Basic Business Entity Compliance

As every business owner knows, the various compliance requirements imposed by local, State and Federal laws are a burden and seem to take more and more of our client's productive time away from running their business. In addition to the basic compliance items necessary to keep a business operating, there are several necessary actions that should be taken on an annual basis to ensure compliance and maintain the protection of the owners from personal liability for the debts and obligations of business entities. in order for a Corporation or Limited Liability Company to provide its owners with protection from the general business debts and liabilities of operating a business in our litigious society, it is essential that all business entities can demonstrate that they have maintained corporate formality and financial accounting distinct from that of its owners.

Corporate formality in the case of Corporations and LLCs is complied by conducting annual meetings and memorializing them with Minutes for your meetings, as well as presenting yourself consistently as a representative of the business entity and only entering into contractual obligations that make it clear that the Corporation or Limited Liability Company is the true party in interest and not the owner individually. From an accounting standpoint, it is absolutely essential that all businesses maintain separate bank accounts and financial records distinct from their individual owners and that all expenditures of the entity are undertaken in compliance with the rules of the Internal Revenue Service.

In addition to respecting the corporate formality of business entities, it is also essential to maintain compliance with the various states by fi ling Annual Reports and if appropriate, Franchise Tax Returns with the State of Kansas and/or Missouri. Both of these functions previously were administered through the Secretary of State's office, but they have recently been divided amongst Annual Report filings with the Secretary of State, and if appropriate, Franchise Tax Return filings with the Department of Revenue. In order for a Corporation or Limited Liability Company to remain in good standing under the laws of the state in which it was organized, it is essential to file an Annual Report with the Secretary of State's office each year. The failure to file an Annual Report will result in forfeiture of the entity and will necessitate an expensive and burdensome process to re-instate the entity. This is particularly true in the State of Missouri, which requires a Tax Clearance Certifi cate from the Department of Revenue prior to re-instatement. This can take several months to obtain. The Annual Reports for both Kansas and Missouri can be filed electronically or in a paper form and in the case of Kansas, the Annual Report fee is $50.00 to $55.00, and in Missouri the Annual Report fee is $20.00 to $45.00. Kansas and Missouri also have Franchise Tax requirements. In simple terms, the State of Kansas requires the filing of a Franchise Tax Return and payment of Franchises Taxes under circumstances in which the entity has a net worth in excess of $100,000.00. In the case of Corporations or Limited Liabilities Companies which are organized in states other than Kansas, but have fi led as Foreign entities doing business in the State of Kansas, the franchise tax would be based on that portion of their net worth or capital located in the State of Kansas. Missouri requires all corporations to file Franchise Tax Returns and imposes franchise tax upon Corporations having more than $1,000,000 of assets in the State of Missouri. Limited Liability Companies and other non-corporate entities are not subject to the Missouri franchise tax. For assistance in maintaining the integrity and compliance of your business entities, please do not hesitate to contact the corporate attorneys of Evans & Mullinix, P.A.

Capital Gains Taxes For Real Property 

I. Defination of Capital Assest

Under current law, the marginal rate of tax applied to a taxpayers adjusted gross income ranges from 10% to 35%. However, gains derived from the sale or exchange of capital assets that have been held for more than one year are subject to lower-than-normal rates of taxation. Net capital gains, the amount by which the year's long-term capital gains exceed short-term capital losses, are usually taxed at a maximum rate of either 15% or 5% depending on the taxpayer's income. A taxpayer realizes a capital gain when the amount received from the sale or exchange of a capital asset is greater than the taxpayer's basis or investment in that property. The Internal Revenue Code has defined what types of property qualify as capital assets by exclusion. In general, almost everything you own and use for either personal or investment purposes is a capital asset. Examples of capital assets include your home, car, stocks and bonds, and real property not used in a trade or business.

II. Your Primary Residence

When a taxpayer sells his or her home, the home is not only treated as a capital asset, but the taxpayer may also be eligible to exclude a portion of the sale's profits from his gross income. To qualify for this exclusion, a single taxpayer must have owned and used the home as a principle residence for periods aggregating at least two years during the five year period ending on the date of the sale. Married couples qualify for the full exclusion amount if either spouse meets the ownership requirement, and both spouses meet the use requirement. The amount of gain eligible for exclusion is currently limited to $250,000 for single taxpayers and $500,000 for a husband and wife fi ling a joint tax return. Taxpayers can also potentially use this exclusion every time they sell a house, provided they have not used the exclusion in the last two years and they meet the ownership and use as a principle residence requirements. For tax purposes, a "principle residence" is the primary residence. Taxpayers may only have
one principle residence at a time. If you live in more than one place during a given tax year, your principle residence is the home where you spend the most time. Therefore, the sale of
a seasonal-use vacation home would probably not qualify for exclusion, although it may qualify as a capital asset. If a taxpayer does not meet the requirements for full exclusion, he or she
may still be eligible to take a partial exclusion. However, proportional relief only applies if the taxpayer is forced to sell a principle residence due to job change, health crisis, or other unforeseen circumstances. In such situations, the percentage of partial exclusion is based on the number of months the taxpayer meets the use and ownership requirements.

