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Transcript of Business Tax Planning Guide 2011
8/8/2019 Business Tax Planning Guide 2011
http://slidepdf.com/reader/full/business-tax-planning-guide-2011 1/36
2010 - 2011CBIZ MHM Business Tax Planning Guide
8/8/2019 Business Tax Planning Guide 2011
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RECENT TAX DEVELOPMENTS
Twists and Turns Leave Many
Unanswered Questions .......................................3
Uncertainty Abounds ........................................3
Health Care Reform DominatesLegislative Session ..........................................5
The Hiring Incentives to Restore
Employment Act ...............................................8
GETTING STARTED
Mapping the Right Path to
Long Term Success ............................................9
Choosing the Right Business Entity ...................9
Opportunities and Pitfalls:
Specific Entities .............................................10
RUNNING YOUR BUSINESS
Navigating the Long and
Winding Road of Taxation .................................15
Recovering the Cost of Business Property ......... 15
Dispositions of Business Proper ty ...................17
Prevalent Tax Attributes and Issues .................20
INTERNATIONAL TAXATION
International Superhighway
Congested by Tax Complexity ...........................25
Taxing Worldwide Income ................................25
Foreign Tax Credit ..........................................25
Income Tax Treaties .......................................26
Deferral of U.S. Tax on Foreign Earnings ........... 26
Transfer Pricing .............................................26
International Tax Filing Obligations ..................26
Taxation of Expatriates ...................................27
EXIT STRATEGIES
Planning Your Route: The Keys to
Winding Down or Moving On .............................28
Mergers and Acquisitions ...............................28
Noncompete, Consulting and
Employment Agreements ................................30
Business Succession Planning ........................30
CHECKLIST
Tax Planning Ideas and Opportunities ...............32
The 2010 – 2011 CBIZ MHM Business Tax Planning Guide is distributed with the understanding that CBIZ MHM is not rendering legal,
accounting or other professional advice. As a result, you should obtain advice and guidance from your own tax professional, after
discussing your specific situation and facts, before taking any action based upon information contained in this guide. To ensure compliance
with requirements imposed by the IRS, we inform you that any tax advice in this guide (and any attachments) has not been written with
the intent that it be used, and in fact it cannot be used, to avoid penalties under the Internal Revenue Code, or to promote, market, or
recommend to another person any tax related matter. CBIZ MHM assumes no liability whatsoever in connection with the use of this
information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information
contained herein. All of the information contained herein is based on the tax laws in effect as of October 22, 2010.
Table of Contents
2010 - 2011 CBIZ MHMBusiness Tax Planning Guide
CONTENTS
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Legend
Throughout this guide, we have included visual callouts to help highlight key planning points, tax traps, expiring provisions,
and pending legislation. We hope the incorporation of these symbols make this year’s guide easier to navigate and
reference throughout the coming months.
P LANNING P OINT – Tax planning ideas and opportunities for you to save money.
T AX T RAP – Potential tax traps that may cause problems for the unwary.
E XPIRING P ROVISION – Tax benefits that either have expired or will expire at the end of 2010. These provisions have not been
extended as of our publication date. Visit www.cbiz.com/taxtracker to learn the current status of these tax provisions.
L EGISLATION P ENDING – Proposals have been introduced that could change the information available at time of press.
Visit www.cbiz.com/taxtracker to learn the current status of these tax proposals.
To our valued clients and friends:
This year (2010) has been another challenging one for our economy and the business community, making the need for tax
planning even greater! Although income tax rates are set to rise absent Congressional action, with proper planning most
businesses can achieve significant tax savings to effectively offset a significant portion of such increases. Many tax
incentives, such as cost recovery write offs and various tax credits, can be tapped to reduce tax obligations. Even tax deferra
strategies, while not delivering permanent tax reductions, can create important benefits by providing needed sources of cash
to fund debt repayment, as well as make critical investments in capital and personnel.
As we went to press, the tax outlook was uncertain, highlighted by the pending expiration of many tax cuts and theintroduction of new legislation in Congress. We have identified a number of proposals which may make it into final legislation
in some form in the near future. As the economy improves, most businesses will look for ways to take advantage of the
recovery. Hopefully, most will have taken advantage of the downturn to streamline operations and position their business for
future growth at a higher level of profitability.
While most of the focus on annual business tax planning leverages income tax savings ideas, we would be remiss if we
didn’t strongly encourage business owners, as well as executives of larger, more widely-held companies, to take
advantage of the unprecedented combination of depressed asset values and low interest rates prevailing in the current
economic climate. It appears likely that estate and gift taxes will continue to be substantial after current legislative
proposals are enacted, and there is truly a limited window of opportunity for individuals with substantial family assets to
transfer some portion of wealth to future generations at a significant tax savings. You might be surprised at the sizable
increase in your family’s net wor th 10 years from now as a result of enacting some relatively simple strategies today.
With the looming sunset of the 2001/2003 Bush tax cuts, and the need to balance economic growth against deficit control,
I cannot remember when so many major tax provisions have been in flux at the same time. Our Business Tax Planning Guide
reflects all legislative changes that have been enacted as October 22, 2010. We also point out any provisions that may
expire at the end of 2010 or that may be affected by pending legislation. To find out the current status of these provisions,
visit www.cbiz.com/taxtracker.
We hope you will strongly consider how the tax planning strategies discussed in this guide might enhance your business over the
next year. Please do not hesitate to contact your CBIZ MHM professional for assistance. Best wishes for a prosperous 2011!
Steve Henley
National Tax Practice Leader
CBIZ MHM, LLC
Steve Henle
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Uncertainty Abounds
No year in recent memory compares
to 2010 as it pertains to the federal
tax landscape. It is no longer just a
question of what tax law changes
Congress and the Administration
might implement. We also have to askourselves “What happens if Congress
does nothing at all?” A stalemate in
Congress usually means the status
quo prevails, but not this year.
Significant tax cuts passed during the
Bush Administration in 2001 and
2003 (“the Bush tax cuts”) were
made temporary to comply with
Congressional budget rules requiring
future revenues to offset the costs.
Fast forward to the present where
most of these tax breaks either expiredat the end of 2009 or will at the end of
2010 (See Charts 1 & 2) . This means
that without Congressional action, the
tax law pertaining to these tax breaks
will revert back to where it stood in
early 2001, raising taxes on virtually
all taxpayers (individuals, corporations
and other business entities and
estates). In addition to the Bush tax
Twists and Turns Leave ManyUnanswered Questions
RECENT TAX DEVELOPMENTS
Chart 1
Tax Provisions That Expired
at the End of 2009
• AMT patch
• Research and experimentation
credit• 15 year cost recovery or
qualifed leaseholds, retail andrestaurant property
• Five-year NOL carryback
Chart 2
Tax Provisions Due to Expire
at the End of 2010
• 33% and 35% top tax brackets
or individuals• 15% long term capital gains
tax rate
• 15% qualifed dividends tax rate
• Repeal o the overall limitation onitemized deductions and phase-outs o personal exemptions
• Marriage penalty relie
• 50% bonus depreciation
• Deferral of cancellation of
indebtedness income
• Increase in exclusion from saleof qualified small business stock
to 75% or 100%
• Repeal of the estate tax
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cuts, several other temporary tax
incentives meant to stimulate the
sagging economy have either already
expired or are set to expire at the end
of 2010.
Add to this a change of power in
Washington, the desire to provide
economic stimulus and relief inthe wake of a recession and the
competing need to control a spiraling
budget deficit. The result is a flurry
of unanswered questions and
considerable uncertainty. Congress
addressed some of these issues as
part of the Small Business Jobs Act
at the end of September, but many
provisions remain in flux. Visit
www.cbiz.com/taxtracker to learn
the current status of these tax
provisions, what will happen if Congress
does not take action and whatproposals are under consideration.
Some of the suggestions in this guide
are intended to minimize, or at least
defer, income taxes by accelerating
deductions into the current year and
deferring income into next year. If you
are the owner of an S corporation,
partnership or LLC, you may want to
take the opposite approach and
accelerate income into 2010 and defer
deductions until 2011 (assuming you
will ultimately recognize the income or
deduction either way).
For example, assume that by using
one of the ideas in this guide, you
were able to generate an additional$50,000 of deductions and can
control in which year you take the
deduction. By deferring that deduction
until 2011, an individual in the
highest bracket would save an
additional $2,300 in federal income
taxes. Take the deduction in 2010
and you will need to earn a one-year
return of over 13 percent on that tax
savings to equal the savings you
would have realized by deferring the
deduction until 2011 (See Chart 3) .
Whether it was due to political gridlock
or the lack of a sense of urgency,
Congress accomplished little related
to taxes prior to the return from their
August recess. Congress did manage,
however, to pass some tax breaks
for job creation and one other very
significant piece of legislation.
Chart 3
When Do I Take the Deduction?
Amount of Deduction: $50,000
Deduct in 2010 Deduct in 2011
Highest IndividualTax Rate
35%Highest IndividualTax Rate
39.6%
Tax Beneft
rom Deduction$17,500
Tax Beneft
rom Deduction$19,800
Additional Tax Savings byDeerring Deduction until 2011: $2,300
One-year Return Required on
$17,500 to Earn $2,300: 13.14%
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responsibility payment”). Exempt
individuals include certain lower-income
individuals as well as undocumented
aliens, religious objectors, prisoners,
members of Native American tribes and
certain hardship cases.
Health care coverage may be obtained
through an employer-sponsored planor independently through a state
insurance exchange. Lower-income
taxpayers (who do not qualify for the
exemption) may be eligible to receive
a premium assistance tax credit, free
health vouchers or other cost-sharing
arrangements to ensure they are not
spending more than a certain
percentage of their income on health
care coverage.
Large Employers
Must Play or PayBeginning in 2014, nondeductible
penalties will be assessed against a
“large” employer that does not offer its
full-time employees the opportunity to
enroll in minimum essential coverage
under an employer plan, if at least one
full-time employee is enrolled in an
insurance exchange and receives a
premium assistance credit or cost-
sharing. For the purpose of the new
legislation, a large employer generally is
defined as an employer who employedan average of at least 50 full-time
employees during the preceding
calendar year. Employers under
common control are aggregated for
purposes of the 50-employee threshold
and the 30-employee exemption from
the penalty calculations. Full-time
employees generally are defined as
employees working 30 or more hours
per week. Solely for purposes of the
large employer test, an employer also
must consider the number of full-time
employee equivalents made up bypart-time employees.
The penalty is equal to $166.67 per
month multiplied by the number of
full-time employees for the month.
The first 30 employees are subtracted
from the penalty calculation.
