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socrateaser
socrateaser, Lawyer
Category: Tax
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Experience:  Retired (mostly)
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ATTN:TO SOCRATEASER ONLY subject:CORPORATION TAX for TAXI

Resolved Question:

ATTN:TO SOCRATEASER ONLY
subject:CORPORATION TAX for TAXI MEDALLION business.
My friend has a taxi medallion in Chicago.He has a C Corporation.He purchased the medallion in 2010 with $100,000.In 2012,medallion price/value is $300,000.
He refinaced the medallion in 2012 (loan balance was 90000) and took out cash 50.000.So now the Medallion Loan Amount is 140,000.
VAlue of medallion on Market is 300,000.
Submitted: 10 months ago.
Category: Tax
Expert:  socrateaser replied 10 months ago.
Hello again, and thanks for asking for me to answer your new question! You asked:

My friend has a taxi medallion in Chicago.He has a C Corporation. He purchased the medallion in 2010 with $100,000. In 2012,medallion price/value is $300,000. He refinanced the medallion in 2012 (loan balance was 90000) and took out cash 50.000.So now the Medallion Loan Amount is 140,000. VAlue of medallion on Market is 300,000.

Comment: I don't see a question related to the above-provided info. What is it exactly that you would like to know about the described transaction?
Customer: replied 10 months ago.

Hi!Here's the continuation of the message:


 



When doing the Tax Returns for 2012,does he have to report anything related to the "cash out amount of 50000"?does he have to pay taxes of the Refinaced cash out amount of 50000?Or he can do as many refinances he wants ,without reporting it,and only pay taxes when he sells the medallion ,for the profit(for example:purchase price was 100000.he does a few cash-out refinances ,and in a few years he sells the medallion for 500000,and pays tax on the total profits of 400,000)?


 




And what is the his ASSET VALUE(that needs to be reported on tax return)?(considering he has a Loan of 140000 of a Medallion whose estimated current market value is 300000)?


Expert:  socrateaser replied 10 months ago.
When doing the Tax Returns for 2012,does he have to report anything related to the "cash out amount of 50000"?does he have to pay taxes of the Refinaced cash out amount of 50000?Or he can do as many refinances he wants ,without reporting it,and only pay taxes when he sells the medallion ,for the profit(for example:purchase price was 100000.he does a few cash-out refinances ,and in a few years he sells the medallion for 500000,and pays tax on the total profits of 400,000)?

A: Refinancing an asset to obtain a loan on its value is not taxable income, unless the transaction provides protection that removes substantially all of the risk in the transaction, and the transaction concerns stock, a debt instrument, or a partnership interest. This is called a constructive sale or gain (IRC 1259-1260). Since the Medallion is none of the target instruments, there is no constructive gain and no tax liability concerning the refinancing of the Medallion, until the Medallion is transferred to a third party (or to the lender in a default on the loan).

And what is the his ASSET VALUE(that needs to be reported on tax return)?

A: It's not income, so there's nothing to report.

Please let me know if my answer is helpful or if I can provide further clarification or assistance.
Customer: replied 10 months ago.

reply to Answer 1:but then,when selling the Medallion,what is considered profit and how its taxed?if initial purchase price was 100000(with a loan),was refinanced ,so new loan balance is 300.000 and its sold for 500000.is the profit considered to be 500000(selling price)-100000 original purchase price=400000taxable??


OR its 500000-300000(current loan balance after refincing)=200000 considered profit and taxable??


 


 


 


 


reply to answer 2:


but Asset definition is not Current Value of an asset Minus Liabilities?


so 500000-300000= 200000 assets?


 


And is the Interest paid on Loan Tax Deductible,just like on a home mortgage?


 


The medallion has a taxi car that produces income lease paid by drivers.if income for the year is ,for example $20000,and Officer Salary is 15000 for the year on a 1099 Misc,is the company profit 20000-15000=5000?


this is a C Corporation


 


Thank you!


 


 


 

Expert:  socrateaser replied 10 months ago.

reply to Answer 1:but then,when selling the Medallion,what is considered profit and how its taxed?if initial purchase price was 100000(with a loan),was refinanced ,so new loan balance is 300.000 and its sold for 500000.is the profit considered to be 500000(selling price)-100000 original purchase price=400000taxable??


OR its 500000-300000(current loan balance after refinancing)=200000 considered profit and taxable??

 

A: Taxable Gain = Sales Price - (Acquisition Cost + Improvements).

 

A Medallion is a license to drive a cab in Chicagoland. There are no improvements, so Gain is merely the Sales Price - Acquisition Cost.

