Restyling & Truck Accessories - February '15

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42 Restyling & tRuck AccessoRies | FEBRUARY 2015 corporated business makes an in- terest-free (or low interest) loan to its shareholder, in the eyes of the IRS, the shareholder is deemed to have received a nondeductible dividend equal to the amount of the foregone interest. The incor- porated business is, at the same time, deemed to have received a like amount of interest income. Fortunately, there is a $10,000 de minimis exception for com- pensation-related and corporate/ shareholder loans, at least those that do not have tax avoidance as one of the principal purposes. Although this transfer of taxable income between entities may ap- pear to be offsetting, there can be a significant tax impact on the real- location, depending on the relative tax benefits to the borrower and to the lender, and the deductibility of the expense deemed paid. Downside: Stock Or Loan When IRS examiners review loans from shareholders and the common stock accounts of an af- termarket accessories business, they often encounter what can only be called "thin capitaliza- tion." Thin capitalization occurs when there is little or no common stock and there is a large loan from the shareholder. A special section of the tax law, Section 385, specifi- cally considers whether an own- ership interest in a corporation is stock or as indebtedness. The IRS's objective when they encounter thin capitalization is to convert a portion, if not all, of the loans made by the sharehold- ers into capital stock in the busi- ness. Naturally, this conversion requires an adjustment to the in- terest expense account because, at this point, the loans are considered nonexistent. The interest paid by the incorporated business on these disallowed loans, becomes a divi- dend paid to the shareholder in an amount equal to the operation's earnings and profits. Recovering From The Downside, Loans Gone Bad Under U.S. tax laws, a business bad debt deduction is not avail- able to shareholders who have advanced money to a corporation where those advances were labeled as contributions to capital. How- ever, a business owner or share- holder who incurs a loss arising from his guaranty of a loan is enti- tled to deduct that loss—but only where the guaranty arose out of his trade or business or in a transac- tion entered into for profit. If the guaranty relates to a trade or busi- ness, the resulting loss is an ordi- nary loss for a business bad debt. Sale-Leasebacks When attempting to get funds from the shop or business, one op- tion involves taking tax benefits instead, especially in situations where the aftermarket accessories business might profit from an in- fusion of badly needed cash? If the business is in need of an infusion of cash and the owner is reluctant to invest additional money, an an- swer may lie with the tax benefits. Are the restyling and truck acces- sories operation's tax benefits be- ing wasted because of low or non- existent profits? A one-transaction-cures-all, all- purpose solution involves the sale-leaseback of the business's assets. Gen- erally, the aftermarket ac- cessories business sells its assets, the building that houses the operation, the equipment used in the business, its furniture, fixtures, or other property owned by the business. The buyer of those assets, usually using borrowed funds, is often the owner, partner or shareholder. When the owner or share- holders in an aftermarket accessories business own "With conventional financing still difficult to obtain, it is little wonder that "self-financing" is the No. 1 form of financing used by small business owners. It's quick, doesn't require a lot of paperwork and is often less expensive than conventional financing."

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