Health CareReform DominatesLegislative Session
The predominant legislation to
emerge from the 2010 Congressional
session was the landmark health
care reform package. With calls
for repeal and threats of lawsuits
before the ink from the President’s
signature was even dry, it is uncertain
how many provisions from this
legislation will survive until their
effective dates. What is certain is
that this legislation, should it stand,
will greatly impact employers for
many years to come. The discussion
that follows is a summary of some
of the major provisions of the
health care legislation, focusing on
the impact to employers. Consultyour tax and benefits advisors or
visit www.cbiz.com/healthcare
for more detailed information
on this expansive legislation.
The Big Picture
As an alternative to establishing
universal healthcare, Congress opted
to mandate health insurance coverage
– a mandate that is on the individual,
not the employer. Large employers,
however, will be subject to “play or
pay rules” (after 2013), whereby theywill be required to offer full-time
employees minimum essential
coverage or face nondeductible
penalties. Small employers that
provide adequate coverage will be
eligible for a tax credit. The legislation
included over $400 billion in revenue
raisers, the most prominent of which
are new FICA and Medicare taxes on
high-income individuals.
Individual Mandate
Beginning in 2014, individuals not
covered by Medicare or Medicaid (with
certain exceptions) will be required to
obtain minimum essential health care
coverage for themselves and their
dependents or pay a penalty
(euphemistically dubbed a “shared
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the cost of health insurance
premiums to qualify for the credit.
From 2010-2013, the maximum credit
is equal to 35 percent of the
employer’s portion of the health
insurance premiums. The credit
begins to phase out for employers
with more than 10 employees and/or
average annual wages over $25,000.
After 2013, small employers will needto purchase coverage through an
insurance exchange to qualify for the
credit, but the credit will increase to
50 percent of the contribution (for up
to two years).
Medicare Tax Increases on
Higher-Income Taxpayers
To help pay for all of this health care
reform, Congress has imposed two
Medicare tax increases on higher-
income taxpayers, beginning in 2013.
The first tax increase is an additional
0.9 percent Medicare tax on an
employee’s wages in excess of
$200,000 ($250,000 for joint filers).
Only the employee is subject to the
additional tax, as opposed to the 1.45
percent Medicare tax which is owed
Even if a large employer offers its
full-time employees minimum essential
coverage, it will still be subject to a
penalty if any of its employees are
enrolled in an insurance exchange and
receives a premium assistance credit
or cost-sharing. In that instance, the
penalty is equal to $250 per month
multiplied by the number of full-timeemployees enrolled in an insurance
exchange and receiving a premium
assistance credit or cost-sharing. The
total penalty imposed cannot exceed
the penalty that would be imposed if
the employer was not offering any
coverage at all.
Minimum Essential Coverage
For an employer-sponsored plan to be
deemed to provide minimum essential
coverage, the employer must contribute
at least 60 percent of the benefit costs,
and the employee’s contribution,
including salary reduction amounts,
cannot exceed 9.5 percent of
household income.
An employer must provide free choice
vouchers to certain lower-income
employees who do not participate in
the employer-sponsored plan if to do
so would require an employee
contribution of more than 8 percent of
household income. The free choicevoucher is equivalent to the value of
the coverage that the employer-
sponsored plan would have provided to
the employee and is applied against
the cost of coverage obtained through
an exchange.
Small Employer Health
Insurance Credit
While none of the aforementioned
health care reform provisions become
effective until 2014, one provision
that became effective immediatelywas the small employer health
insurance tax credit. A small employer
is defined as an employer with 25 or
fewer full-time equivalent employees
with average annual wages of less
than $50,000. The small employer
must contribute at least 50 percent of
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P LANNING P OINT : The
additional 3.8 percent
Medicare tax on investment income
makes investments that do not
produce current taxable income,
such as tax-exempt municipal
bonds and non-dividend paying
stocks, more attractive.
trusts also are subject to the tax on
the lesser of their undistributed net
investment income and the excess of
their adjusted gross income (AGI) over
the starting point of the highest
estate and trust income tax bracket
($11,200 in 2010 but will be adjusted
for inflation).
Net investment income includes
gross income from interest, dividends
annuities, royalties and rents less
allowable deductions, as well as net
gains attributable to the disposition
of property. For purposes of this 3.8
percent Medicare tax, investment
income also includes all income from
a trade or business that is a passive
activity with respect to the taxpayer o
from a trade or business that
consists of trading financial
instruments. Net investment incomedoes not include IRA or qualified
retirement plan distributions.
by both the employee and the
employer. The wages of married
taxpayers are aggregated to determine
the amount over the $250,000
threshold. Employers are only required,
however, to withhold the additional
Medicare tax when an employee’s
wages exceed $200,000. The
additional 0.9 percent Medicare tax isalso assessed on self-employment
income, and none of the additional tax
is deductible on page 1 of Form 1040.
The second Medicare tax increase is
a 3.8 percent tax imposed on the
lesser of:
■An individual’s net investment
income, or
■An individual’s modified adjusted
gross income (MAGI) in excess of $200,000 ($250,000 for joint filers)
Although the Medicare tax is
traditionally only paid by those with
wages or self-employment income,
this 3.8 percent tax does not require
earned income. Estates and most
Case Study
Impact of Additional Medicare Taxes
Marital Status MarriedFiling Joint
Wages $300,000
Net Investment Income $125,000
Modified AGI $425,000
0.9% Medicare Tax on Wages Net Investment Income Tax
Total Wages $300,000 Net Investment Income $125,000
Less Threshold - $250,000 Modified AGI less $250,000 $175,000
Wages Subject to 0.9% Tax $50,000 Lesser of the two $125,000
Tax Rate 0.9% Tax Rate 3.8%
0.9% Medicare Tax $450 Net Investment Income Tax $4,750
Total Additional Medicare Taxes: $5,200
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Retention Tax Credit
As an incentive to retain those new
employees, the HIRE Act also includes
a retention tax credit. Employers
receive a general business credit of
$1,000 in 2011 for each qualifying
employee that satisfies a minimum
employment period.
A qualifying employee must satisfy the
same requirements necessary for the
payroll tax holiday, plus these conditions:
■Be employed by the employer on
any date during the taxable year;
■Be employed continuously by the
employer for at least 52 weeks
from the hire date; and
■Receive compensation during the
last 26 weeks of the period that isat least 80 percent of the
compensation paid during the first
26 weeks of the period.
For more information on the HIRE Act,
visit www.cbiz.com/HIRE.
The Hiring Incentives toRestore Employment Act
In March of 2010, Congress passed
the Hiring Incentives to Restore
Employment (HIRE) Act. Intended as a
first step to boost a stagnant
economy, the HIRE Act provided
incentives for businesses to invest in
new employees.
Payroll Tax Holiday
In an attempt to spur job growth, the
HIRE Act temporarily exempted
employers from paying Federal
Insurance Contributions Act (FICA) tax
on the wages of newly hired workers
who were formerly unemployed. The
exemption applies to FICA taxes on
wages paid from March 19 -
December 31, 2010. The exemptiondoes not apply to Medicare taxes and
does not apply to the employee’s
portion of FICA taxes.
The exemption applies to wages paid
to an employee who:
■Begins employment with the
employer after February 3, 2010
and before January 1, 2011;
■Certifies that he has not been
employed for more than 40 hours
during the 60-day period ending onthe date of hire;
■Is not employed to replace another
employee unless that other
employee separated voluntarily or
for cause; and
■Is not related to a greater than 50
percent owner of the employer.
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E XPIRING P ROVISION :
Without Congressional
action, the highest ordinary income
tax rate will increase from 35
percent to 39.6 percent in 2011,
and the 15 percent qualified
dividend rate will revert to ordinary
income tax rates. To check thecurrent status of this provision,
visit www.cbiz.com/taxtracker .
wages will generally be taxed at a
higher rate than dividends, because
wages are ordinary income with rates
up to 35 percent, and they are also
subject to employment tax. Qualified
dividends, on the other hand, are
currently taxed at a maximum federal
rate of 15 percent, without employmenttax. It is always important to
remember that dividends must be paid
to all shareholders pro rata, while
compensation can be customized.
S corporations, partnerships and
limited liability companies (LLC)
generally enjoy “pass-through” status
for tax purposes. This means that the
net profits or losses of the entity are
reported directly on the owners’
individual income tax returns, and the
entity pays no tax itself. As is so oftenthe case, the devil is always in the
details, and the exceptions to these
rules contribute to an Internal Revenue
Code and Regulations that currently
consumes almost 10,000 pages.
When considering which entity is best
for you, do not limit your consideration
exclusively to the tax attributes
inherent in the various entity
structures. Think ahead to what types
of assets the business will have, how
you will finance the business, what willhappen when you are winding down or
liquidating the business and how or
when you intend to take distributions
from the business. Sometimes it
makes sense to change your business
structure after you have been operating
in your initial form, in order to
Choosing the RightBusiness Entity
Whether you are a start-up company or
an existing business, selecting the
best legal entity for your business
affects not only profitability and
operations, but also your taxability,your benefits, your risk exposure and
your ability to accumulate wealth as an
owner or executive. Your tax planning
should tie together your business
strategies with your personal tax,
investment and estate planning goals.
An Income Tax Primer
Apart from protecting the owners from
liabilities, income taxation is probably
the most important factor when
choosing an entity structure. The C
corporation or “regular” corporation is
subject to “double taxation.” This
means that the corporation pays tax on
its net profits, and when dividends are
paid to its shareholders, the
shareholders also pay tax on those
dividends. If a C corporation has net
losses, it must use them against its
own income, either carrying the losses
back to obtain refunds of prior years’
taxes, or carrying them forward to
offset future years’ income, or both.
C corporation shareholder/employees
generally receive income as either
salary or dividends. The corporation
can deduct (within limits) compensation
paid to employees, while dividends
are not deductible, and therefore are
paid after tax. At the employee level,
Mapping the Right Pathto Long Term Success
GETTING STARTED
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E XPIRING P ROVISION :
Without Congressional
action, the accumulated earnings
tax will be imposed at the highest
marginal individual tax rate
beginning in 2011. This is currently
slated to be 39.6 percent.
T AX T RAP : Some companies
unknowingly become PHCs
during the winding down phase
following a reorganization or sale
of assets, so careful planning is
required.
tax, because the companies tend to
pay out the profits in bonuses at year
end. When it comes time to sell the
business, however, they can find
themselves searching desperately for
ways to avoid double taxation.
Because C corporations do not get
any break for capital gains, holding
real estate inside a C corporation canmake the double tax problem even
worse. Here are some additional
issues to consider as a C corporation:
Corporate Penalty Taxes
In addition to the regular income tax,
C corporations can also be subject to
the accumulated earnings tax. A
corporation that accumulates earnings
and profits (E&P) beyond its
reasonable business needs may be
subject to an additional 15 percent
tax on the accumulated taxable
income. Various exceptions may apply
to reduce this tax, including a
$250,000 accumulated earnings
credit ($150,000 in the case of
personal service corporations).
