# Tri-County Tire LLC — Tax Strategy Memo (Preliminary)

**From:** Rex
**To:** Jimmie (for client conversation)
**Date:** 2026-05-24
**Status:** PRELIMINARY — finalized after client inputs land (see §7)
**Triggered by:** Ledger urgent handoff (2024 Schedule C filing error + co-owner status confirmation)

---

## 1. Executive Summary

| Item | Finding | Annual / Total Impact |
|------|---------|----------------------|
| 2024 filing error | Schedule C should have been Form 1065 partnership | ~$15-30K amendment cost; **indefinite SOL exposure if not corrected** |
| Riley Nolt 2024 tax catch-up | SE tax + WI income tax never paid on his share | ~$75-90K back tax owed by Riley |
| Joshua Nolt 2024 refund opportunity | Over-paid SE tax on full business income | ~$37K federal refund (roughly mirrors Riley's exposure) |
| Entity election (S-corp vs partnership) | At $1.23M net profit, S-corp election has material benefit | **~$80-85K/year savings to the family** |
| §199A QBI deduction (current state) | W-2 wage limit binding at current ~$24K payroll | Severely limited; expands ~$120K under S-corp |
| $844K "Due from Owner-Riley" | Needs proper loan documentation or recharacterization | 3 paths modeled — pending client input |
| Depreciation (book vs tax) | Use tax method for books (common small-business approach) | No incremental work; mirror tax schedule |

**Bottom line:** The combination of voluntary 2024 amendment + 2026 S-corp election (with late-election relief) saves the family **~$50K in net out-of-pocket year one** and **~$85K/year going forward**. The amendment is also the only way to close the indefinite-SOL exposure on the unfiled 1065.

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## 2. The 2024 Filing Error — Quantified Exposure

### What happened
Joshua filed his 2024 1040 reporting Tri-County Tire on Schedule C as a sole proprietorship. With Riley confirmed as a co-owner (and not Joshua's spouse — no qualified joint venture election available), the business should have filed Form 1065 with K-1s to both partners.

### Penalty exposure if unaddressed

| Item | Calculation | Amount |
|------|-------------|--------|
| §6698 failure-to-file partnership penalty | $235/partner × 2 partners × 12 months max | $5,640 federal |
| Wisconsin failure-to-file partnership penalty | State-level, ~$200-500 | ~$200-500 |
| Interest from due date | ~7-8% federal short-term rate × ~14 months | Variable, modest |
| Riley §6651 failure-to-file (if no 2024 1040 filed) | 5%/month, max 25% of tax owed | Up to $20K if $75K underlying tax |
| Riley §6651 failure-to-pay | 0.5%/month | Modest |

**Critical:** The statute of limitations on a Form 1065 starts when the return is filed. Because it was never filed, **the IRS assessment period is open indefinitely** for the partnership. This is a ticking exposure — every year compounds it.

### Tax-shift exposure (Joshua vs Riley)

Assuming roughly 50/50 ownership (POS shows equal $102,500 withdrawals each in 2025):

**Joshua's 2024 position:**
- Reported 100% of Tri-County net income on Schedule C
- Paid SE tax on entire net profit
- **Owed:** ~37% federal income tax + 15.3% SE tax (up to SS wage base) + 2.9% Medicare + 0.9% surcharge
- **2024 refund opportunity (federal SE only):** ~$37,000

**Riley's 2024 position:**
- Reported nothing from Tri-County (or possibly nothing at all if he didn't file)
- **Owes:** Federal income tax on K-1 share ~$155K + SE tax ~$37K + WI state tax ~$38K
- **2024 tax catch-up (Riley):** ~$75-90K depending on filing status and other income

**Net IRS exposure (federal):** Roughly washes between brothers — Joshua's overpayment offsets Riley's underpayment at SE tax level. Income tax piece nets minimal differential. **The cost of amendment is mostly penalties + interest + professional fees, not net tax.**

### Amendment cost-benefit summary

| Cost item | Estimate |
|-----------|----------|
| Federal late 1065 penalty | ~$5,640 |
| State late penalty | ~$500 |
| Interest (federal + state) | ~$5,000-10,000 |
| Riley FTF/FTP penalties (if applicable) | $0-20,000 |
| Tax prep fees (amended returns × 3 + 1065 + state) | ~$3,000-5,000 |
| Rex strategy work | ~$3,000-5,000 |
| **Total out-of-pocket** | **~$15-30K** |
| vs **Cost of not amending** | Indefinite SOL exposure; if IRS discovers via 2025 differential filing pattern, penalties could be 2-3× higher; Riley's personal exposure compounds |

