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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
Category: Tax
Satisfied Customers: 586
Experience:  10 years experience
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I moved to idaho, lived there a week to long and was considered

Customer Question

I moved to idaho, lived there a week to long and was considered a resident(6 weeks.. really?) I own a business and its now back in utah with me and i got divorced. since i was considered a resident of idaho the divorce was done there and my ex was granted a 740k buyout of my business (that she didn't help build at all but whatever) my question is with taxes. Should i be sending her a 1099 since I'm stuck paying taxes on that money as a member draw (we are an S Corporation)
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.
Hi,The criteria for taxation on S-Corp is (1) profits, and (2) involved shareholder salary(The physical distributions you take are not taxable events - although they DO affect your BASIS in the property for gapital gains purposes). As someone who is involved with the property, IRS requires you to take a salary (this is how they make sure you pay into social security and medicare) .. becasue the nprofits distributed on the K-1 (over and above that salary and other expenses - which is what makes it profit) is NOT taxed by SS & Medicare ... one of the best reasons (possibly the only reason) to move from LLC to S-corp taxation ... once you've reached a level of gross income that takes the profit FAR above what a reasonable salary would be. The 1099 would be needed if you paid HER individually for some service... but 1099's to corporation are an exemption. (You should only have to pay taxes on the profits and salary for the time you were an owner - THAT's something that the person doins the 1120_S should handle appropriately). Have I understood your question correctly? let me know ...
Expert:  Lane replied 2 years ago.
Hi,I've been waiting for you to come into the chat here.I have clients conimg inot the offie at 4:00... I'll be glad to develop this more with you, but will be away for a bitI'll be back after 6:30 or so.Hope that'll work for you lane
Customer: replied 2 years ago.
No, I Still Own the company. She was never an owner but Idaho decided it was half hers and Ordered me to pay her 12500 every month until i pay off the 740k I take a salary. which is actually less than i am paying her. But she gets that much money every month. My accountant says that goes against me as a Member Draw as i am an S Corp. What i am wondering is Since she has used those funds to prove she has an income to purchase a house etc.. (she does not work, and refuses to) Should My company be sending her a 1099 i.e... she has to claim that as income on her taxes? does that make more sense?
Expert:  Lane replied 2 years ago.
We're closing in on it.But what has to be determined is whether this could be considered alimony or a property settlement in payments. Property settlements (such as when 1/2 of a house or any other asset is awarded - OR when 100% of something is awarded in order to equalize or make things "fair," in a judges opinion) are not taxable. They are treated (from a rtax perspective as a gift). Alimony and other forms of spousal support (NOT child care) are deductible by the payor and taxible TO the payee. Here's how IRS defines Alimony:Alimony requirements. A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. Now, here's how IRS defines Property Settlement: The payment is in cash.The instrument does not designate the payment as not alimony.The spouses are not members of the same household at the time the payments are made. This requirement applies only if the spouses are legally separated under a decree of divorce or separate maintenance.There is no liability to make any payment (in cash or property) after the death of the recipient spouse.The payment is not treated as child support.Property SettlementsGenerally, there is no recognized gain or loss on the transfer of property between spouses, or between former spouses if the transfer is because of a divorce. You may, however, have to report the transaction on a gift tax return. See Gift Tax on Property Settlements , later. If you sell property that you own jointly to split the proceeds as part of your property settlement, see Sale of Jointly-Owned Property , later.Transfer Between SpousesGenerally, no gain or loss is recognized on a transfer of property from you to (or in trust for the benefit of):Your spouse, orYour former spouse, but only if the transfer is incident to your divorce.This rule applies even if the transfer was in exchange for cash, the release of marital rights, the assumption of liabilities, or other consideration. The 1099 is not appropriate...1099's are given when there is a servoce provided or for other taxable exchanges... I would look to the language of the divorce decree and see if you see the terms suppor, alimony, etc (taxable to her deductible to you)ORWords like division of property, property settlement (not deduction or taxation on the other side) One last hint: If she does not BECOME an owner, if no assets or stock or ownership in the S_Corp is transferred TO her. Then this is likely NOT a property settlement, and more likely to be alimony. If yuo can make a determination that this is ALIMONY, and without know more it sounds to me like it is, you do not have to issue her a 1099. You just enter Alimony paid on your return with the amount paid, her name & SSN & she would enter her Alimony received on her tax return. You'll enter the alimony paid on line 31a where it says " Alimony paid _________b Recipient’s SSN ▶ And she will enter on line 11 of the 1040, Alimony received. Hope this helps ... let me know what you see in the decree/separation agreement lane
Customer: replied 2 years ago.
The Decree states NOTHING about alimony and from my understanding this is supposed to be a property settlement. I have been informed that i am the one who is going to be taxed on the money i give her towards her payoff as its a member draw. It is supposed to be a company buyout. ie. pretend she had stocks and I'm buying them back? But she does not get alimony. She gets 6015.00 every 2 weeks plus 2011 dollars a month in child support. She has claimed it as her income to purchase a home. But if i understand correctly.. she gets to claim it as income and is not taxed on it at all?
Expert:  Lane replied 2 years ago.
Ok,Yes, what's happening is you are forced to pull money out of the S-Corp.However, this IS only taxable to the extent that you have no basis left in the company.I'm guessing that your accountant has calculated that based on amounts, at some point you will getting into the territory where you will have to pull out more than you have invested IN the S-Corp.THATs the point where distributions from S-Corps (capital draws as some call them) starts to be taxed as gain. Or looking at it from a different perspective are always taxed on S-Corp profit (becasue it's a passthrough, as I mentioned before) so you are essentially taking out profit (which as the owner - beccasue the S-COrp if a pass-through - you are ALWAYS taxed on) BUT now being forced to hand it over to her in property settlement. It's really the same issue, you are having to give her somethong in lieu of giving ther the S-Corp itself. That's the only way I would know to describe this if it's YOU that's ending up with the shares in the S-Corp. Now, there's one other way the term buyout is used and that's where the CORPORATION itself is buying YOU out ... and THERE you might have capital gains becasue you are selling back to the corporation (the stock becomes treasury stock in this type of buyout) at a price that OVER you basis in the company. (sales price - basis = capital gain). But based on the way you've described this .. YOU ending up woth the stock, and this being described as a CAPITAL DRAW to do so, the gain would comme fromyou having to pull money out of the company that in excess of basis (which, again, is always a taxable gain to the owner). But again, so sorry, no 1099, as this, from her perspective is property settlement. But by the way ... if this os going to end at some point (which as a buy-out it has to) and she's reported this as income to the underwriter, she may not be GETTING that loan if the undersriter understands that this is a finite property division and not an ongoing form of support, such as alimony.