Another penalty tax applies to
Personal Holding Companies (PHCs).
In general, a PHC is a closely-held
corporation which derives at least 60
percent of income from passive
sources, such as dividends, interestand rent. A PHC is taxed at the
dividend rate on its undistributed PHC
income. There are exceptions for
banks, finance companies and certain
other corporations.
For more information on the
accumulated earnings tax, visit
www.cbiz.com/AET.
accommodate new goals or facts.
Make certain you thoroughly
understand the tax consequences
before making a change (See Chart 4) .
Chart 4
Common Entity Considerations
• Pass-through taxation vs.double taxation
• Flexibility to allocate tax itemsamong owners
• Flexibility to make distributionsother than pro rata
• Flexibility in the types o owners
(e.g., corporate, oreign)
• Flexibility in methods o providing capital
• Owner participation in management
• Liability protection or owners• Tax rates
• Treatment o liabilities ortax purposes
• Type of property to be held
inside entity
• Ability to compensate employees
with equity participation
• Exit strategies
• Ability to use losses
• Employment tax consequences
• Employee benefits
• Impact of state taxes
• Estate and gift taxes (e.g., valuation
of business interests)
Opportunties and Pitfalls:Specific Entities
C Corporations
The C corporation is the entity type
most people associate with big
business. But C corporations come in
all sizes and meet dif ferent needs for
different people and businesses.
Smaller C corporations often avoid the
adverse impact of the corporate level
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T AX T RAP : Distributions
made to shareholders that
do not match share ownership
percentages can be treated by the
IRS as creating a second class of
stock, thereby terminating S
corporation status. The same
applies to allocations of income.
Options and warrants to purchasecommon stock may also contain
provisions that create a second
class of stock. Review buy/sell
arrangements as well, because the
buyout provisions may cause the
corporation to have an ineligible
shareholder or create a second
class of stock.
P LANNING P OINT : While
non-pro rata distributions
or allocations of income will
jeopardize S corporation status,
the use of both voting and
nonvoting shares of stock will not.
Use nonvoting shares as a way to
allow key employees or your
children to reap the economic
benefits of S corporation ownership,
while allowing you to maintain
control over the company.
S Corporations
Many business owners like to operate
in corporate form, in part because they
are comfortable using stock as the
form of ownership interest. For these
people, an S corporation can provide
the perfect vehicle to operate as a
corporation, while only paying one level
of tax, similar to a partnership. An S
corporation needs careful planning and
ongoing monitoring, however, in order to
deal with the many issues surrounding
shareholder basis, distributions and
maintaining S corporation status.
Eligibility for
S Corporation Status
While the rules regarding eligibility to
operate as an S corporation have
become increasingly more flexible in
recent years, several limitations stillmust be monitored and navigated
properly. An S corporation can now
have up to 100 shareholders, however
the type of persons or entities eligible
to be shareholders is very specific
(See Chart 5) .
In addition to these restrictions, an S
corporation can only have one class of
stock. Although stock can be
nonvoting, this restriction also comes
up in a wide variety of situations that
are not as readily apparent.
Personal Service Corporations
A Personal Service Corporation (PSC)
is a corporation performing services
in the fields of health, law,
engineering, architecture, accounting,
actuarial science, performing arts or
consulting. PSCs are subject to a
variety of special rules:
■PSCs are taxed at a flat 35 percent
rate, and therefore do not benefit
from the lower, graduated rates.
This rate will increase to 39.6% in
2011 without Congressional action.
■A fiscal year PSC is subject to a
“minimum distribution”
requirement, which in effect evens
out payments to employee-
shareholders for things like
compensation and rent, and may
postpone part or all of thededuction for these payments.
■PSCs can generally use the cash
method of accounting, whereas a
regular C corporation over certain
income levels generally must use
the accrual method.
■PSCs and certain other small
businesses on the accrual method
of accounting are permitted to
reduce their accrued service income
by an amount that, based uponexperience, will not be collected.
Chart 5
Eligibility for S Corporation Status
Corporate Requirements Eligible Shareholders
Must be domestic corporation Individuals must be U.S. citizens or resident aliens
Cannot have more than 100 shareholders Estates
Insurance companies are not eligible Grantor trust with eligible grantor
Financial institutions cannot be on reserve methodof accounting Electing small business trust (ESBT)
Qualified subchapter S trust (QSST)
Another S corporation (if sole shareholder – a “QSSS”)
Certain tax exempt organizations
Certain retirement plans
Chart 5
Eligibility for S Corporation Status
Corporate Requirements
Must be domestic corporation
Cannot have more than 100 shareholders
Insurance companies are not eligible
Financial institutions cannot be on reserve method
of accounting
Chart 5
Eligibility for S Corporation Status
Eligible Shareholders
Individuals must be U.S. citizens or resident aliens
Estates
Grantor trust with eligible grantor
Electing small business trust (ESBT)
Qualified subchapter S trust (QSST)
Another S corporation (if sole shareholder – a “QSSS”)
Certain tax exempt organizations
Certain retirement plans
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T AX T RAP : If your debt basis
in an S corporation has been
reduced by losses, any repayment
on that debt will result in income
to the shareholder, unless the basis
has been fully restored. Do not
assume that if your remaining debt
basis is more than the repayment,
that the repayment is tax free.
P LANNING P OINT 1 : Through
2010, qualifying dividends
are taxed at a maximum rate of 15
percent. This is a good time for S
corporations with C corporation
E&P to consider paying a
dividend to take advantage of the
15 percent tax rate.
P LANNING P OINT 2 : Investing
in publicly traded
partnerships may help to avoid the
excess passive income tax, because
the gross receipts allocated to each
partner are not considered passive
for purposes of this tax.
Distributions which exceed the
corporation’s AAA may result in
inadvertent dividends if the
corporation has earnings and profits
(E&P) accumulated from the time it
was a C corporation. Delay
distributions if the amount in AAA at
year end is uncertain.1
Excess Passive
Investment Income
S corporations that have accumulated
E&P from the time prior to becoming
an S corporation, along with
substantial “passive” income, may
have more to worry about than just the
timing of distributions. S corporations
with net excess passive investment
income that exceeds 25 percent of
gross receipts may be subject to tax at
the highest corporate income tax rate(currently 35 percent). Passive
investment income is income from
rents, royalties, interest, dividends and
annuities. Banks are excluded from the
passive income restrictions.
If the corporation has net excess
passive investment income for three
consecutive years, S status is
terminated as of the first day of the
following year.2
Built-In Gains TaxThe built-in gains (BIG) tax imposes a
corporate level tax on the amount of
gains inherent in assets that were held
by a C corporation at the time it
converted to an S corporation, or
assets that were acquired by the S
corporation in certain tax deferred
transactions. If an S corporation
anticipates selling assets that will
create the BIG tax, it should consider
offsetting the gains by recognizing
built-in losses or delaying the sale to
defer the tax. Estimated taxes must bepaid on net recognized built-in gains,
and these estimates cannot be based
on the preceding year’s tax, if any.
Generally, the BIG tax applies to
assets sold within ten years from the
date of the S election. Congress has
Stock Basis, AAA and
Distributions
Shareholder stock basis and the
corporate Accumulated Adjustments
Account (AAA) must be closely
monitored in order to anticipate the
tax impact of losses, distributions and
transactions.
Tax-free distributions are allowed to
the extent of the shareholder’s stock
basis. Shareholders must have basis
in their stock or in loans made directly
to the corporation, and be “at risk” for
those amounts, in order to take
advantage of pass-through losses.
Basis may be increased by capital
contributions or direct shareholder
loans to the corporation. Be cautious
of loans with guarantees, related
party transactions, mirror loantransactions and circular loans. Loans
that achieve their desired business
results may be structured to give
shareholders the basis they seek,
but should be closely analyzed.
For more information on
complications associated with
loans to S corporations, visit
www.cbiz.com/SCorpDebt.
When a shareholder has both stock
and debt basis, the stock basis is
reduced by losses first. After the
stock basis has been reduced to zero,
the shareholder’s basis in debt is
reduced by pass-through losses and
then restored by the pass-through of
subsequent years’ income.
Loan repayments to the shareholder
may produce taxable income for the
shareholder and should be timed to
minimize the tax impact.
Advances to the corporation should be
documented by a note, and anyrepayments on a reduced-basis note
should be made more than 12 months
after the initial loan in order to obtain
capital gain treatment. Repayment of
open advances will result in ordinary
income if the debt basis of the
advance had been reduced by losses.
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L EGISLATION P ENDING : A
carried interest is an interest
received in the future profits of a
partnership or LLC in return for
services provided. Unlike the
interests of other partners or
members, these interests are given
without the requirement of
contributing capital into the venturein exchange for the interest. Under
current law, the majority of the
income generated by a carried
interest typically is taxed at capital
gain rates. As of our publication
date, several proposals have been
introduced that would tax the
majority of this income at ordinary
income rates. For more information
on carried interest, visit
www.cbiz.com/CarriedInterest.
T AX T RAP : The IRS closely
scrutinizes whether liabilities
of an LLC should be taken into
account in determining the amount
for which a member is at risk, even
with single member LLCs.
Remember that if the member is not
ultimately liable for satisfying the
liability, he is probably not at risk,
and he will not be able to deduct
losses from the LLC. Before
finalizing any LLC membershipagreements, consult with your tax
advisor to discuss whether the terms
align with your understanding of
the tax consequences.
P LANNING P OINT : Typically,
a partnership will benefit by
making a tax election to increase
the basis in the partnership’s assets,
based upon the gain reported by a
partner who has sold his interest.
Once made, this election applies toall future transfers of partnership
interests and distributions of
property to partners.
Liabilities and Losses
Routine changes in partnership
liabilities may cause loss allocations
to be adjusted, which can sometimes
lead to unanticipated results. Even if
these changes do not affect
allocations, they may trigger income
to the partners in certain
circumstances. One such example is
when losses or withdrawals have been
taken against debt basis. Take care
when categorizing any partnershipdebt and be sure to monitor any
potential effects caused by shifting
levels of liabilities and debt.
Unexpected Income
Income and gain recognition can occu
unexpectedly based upon partner
contributions to the par tnership,
distributions to par tners and transfers
of partnership interests. Income
recognition often depends on the
position of the partnership at the end
of the taxable year. Year end planning
can often mitigate unforeseen tax
consequences.
recently decreased the holding period
to seven years for assets disposed of
during 2009 or 2010 and to five years
for assets disposed of during 2011.
Partnerships and LLCs
Partnerships, and limited liability
companies taxed as partnerships
(LLCs), have evolved as the entity of
choice for many businesses today.
Unless an LLC elects otherwise when
formed, it will be taxed as apartnership by default. These entities
have the same pass-through taxation
benefits as S corporations but provide
additional flexibility. References to
partnerships below are intended to
include LLCs.
