Tax Guru – Ker$tetter Letter

Helping real people win the tax game.

Gifting Confusion

Posted by taxguru on December 16, 2016

Q:

Subject: S Corp Gifting 

I stumbled into your web site back in 2007 when I was thinking of changing from a C Corp to an S Corp.
Very helpful information written for the non-accounting business owner.

My company (S Corp) has had a banner year and I am now facing a HUGH tax check payable to Uncle Sam.

Here is my question: Obliviously trying to lower my bottom line as much as I can before years end, can I
gift 2 of my best employees $100K each. Our company would pay the taxes for them but then they would
gift back to me $50K each making all of us happy and lowering my bottom line?

I love these guys and they have been employed here for over 35 years each. I have already given them
a bonus of $20K to employee #1 and $13K to employee #2 this Thanksgiving. They are both happy to
receive and willing to file form 709 on their taxes for a cut of the $100K. Can I do this?

Thank you for any help –

 

A:

I don’t want to seem harsh, but I’m getting the impression that you have been trying to navigate the tax waters on your own, without the assistance of professional tax advisors. Any tax pro would have been able to explain how misguided your proposed gifting plan is.

Your ideas regarding the use of gifting as a tax savings strategy are dangerously off-course. Here are just a few of the reasons why this idea is completely wrong for achieving your goal of reducing your 2016 taxable income.

Gifting is a strategy for reducing future Estate (aka Inheritance) taxes and does not produce any kind of current income tax deduction. You could give away everything you have and it would have zero effect on your current year income taxes.

Gifting can only be done by individuals, because only humans are subject to the Estate Tax. Corporations have potentially infinite lives, so they are not ever subject to the Estate Tax.

Gifts have to be no strings attached. Having the recipients gift you back half of the gift clouds what the transaction really is.

True gifts are tax free to the recipients and not deductible by the giver, unlike wages and bonuses, which are reported on W-2s and fully deductible by your business. If you were to gift any person more than $14,000 during a calendar year, you as the giver would need to file a Form 709 Gift Tax return and either pay Gift taxes or utilize part of your lifetime exclusion. The gift recipients do not file 709s. Only the givers do.

There are a number of simple ways that you can still actually reduce your 2016 taxable income. Since most of them will need to be done by 12/31/2016, you need to start working with a professional tax advisor ASAP.

Good luck.

Kerry

TaxCoach Software: Are you giving your clients what they really want?

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