III. Inheriting Real Property

Another scenario signifi cantly affecting an individual's tax liability on real property involves property transfers subsequent to the owner's death. As a general rule, gross income does not include the value of property acquired by bequest, devise, or inheritance. Therefore, when a taxpayer receives a home or other real property by means of inheritance, he or she is not required to pay taxes on the property's value. When the taxpayer does dispose of the property, his gain or loss will be calculated using a basis fi gure equal to the property's fair market value at the time of the decedent's death. This essentially means that no one is taxed for any appreciation that occurred while the property was in the hands of the decedent.

For example, assume that D purchased a home for $100,000. Twenty years later, its fair market value is $200,000. If D were to sell this property for $200,000, he would be taxed on the $100,000 appreciation in value that occurred during his ownership. Now assume instead that D devises the home to S in a will. D subsequently dies when the house is worth $200,000. S's basis in the home is equal to its fair market value at the time of D's death, or $200,000. If S sells the property immediately for $200,000, he is not required to report any gain and receives the $200,000 tax-free. If S holds the property and then sells it ten years later for $225,000, he will only be taxed on the $25,000 difference in the amount realized from the sell ($225,000) and his basis in the property ($200,000).

The Internal Revenue Code has defined what types of property qualify as capital assets by exclusion. In general, almost everything you own and use for either personal or investment purposes is a capital asset. Examples of capital assets include your home, car, stocks and bonds, and real estate.

Tax Free Exchange of Real Property

"Like Kind Exchanges" Section 1031 of the Tax Code allows a taxpayer to sell income, investment or business property and replace it with like-kind property without having to pay federal income taxes on the transaction. Although there is more than one way to conduct an exchange, the recommended format includes the use of an intermediary, direct deeding, and qualified escrow accounts for temporary holding of "exchange funds." To decide whether or not a 1031 exchange is possible, one must first assess whether the relinquished property is qualifying property. Qualifying property is property or equipment held for investment purposes or used in a taxpayer's trade or business. Some examples of non-qualifying property are: a personal residence, corporation common stock, bonds, notes, inventory property, property purchased for resale, and partnership interests. Real estate must be replaced with like-kind real estate and equipment must be replaced with like-kind equipment. Like-kind replacement property for real estate exchanges means any improved or unimproved real estate held for income, investment or business use. If the taxpayer wants the exchange to be completely tax free, the taxpayer must avoid any "boot" in making the exchange. "Boot" is the money or the market value of other property received by the taxpayer in an exchange. Other property is property that is not like-kind, such as personal property received in an exchange of real property, property used for personal purposes, or "non-qualified property." The general rule to avoid "boot" is to always replace with property of equal or greater value than the relinquished property. The timing of a like-kind exchange can vary. A simultaneous exchange occurs when the closing of the relinquished property and the replacement property occur on the same day. A delayed exchange is an exchange where the replacement property is closed on at a later date than the closing of the relinquished property. The Code and Regulations have established strict time frames in which a delayed exchange must occur in order to qualify as a likekind exchange. A reverse exchange occurs when the replacement property is purchased and closed on before the relinquished property is sold. For a delayed exchange to be valid, a qualified intermediary must be part of the exchange. A qualified intermediary is a disinterested person or entity who enters into a written agreement with the taxpayer, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. Part of the written agreement must expressly limit the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefi ts of the money or property held by the intermediary. Although there are no licensing requirements for intermediaries, they cannot be an agent of the taxpayer, such as an accountant, attorney or real estate agent, who has served in their professional capacity for the taxpayer within the past two years. A 1031 like-kind exchange can be a very valuable tool. We suggest consulting with an attorney to ensure that the requirements are met and the exchange can occur tax-free.
Tax Free Exchange Of Real Property

New Faces
J. Donald Lysaught, Jr. Matthew P. Dykstra

Evans & Mullinix is pleased to add the expertise of J. Donald Lysaught, Jr. to the firm. Don has over 30 years experience in the areas of Civil Litigation, Personal Injury, Family Law, Business Law and Worker's Compensation. He is licensed to practice in both federal and state courts in Kansas and Missouri. A native of Kansas City, Don completed his Juris Doctorate degree at the University of Kansas in 1976 and practiced law in South Dakota before returning to Kansas City in 1981. He was associated with the firm of Weeks, Thomas, & Lysaught before becoming a partner in the Kansas City, Kansas firm of Higgins, Lysaught, Tomasic & Lynch. Don is married and currently has two sons in college.

Matthew P. Dykstra is a second year associate at Evans & Mullinix. Licensed in both Kansas and Missouri and a member of the Johnson County Bar, Matthew specializes in various aspects of Corporate Law, including business entity selection and  formation, shareholder restriction agreements, and the sales of businesses. He also assists clients in all aspects of estate planning, administration of probate estates, as well as all aspects of civil litigation. While obtaining his Juris Doctorate degree at the University of Kansas, Matthew was a Recipient of Dean Jimmy Green Scholarship, a Member of the Paul E. Wilson Defender Project, and a clerk for the Honorable David J. Waxse of the United States District Court for the District of Kansas.