Special Allocations of Income
While S corporations require a strict
per share, per day allocation of
income and pro rata distributions,
partnerships and LLCs provide
considerably more flexibility. As longas the income tax allocations have
substantial economic effect (as
defined in the Regulations), you have
wide latitude in how you allocate
income and take distributions, such
as creating preferred interests for
certain partners.
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T AX T RAP : Operating
businesses commonly hold
real estate in a separate entity for
a variety of tax and business
reasons. Do not fall into the self
rental trap. If your partnership
rents property to a separate
business in which you materially
participate, the rental income that would normally be passive income
is recharacterized as active, while
any rental losses remain passive
losses. So you lose the ability to
offset other passive losses against
the rental income or use the rental
losses to offset active trade or
business income.
Single Member LLCs
A single member LLC owned by a
corporation can choose to be taxed as
part of its corporate owner or as a
separate corporate subsidiary. A
single member LLC owned by an
individual can choose to be taxed
either as a sole proprietor, and repor t
the business activity on the individual
owner’s Form 1040, or as a
corporation. While these entities are
often disregarded for federal income
tax purposes, remember that they
may still have employment, excise tax
or state franchise tax obligations.
Passive Losses
Generally, passive losses from a
partnership or other pass-through
entities can only offset passive
income, with unused passive losses
carried to future years. Any
suspended or unused loss generally is
deductible upon disposition of the
entire interest in the passive activity.
For more information on the passive
loss rules, particularly with respect to
partnership, LLC and LLP members,
visit www.cbiz.com/LimitedPartners.
Rental Real Estate
Rental real estate is a passive
activity by definition, but real estate
professionals escape the limitation
on passive losses. A real estate
professional is someone whospends more than 750 hours, and
more than 50 percent of his time,
and materially participates in real
estate businesses. In determining
material participation, each rental
real estate interest must generally
be treated as if it were a separate
activity. Alternatively, the taxpayer may
elect to treat all of his interests in
rental real estate as a single activity.
The election is irrevocable.
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E XPIRING P ROVISION : The
bonus depreciation provision
was extended only through 2010 as
part of last September’s Small
Business Jobs Act. The
Administration would like to see
this provision increased to 100
percent and extended through 2011.Visit www.cbiz.com/taxtracker
to see the current status of
this provision.
Expensing Election –
Section 179
For tax years beginning in 2010-2011,
you now may generally elect to deduct
up to $500,000 of depreciable
tangible personal property (including
off-the-shelf computer software) in the
year of purchase if your business has
sufficient taxable income. The
increase in the expensing limit from
$250,000 to $500,000 was a result
of the Small Business Jobs Act of
2010 (SBJA). The benefits of this
election begin to phase out if more
than $2,000,000 of qualifying
property is placed in service during
the tax year. The maximum amount
that can be expensed is reduced dolla
for dollar, with the expensing election
completely phased out at $2,500,000If taxable income is not sufficient to
use the entire Section 179 deduction,
the unused amount may be carried
over to subsequent years.
SBJA further enhanced this deduction
by expanding it to certain real property
A taxpayer may now elect to expense
up to $250,000 of qualified leasehold
improvement property, qualified
restaurant property, and qualified retai
improvement property. This provision
marks the first time that the expensingelection has been extended to any type
of real proper ty. It does, however,
come with some limitations. Generally,
if a taxpayer cannot deduct the full
amount of the Section 179 deduction
due to taxable income limitations, the
excess carries forward to future years
Recovering the Cost of Business Property
Bonus Depreciation
Congress reinstated the 50 percent
bonus depreciation deduction for
qualifying assets placed in service
during calendar year 2010, with limited
application in 2011 for certain longer
lived property. The provision generally
applies to tangible personal property,
qualified leasehold improvements and
purchased computer software. The
increased deduction applies for both
regular tax and alternative minimum
tax purposes.
Navigating the Long andWinding Road of Taxation
RUNNING YOUR BUSINESS
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P LANNING P OINT 1 : While the
15-year recovery period for
qualified leasehold improvements,
retail improvements and restaurant
property currently does not apply to
assets placed in service after
December 31, 2009, make sure
that you took advantage of this
provision when it was available. Review your depreciation records
for the last few years and, if you
inadvertently failed to use the
15-year recovery period, you can
correct the matter through a
change in accounting method or,
in some instances, an amended
tax return.
L EGISLATION P ENDING : As of
our publication date, no
proposals had been introduced in
Congress that would reinstate the
15-year recovery period. President
Obama’s budget, however, did
contain such a provision. Visit
www.cbiz.com/taxtracker to see
the status of this legislation.
P LANNING P OINT 2 : As a
bonus, because changing the
depreciable life of an asset
constitutes an accounting methodchange, the present depreciation
method for property previously
misclassified can be changed, and
the full amount of any prior
depreciation understatement can
be deducted in the current year.
lease when made to the interior
portion of nonresidential real property
that is at least three years old. Similar
provisions apply to qualified restaurant
property and qualified retail
improvement property.1
Cost Segregation
Timing of asset purchases is not theonly way to maximize depreciation.
Make sure that assets are properly
categorized into the proper
depreciable class. Mistakenly
depreciating a 5-year asset over 39
years will dramatically reduce your
depreciation deductions.
If you have recently purchased or built
a building, remodeled existing space,
or plan to do so in the near future,
consider a cost segregation study. A
cost segregation study determineswhether an item is personal property
or a structural component of the
building for depreciation purposes. By
identifying the personal property
components and their related costs
that can be depreciated over five,
seven or 15 years, you can
dramatically accelerate your current
depreciation deductions. Not only are
you shortening the depreciable life,
you are changing to an accelerated
method. Real property must bedepreciated using the straight-line
method, but 5-year and 7-year
property use 200 percent of the
straight-line rate, and 15-year property
uses 150 percent of the straight-line
rate. The corporation or pass-through
owner may lose some of the benefit of
a cost segregation study if the
business or pass-through owner is
subject to AMT.
Typical assets that may be incorrectly
classified as part of the building, butshould have short depreciable lives,
include: cabinets, decorative fixtures,
partitions or removable walls, security
equipment, parking lots, landscaping
and allocable architectural fees.2
until there is sufficient taxable income
to absorb the remainder of the
deduction. With respect to qualified
real property, any amount subject to
the election that cannot be utilized in
2010 or 2011 will be treated as
placed in service in 2011 and subject
to normal depreciation rules.
Energy Efficient Commercial
Building Deduction
Taxpayers who build or renovate their
real estate holdings may qualify for
special tax benefits if they “go green.”
The energy efficient commercial
building deduction, or “179D
deduction,” allows businesses to
immediately deduct the cost of
qualifying energy efficient proper ty,
subject to a cumulative limitation of
$1.80 per square foot of floor space.The improvements must result in a 50
percent reduction in energy costs,
though a partial deduction of up to 60
cents per square foot is allowed for
improvements to interior lighting, HVAC
or the building envelope that meet
certain energy targets. Unlike most
current tax incentives, the 179D
deduction extends through 2013,
giving taxpayers time to plan upcoming
renovations to maximize the deduction.
For more information on the energyefficient commercial building deduction,
visit www.cbiz.com/179D.
Leasehold Improvements
There are a number of tax rules
specific to leases. Generally, the cost
of leasehold improvements must be
depreciated over 39 years instead of
the lease term. Should the tenant
vacate the property before the end of
the term, the tenant may deduct any
unrecovered cost. Qualified leasehold
improvement property placed inservice prior to January 1, 2010, was
eligible to be depreciated over 15
years using the straight line method,
rather than over 39 years. Qualified
leasehold improvement property is any
improvement made by the lessor or
lessee pursuant to the terms of the
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accounting method. Once on LIFO, you
are also required to use it in any
external financial statements.
If a corporation using the LIFO method
files an S corporation election, it pays
tax on its LIFO recapture amount,
which is the difference between the
inventory value on FIFO and LIFO onthe date the S election is effective.
This LIFO recapture amount must be
included in income on the final C
corporation return. The tax
attributable to the LIFO recapture,
however, is payable in four annual
installments beginning with the final C
corporation return. In addition, LIFO
may help defer any built-in gain
recognition related to inventory if
there are additional layers added
during S corporation years.
Dispositions of BusinessProperty
Installment Sales
Installment sales allow you to defer
your gain over a number of years when
your payment is spread over time (for
example, when you take a promissory
note as part of the purchase price).
Remember these points when
considering an installment sale.
■Installment treatment is not
available for publicly traded
securities or inventory.
■Depreciation recapture is recognized
in the year of sale regardless of the
amount of cash received.
■Certain sales to related parties can
either result in ordinary income or
acceleration of gain recognition.
■Subsequent disposition of the
installment note will accelerate
the gain.
■Distribution of an installment note
to a shareholder (e.g. when a
corporation liquidates after selling
its operating assets) generally will
accelerate gain recognition.
Inventory
If your business does not take a
physical inventory count at year end,
you may still be able to accrue a
deduction for estimated inventory
shrinkage. Inventory shrinkage could be
the result of bookkeeping errors,
breakage or undetected theft. To
estimate shrinkage, you should
consider prior years’ experience and
adjust for unusual or special
circumstances or factors. As with other
inventory methods, the change to
inventory shrinkage requires application
to and consent from the IRS.
Inventory write-downs recorded at year
end may or may not be deductible.
Write-downs can occur if the inventory is
obsolete, the inventory is “subnormal,”
or the inventory is to be scrapped. Also,
the company may be on a cost or a
lower-of-cost-or-market method. As a
general rule, subnormal finished goods
that are not completely obsolete must
be offered at reduced prices within 30
days of year end in order to take an
inventory write down to market value.
Work-in-process and raw materials can
be valued using any reasonable
method since no market typically
exists for these items. Inventory that is
to be scrapped can be written down to
its scrap value at year end.
For more information on how to
take advantage of inventory
write downs, visit
www.cbiz.com/InventoryWritedowns.
LIFO Inventories
Special rules apply to LIFO
inventories, but despite increased
complexity, it is often well worth the
effor t to plan for and maintain this
inventory method. LIFO is par ticularly
beneficial in times of inflation;however, once on the LIFO method,
you should monitor inventory levels to
avoid invading LIFO inventory layers
and triggering an increase in taxable
income. LIFO inventory accounting
requires an election and, if you are an
existing business, a change in
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E XPIRING P ROVISION :
W ithout Congressional
action, the 15 percent long-term
capital gain tax rate for non-
corporate taxpayers that would
apply to pass-through gains from
an installment sale will revert to
20 percent in 2011. Visit
www.cbiz.com/taxtracker to seethe current status of this provision.
year), you would have to discount
those payments back to today’s dollars
by more than 10 percent to equal a
present value of $600,000. Shorten
the deferral period and the results are
even more dramatic.
