ROBS Tax Planning and Compliance

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The ROBS Tax Expertise

Unlike most small business owners who file their business returns as part of their personal filings or receive K-1 forms from their businesses – a ROBS arrangement taxpayer files a Corporate Return on Form 1120 using accrual-basis accounting on a fiscal year basis. They will never receive a K-1 from their business. Instead, they will earn wages on a W-2 and need to declare, record, pay, and report dividends paid to shareholders on Form 1099-DIV. Phew! This isn’t the kind of stuff you want handled by sun-kissed sign-spinners at your local discount tax outlet! —Just one of the many reasons why you should enlist the help of a ROBS CPA.

The Compliance Know-How

ROBS business owners need to be aware of compliance pitfalls. Because the retirement plan owns the majority of the company, there are prohibited transactions that shareholders need to be aware of as they operate their ROBS arrangement. The short explanation of what defines a prohibited transaction would be an act that benefits the taxpayer personally at the expense or disinterest of the 401(k) shareholder. This is a conflict of interest and is a big no-no with the IRS.

If the IRS determines that there are prohibited transactions within the company, they could disqualify the ROBS arrangement’s tax-exempt status. These issues are not a concern for business owners operating as S-corporations, partnerships, or disregarded entities. But in a ROBS arrangement, it’s critical to have an accountant on your side who knows ROBS compliance and can advise you on how to stay compliant.

The ROBS Strategy

If an accountant has told you that this arrangement is not a good idea because you’ll have to file returns as a C-Corporation – they are missing the point. These arrangements are for the entrepreneur who wants to think big and dream bigger and needs a boatload of capital to get their idea off the ground. They also happen to have a concentration of their wealth isolated in tax deferred accounts that they otherwise could not touch without penalty.

Starting a business is not without risk, and just like any enterprise – businesses fail and entrepreneurs can lose their investments if the corporation goes into default. However, there are plenty of entrepreneurs out there who are willing to take the risk of converting some of their nest egg into start-up capital because it aligns with their risk tolerance for failure, their age and earnings potential, and their personal desires such as moving up from manager to CEO.

If you are thinking about a ROBS arrangement and would like to get a knowledgeable accountant’s perspective on your specific situation, you can schedule a ROBS consultation with us now by calling us at 719-493-9499 or request your free ROBS consultation to learn more about our professional services.

Tax Strategies for Businesses