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Webinar: Understanding Business Tax Returns - A Case Study for Family Lawyers

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Join Aronson LLC experts Stuart Rosenberg and Sal Ambrosino for an informative webinar as they walk you through the basics of business returns. Stuart and Sal will show you how the choice between Corporation, S Corporation, or partnerships can effect reporting for very similar businesses.

Who should attend this webinar?

Family lawyers wishing to understand the basics of business income tax returns and the valuable information they contain.

Learning Objectives:
-Common tax forms for all business income tax returns
-The basic business income tax returns
-Where to find key information quickly
-How the different entities report owners’ compensation
-How the choice of entity effects the owners’ tax burden

Join Aronson LLC experts Stuart Rosenberg and Sal Ambrosino for an informative webinar as they walk you through the basics of business returns. Stuart and Sal will show you how the choice between Corporation, S Corporation, or partnerships can effect reporting for very similar businesses.

Who should attend this webinar?

Family lawyers wishing to understand the basics of business income tax returns and the valuable information they contain.

Learning Objectives:
-Common tax forms for all business income tax returns
-The basic business income tax returns
-Where to find key information quickly
-How the different entities report owners’ compensation
-How the choice of entity effects the owners’ tax burden

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Webinar: Understanding Business Tax Returns - A Case Study for Family Lawyers