Of course, other elements must be
factored into the calculation, such asstate income taxes and whether the
cash is available to pay the accelerated
tax liability without borrowing. Also
remember that the election out of
installment sale treatment is made at
the entity level. You should consider
the impact of that election on all of
the owners before making it. Is your
S corporation still receiving payments
on an installment sale prior to 2010?
If so, consider triggering the
acceleration of the remaining gain
into 2010 by distributing theinstallment note to a shareholder or
selling it to a related party.
■There is a restriction on tax
deferral for large installment sales.
If you have outstanding installment
receivables in excess of $5 million
which arose in the same tax year,
installment treatment does not
help since you must pay an
“interest charge” on the amount of
tax deferral.
If your partnership, LLC or S
corporation sold assets in 2010 in
exchange for a promissory note,
consider electing out of installment
sale treatment to reduce your tax
burden. Take a simplified example
where a five year installment sale
results in $4 million of long-term
capital gains. If all of the gain is
deferred until 2011 and beyond, the
total federal tax paid would equal
$800,000 instead of $600,000 if theentire gain were recognized in 2010.
Even when spreading the tax payments
out over five years ($160,000 per
Case Study
Should You Elect out of Installment Sale in 2010?
Long-term Capital Gain $4,000,000 2010 Tax Rate 15%
Term of Installment Note 5 years 2011-2015 Tax Rate 20%
Annual Gain Recognized under Installment Sale $ 800,000
Required Discount Rate on Installment Sale Tax Payments to Break Even 10.425%
Elect out of Installment Sale Treatment Elect Installment Sale Treatment
Year Tax on Installment Gain Tax Discounted at 10.425%
Tax on Entire Gain in 2010 $600,000 2011 $160,000 $144,895
2012 $160,000 $131,216
2013 $160,000 $118,828
2014 $160,000 $107,609
2015 $160,000 $ 97,450
Total $800,000 $599,998
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P LANNING P OINT 1 : Although
you cannot exchange
partnership interests directly and
defer tax, it may be possible to
achieve the same result through a
different structure or by exchanging
underlying like-kind assets.
T AX T RAP : The ability to
defer gain recognition by
executing a like-kind exchange is
a great planning opportunity, but
it can also hurt you when asset
values are depressed. Just as the
realized gain on the property you
exchange is deferred from
taxation, so is any realized loss.
Given the current real estate
market, make sure that any
transfers of property whose basis
exceeds its value do not qualify for
like-kind exchange treatment.
That way, you can recognize the
loss in the current year.
P LANNING P OINT 2 : The IRS
recently ruled that certain
types of intangibles, such as
trademarks, trade names and
other customer-based intangibles,
may qualify as like-kind property
if they can be separately describedand valued apart from goodwill
(which will not qualify for
like-kind treatment). This ruling
represents a major change in the
Service’s position on this issue.
While this opens up new planning
opportunities, tread carefully to
make sure that the property will
qualify as like-kind and meet the
other requirements for a tax-
deferred exchange.
close the purchase. Exchanges with
related parties are subject to
additional restrictions. 2
Related Party Transactions
The definition of “related party” varies
depending on the type of transaction,
but it is a concept that you should
always keep in mind. Related partiescan include:
■An individual and a corporation of
which he owns more than 50
percent of the stock.
■Partnerships and their partners.
■S corporations and their
shareholders.
■Two corporations having more than
50 percent common ownership.
■A corporation and a partnership, if
the same persons own more than
50 percent of each entity.
■Trusts and estates with common
grantors or beneficiaries.
Whenever you are involved in a
transaction with one or more related
parties, you should consult with your
tax advisor to determine whether you
are facing any unforeseen tax
consequences. Here are some of theareas where transactions among
related parties can af fect the tax
treatment:
■Accrual method taxpayers may not
deduct salaries, bonuses, interest,
rent and other expenses owed to
related cash method parties until
payments are made (or the
recipient reports the income in
some cases).
■Losses on sales between relatedparties are often disallowed
or deferred.
■Sales of depreciable property may
result in ordinary income rather
than capital gain.
Like-Kind Exchanges
Exchanging one property for another
qualifying property is a “plain vanilla”
like-kind exchange with which most
people are familiar. The like-kind
exchange rules can also apply to more
complicated transactions. With proper
planning, you can exchange like-kind
property and defer tax on the
transaction in the following situations:
■You are selling two or more
properties.
■You have not found the property you
want to own at the time you sell the
property you own.
■A qualified intermediary “buys” the
property you want before you sell
the property you own.
■You acquire and “park” the
replacement property before the
property you are transferring is
relinquished.
■You acquire an interest as a tenant
in common as an investment.
■You use a related par ty to
accomplish your exchange.
Anytime you are going to sell business
property, consider whether a like-kind
exchange would be viable andadvantageous. Once you have sold
your property and received your
payment, the transaction is taxable
and it is too late to implement a
like-kind exchange strategy. With the
scheduled return of the 20 percent
long term capital gains rate in 2011,
however, make sure to analyze
whether paying the tax at the current
lower rates on the sale might better
suit your goals.1
If the like-kind exchange requirementsare not rigorously followed, you can
end up with a taxable transaction.
These requirements include strict
definitions regarding what type of
properties are “like-kind” with each
other, and shor t time frames to
identify replacement properties and
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member with the ability to utilize
losses in subsequent years.
Additionally, when a corporation with
an NOL has more than a 50 percent
change in ownership, its NOL
available in future years may be
severely limited. Generally, the annual
NOL available to offset other incomewill be limited to the value of the
corporation at the time of the
ownership change multiplied by a
defined federal interest rate (currently
between 3 and 5 percent). Exceptions
to this rule may apply to corporations
that emerge from bankruptcy owned
by former shareholders and certain
creditors. Again, these rules are
extremely complex and fact specific,
so consulting with your tax advisor
early in the planning will allow you to
maximize your NOL utilization.
For more information on net
operating loss limitations, visit
www.cbiz.com/NOLs.
Debt Forgiveness
The Internal Revenue Code states
succinctly that gross income
includes “income from discharge of
indebtedness.” That is where the
simplicity stops. An explanation of
all of the ways in which discharge
of indebtedness (also referred toas cancellation of debt or COD) may
apply and how to avoid reporting
the income on COD are beyond
the scope of this Guide, but some
of these are highlighted below. Be
sure to speak with your tax advisor
before engaging in any transactions
that change the balance of
outstanding debt other than through
simple borrowing or repayment.
The tax consequences from the
transfer of real estate in satisfactionof a debt are significantly different
depending upon whether the debt is
recourse or nonrecourse. A transfer of
property in satisfaction of a recourse
mortgage is bifurcated into two types
of income. The excess, if any, of the
■Property received in a like-kind
exchange between related parties
which is sold within two years will
trigger tax for the initial seller.
■Installment sale property which is
resold by a related par ty within
two years accelerates gain to the
initial seller.
Prevalent Tax Attributesand Issues
Net Operating Losses (NOLs)
A net operating loss is a valuable
corporate attribute, because it allows a
business to potentially obtain refunds
of prior years’ taxes and generate
future profits tax-free. Generally,
corporations can carry back NOLs
two years to recover taxes paid inprevious years or carry those losses
forward up to twenty years. NOLs
generated in either 2008 or 2009 (or
in both years in the case of certain
small businesses), however, can be
carried back as many as five years.
When planning for estimated tax
payments or projecting cash flow,
remember that the benefits of a
corporation’s NOL is reduced by the
alternative minimum tax (AMT). The
NOL is only available to offset 90percent of the corporate alternative
minimum taxable income, which leaves
10 percent of the AMT unprotected.
For corporations filing consolidated
returns, the rules for utilizing the
NOLs of a member entering or leaving
the consolidated group are extremely
complex, and as a result, advance
planning is critical. For acquired
companies, losses generated before
entering the consolidated group are
SRLY losses – incurred in a “separatereturn limitation year” – and utilization
of those losses is typically limited to
the taxable income generated by that
member. For members leaving the
consolidated group, complicated
apportionments of the NOLs will be
required, but may leave the departing
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Exceptions to the taxability of COD are
codified in Internal Revenue Code
Section 108. The two most common
exclusions under Section 108 are for
bankruptcy and insolvency. COD
income will be excluded if the taxpaye
is a debtor in a federal bankruptcy
case and the debt was discharged
either by order of the bankruptcy courtor pursuant to a court approved
liquidation plan. Insolvency exists if a
taxpayer’s liabilities exceed the FMV
of his assets, measured immediately
before the debt forgiveness. The
“price” for using the bankruptcy or
insolvency exception is a
corresponding reduction to the
taxpayer’s positive tax attributes,
including NOLs, tax credits, capital
and passive loss carryforwards and
basis in depreciable assets.
A taxpayer who is neither bankrupt no
insolvent has other possibilities
available to defer or exclude COD
income. For example, COD from
business debt that a taxpayer
reacquires before January 1, 2011
can be deferred at the taxpayer’s
election until 2014, and then included
ratably over the ensuing five years.
The reacquisition can be
accomplished with a cash payment, a
new debt instrument, stock or
partnership interests or a contribution
to capital by either the debtor or
certain related persons or entities.
Also, a taxpayer can elect to exclude
the forgiveness of qualified real
property indebtedness (QRPI) from
income. QRPI is secured debt used to
acquire or substantially improve real
property used in a trade or business,
including rental real estate. The
maximum amount that can be
excluded as QRPI is the excess of the
outstanding mortgage (including
accrued interest) over the FMV of the
property. The amount excluded cannot
exceed the adjusted bases of the
taxpayer’s other depreciable property,
which is reduced if the taxpayer elects
to exclude the COD income.
debt over the fair market value (FMV)
of the underlying property is COD
income, and the excess of the FMV of
the property over its basis is treated
like a gain on a sale of the proper ty.
For property secured by a nonrecourse
mortgage, the transfer is treated as a
sale of the property for the amount of
the mortgage, with the resulting gainor loss taxed as a normal property
sale. No COD income is realized from
the transfer of property in satisfaction
of a nonrecourse liability, and as a
result, the Section 108 exclusions
(discussed below) do not apply. Note
that a reduction in or forgiveness of a
recourse or nonrecourse debt, rather
than a transfer of the underlying
property in satisfaction of the debt,
will generate COD income.
An important distinction exists in thetreatment of COD income between an
S corporation and partnership or LLC.
For S corporations, the bankruptcy
and insolvency tests, as well as the
reduction of tax attributes, are all
made at the corporate level. For
partnerships and LLCs, this is done at
the partner or member level. This
means that COD income from a
partnership or LLC could have a
different impact on the partners or
members depending upon their
individual financial conditions and
personal tax elections. And a
partnership must consent to a
partner’s election to reduce his or her
share of the par tnership’s depreciable
property. Another important
distinction for S corporations is that
COD income does not increase a
shareholder’s basis in his stock.