**Strong recommendation: VOLUNTARILY AMEND.** The cost is bounded and the SOL relief is permanent.

---

## 3. Entity Election Analysis — Partnership vs S-Corp

### Methodology
Modeled on 2025 POS Net Profit of $1,229,628 (gross profit $2.55M, total expenses $1.32M). Assumed 50/50 ownership.

### Option A: Multi-member LLC + Partnership Taxation (default)

Both Joshua and Riley pay SE tax on their full distributive share.

| Item | Per Partner | Total |
|------|------------:|------:|
| Distributive share of net profit | $614,814 | $1,229,628 |
| Social Security tax (12.4% × $168,600 cap, 2025) | $20,906 | $41,813 |
| Medicare tax (2.9% × all distributive share) | $17,830 | $35,659 |
| Additional Medicare (0.9% over $200K single) | $3,733 | $7,467 |
| **Total SE tax** | **$42,469** | **$84,939** |

§199A QBI deduction:
- Tire repair is NOT a SSTB (no income phase-out)
- 20% × $1.23M = $246K potential
- W-2 wage limit: 50% × current $24K payroll = **$12,000 max deduction**
- W-2 wage limit binds severely → effective QBI deduction ~$12K
- Federal tax savings on $12K QBI deduction at ~32% marginal: ~$3,800

### Option B: Multi-member LLC + S-Corp Election

Both owners become W-2 employees of the S-corp; distributions above reasonable comp are NOT subject to FICA.

**Reasonable compensation analysis (Wisconsin tire shop owner-operators):**

Per RC Reports / industry data for tire-service business owners:
- Median: ~$95K
- Above-median (working-owner, multi-location): $120-150K
- Recommended: $120,000 each (defensible; reflects active operational involvement, multi-location oversight)

| Item | Per Owner | Total |
|------|----------:|------:|
| W-2 wages (reasonable comp) | $120,000 | $240,000 |
| Employer-side FICA (7.65%) | $9,180 | $18,360 |
| Employee-side FICA (7.65%, withheld) | $9,180 | $18,360 |
| FUTA + WI SUTA | ~$600 | ~$1,200 |
| Distribution portion of profit | $494,814 | $989,628 |
| **FICA on distributions** | **$0** | **$0** |

§199A QBI deduction under S-corp:
- W-2 wages now $240K → 50% × $240K = $120K W-2 wage limit
- QBI = $989,628 (profit less reasonable comp), 20% = $197,926
- **QBI deduction limited to $120K** (W-2 wage limit binds)
- Federal tax savings on $120K QBI at ~32-37%: **~$38K-44K**

### Side-by-side comparison

| | Partnership (Option A) | S-Corp (Option B) | Annual Savings |
|---|----------------------:|------------------:|---------------:|
| SE tax / FICA total | $84,939 | $36,720 | **$48,219** |
| QBI federal tax benefit | ~$3,800 | ~$41,000 | **$37,200** |
| Incremental compliance cost | $0 | ~$4,000 | -$4,000 |
| **NET ANNUAL BENEFIT TO FAMILY** | — | — | **~$81,400** |

### Timing — S-corp election

Today is 2026-05-24. The deadline to elect S-corp for 2026 was March 15, 2026 — **already missed**. Two paths:

1. **Late S-corp election relief under Rev. Proc. 2013-30:**
   - Filed within 3 years and 75 days of intended effective date
   - Requirements: would have been eligible, all owners would have agreed, reasonable cause for late filing, no inconsistent tax positions, all returns filed consistent with S-corp status from intended date
   - **Eligible for 2026 effective date via Rev. Proc. 2013-30 relief**
   - File Form 2553 with reasonable cause statement
2. **Make timely election for 2027 by 3/15/2027** — defer ~$81K of 2026 benefit

**Recommendation:** Pursue 2013-30 relief for 2026 effective date. Net savings if successful: ~$81K for 2026 alone. Cost of attempting: ~$1K of compliance work.

