Given the breadth of the field, accountants often find themselves in a variety of situations regarding their clients' taxes. While some issues are relatively easy to approach, others are much more complicated. Dealing with pass-through entities and estate tax returns together, for example, can be problematic for a few reasons.
Corporations are taxed differently and separately from individuals, and that's why many business owners file legal paperwork to incorporate their business. These papers typically go through a secretary of state's office. Owners must also file different sets of paperwork through the IRS. These pass-through entities wind up paying income taxes on business profits instead of on individual income.
What happens when a long-time owner dies? Who gets the estate and who pays the estate tax on the assets? Many accountants look at the original operating agreement, but many things can happen to the agreement after several decades. The original accountant or lawyer who helped set up the business may no longer have the operating agreement on file, or the deceased owner's files may not contain the paperwork. If no one can find this vital piece of paper that outlines what happens to the business assets once an owner dies, sorting out the deceased's affairs becomes difficult.
Dividing the Assets
Even with the agreement in hand, it needs to have a buy/sell clause in place to determine who gets the assets. Does another person buy out the deceased's shares, or is the company sold, with the cash going toward the owner's estate and any estate tax? If the agreement doesn't say who gets what, then state law kicks in. When the state becomes involved in probate court, that usually means a long, drawn-out process in litigation.
State laws can even put business owners in a bind. Laws may change from the time a pass-through entity starts and when an owner retires or passes away. Good accountants usually keep their clients abreast of any changes, but that doesn't always happen. Another problem accountants face with estate tax and corporations involves the titling of assets; business assets may have the owner's name on them rather than the company's name. This means a creditor may seize the wrong assets to pay debts.
IRS forms filed by the executor of an estate potentially tell the tax agency how much an estate is worth before someone files an income tax return on the estate's behalf. Failing to file timely paperwork can change the value of business assets, which can make an estate worth less or more money. Changing the value can increase or decrease the taxes owed to the agency.
The best thing business owners can do is hire an accountant and keep one throughout the entire time they operate the company. Any time a new accountant comes on board, that person should know enough about estate tax law to establish what happens when an owner passes away. Accountants must also know which IRS forms to file and when to file them.
Accountants are trained to look for complex situations, such as those that arise when dealing with pass-through entities and estate tax. Accountants who think ahead can save a lot of problems down the road, so practitioners should watch out for these issues now instead of later.
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