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E XPIRING P ROVISION : The
R&E credit expired at the
end of 2009. Often, the R&E credi
faces extinction only to be extended
at the last minute. Proposals were
under consideration in Congress to
extend the R&E credit for at least
another year, through 2010, or
even to make it permanent. Visitwww.cbiz.com/taxtracker to see
the current status of this provision.
T AX T RAP : Several states do
not allow the DPAD as a
deduction. Be sure to account for
your states’ rules when projecting
your state income tax liabilities.
■Payments to energy research
consortia for energy research.
If your business has activities related
to the development or improvement of
products, software, manufacturing or
other processes, techniques, formulas
or similar activities, now is the time to
assess whether your business istaking full advantage of this valuable
incentive. Even if your company has
been claiming the R&E credit for
several years, have an advisor review
your computations periodically. New
methods for computing the credit have
been introduced over the last few
years and you may not be using the
method that is most advantageous for
your unique situation.
Although the domestic production
activities deduction (DPAD) has beenaround for several years, many
companies are not taking maximum
advantage of it. In 2010, the
deduction increased to 9 percent of
qualified production activities income
(QPAI) – up from 6 percent in 2009.
Domestic production activities that
qualify for the deduction include:
■The manufacture, production,
growth or extraction of tangible
personal property;
■Engineering and architectural
services;
■Construction or renovation of
real property;
■Electricity, natural gas or water
production (subject to certain limits);
■Film production;
■Agricultural processing; and
■Computer software production.
Your tax advisor should be able to
help you determine whether your
business qualifies for the deduction, if
there are ways to increase it and how
to capture the necessary information
in your accounting system.
Depreciable property acquired in
contemplation of a discharge of QRPI
does not increase the limitation.
Another exclusion for solvent
taxpayers is for purchase money debt.
Under this provision, if a seller-
financed mortgage is reduced, the
basis of the property securing themortgage is lowered instead of
generating COD income. It is treated
as if the purchase price of the
property were adjusted downward.
This basis reduction, like the others in
Section 108, defers the recognition of
COD income rather than permanently
eliminating it. Depreciation expense is
reduced on the taxpayer’s other
properties, and an eventual sale of
the property will generate a larger
gain due to the basis reduction. The
amount of the gain equal to theexcluded COD income is treated as
depreciation recapture.
Individual taxpayers can exclude up to
$2 million of COD income arising from
the reduction of the mortgage on, or
foreclosure of, their principal
residence. This provision can be
combined with the other exclusion
provisions discussed above if part of
the forgiven debt fails to qualify under
this provision.
Tax Credits and Incentives
The research and experimentation
(R&E) tax credit is intended to
encourage domestic research and
experimentation, and it applies to a
broad range of industries and
activities. Many states also have their
own R&E credits for qualifying work
performed within the state. The
federal credit is based on three types
of payments:
■Qualified research expenses- certain expenses for product,
process, software development and
improvement activities.
■Payments to qualified organizations
for research.
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■If the position does not satisfy the
MLTN standard, no benefit may be
reported on the financial
statements. Conversely, tax
liabilities may need to be repor ted.
FIN 48 can apply to certain pass-
through and tax exempt entities. For
example, with S corporations, if thereare issues related to whether the
company is entitled to be taxed as an
S corporation, it must evaluate
whether it is “more likely than not”
that its S corporation status would be
maintained upon audit. If the answer
is negative, the company would have
to record the ensuing tax liabilities
accordingly. Also, other S corporation
tax positions have to be evaluated,
such as potential recognition of
built-in gains. For tax exempt entities,
issues such as the validity of its taxexempt status and the existence or
amount of unrelated business taxable
income need to be analyzed.
FIN 48 requires disclosure of tax
benefits that do not meet the MLTN
test and do not qualify for financial
statement recognition. Annual filings
are required to report these positions
and changes to these positions.
Piggybacking off of the concepts in
FIN 48, the IRS is introducing acontroversial new tax form for 2010
tax returns – Schedule UTP. Large
corporations (those with $100 million
or more in assets) will be required to
report on the new Schedule UTP all
uncertain tax positions (UTPs) for
which a FIN 48 reserve was recorded
in their audited financial statements,
as well as UTPs for which no reserve
was recorded due to an expectation to
litigate. In 2012, the asset threshold
will be reduced to $50 million, and in
2014 to $10 million. For each UTP,taxpayers are required to include a
description sufficient to apprise the
IRS of the tax position and to rank the
positions by the size of the potential
tax liability, identifying any position
that accounts for 10 percent or more
of the total reserves.
FIN 48 and Schedule UTP
FIN 48 requires that any tax position
creating a tax benefit reportable on a
company’s financial statements
satisfy the requirement that it is
“more likely than not” (MLTN) that the
position will ultimately be sustained
on its merits if challenged by the IRS
(or relevant taxing authority). The
MLTN standard assumes that the IRS
has full knowledge of the tax position
and all of the relevant facts; in other
words, the company cannot consider
the likelihood of audit in arriving at its
MLTN conclusion.
FIN 48 applies to tax positions taken in
all open tax years, not just the current
year. This generally means that it
applies to positions taken up to three or
more years in the past. If a company
has a net operating loss carryforward,
the time can be even longer.
Tax positions that must be evaluated
include jurisdictional issues. For
example, a company that was
unaware of or ignored income tax
responsibilities in states, localities or
foreign countries has created an
uncertain tax position.
A private company must undertake
the following steps when evaluating
each tax position:
■Determine whether each tax
position meets the MLTN standard.
The company must also determine
the appropriate level at which the
position is analyzed (called the
“unit of account”) and document
why that level is appropriate.
■If the position satisfies the MLTN
standard, the company must
determine the amount of benefit
that should be recognized on thefinancial statements from the tax
position. The benefit is measured
“at the largest amount of benefit
that is greater than 50 percent likely
of being realized upon settlement.”
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Currently, par tnerships, S
corporations and regular corporations
that do not issue (or are part of a
group that does not issue) audited
financial statements are not required
to complete the form; however, the
IRS is currently considering whether
Schedule UTP should apply to pass-
through entities.
When FIN 48 was introduced, many
expressed concern that the FIN 48
reserve disclosures would serve
as a roadmap to audit adjustments
for the IRS. With Schedule UTP,
the IRS has saved their agents the
trouble of having to read the financial
statements by requiring taxpayers to
report the UTPs directly on the tax
return. When FIN 48 was introduced,
many expressed concern that it would
serve as a roadmap for IRS auditadjustments. By requiring taxpayers
to report the UTPs directly on their tax
returns, the IRS has saved its agents
the trouble of reading the financial
statements. Disclosures on Schedule
UTP will all but guarantee examinations
of those positions. Taxpayers should
work closely with their tax advisors
to carefully craft the disclosures and
to build the case for their positions
in anticipation of the IRS audit.
Disclosures on Schedule UTP will allbut guarantee examinations of those
positions. Taxpayers should work
closely with their tax advisors to
carefully craft the disclosures and to
build the case for their positions in
anticipation of the IRS audit.
In May of 2010, CBIZ MHM submitted
comments to the Commissioner of the
Internal Revenue Service expressing
concerns over whether Schedule
UTP should be implemented
and the burdens the Schedulewould impose on taxpayers.
Visit www.cbiz.com/UTP
to read our comments.
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and LLCs) are subject to tax on
income from all of their worldwide
activities. Thus, income earned by a
U.S. person in a foreign country is
subject to U.S. federal income tax,
even if that same income is subject to
tax in the foreign country.
Foreign Tax Credit
To avoid double taxation, U.S. taxpayers
may be able to claim a foreign tax credit
for taxes paid to foreign jurisdictions.
The amount of the credit is subject to
certain limitations, including the
requirement that there be foreign
source income as well as the
requirement that expenses be allocated
and apportioned among U.S. source
income and foreign source income.
Therefore, characterization issues as
well as location of the sales or services
are critical in maximizing a company’s
foreign tax credit. Corporate U.S.
taxpayers (excluding S corporations)
that own foreign corporations may be
able to claim a deemed paid credit on
the foreign taxes paid by the foreign
subsidiary. Unused foreign tax credits
can be carried back one year and
forward 10 years.
Legislation enacted in the summer of
2010 sought to curb perceived
exploitations of the foreign tax credit
rules. These changes make it more
difficult for corporations to separate
creditable foreign taxes from the
associated foreign income.
Over the past decade, closely held
companies have increasingly ventured
overseas to sell products and provide
services. At the same time, every
country wants to ensure that it is
getting at least its fair share of tax
from the revenues generated by
multinational activities. This leads tothe possibility of double taxation.
Several international taxation changes
were passed by Congress this year in
an attempt to close perceived
loopholes favoring corporations and
high net worth individuals. More
reform is expected in the coming
years. The need to understand the
existing and evolving complexities of
international tax and the
interrelationships with other taxing
jurisdictions becomes increasingly
important as the burden of avoidingtaxation by multiple jurisdictions falls
squarely on the taxpayer.
Taxing Worldwide Income
The U.S. maintains a worldwide
taxation system in which U.S. persons
(including individual citizens and
residents, corporations, partnerships
International SuperhighwayCongested by Tax Complexity
INTERNATIONAL TAXATION
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necessary to prevent the evasion of
taxes or to clearly reflect the income
of the organizations.
For example, a U.S. company that sells
widgets in England for $100 with a per
unit cost of $40 would normally be
subject to U.S. tax on the $60 of profit.
Assume the U.S. company forms awholly-owned Bermuda subsidiary
corporation and first sells the widgets
to Bermuda for $45 and then Bermuda
sells the widgets to England for $100.
In this case, the U.S. company would
be subject to tax on $5 from the sale
to Bermuda, with the remaining $55
profit deferred from U.S. tax since it is
held by the Bermuda company. In this
example, assuming there are no
activities in Bermuda, the IRS may
reallocate the income making all of the
profits ($60) subject to U.S. tax.
By conducting proactive transfer
pricing that supports, through
contemporaneous documentation,
certain activities and risks in
Bermuda, the company could maintain
tax deferral on a substantial portion
of the profits in the above example.
International Tax FilingObligations
One of the most common problems
for companies with overseas activities
is the failure to file the necessary
forms, returns or reports. In recent
years, the IRS has increased the
penalties for noncompliance and
enforcement resources are being
directed to this area. The following is
a list of the most common
international tax filings:
■Form 5471 - U.S. companies that
own 50 percent or more of foreigncorporations must file Form 5471
providing information to the IRS
regarding intercompany transactions.
Failure to file Form 5471 by its due
date will result in an automatic
assessment of the $10,000 penalty
for each late Form 5471.
Income Tax Treaties
The U.S. is also a party to a number
of income tax treaties that provide for
a reduction in withholding tax on
interest, dividends and royalties paid
to or from U.S. persons, and define
the types of business income that
may be subject to tax in each countr y.Contact your tax advisor for a listing
of the countries with which the U.S.
has an income tax treaty currently in
force and the withholding tax rates of
such treaties.
