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Dissolving business brings tax obligations

 

Q: I have a corporation that I have used to operate a small store that sells novelty items. Business has been very poor for the past few years and I plan to end the novelty business and return to school at CNM. If I no longer operate this corporation, what are my tax-reporting obligations as I wind up the business? I am holding a going-out-of-business sale and plan to end everything by the start of the fall semester at CNM.

A: You have two parties to deal with — the New Mexico PRC and the IRS. You may want to discuss the legal issues with an attorney, but I’ll address the tax issues. See the following link, www.nmprc.state.nm.us/corporations/pdf/charter/dprdv.pdf, for PRC forms (and fees) to dissolve.

The IRS requires that you file a Form 966 within 30 days of adopting a plan to liquidate a corporation. This form is filed separate from your tax return, but at the same address as the tax return.

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You will also need to file Form 1099s reporting distributions made to shareholders, together with the Form 1096 transmittal. Then, final income tax and, if applicable, payroll tax returns need to be filed.

As you probably know, a corporate tax return is due the 15th day of the third month following the close of the tax year. Normally this means March 15 for a calendar-year corporation.

But if you liquidate, the return’s due date will be accelerated. For example, if the entity liquidates in July 2011, the final return will be due Oct. 15, 2011. The return due date may also be extended by 6 months, just as if it had not liquidated.

Q: Recently, I had two investment companies/custodians make direct contributions to our church. The two checks were made out to the church; I did not receive the monies. In both withdrawals, I signed normal IRA Withdrawal forms. Should I request the investment advisors send to the IRS specific forms to support that these withdrawals are tax free? I have received other normal distributions (1099-R #7) this tax year from both investment companies/custodians, so I will be receiving 1099-R’s next year. I want to avoid tax difficulties over these tax free distributions to our church.

A: The tax provision allowing for a qualified charitable distribution, or QCD, was extended through the end of 2011. This allows an individual age 70½ or older to direct a retirement plan distribution, up to $100,000, to a qualified charity.

The IRA custodian must pay the funds directly to the charity. The distribution is reported on a Form 1099, but it is not subject to tax. Obviously, a charitable contribution deduction may not be claimed when the distribution was not reported in income.

The custodian will be required to report the distribution to the IRS. What you are supposed to do is report the distribution on line 15a of page 1 of the Form 1040, report none of it as taxable on line 15b, and then write “QCD” next to line 15b to explain why no portion of the distribution was reported as income.

Q: The deep freeze of February damaged or killed many trees and shrubs in New Mexico.  It occurs to me that it may be possible to claim this loss as a casualty loss for tax purposes. The requirements to qualify are described as a loss occurring because of a sudden, unexpected, out of the ordinary event. The freeze undoubtedly qualifies. Your advice on how to proceed to calculate the value of a casualty loss claim would be greatly appreciated.

A: I think the event is sudden and unexpected. Challenges to tree damage tend to arise when it is insect damage, which is often not sudden.

The problem is that the measure of the loss is the difference in the value of the property with the trees and shrubs and the value without the trees and shrubs. That is, it’s not just the replacement cost.

It is difficult to show this loss of value. Also, the loss is allowed only to the extent it exceeds 10 percent of adjusted gross income (minus a “floor” of $100), and then only as an itemized deduction.

James R. Hamill is the Director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.

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