July Tax Tips

View this email in your browser

Shutting Down a C Corporation There are several tax implications that you need to be aware of when shutting down a C corporation. Complete liquidation of a C corporation is when it ceases to be a going concern, winds up its affairs, pays its debts, and distributes its remaining assets to the shareholder(s). In tax terms, the corporation redeems all its stock, and during the redemption, there can be one or more distributions pursuant to a plan. While not mandatory, having a written plan is advisable because it establishes a specific start date for the liquidation process. This helps differentiate between regular dividends and liquidating distributions. There are three ways your corporation can achieve liquidation:

• Distribute all of the corporation's assets to the shareholder(s)

• Sell all its assets, and distribute the proceeds.

• Sell some assets, and distribute the resulting sales proceeds and unsold assets.

The bottom-line federal income tax results for all these options are similar for the corporation and the shareholder(s). If your corporation distributes property other than cash during liquidation, it must recognize taxable gain or loss as if the distributed property had been sold for its fair market value (FMV). As a shareholder, you treat the liquidating corporate distribution as payment in exchange for your stock. You recognize taxable capital gain or loss equal to the difference between the FMV of the assets received and the adjusted basis of the stock you surrender. The complete liquidation of a C corporation with appreciated assets often results in double taxation—once at the corporate level and again at the shareholder level. Hence, the timing could be critical depending on your situation and future changes in tax rates. As of 2023, the maximum individual federal income tax rate on long-term gains from a corporate liquidation is 20 percent, or 23.8 percent if the 3.8 percent net investment income tax applies. Once you decide on a complete corporate liquidation, the Board of Directors should adopt a plan and file Form 966 (Corporate Dissolution or Liquidation) with the IRS within 30 days of adopting the liquidation plan. The corporation should then file its final tax returns. A Cleaning Lady & Your Home-Office Deduction If you have an office in your home that qualifies for the home-office deduction and you employ a cleaning lady who maintains both your home and your home office, there are a couple of tax considerations to keep in mind. The amount you pay your cleaning lady for her services can have an impact on your taxes. Let’s assume you pay her $200 every two weeks, totaling $5,200 annually. Say your office is 15 percent of your home. In this case, you pay her $780 to clean your office and $4,420 to clean your home. Here are two key questions: 1. Should you pay your cleaning lady through a W-2 or a 1099 for the office cleaning? 2. Do you need to pay the Nanny Tax for the home cleaning? The answers depend on whether the cleaning lady is considered an independent contractor or an employee. Given the conditions of her work—she cleans with little or no direction, provides her own supplies, and cleans many other houses—she exhibits the characteristics of an independent contractor. Accordingly, for the $780 you paid her to clean your office, you should provide her with a 1099-NEC form. On the personal front, you are not liable for the Nanny Tax because the cleaning lady qualifies as an independent contractor. Please note that if you fail to file Form 1099-NEC, you could face an intentional disregard penalty of $630 or more for each missed form. To contact our associates use these emails:

Greg Specht - gspecht@fxcassidy.com

Tom Dewey - thomas@fxcassidy.com

Patrick Higgins - phiggins@fxcassidy.com

610-667-0800 www.fxcassidy.com