Deferral of U.S. Tax onForeign Earnings
The earnings of a foreign corporation
owned by a U.S. person are generally
not subject to U.S. taxation unless anduntil such earnings are repatriated.
Under certain circumstances, if the
foreign corporation is considered a
controlled foreign corporation (CFC),
the deferral from U.S. tax is not
allowed. A CFC is generally defined as
any foreign corporation where more
than 50 percent is owned by U.S.
shareholders. The U.S. shareholders
will generally be required to include in
income their pro rata share of
specifically defined types of income
earned by the foreign company,denominated as “Subpart F income.”
The passive foreign investment company
(PFIC) rules apply to foreign corporations
heavily engaged in investing in passive
assets or companies that generate
passive income. The rules are intended
to tax U.S. owners on income from
foreign companies that are not engaged
in active business.
Transfer PricingIf two or more businesses are owned
or controlled by the same owners, the
IRS may reallocate gross income,
deductions, credits or allowances
between the businesses. The IRS will
perform this reallocation when it is
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Taxation of Expatriates
Many businesses have employees
working outside the country who are
U.S. citizens or residents. As
previously discussed, the U.S. taxes
citizens and residents on their
worldwide income. A qualifying
individual who is living or workingabroad may elect to exclude up to
$91,500 (for 2010) of foreign earned
income from U.S. taxation. In
addition, a qualified individual may
elect to exclude a cer tain amount of
employer-provided foreign housing
expenses that are included in the
salary of the individual.
A qualified individual is one who has
met either the bona fide residence or
physical presence test to establish a
foreign tax home, which generallymeans that an individual must have
an overseas assignment of greater
than one year. In either test, it does
not matter if there is more than one
foreign country involved.
Foreign earned income includes wages,
salaries and other compensation
amounts for services actually rendered
overseas and while the individual had a
foreign tax home. The exclusion
amounts are for a full calendar year,
and are prorated by days for the firstand last year an individual qualifies if
less than the full calendar year.
For foreign income taxed by a foreign
country that is not excluded under
provisions noted above, or does not
qualify for such provisions, an
individual is entitled to a foreign tax
credit as calculated on Form 1116.
International tax is a complicated area
to which more businesses are
becoming subject as they expandoverseas. To make sure that you
follow the requirements, and to plan
for minimizing the tax impact, contact
your international taxation specialist.
■Form 5472 - Foreign companies
owning more than 25 percent of a
U.S. corporation must report
intercompany transactions.
■Form 8858 - U.S. persons with
foreign “disregarded entities” (DRE)
must report the financial
information and taxable income of the foreign DRE.
■Form 8865 - U.S. persons who
control a foreign partnership must
report intercompany transactions.
■Form 926 - U.S. persons must
report certain transfers of property
to foreign corporations.
■TDF 90-22.1 (FBAR) - Each U.S.
person who has a financial interest
in, or signature or other authority
over, certain foreign financial
accounts, must repor t that
relationship each calendar year on an
FBAR. The accounts include bank,
securities or other types of financial
accounts if the aggregate value of
these accounts exceeds $10,000 at
any time during the calendar year.
The FBAR must be filed with the
Department of the Treasury on or
before June 30 of the succeeding
year, and because it is not part of the
tax return, extending your tax returnwill not affect your FBAR filing
deadline. In 2008, the IRS stated
that interests in foreign hedge funds
are “financial accounts” for purposes
of this filing, but then proceeded to
exempt interests in those funds from
the reporting requirements for 2009
and earlier years.
Contact your tax advisor to determine
if you have filed all required reports,
whether you qualify for an amnesty
program and what action, if any, youneed to take.
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hand, would typically prefer a stock
sale in order to benefit from the
capital gains rates on the entire gain.
There are an infinite number of
variations on these themes, involving
things such as consulting
agreements, covenants not to
compete and personal goodwill,among others.
The impact of a business combination
or acquisition affects more than the
character or timing of income on the
sale. It can also affect other areas,
including, but not limited to, the ones
listed in the chart (See Chart 6) .
Determining the effects of these
transactions requires a careful
working relationship among clients,
attorneys and tax professionals.
Whether you are buying or selling a
business, or thinking about how to
transition out of your business,
thoughtful planning is essential.
Among the many issues to consider,
taxes typically loom large. Some of
the most critical choices involved are
discussed in this section.
Mergers and Acquisitions
In a traditional acquisition, the buyer
and seller will have opposing interests
regarding the structure of the
transaction. For instance, a buyer may
want to purchase the seller’s assets,
thereby obtaining increased basis for
depreciation and amortization
deductions, as well as providing
protection from the seller’s historical
liabilities. The seller, on the other
Planning Your Route: The Keys toWinding Down or Moving On
EXIT STRATEGI
Chart 6
Ancillary Considerations of Mergers and Acquisitions
• Whether transaction costs are capitalized or deducted
• Whether tax attributes (such as losses or accounting methods) carry over
• The rights of minority interest shareholders who may not want to continue
with the business
• The holding periods of assets or ownership interests
• Restrictions caused by the involvement of related parties
• The effect of the business structure or ownership on contracts, licensesand registrations
• Depreciation recapture
• The effects on qualified and non-qualified retirement plans or compensation
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■The seller does not have to worr y
about the quality of buyer stock or
other replacement property and the
business risks that might come with
a tax-deferred transfer.
■The buyer benefits by receiving
a stepped up basis in the
acquired assets.
■The buyer can eliminate the
seller’s continued involvement in
the business, unlike in a tax
free reorganization.
■The parties do not have to meet
the technical requirements of a
tax-deferred transfer, which can
drive up the costs of completing
the transaction.
■The seller can obtain the benefits of
the substantially lower capital gains
tax rates which exist today without
having to be concerned about
whether Congress will raise the
rates in the future.
With a partnership or LLC, the
distinctions between an asset sale and
a sale of the ownership interests may
be less significant than with a
corporation, but there are a number of
“surprises” in the partnership rules
that make it imperative that you obtain
competent tax advice before
proceeding. For instance, a transfer of
more than 50 percent of the interests
in a partnership will cause the
partnership to terminate for tax
purposes, resulting in a deemed
liquidation and contribution to a new
partnership. The existence of certain
tax elections can dramatically influence
who bears current and future tax
consequences when this happens.
One way to avoid the double tax and
defer current taxation on the sale of a
business is through a reorganization.
C corporations may have an
advantage when it comes to mergers
and acquisitions, because they can
most easily meet the requirements for
tax-free reorganizations. If you are
anticipating that your business will beacquired (or go public) in the near
future – or, if you are looking to
acquire a business - consider whether
C corporate status is to your
advantage. Remember to consult with
your tax advisor early, however, as you
may need to operate as a C
corporation for a period of time prior
to the acquisition.
You may not always want to avoid tax.
Although you generally want to defer
the payment of tax wheneverpossible, a taxable sale can have
some advantages.
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P LANNING P OINT : Even if
the tax treatment of some
ancillary agreements is less
advantageous than the asset or
stock sale, (e.g., ordinary income
to the seller instead of capital
gain), always consider allocating
reasonable value to these
agreements. The existence of theseagreements must be disclosed to
the IRS in an asset sale. By failing
to allocate a reasonable value to
them, you allow the IRS to
determine its own value – one that
may be considerably higher than
you expected.
T AX T RAP : The IRS has
subjected income from
noncompete agreements to self
employment tax when the parties
sign a single agreement that provides
for both consulting and restrictions
on competition, without specifically
allocating reasonable amounts to
each component. Always consult with
your tax advisor as part of your exit
or acquisition strategy to structure
the terms of your sales agreement in
the most advantageous manner.
E XPIRING
P ROVISION
: No tax provision has sent taxpayers
on a roller coaster ride like the
estate tax. Between 2001 -2009, the
estate tax exemption gradually
increased from $1 million to $3.5
million and the maximum estate
tax rate gradually dropped from 55
percent to 45 percent. Under current
law, the estate tax was then
scheduled to be repealed in 2010
only to be reinstated in 2011 at the
pre-2001 exemption amount and
tax rates. As of our publicationdate, the estate tax exemption and
tax rates going forward, and the
possibility of making the change
retroactive to January 1, 2010, still
had not been determined. Visit
www.cbiz.com/taxtracker to see
the current status of this provision.
the seller, and each should be
analyzed to make sure that the
amounts applied to each component
are reasonable. Additionally, there
may be situations where the selling
owner has personal goodwill, separate
from the goodwill of the business,
which may be separately appraised
and sold. Chart 7 provides a summaryof the most common tax
consequences of these types of
agreements.
Business SuccessionPlanning
Every business owner eventually faces
the question: “What do I do with my
business when I no longer want to run
it?” There are any number of possible
answers to this question, including
selling to employees, selling tooutsiders, establishing an ESOP and
transferring the business to family
members who are either active or
inactive in the business. As you
contemplate these and other
succession choices, you should also
seek to minimize the income, gift and
estate tax liability for yourself and
your heirs.
For more information on
estate planning in the wake
of this uncer tainty, visitwww.cbiz.com/EstatePlanning.
In recent years, the IRS has made an
effort to provide more certainty as to
whether various costs, especially
costs that provide a benefit beyond
the current taxable year, can be
deducted currently or are required to
be capitalized. Guidelines have been
issued with regard to tangible assets,
intangible assets and related costs. Inparticular, the regulations’ treatment
of costs of acquiring or creating
intangible assets may have a big tax
impact. There are also guidelines on
how certain costs must be
documented in order to be deducted.
If you have just completed, or are
contemplating a merger or other sale
or acquisition, you should carefully
analyze the transaction details to
maximize deductible costs.
Noncompete, Consultingand EmploymentAgreements
When buying or selling an entire
business, ancillary agreements such
as noncompetition, consulting or
employment agreements can almost
be an afterthought. For instance, as a
prudent buyer, you need to protect
yourself from future competition by
the seller. If you are the seller, you
certainly want to be compensated forthat, and you want explicit conditions
regarding when you are permitted to
“get back in the game.” Each of these
elements has its own tax
consequences for both the buyer and
Chart 7
Tax Consequences of Sales Agreements
Buyer Treatment Seller Treatment Employment Taxes
Consulting
AgreementOrdinary deduction Ordinary income
Self employment
(S/E) taxEmployment
AgreementOrdinary deduction Ordinary income Payroll taxes
Noncompete
Agreement15 year amortization Ordinary income Possible S/E Tax
Personal
Goodwill15 year amor tization Capital gain None
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P LANNING P OINT : You can
create a nonvoting class of
ownership in order to shift future
appreciation to family members,
while continuing to maintain
control. Alternatively, you can
give control immediately to
family members who are active in
the business.
medical expenses do not use any of
your $1 million lifetime gift tax
exemption. In addition, annual
exclusion gifts and direct tuition or
medical payments for grandchildren
are exempt from generation skipping
tax (GST). Amounts passing to your
spouse, whether via gift or upon your
death, qualify for an unlimited maritaldeduction; however, the assets are
then subject to estate tax in your
spouse’s estate. Finally, do not forget
the impact of possible state estate
taxes. Many states have their own
estate and gift tax regimes; in some
cases a state estate tax will be due
even if there is no federal estate tax
due. As you develop your estate plan,
be sure to consult with a qualified
adviser in the state where you live and
in states where you own property.
