Taxes: Reporting Business Income (when you are paid instead of the business)

I have a 1099 in my name, but the money was really for the business...

This is a common problem we see in tax filings of small businesses -- especially those involved with the Federal Government or consulting work. Frequently, a hiring company will refuse to pay corporation-to-corporation, and instead insists on paying in the name of the principal. Said a different way -- your business isn't paid for the work you've done -- you are paid directly.

This presents a serious problem. First, by paying you directly, it most likely changes the taxable bracket in which you fall. Secondly, by paying you directly, you are unable to claim business deductions from the amount - before it becomes income via a K1 or other vehicle.

The fix for this is not too complicated, but does take a little planning. First, you must report your income. The key is where. In this case, you must file a 1120S (1120S = corporate filing, sub-chapter S election -- if you need help understanding this, you need to contact us to discuss. You must elect sub-s status, it is not automatic. Technically, this applies to C corporations, also, however, handling partnerships may be a little different -- so chat with us first). The 1120S needs to reflect the income that should have been attributed to the company, but was paid to you directly (the principal). To the penny, this must be accurate.

Then, on your 1040, include the money from the 1099 as self-employed business income. You will complete Schedule C, indicating a business. Use the EIN from the 1120S. Show all income paid on the 1099 or W2, and deduct the entire amount. Under explanation, indicate that this money was accounted for in the 1120S that was filed for the corporation. You should, therefore, show the income and a 100% right off on your 1040, and an exact matching entry on the 1120S (income). This properly removes the amount from your 1040 personal income, and places it on the 1120S. Once you have completed the deductions on the 1120S, the remainder income will then come over as a K1 -- so you'll see at least part of the income again in the form of dividend income (the proper method for receiving any overage from the corporation).

Do you have a tax question? Give us a call at 703-402-2723 or 1-800-579-9864. Your initial consult is free, and we're happy to discuss tax matters in a way you can understand.

Hanover Law, PC
Offices in Fairfax, VA and Washington, DC
www.hanoverlawpc.com		Lili O'connell, Esq. Abby Archer, Esq.
888 16th St., NW Ste 800 Washington, DC 20006	2751 Prosperity Ave, Ste 580 Fairfax, VA 22031	Sean R. Hanover, Esq. Stephen Salwierak, Esq.
1-800-579-9864	admin@hanoverlawpc.com	Charles Hatley, Esq.

Tax Liability and Divorce

So what happens when your love is shattered on the shoals of acrimonious divorce? Well, according to the tax man (aka Federal Government) -- not much. A joint tax liability waits for no man (or woman!), regardless of the current status of the divorce. Let me explain what this means, and then a few tricks to address the problem.

Okay -- here's the scenario. Wife and Husband have been married for five years. They created a joint basket business supplying eager underwater artists. The business was a success but the marriage was not. On the eve of the fifth anniversary, wife informs husband that the honeymoon is over, and serves him with a causes bellos for mensa et thoro in Virginia. All is progressing as these actions are want to do, with a large joint asset pool, including vehicles, an expensive home, and two kids. Then -- the unexpected happens.

In August of 2012, the IRS contacts the husband (nominal CEO of the basket business). They are being audited. The tax returns from 2007 - 2012 were filed jointly (1040) and include, primarily, the income from the business as the income for the couple. Additionally, although wife is listed as the only member of the basket weaving business, in fact the 1120S forms show husband as owning 49% (via K1's). The audit progresses, and it is determined there is a liability of $60,000.

Now, you would expect this debt (joint) to be considered a marital debt to be determined by the state court handling the divorce. However, the IRS is demanding payment NOW or levies will be had (now = August 2013), and the payment demanded is $60,000. Husband is no longer communicating with wife, and she has no way to get him to pay his part of this prior to the final merits hearing on the divorce, which is not scheduled for April 2014.

So, what options are out there to handle the impending debt? First, they need to be three months behind before the IRS starts rattling the lien-sabre. Interest will accrue, but nasty messages will be minimal.

The solution to this is to have the wife pay the IRS debt and then sue in state court to be re-paid...but what is husband is likely to be a no-show at the hearing, or has no money to pay?

Then the couple should file for a payment plan or reduction in the punishment amount from the IRS via a form 433A. This is a request for payment plan and abatement of collection operations. This will allow a payment plan to be implemented until a final judgment from the state judge may be had. Of course, both parties must sign. However, you can ask the court to enforce payment pendente lite or conversely require that the state court require the reticent party to agree to complete the 433A.

Interestingly, on a joint case were share with another law firm, one of their associates came up with a clever idea to get a home equity loan on the house to pay the tax debt, then sort out the home equity loan in the state court. That would work, too.

Finally, you can petition the IRS to split the tax liability by filing amended returns. This is the least palatable option as it causes significant disruption to the agreed on tax resolution.

What you must advice your client, however, is that the IRS does not care about his/her state divorce operations. A joint debt is joint and severable. Someone will pay, or both will get liens. Do not let on of the parties use a suicide-technique of just "sacrificing" themselves via tax lien to hurt the opposing party (i.e. do nothing just so that the parties will be hit with the liens). That is gross bad act, and warrants state court action to injoin. Need help with a tax or family matter? Give us a ring! We'll discuss your case for free on the phone. We have several VA, DC, and MD lawyers who have considerable experience in sorting out messy and complex litigation matters.

http://www.hanoverlawpc.com
703-402-2723

Sean R. Hanover, Esq.
Principal Attorney
The Hanover Law Firm is located in Washington, DC and Fairfax, VA. We practice
in both state and federal courts in VA, MD, and DC.