 

However, there is potential issue where indebtedness exceeds the Sales Price. Where a loan is not satisfied, the lender is entitled to charge off the difference, and send the borrower a Form 1099-C. That unpaid loan balance is called "cancellation of indebtedness," and it is income to the taxpayer. So, if at the time of the sale of the Medallion, the borrower does not pay off any unpaid balance on the loans obtained from the Medallion refinancing, then the borrower will have to pay taxes on the unpaid balance charged off by the lenders.

 

Reply to answer 2:

but Asset definition is not Current Value of an asset Minus Liabilities?


so 500000-300000= 200000 assets?

 

A: The corporation does not have to "mark-to-market" the value of the Medallion as an asset. The asset value can remain on the books at its acquisition cost, and the loan balance can be increased as a liability. Corporate cash increases to take up the difference, but that cash is not income -- it's merely loan proceeds.

 

And is the Interest paid on Loan Tax Deductible,just like on a home mortgage?

A: Loan interest paid by a corporation is fully deductible.

The medallion has a taxi car that produces income lease paid by drivers.if income for the year is ,for example $20000,and Officer Salary is 15000 for the year on a 1099 Misc,is the company profit 20000-15000=5000?

 

A: If your example were to represent all of the income and expenses of the corporation, then, yes, the profit is $5,000.

 

This is a C Corporation.

 

A: I observe a potentially huge problem here: You cannot pay a corporate officer using IRS Form 1099-Misc. Corporate officers are employees of the corporation as a matter of law; officers must be paid W-2 wages/salary. If you want to discuss this issue, please open a new Q&A session, because this issue is out of scope of your original question.

 

Hope this helps.

Customer: replied 10 months ago.

Thank you for the answer.I do need further clarification please:


 


Your answer was:



"A Medallion is a license to drive a cab in Chicagoland. There are no improvements, so Gain is merely the Sales Price - Acquisition Cost.


 


However, there is potential issue where indebtedness exceeds the Sales Price. Where a loan is not satisfied, the lender is entitled to charge off the difference, and send the borrower a Form 1099-C. That unpaid loan balance is called "cancellation of indebtedness," and it is income to the taxpayer. So, if at the time of the sale of the Medallion, the borrower does not pay off any unpaid balance on the loans obtained from the Medallion refinancing, then the borrower will have to pay taxes on the unpaid balance charged off by the lenders.".


 


So in this case,for example:purchase price of Medallion 100000.cash out refinance 300000,so curent Loan Balance 400000.Medallion sells for 350,000.So Seller of Medallion will pay taxes on:350000(selling price)-aquisition cost (100000)=250000taxable PLUS the Charged Off amount on 1099-C(which will be 50000)?Is this correct?


 


 


Q:C Corp vs S corp


CAN YOU JUST ANSWER "YES"(if what im saying below is correct) or "NO" (if what im saying below is Not correct)to the question below?


 


 


I understand that officer of corporation cannot be paid on 1099Misc.


 


But,for a C Corp,is owner taxed twice on profits?


For example ,Corpoartion tax shows a profit of $6000.Does the owner of the corporation have to declare the 6000 on his PERSONAL TAX RETURNS too?So the 6000 will be taxed TWICE.


 


VERSUS S-Corp:


 


For S -Corp ,the $6000 profits could be "transfered" to the Personal TAx Retiurns only,by Issuing a 1099K.Therefore ,the Corporation Profits would be "$0 zero" and the 6000$ will be ONLY on the Personal tax returns.


 


IS THE ABOVE CORRECT?


 


And for a S-Corp,this will also be valid when Selling the Medallion(The profits will be taxed only ONE TIME),on the S-Corp Taxes?Is this correct?


 


 


Thank you!

Expert:  socrateaser replied 10 months ago.
But,for a C Corp,is owner taxed twice on profits?

A: The C Corp is taxed on the profit in the year earned. If the profit is later distributed to the owner then the owner is taxed on the distribution, which is considered a stock dividend, unless it is paid out as W-2 wages. In either case, the distribution is taxable income to the owner -- so, there is a double tax on the original $6,000: once as corporate profit, and once as a stock dividend or W-2 wages.

For S -Corp ,the $6000 profits could be "transfered" to the Personal TAx Returns only,by Issuing a 1099K.Therefore ,the Corporation Profits would be "$0 zero" and the 6000$ will be ONLY on the Personal tax returns.


IS THE ABOVE CORRECT?

 

A: S Corp profits are reported as income to the owner, on a form 1099-K, in the year earned. There is no corporate tax on an S Corp.

 

And for a S-Corp,this will also be valid when Selling the Medallion(The profits will be taxed only ONE TIME),on the S-Corp Taxes?Is this correct?

A: Correct.

Please provide a positive rating for my answer to all of these questions. Otherwise, I receive nothing for my efforts in your behalf.

Hope this helps.
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 33931
Experience: Retired (mostly)
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