---

## 4. The $844K "Due from Owner-Riley" Treatment

### Three classification paths

**Option 1: Bona Fide Partner Loan**

Requirements: written loan agreement, market interest rate (AFR), repayment terms, evidence of intent to repay (actual payments).

Currently:
- Books accruing $39,756 of interest revenue in 2025 (~4.7% — consistent with mid-term AFR around 4.5%)
- No confirmation of written documentation
- No confirmation Riley is making actual payments

**Tax consequences:**
- Partnership recognizes interest income annually
- Riley deducts interest expense (or capitalizes if loan was used for capital purposes)
- §7872 below-market loan rules apply if interest rate <AFR
- Permanent classification preserves deductibility and avoids gain recognition

**Recommendation if going this route:** Get written loan agreement signed THIS YEAR with terms reflecting current balance. Have Riley begin actual cash repayments (even modest, e.g., $5K/month) to demonstrate bona fide intent. Document AFR rate selection (mid-term).

**Option 2: Distribution (reduce Riley's partner capital account)**

Treat as withdrawals already taken, not a loan.

**Tax consequences:**
- §731(a): distributions in excess of basis trigger capital gain
- Riley's basis depends on cumulative share of partnership income less prior distributions
- Need to determine 2024 starting basis — pulling from POS BS retained earnings + cumulative withdrawals
- Estimated Riley basis 12/31/2024: ~$500-800K (rough — depends on multi-year P&L history we don't have)
- If $844K exceeds basis, excess is long-term capital gain (assuming holding period >1 year)
- Capital gain at 23.8% (federal LTCG + NIIT) on excess: potentially significant

**Option 3: Guaranteed Payment Recharacterization**

Treat as compensation for services Riley provides to the business.

**Tax consequences:**
- Ordinary income to Riley, deductible to partnership
- Subject to SE tax (Riley owes)
- Probably partially appropriate if Riley actively works in the business
- Could be a hybrid: some portion guaranteed payment, some loan

### Recommendation

**Pursue Option 1 (bona fide loan), but only if:**
- Client commits to executing written loan agreement now
- Riley begins actual cash repayments at a reasonable cadence
- AFR rate is documented as the applicable rate

If client objects to formalization, fall back to **Option 2** (capital reduction) with proper basis modeling. Need cumulative partnership P&L from inception to model basis.

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## 5. Depreciation: Confirm Book = Tax

Confirmed for Ledger: yes, mirror the tax depreciation schedule in QBO books. There's no GAAP requirement for separate book depreciation for a closely-held partnership. The §179 and bonus depreciation elections used in 2024 (e.g., $119,903 §179 across 8 assets) flow directly to the books.

**Action item for Ledger (Phase 7):**
- Build fixed asset register from 2024 Federal Asset Report (already extracted)
- Set up accumulated depreciation accounts (one per asset class: Buildings, Equipment, Vehicles)
- Post 2025 depreciation per FYE 12/31/25 future depreciation report (extract from 1040 pages 39-40)
- Going forward: monthly depreciation entries from FA schedule, with year-end true-up to actual tax

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## 6. TriCounty Holdings (Open Item)

POS shows $3,750 short-term note payable to "TriCounty Holdings." Likely a sister LLC.

**Need from client:**
- What is TriCounty Holdings? Real estate holding company? Investment vehicle?
- Who owns it (same Joshua + Riley, or different ownership)?
- What intercompany transactions exist between Tri-County Tire and TriCounty Holdings?

If Holdings owns real estate leased to Tire (common structure), watch for:
- Self-rental rules under §469(c)(2) — rental income recharacterized as non-passive
- Reasonable rent determination
- §1099-MISC requirements for rent payments

**Parking lot for now** — won't impact Phase 1-3 cleanup work. Address before final tax memo.

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## 7. What I Need From the Client (Via Jimmie)

These need to land before I can finalize numbers and turn this preliminary memo into the final strategy document. Listed in order of importance:

