Hi. I haven’t been around in a while but I have this q and I thought I’d post it here. I have always found AF members knowledgeable and I value their feedback… Anyway, here it is: I purchased a deceased partner’s business from a family trust/estate. Two CPA’s have offered advice. The first, does the corp taxes, the second does mine personally. The business purchased is primarily an intangible asset. It was valued and a payment schedule was agreed upon. Both CPA’s agree: 1.) That payments are not expensed, but amortized over 15 years. And 2.) That since the practice flows through the trust/estate, the widow receives a stepped up cost basis, and therefore payments received incur no cap gains or income taxes. The rest they pretty much disagree on. CPA 1 has all revenue paid to me and taxed, payroll taxes are withheld on the entire amount. Then after taxes, periodic payments are made to the estate/trust. My income and tax liability increases substantially, then when I file I claim the amortization on my schedule A. CPA 2, has me set up a LLC. Revenue is split, a portion is payroll to me (W2 from RIA), and the portion to meet the payment schedule is transferred into the LLC (1099) where it then flows to the trust/estate. At the end of the year the total of payments made to the LLC are reduced by the amortization, and the balance flows to me on my return. So payroll taxes are only withheld on the amount of compensation I am paid W2, additional income comes from the LLC, and would be taxed accordingly. The intangible asset is purchased by the LLC, and so the amortization is matched with the payments made in the LLC, as opposed to on my schedule A. CPA 1 says you can’t get both a W2 and a 1099 from the same entity, so if you want CPA 2’s format then all revenue has to go into the LLC and then the LLC should do a payroll. Well that would create additional problems as the LLC has no medical, no 401k, etc. and other partners are involved. So what is up? Can you receive both a W2 and a 1099 from the same entity? Can you be categorized as a statutory employee? Should this be handled differently than either format suggested? I expect and plan to pay taxes on all compensation. That said, there seems to be significant disadvantages associated with withholding payroll taxes on everything, then making the payments, and then claiming the amortization on a schedule A, hoping for some refund… higher tax rates would apply, limits on deductions apply, AMT would apply, etc. Any thoughts?
Not sure on the intricacies of tax code and I’m not a CPA, but I’m pretty sure you can receive a 1099 and W-2 from the same company since I received both last year. They weren’t concurrent, as I was paid initially as an makeshift intern via the 1099 then received the W-2 once I was added to regular payroll, but the return doesn’t list dates anyways. We have a CPA do our small business LLC tax returns if that adds any legitimacy.
The answer is yes you can get both a 1099 and a W-2 depending on what kind of service you perform. That’s not the real question. The real question is, is CPA #1’s advice more sound than CPA #2’s? My advice - take it with a grain of salt CPA #1 - It’s the safer of the two choices. The more classical way. CPA #2 - Effectively, the LLC income will still flow-through to you on your 1040. The benefit is that you can deduct more “business” expenses on the LLC’s return. However, if you ever get audited, be prepared to show that it’s a legit business. Would you be the sole-owner of the LLC? I mean, you have to file with the state and all that jazz (it’s not like a sole-prop. entity). It’s the more sophisticated way of doing things, but you HAVE to have the paperwork. CPA #2’s advice necessitates that you have an additional person that knows what type of paperwork is needed in having an LLC (unless the CPA knows this part too, which I doubt). Also things to consider - Will the intangible asset appreciate in the future? Do you have any partners in the LLC? What is the purpose of the LLC? Long story short - CPA #1’s and CPA #2’s choices are both viable because I’ve seen it done both ways. However, you have to weigh how much you will save in setting up that LLC and doing all that’s necessary to upkeep the business versus tax savings. Do both of these CPA’s specialize in estate planning? For what it’s worth, I’m a CPA as well but I do not specialize in this stuff. However, I’m exposed to it and know the basics. Like I said - take my advice with a grain of salt.
Thx. I appreciate you guys taking the time to respond. And I appreciate the valuable info. In short, it seems both were potentially viable formats and the firm “you can’t do that” reaction was off base. I have some minor business expenses that could be deducted on the LLC return. primarily charitable contributions, but potential others: phone bill, CFAI dues, modest client entertainment, lunch, lap dances, etc. (just kidding). Anyway I am the sole-owner of the LLC. It was set up, filed, etc. by our attny. The purpose of the LLC, as it was described to me, was to group all inflows and outflows related to the purchase in one entity. The costs associated with setting up the LLC are sunk. (and they were less than what might be withheld for a particular payment.) To me it sounded like the savings from using the LLC format were: a) less withholding - money transferred to the LLC (1099) bypasses some payroll taxes, fica, etc. whereas if format 1 was used it all runs through payroll (W2). b) there is a disadvantage to listing the amortization on a sched A. (you lose 2%? I think CPA 2 said that). c) high withholding and potential for refund vs. less withholding and pmts. (Using format 1 from May to recently, I have already withheld more in state and fed respectively than were paid in all of 2009. slightly higher net income but still, significantly higher withholding) If sched A deductions are limited do you lose the amort? if AMT applies to the higher AGI, then what ?) d.) ability for limited business expenses in the LLC. In this relatively small community I don’t think either of the CPA’s specialize in one particular area.