Edition 31 Archives - Think Outside the Tax Box

Edition 31

By Phyllis Jo Kubey EA CFP ATA ATP NTPI Fellow

I Won! Now What? What Is the Tax Price of Success?

Lucky and talented folks win all sorts of prizes and awards. Often, the winnings have nothing to do with the winner’s business or profession, but sometimes there’s a professional or business connection.

You might view your career arcs as a series of applications, interviews, hirings, promotions with one or multiple employers. But some career paths – musicians (both instrumental and vocal), songwriters, and composers come to mind – involve frequent auditions with a healthy dose of competition.

The renown and visibility afforded to competition winners often open doors to career advancement – more and better engagements, management contracts, and media/recording opportunities.

Competition prizes and awards are taxable. But these winnings might also be subject to self-employment tax that can be up to 15.3 percent on the taxable amount. While most professional musicians are in the business of being musicians, very few consider themselves in the business of being competition participants. The distinction is important and allows for tax planning and savings opportunities.

To learn which is better for tax planning, keep reading.


Don’t Let Estate Taxes Force Your Family Business into Liquidation

My mom knew she was going to die. And she knew it would be sooner rather than later. Unfortunately, it was much sooner than she expected. She had time to put her personal affairs in order but ran out of time for figuring out succession planning for her business. Transitioning her sole-shareholder S-corporation shares over to me upon her death should have been straightforward. It wasn’t. But that’s a subject for another article. Transitioning a family business upon the death of an owner or a significant stakeholder (partner or shareholder) is never easy. Having to grapple with how to pay estate taxes on a closely held business can add complexity and stress to an already fraught process. With proper planning, however, family and other closely held businesses can avoid having to liquidate assets or sell shares or partnership interests to pay estate taxes. Insurance arrangements, operating agreements that include buy-sell provisions, and gifting strategies can all help to ensure a family business remains in the family and can pay any associated estate taxes. But what happens in the absence of proper planning? What happens when beneficiaries inherit a business they would like to keep family owned or closely held, but which is not liquid enough to pay the associated estate taxes within the required nine months? IRC Section 6166 can come to the rescue. Continue reading to learn more.

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Last-minute Tax Fix for PTET Businesses That Missed the 12/31 Deadline

Question: My client is just now paying the PTET for California with a timely filed election. Can they deduct the tax payment if they are an accrual basis taxpayer? Answer: Based on face value, unfortunately, the answer is no. Both cash and accrual basis passthrough entities would need to pay the tax by 12/31/21 (assuming calendar year-end) to get the deduction on the 2021 tax return. This answer is based on IRS Notice 2020-75, stating that an entity could take a deduction in the year paid. While the guidance did not specify cash or accrual in the definition, unless the IRS comes out with any other guidance stating otherwise, it is a federal deduction so it works the same as accrued state taxes, which the taxpayer must pay by the end of the tax year to deduct the amount following the economic performance rules. However, what if your client is an accrual basis taxpayer? While Notice 2020-75 does not specifically distinguish or reference method of accounting, there may be a way to fix your 2021 state tax deductions if you missed the 12/31 deadline. Click here to keep reading.

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Tax Strategies for the Worthless NFT

So, you bought an NFT of a unicorn riding a unicycle. That sounds nifty. Turns out, though, even though you paid $500 for it with the expectation of a tidy profit, no one actually wants to buy it from you. It’s now so worthless you can’t even give it away. Is there a way to at least deduct the loss and save a bit in tax? Let’s find out.

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