1. **Wisconsin LLC formation status** — is "Tri-County Tire LLC" registered with WI DFI? Date of formation? If yes, multi-member LLC defaults to partnership taxation — easy fix. If no, general partnership formed by operation of law — harder conversation about whether to formalize.
2. **Operating agreement** — ownership %, distribution waterfall, management structure. Even if just a handshake, document something.
3. **Riley's 2024 personal tax return** — did Riley file? What did he report from the business?
4. **Riley's 2024 estimated tax payments** — to factor into amended-return cash flow
5. **Written loan documentation** for the $844K balance — does it exist? If yes, share it; if no, decision required on Option 1 vs 2 vs 3.
6. **Payroll detail for 2024 + 2025 YTD** — who's on payroll, exact W-2 wages, and specifically whether Joshua or Riley have been receiving W-2 comp (matters under both partnership and S-corp treatment)
7. **TriCounty Holdings structure** — ownership, purpose, transactions with Tri-County Tire
8. **Prior-year (2022, 2023) tax returns** — to establish partner basis history for capital account reconstruction

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## 8. Recommended Client Conversation Framing

Jimmie — when you take this to Joshua + Riley, frame it as:

**The good news:** The business is doing well ($1.23M net profit). With proper entity structure going forward, we can save the family ~$81K/year in taxes starting 2026 via S-corp election.

**The problem to fix:** 2024 was filed wrong. The good news is the IRS exposure is bounded — the cost to fix is ~$15-30K, and most of that is shifting taxes that were already owed (Riley pays back, Joshua gets refund). The cost of NOT fixing is the indefinite SOL — meaning this exposure compounds every year we leave it alone.

**The recommendation:**
1. File 2024 amendments now (voluntary disclosure posture)
2. File 2025 as a partnership return (no choice — has to be 1065 with K-1s)
3. Make late S-corp election for 2026 (Rev. Proc. 2013-30 relief) — start saving $81K/year
4. Get the $844K Riley loan properly documented OR converted to capital account reduction
5. Get an LLC operating agreement in place if not already (legal counsel territory — recommend a Wisconsin business attorney)

**Open questions to ask Riley specifically:**
- Did you file a 2024 federal return? State?
- Do you have any documentation of your ownership in Tri-County Tire?
- Have you been making payments on the $844K balance, or is that all draws?
- What W-2 wages, if any, have you received from Tri-County?

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## 9. Timeline & Next Steps

| Week | Deliverable | Owner |
|------|-------------|-------|
| This week (5/24-5/31) | Take this memo to client; get the 8 items in §7 | Jimmie |
| Week of 6/2 | Finalize entity election memo with confirmed inputs | Rex |
| Week of 6/9 | Draft amended 2024 1040 + 1065 (working drafts) | Rex coordinated with tax preparer |
| Week of 6/16 | $844K treatment memo (final, with basis calculations) | Rex |
| Week of 6/23 | File Form 2553 for late S-corp election (Rev. Proc. 2013-30) | Rex coordinated with tax preparer |
| Q3 2026 | File amended 2024 1040 + initial 1065 | Tax preparer |
| Phase 4 (cleanup) | Reclass $844K per agreed treatment | Ledger |
| Phase 9 (cleanup) | Equity reset with partner capital accounts | Ledger |

**Critical path:** Client conversation → entity election decision → all downstream work flows from this.

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## 10. Open Strategic Items (Beyond Cleanup Scope)

Once cleanup is complete, several additional tax strategies are worth modeling for Tri-County Tire / the Nolt family:

- **Cost segregation study** on the new building ($1.6M) — could accelerate $200-400K of depreciation into year-of-acquisition (already partially captured via §179 + bonus, but a study would maximize)
- **Retirement plan optimization** — Solo 401(k) → SEP-IRA → Defined Benefit Plan candidacy at $1.2M+ income; significant tax-deferred contribution potential under S-corp structure
- **TCJA sunset planning** — at family net worth ~$5M+ (rough estimate based on business value), 2026 exemption compression is a near-term planning trigger; gifting and trust strategy review warranted
- **State PTE election** — Wisconsin offers PTE election as SALT workaround; would benefit both owners at federal level (federalize WI tax deduction)
- **R&D tax credit** — unlikely for a tire shop, but mobile service truck operations or proprietary inventory management could qualify; quick screen warranted

I'll deliver these as separate memos after cleanup work stabilizes (Q3-Q4 2026 timeline).

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**Status:** Preliminary. Awaiting §7 client inputs.
**Cleanup gating:** Phase 4 (Riley loan reclass) blocked until §4 decision; Phase 9 (equity reset) blocked until entity election finalized.
**Contact:** Rex via Larry orchestration.