Can Your IRA Own A Business You Want To Operate?
A lot of wealth is in IRAs. Accordingly, many individuals who want to buy a business want to use those funds to buy the business. Unfortunately, the Internal Revenue Service (“IRS”) has strict regulations on what an IRA owner can and can not do with an IRA. When the IRA owner is planning to operate the business, the IRS has very strict requirements of qualified and disqualified participation and you have to be very careful or the full amount of the IRA could be subject to tax and penalties. I have discussed this in a prior blog. However, people continue to do what the IRS does not allow! Thiessen v. Commisssioner illustrates this.
In Thiessen, James and Judith Thiessen (“Thiessen”) left jobs at Dillon Cos., Inc, a subsidiary of Kroger.
Co. They then rolled over their retirement funds from their 401(k) into their own IRAs, and then caused their IRAs to acquire stock of a new corporation, Elsara. Elsara then acquired assets of another business. Thiessen then personally guaranteed the repayment of a loan that Elsara owed to the seller of the assets.
The Thiessens did not report the rollover of their retirement plans to their IRAs as taxable, nor did they tell the IRS that they guaranteed the loan. The IRS claimed that the prohibited transaction rule of Section 4975(c)(1)(B) of the Internal Revenue Code caused a deemed distribution of all the IRA funds which was then taxable to the Thiessens in the year of the prohibited transaction. The IRS determined that, because the Thiessens were “disqualified persons” as to the IRA, and the transaction was an indirect lending of money between a plan and a disqualified person, the IRA lost its tax exempt status and all of the proceeds were taxable distributions. The court agreed.
ADVICE: Any time an individual is attempting to do business with his or her IRA, the prohibited transaction rule can cause disastrous tax consequences. A few of the red flags would be (1) renting a piece of property, owned by your IRA, to a relative, (2) lending money to a business in which you are a shareholder or officer, (3) receiving compensation from a company owned by your IRA or lending money to a company owned by your IRA, or (4) furnishing ANY kind of services to an IRA owned business. Be careful with alternative investments. Be sure that the prohibited transaction rule is not violated.
WORD OF THE WEEK: GUARANTY is a promise to pay when the original person who owes the money (the “borrower”) does not pay the person who made the loan (the “lender”) . You are guaranteeing that the borrower will repay the money to the lender and if not, then the lender can look to the guarantor for payment. Be VERY careful when guaranteeing a loan. Many people do that for their children. If your children do not pay, then you WILL be liable on that loan.
GENEROSITY IS A KEY TO HAPPINESS …REACH OUT AND HELP SOMEONE TODAY! 😎