Revenooer Rants: Have your IRA invest in your business?
January 21, 2014
Not a real smart thing to do. It may sound good, on the surface, to have that IRA capitalize what you are sure will be a growing, killer business, thus generating all kinds of retirement funds for your golden years. But try convincing the IRS.
A recent Tax Court decision, in the matter of Mr. Ellis, holds for the proposition that if your IRA invests in your business (an LLC in this instance), the LLC's payment of compensation to you for your services constitutes a "prohibited transaction," (in the terms of the Internal Revenue Code) resulting in disqualification of the IRA and a deemed distribution of its assets.
Getting back to the Internal Revenue Code, there are several kinds of "prohibited transactions" which a retirement plan can orchestrate, one of which is any transfer to, or use by or for the benefit of a disqualified person (typically, the retirement plan creator) of the income or assets of the plan.
Contrast this hard line with IRS' view of "Rollovers as Business Startups" (ROBS) which are similar transactions, widely promoted, in which a retirement plan invests in employer stock and which, if handled correctly, just might pass IRS muster.
We say "might" because needless to say, these transactions have not escaped the attention of the IRS in recent years, leading the Revenooers to actually create an "Employee Plans Compliance Unit" which recently looked at these deals and published a report on just what it would take to not trigger IRS ire.
Overall, IRS' study results led them to the conclusion that while some ROBS were successful (and legit), many of the companies in their study sample had gone out of business within the first three years of operation — precisely the concern IRS has about transactions of this sort in the first place, always worrying about the retirement plan beneficiary's golden years, when he will need the dough he originally stashed away for retirement.
Bottom line on this is IRS' thought that ROBS plans, while not considered an abusive tax avoidance transaction, are "questionable" in that they may serve solely to benefit one individual's exchange of tax-deferred assets for currently available funds — a 'la the Ellis deal mentioned above.
Don't try this at home — indeed, maybe you shouldn't even try it at all. But if you do, sharpen that pencil and dot your I's and cross your T's before the Revenooers come calling.
CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters. You should consult your CPA regarding the implications to your own particular situation. Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno. He can be reached at 831-7288 and welcomes comments at firstname.lastname@example.org.