass credit card fees along to the customer?

Currently, there is no federal prohibition, but 10 states have laws prohibiting a merchant from charging customers a surcharge to pay by credit card (CA, CO, CT, FL, KS, ME, MA, NY, OK, and TX). In California and New York, court orders have enjoined the state from enforcing the prohibition laws, but those cases remain on appeal. In Florida, an appeals court reversed a trial court order that upheld Florida’s law limiting surcharges, but that case remains subject to further litigation. So, what can a small business owner do to offset or recoup credit card surcharge fees?

Biz&TaxHax Tip:

If you are an entrepreneur or small business owner considering charging your customers a fee for paying by credit card, following is some guidance for minimizing the effect of credit card transaction fees to your business:

  1. Review Credit Card Network Agreements – Although there is no federal prohibition, and your state may not be one that prohibits imposing a surcharge for credit card users, companies should review their agreements with the various credit card networks to determine whether a contractual prohibition or limitation exists. Agreements with the credit card networks may prohibit or otherwise limit or restrict the merchant from charging the transaction processing fee to the customer. So it is important to review all agreements with credit card networks before imposing any surcharge on credit card users to avoid potentially breaching those agreements.
  2. Review Applicable Law for Specifics – Even if your business operates in a state where there is a prohibition on imposing a “surcharge” to credit card users, these laws may be drafted such that the company can avoid the prohibition by simply offering a discounted price to cash (non-credit card) payers. In other words, the company could simply set the price for its products or services at a particular amount that would cover the credit card processing fee cost, and then advertise to customers that if they pay by cash, they get a discount from the regularly stated price. Of course, if your company operates in a state with a surcharge prohibition, you should review the particular statutory/regulatory language before using this discounted price method, to ensure that this method would not also violate the law.
    • Read Credit Card Network Agreements Again & Clearly Post Discounted Prices for Cash Payments – Note, this practice may still violate some credit card network agreements, so it’s important to read the agreements carefully. Also, be careful to clearly and conspicuously post the discounted price for customers paying by cash to avoid any possible concerns with consumer protection/deceptive trade practices laws.

As always, it’s important to consult an attorney familiar with your company’s specific facts and circumstances and the applicable law before making any decision or taking any action that may affect contractual or regulatory compliance obligations of your company. An experienced lawyer can fully evaluate your facts and circumstances along with applicable law and guidance to develop the most effective, efficient, and proper solution to your business compliance and planning needs.

Tax Tips for Entrepreneurs and Business Owners – Part 4: The Business Start-Up Cost Deduction

Nick Eusanio, Esq., LL.M. Leave a comment

The fourth article in the Tax Tips for Entrepreneurs and Business Owners series focuses on the business start-up cost deduction. This article highlights the importance of the business start-up deduction for entrepreneurs. This article briefly explains the business start-up cost deduction, the general test to qualify for the deduction, and some key tips.

What is the Business Start-Up Cost Deduction and How Can My Company Qualify?

The business start-up cost deduction allows an entrepreneur to take a current tax deduction for certain expenses incurred prior to, and for the purpose of, beginning the company. The deduction is limited to $5,000, and phases out on a dollar-for-dollar basis once the total qualifying start-up and organizational costs exceed $50,000. The entrepreneur must then amortize–or deduct pro-rata over a specified period of time–the remaining eligible start-up and organizational costs.

To qualify, the entrepreneur must have incurred eligible: (1) Start-Up Costs; or (2) Organizational Costs necessary to begin an active trade or business. Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs are the expenses associated with creating a corporation or partnership.

Which Costs Qualify as Deductible Start-Up or Organizational Costs?

Qualifying Start-Up Costs include:

  1. Analyses or Surveys of potential markets, products, labor supply, transportation facilities, etc.
  2. Advertisements for the opening of the business.
  3. Salaries and Wages for employees who are being trained and their instructors.
  4. Travel and other necessary costs for securing prospective distributors, suppliers, or customers.
  5. Salaries and Fees for executives and consultants, or for similar professional services.
  6. Investigative costs incurred as part of a general search for or initial evaluation a business to be acquired/purchased. These are the costs that help the entrepreneur decide whether to purchase the particular business.

BizAndTaxHax Tips: Start-up costs do not include deductible interest, taxes, research and experimental costs, or costs incurred as part of attempting to purchase a specific business. These expenses must be capitalized instead.

Qualifying Organizational Costs include:

  1. The cost of Temporary Directors.
  2. The cost of Organizational Meetings.
  3. State Incorporation Fees or Filing Fees.
  4. The cost of Legal Services for organization of the company, such as negotiation and preparation of the company’s organizing agreement.
  5. The cost of accounting services incident to organization of the business.

BizAndTaxHax Tips: The following expenses must be capitalized, rather than currently deducted and amortized: costs for marketing, issuing, and selling stock, securities, or company interests (such as commissions, professional fees, and printing costs); costs related to acquiring assets for the business or transferring assets to the business; costs for admitting or removing partners, shareholders, or members, other than at the time the company is first organized; costs of drafting an agreement concerning the operation of the business, including a contract between a partner, member, or shareholder and the company. These expenses must be capitalized.

Determining whether your company’s start-up or organizational costs are currently deductible and amortizable, or rather must be capitalized, is a specific factual and circumstantial analysis. So, as always, you should discuss your specific situation with a tax attorney and your accountant to obtain advice concerning deductible start-up or organizational costs for your newly formed business. An experienced tax lawyer can help you determine whether your start-up or organizational costs qualify for current deduction, and assist with electing the deduction and keeping the required documentation to support it. If you are a Columbus or Ohio entrepreneur or small business owner and need help preparing for tax return filing season and planning for the future, contact me for a free initial consultation.