  1. 1. Understanding Business Tax Returns: A Case Study for Family Lawyers www.aronsonllc.com/blogs September 12, 2017
  2. 2. ‹#›© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Agenda • Introduction • Business Tax Return Basics • Case Study Part 1 – Fact Patterns & Tax Filings • Case Study Part 2 – Comparisons & Summaries • Conclusion
  3. 3. 3© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Introduction
  4. 4. 4© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Webinar Objectives • Not mention a single IRS Code section • Distinguish between different types of business tax returns • Understand how the entity structure affects its tax reporting • Identify the “normal” owner compensation scenarios for different entities • Identify other entity-specific differences • Develop more meaningful information requests
  5. 5. 5© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Webinar Family Law Context • Market Economy – Active business owners – Driven to maximize returns • Return on capital investment • Compensation • Divorce Motivations – Minimize income while maintaining returns – Minimize value of business interest while retaining control and cash flows
  6. 6. 6© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Business Tax Return Basics
  7. 7. 7© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | The Basics • Standard forms, pre-numbered line items, including: – Page 1 – Income and deductions – Schedule L – Balance Sheet – Form 1125-E – Compensation of Officers – Form 4562 – Depreciation – Form 4797 – Sale of Business Property – Schedule K-1 – Partner Share of Income, Deductions, Credits, etc. • Tax accounting rules may differ from financial accounting rules – Schedule M-1 or M-3 reports the differences • Strict filing deadlines
  8. 8. 8© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | The Basics • Fines & penalties – For late filing – For incomplete or inaccurate reporting • Basic non-financial information common to all business returns: – Name and address of business – Date business started – Method of accounting – Principal business activity – Other entities owned by the business – Principal officer – Tax preparer
  9. 9. 9© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Different Forms for Different Entity Types • Taxed first at the corporate level: – C Corporations / Form 1120 • Pass-Through Entities: – S Corporations / Form 1120S – Limited Liability Companies / Form 1065 – Partnerships / Form 1065
  10. 10. 10© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Form 1120 • Used by C Corporations • Fiscal year permitted • Must use the accrual basis of accounting if over $5.0M in revenue • The C Corporation’s profits are tax at the corporate level separate and apart from its owners • Distributions from a C Corporation to its stockholders (typically in the form of dividends) are taxed again at the stockholder level • No ownership restrictions • May own interests in Partnerships and LLCs, may NOT own interests in S Corporations
  11. 11. 11© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Pass-Through Entities – In General • In general, no income tax at the entity level • Profits are allocated to the owners and taxed on the owners’ separate tax returns • In general, owners taxed on allocated income, not on distributions • Entity will typically distribute at least enough to cover tax burden • There are different rules for different types of pass-through entities
  12. 12. 12© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Form 1120S • In general, ownership limited to individuals, estates and certain trusts • Number of stockholders limited to 100 or fewer • Limited to one class of stock – except voting rights • Must use a calendar year, unless special election made with annual filing and special withholding tax paid • Use of cash basis permitted • Profits are reported on the owners’ tax returns • In general, distributions of profits to the stockholders are tax free • Distributions must be pro-rata to the stockholders • May own interests in C Corporations, partnerships, LLCs and certain S Corporations
  13. 13. 13© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Form 1065 • No ownership restrictions • Uses the same fiscal year as the majority of its partners/members – typically 12/31 • Use of cash basis permitted • Profits are reported on the owners’ tax returns • In general, distributions of profits to the partners/members are tax free • Single member LLCs are disregarded for tax purposes • May own interests in C Corporations and partnerships/LLCs, may NOT own interests in S Corporations
  14. 14. 14© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Case Study Part 1 – Fact Patterns & Tax Filings
  15. 15. 15© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Fact Patterns • ABC, Inc., XYZ, Inc., and LMNOP, LLC are small business which provide professional services in the Washington, D.C. Metropolitan Area. • The companies are owned by triplets Pat (ABC), Alex (XYZ), and Jordan (LMNOP) who have shared everything equally since birth. • Jordan and Ryan are divorcing. • The siblings have all told Ryan’s counsel that the businesses are identical in all respects (except for their corporate structure) and generate equivalent amounts of income. • However, Ryan knows for an absolute fact that the triplets’ salaries are $1,250,000 (Pat), $250,000 (Alex), and $0 (Jordan), and that the net income for the businesses are $973,500 (ABC), $1,595,000 (XYZ), and $1,870,000 (LMNOP).
  16. 16. 16© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Fact Patterns • Can the siblings possibly be telling the truth? • To get to the bottom of it, Ryan’s attorney requests, and Jordan’s attorney provides, copies of the latest tax return for all three entities. • Is it possible to reconcile the significant differences between the entities? • Will the tax returns demonstrate that each entity really generates the same amount of income?
  17. 17. 17© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | ABC Form 1120 Page 1 – Income
  18. 18. 18© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | ABC Form 1120 Schedule L – Balance Sheet
  19. 19. 19© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | XYZ Form 1120S Page 1 – Income
  20. 20. 20© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | XYZ Form 1120S Schedule L – Balance Sheet
  21. 21. 21© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | XYZ Form 1120S Schedule K-1
  22. 22. 22© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | LMNOP Form 1065 Page 1 – Income
  23. 23. 23© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | LMNOP Form 1065 Schedule L – Balance Sheet
  24. 24. 24© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | LMNOP Form 1065 Schedule K-1
  25. 25. 25© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Case Study Part 2 – Summaries & Comparisons
  26. 26. 26© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Tax Return Summary - Income
  27. 27. 27© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Tax Return Summary – Balance Sheets
  28. 28. 28© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Income Statement Comparisons
  29. 29. 29© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Bottom Line – Owner Cash Flows
  30. 30. 30© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Bottom Line – Tax Burden
  31. 31. 31© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Bottom Line – Overall Cash Flows
  32. 32. 32© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Who Would You Rather Be? • Pat ??? • Alex??? • Jordan???
  33. 33. 33© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Conclusion
  34. 34. 34© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Webinar Objectives • Not mention a single IRS Code section • Distinguish between different types of business tax returns • Understand how the entity structure affects its tax reporting • Identify the “normal” owner compensation scenarios for different entities • Identify other entity-specific differences • Develop more meaningful information requests
  35. 35. 35© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Takeaways • You don’t have to be a CPA to understand the basics of business tax returns • Knowing the basics can help with case management • Identify financial and other issues up front by looking at your clients’ tax returns • Know when to engage specialists
  36. 36. 36© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | About Aronson LLC Aronson LLC provides a comprehensive platform of assurance, tax, and consulting solutions to today’s most active industry sectors and successful individuals. For more than 50 years, we have purposefully expanded our service offerings and deepened our industry specialties to better serve the needs of our clients, people, and community. From startup to exit, we help our clients maximize opportunity, minimize risk, and unlock their full potential.
  37. 37. 37© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Stuart A. Rosenberg, CPA, CVA, serves as a partner in Aronson LLC’s Financial Advisory Services group. He joined the firm in 1989 and has spent almost 30 years in the industry. Stuart’s clients include retail, wholesale, service, healthcare, hospitality, professional services, venture capital, construction and real estate businesses. Stuart specializes in litigation support services including valuations of closely- held businesses, preparation and documentation of lost profits, damages claims, evaluation of accounting and tax issues, financial analysis and investigations, general business issues and related expert testimony and forensic support services. As an expert in the field, Stuart has provided a variety of articles for publications such as Legal Time’s Commercial Litigation. He is a member of AICPA, VSCPA, and the National Association of Valuation Analysts. Stuart received his bachelor’s degree in business administration from American University in 1984, and he earned his certification as a valuation analyst from the National Association of Valuation Analysts in 1996. Partner, Financial Advisory Services 301.231.6264 srosenberg@aronsonllc.com Stuart Rosenberg, CPA, CVA
  38. 38. 38© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Sal is a Certified Public Accountant (CPA) with more than 25 years of assurance, tax, and financial advisory services experience. Sal has provided a broad range of services to closely-held businesses and the individual owners of those businesses. He has worked with clients in a variety of industries, including professional practices, retailers, manufacturers, software developers, and internet publishers. As a member of Aronson’s Financial Advisory Services practice, Sal specializes in litigation support services including, valuations of closely-held businesses, forensic accounting, tax matters, and financial analysis with an emphasis in family law engagements. Senior Manager, Financial Advisory Services 301.231.6272 sambrosino@aronsonllc.com Sal Ambrosino, CPA, ABV
  39. 39. 39© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs | Q&A

Notas del editor

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  • -Quick recap of what we discussed.
    -Revisit our webinar objectives.
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