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Warning for Nevada Businesses!

Do you have
Multiple Corporations?

Do you know what Sec. 482 of the IRS code is? It deals with the allocation of income and deductions among taxpayers. Here is what it says:

In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936 (h)(3)(B)), the income with respect to such transfer of license shall be commensurate with the income attributable to the intangible.

What does that mean? If the IRS invokes Sec 482 on your corporations or entities, get out your checkbook because you will owe a lot in taxes! The feds will re-write all the books and ledgers among the companies, reallocating income and deductions between the companies and between fiscal years in such a way as to maximize the income tax for all concerned. This usually happens several years later when all the profits have been spent! Then everyone gets a big tax bill which is followed in short order by execution of levy and public sale of everyone’s assets.

Section 482 comes into play under two scenarios:

  1. Anytime that there is a significant element of tax avoidance or evasion OR
  2. When there is a sharp separation of the expenses of producing a gain from the gain itself such as when one company exports losses to one company to offset income and imports income from that company in another fiscal year to offset losses (does this sound like a familiar strategy promoted in the world of corporations?).

The feds of course don’t care if a state loses taxes. They are concerned about you having multiply corporations and not filing as a controlled group, thereby paying less in federal corporate income tax.

Section 482 is invoked most often where the relationship between the offenders is a close one. Don’t be alarmed about legitimate transfers between your corporations. The tax court has ruled that the fact that one corporation could have earned all the income without expenses is no reason to tax all income to it. On the other hand, loans between corporations which aren’t at market rates and terms with respect to the collateral security credit standings are a red flag!

Your corporation may be a controlled group and that may not be all bad! If the corporations qualifies to file as an affiliated group and file a consolidated return with losses of one company and gains of another they can offset each other (as long as the losses were not part of inter-company transactions)!


Ready to Launch Your LLC or Corporation with Confidence?
Call NCP at 1-800-351-5111
(outside the U.S. 1-702-367-7373)

Avoid Costly Incorporating Mistakes!

 


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California LLC vs an S corporation- Which is Better? - Learn why understanding state taxation is key!

Warning: Do You Have Multiple Corporations?- This common strategy may cost you more than you think!


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