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Timing and Tax Law

  • A mis-timed distribution can result in costly capital gains
  • Janover’s solution unlocks benefits for shareholders and corporation alike

Often, due to timing opportunities, a client of Janover’s will have funds available for a distribution, but no “basis” to distribute the money. This is because the IRS only allows distributions from S-Corporations to be tax free to the extent of capital (cumulative contributions plus income less distributions). If the distribution amount exceeds the capital of the owner, the excess is considered a capital gain.

In order to avoid this unfavorable treatment, Janover had a client corporation enter into a formal demand note agreement with the shareholder. This note calls for the accrual of interest at rates acceptable to the IRS (at the end of 2011, this rate was minimal, less then ½ of 1 percent!). This structure thus allowed to the shareholder to remove the funds tax free from the S-Corporation. Further, the client recently was audited by the IRS and received a “no change”.

Creating strong client relationships allows Janover to intimately understand even minute details of a client’s’ business – and better helps us craft solutions that take advantage of otherwise overlooked opportunities that yield major financial benefit – in this case, one that unlocked tax-free distributions and successfully passed an IRS audit. To learn more, contact Janover at info@Janoverllc.com

For additional Janover case studies, go to: blog.janoverllc.com

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