Employee Stock Ownership
Plan (ESOP)
If you own a corporation, you have the
option of selling your shares to an
ESOP for the benefit of your
employees. You can defer paying
income tax on the gain and diversify
your holdings by reinvesting the sale
proceeds into qualified investments
– generally, publicly traded stock. The
business may also benefit by being
able to take enhanced tax deductionsfor funding the purchase of your stock.
An ESOP is often attractive to owners
who do not have children who wish to
run the business, but it is a
complicated strategy that should only
be pursued after careful consideration.
Deferred Payment of Estate
Taxes
The estate of a decedent who owned
an interest in a closely-held business
may be able to defer the payment of estate taxes attributable to such
interest for a period of up to 14 years
at very favorable interest rates.
Here are some tools that business
owners need, as well as some issues
to bear in mind.
Buy/Sell Agreement
A properly drafted agreement can (1)
give the departing owner (or his
estate) a buyer for his interest which
may otherwise be unmarketable; (2)fix the method of determining the
price and method of payment for the
ownership interest; (3) restrict
transferability of the ownership
interest in order to preserve continuity
and harmony among the owners; and
(4) help establish the value of the
ownership interest for estate and gift
tax purposes, making it a valuable
estate planning tool.
Life Insurance
Life Insurance can be a very important
part of an estate and business
succession plan, because it can
provide the necessary liquidity to pay
estate taxes, fund a purchase of the
decedent’s ownership interest under a
buy/sell agreement or pay debts of the
decedent. Ownership of a life
insurance policy can be structured in a
manner that will avoid the imposition
of income or estate taxes on the policy
proceeds, but professional advice is
essential to make sure these benefitsare obtained.
Gift and Estate Planning
Gifts of ownership interests can be a
very effective way to transfer
ownership of a business to family
members. Both annual exclusion gifts
(currently $13,000 per donee per
year; $26,000 if you elect to “split
gifts” with your spouse) and larger
gifts utilizing portions of a person’s
lifetime transfer credit reduce your
taxable estate, remove future asset
appreciation from your estate and
transfer income producing property to
family members who may be taxed at
lower income tax rates.
Annual exclusion gifts and direct
payments you made for tuition and
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C corporations can donate inventory to certain qualifying
charities and receive an increased charitable deduction
that includes the inventory’s basis plus 50 percent of
the profit.
Check to see if your estimated tax payments are
sufficient, or whether you should adjust your final payment
to minimize penalties.
Review your company’s employee benefit offerings for
better or more tax advantageous ways to reward
employees.
Consider making a $5,000 “catch up” contribution to your
qualified retirement plan (e.g., 401(k)), if you will be at
least age 50 by the end of the year. You can only use the
catch up contribution if your plan permits it.
Accelerate equipment purchases into 2010 to maximize
the first year bonus depreciation deduction and use the
increased Section 179 expense election of $500,000.
Consider a cost segregation study of acquired or
constructed real property to identify those assets that
may qualify for faster depreciation.
Consider reversing any undesirable transactions that
took place during 2010 by year end in order to rescind
the transaction.
Review Nonqualified Deferred Compensation arrangements
and reporting practices for compliance with Section 409A.
If you have received or exercised any stock options,
calculate any potential regular and alternative minimum
tax effect and take action to minimize.
If your company has a net operating loss, estimate
whether and when you will be able to utilize it, calculate
any AMT effects and determine whether any ownership
changes may limit your loss.
Pay any accrued expenses to cash basis related parties
before December 31, 2010. An accrual basis business
can deduct these expenses in the current year only if paid
by the end of the year.
Pay accrued compensation, including vacation pay, to
unrelated individuals within two and one-half months after
year end in order to deduct the compensation this year.Amounts paid later than that become subject to the
deferred compensation rules.
If businesses can repurchase their own debts at a
discount in 2010, they can defer recognition of
cancellation of debt income until 2014.
Take advantage of financial hardship by accelerating
ordinary loss deductions from intercompany transactions.
These include deductions for bad debts or worthless
stock of a subsidiary. The subsidiary may avoid tax by
using the insolvency exception to eliminate the
requirement to report the income from the cancellation of
indebtedness or to avoid §332 liquidation treatment.
Businesses using the LIFO inventory method should
monitor their inventory levels before year end to avoid
invading LIFO inventory layers (and generating taxable
income).
Dispose of obsolete inventory before year end. You can
deduct the inventory you get rid of, but not by merely
booking a reserve on your financial statements.
Review the accounting methods used in your business to
determine whether a change might be advantageous.
Consider the methods used for:■Prepaid expenses
■Vacation pay
■Advance payments
■LIFO inventory
Checklist: Tax PlanningIdeas And Opportunities
CHECKLIST
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S corporations with E&P should consider electing to
distribute C corporation earnings while the dividend rate
is 15 percent.
Partnership allocations, and partnership agreements, can
be amended up through the tax return due date. Consider
whether adjustments are needed.
If your partnership has had a change in ownershipinterests during the year, calculate whether gain has
been triggered and whether remedial action can be taken
by year end.
Shareholders and partners should review projected
flow-through passive or capital gains and losses and
assess whether offsetting passive or capital items can
be generated.
State and Local Taxes
If you are changing locations, expanding your current
location, hiring employees or training employees, check to
see if you qualify for any state or local incentives.
If your property tax deadlines are approaching, think about
a property tax review to make sure you are paying the
lowest tax possible.
If you sell products, have employees or an office location
in a new state or in more than one state, see if there are
ways to minimize your overall state tax burden.
Review the tax impact of any transactions with related
parties.
Construct or review an estate plan, and if applicable, a
business succession plan.
Review your company’s shareholder or partner
agreements and buy/sell agreements for intent,
effectiveness and tax impact.
Assess whether your business activities qualify for the
research and experimentation tax credit.
Analyze foreign sales or foreign operations for tax
minimization.
Ensure that loans to or from the company are properly
documented and charge an appropriate rate of interest.
If you have acquired a new business during the year,
review transaction expenses for potential deductions.
Partnerships and S Corporations Before year end, partners and S corporation shareholders
should determine if they have sufficient basis in their
partnership interest or S corporation stock and loans to
utilize any current year losses.
S corporations that have sold built-in gain (BIG) property
during the year should consider offsetting these gains by
recognizing any built-in losses or by reducing the
corporation’s taxable income. Also, determine whether to
sell BIG property that has been held at least seven years,
to take advantage of the shortened holding period in 2010.
www.cbiz.com/tax
CBIZ MHM, LLC
Notes:
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With offices in major markets across the nation, CBIZ MHM, LLC is one of the largest accounting
providers in the country. Contact the office nearest you for assistance with your tax compliance
and consulting needs.
Atlanta
One Overton Park
3625 Cumberland Blvd. SE, 8th Floor
Atlanta, GA 30339
770.858.4500
Akron
4040 Embassy Pkwy., Suite 100
Akron, OH 44333
330.668.6500
Bakersfield
5060 California Ave., 8th Floor
Bakersfield, CA 93309
661.325.7500
Bethesda
3 Bethesda Metro Center, Suite 600
Bethesda, MD 20814
301.951.3636
Boca Raton
1675 N. Military Trail, Fifth Floor
Boca Raton, FL 33486
561.994.5050
Boulder
One Boulder Plaza
1801 13th St., Suite 210
Boulder, CO 80302
303.444.0471
Cambridge
350 Massachusetts Ave.
Cambridge, MA 02139617.761.0600
Chicago
One South Wacker Drive, Suite 1800
Chicago, IL 60606
312.602.6800
Cleveland
6050 Oak Tree Blvd., Suite 500
Cleveland, OH 44131
216.447.9000
Columbia
9755 Patuxent Woods Drive, Suite 200Columbia, MD 21046
443.656.3044
Cumberland
50 Baltimore St., 4th Floor
Cumberland, MD 21502
301.777.3490
Denton
110 Franklin St.
P.O. Box 500
Denton, MD 21629
410.479.2181
Denver
8181 East Tufts Ave., Suite 600
Denver, CO 80237
720.200.7000
Dublin
5450 Frantz Rd., Suite 300
Dublin, OH 43016
614.793.4501
Easton
28614 Marlboro Avenue, Suite 103
P.O. Box 1187
Easton, MD 21601
410.822.6950
Fairborn
3170 Presidential Dr.
Fairborn, OH 45324
937.320.1717
Irvine
2 Venture, Suite 450
Irvine, CA 92618
949.450.4400
Kansas City
11440 Tomahawk Creek Pkwy.
Leawood, KS 66211
913.234.1000
Los Angeles
10474 Santa Monica Blvd., Suite 200
Los Angeles, CA 90025
310.268.2000
Miami
1200 Brickell Ave., Suite 700
Miami, FL 33131
305.503.4200
Minneapolis
1000 Campbell Mithun Tower
222 South Ninth St.
Minneapolis, MN 55402
612.339.7811
New Bedford
700 Pleasant St.New Bedford, MA 02740
774.206.8300
Newport
130 Bellevue Ave.
Newport, RI 02840
401.380.1806
New York
1065 Avenue of the Americas
New York, NY 10018
212.790.5700
Orange County
2301 Dupont Dr., Suite 200
Irvine, CA 92612
949.474.2020
Oxnard
300 Esplanade Dr., Suite 250
Oxnard, CA 93036
805.988.3222
Philadelphia
401 Plymouth Rd., Suite 200
Plymouth Meeting, PA 19462
610.862.2200
Phoenix
3101 North Central Ave., Suite 300
Phoenix, AZ 85012
602.264.6835
Providence
56 Exchange Terrace
Providence, RI 02903
401.626.3200
Salt Lake
175 South West Temple, Suite 650
Salt Lake City, UT 84101
801.364.9300
San Diego
10616 Scripps Summit Court
San Diego, CA 92131
858.795.2000
San Jose
84 South First St., 3rd Floor
San Jose, CA 95113
408.295.3822
St. Louis
One CityPlace Drive, Suite 570
St.. Louis, MO 63141
314.692.2249
Topeka
990 SW Fairlawn Rd.
Topeka, KS 66606
785.272.3176
Wichita
220 West Douglas, Suite 300
Wichita, KS 67202
316.265.5600
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