Tax Planning and the New Tax Law 11/18/2010

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A compendium of 2010 tax law changes that primarilly affect businesses
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  • 1. Tax Planning and the New Tax Law brown, kaplan + liss llp 11/18/2010
  • 2. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 2 | P a g e CONTENTS Pages 1 – 11 Outline – Tax Planning and the New Tax Law Pages 100 – 115 Articles CIRCULAR 230 DISCLOSURE To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in or accompanying this document, unless otherwise specifically stated, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in or accompanying this document.
  • 3. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 3 | P a g e brown, kaplan + liss llp – Tax Planning and the New Tax Law November 18, 2010 Joe M. Liss, CPA, Managing Partner Michael W. Felz, CPA, MST, Partner and Director of Taxation Kristy McElroy, CPA, Manager Scott Joschko, CPA, Manager I. New tax laws a. Small Business Jobs Act of 2010 (signed September 27, 2010) i. Tax savings provisions 1. Liberalized “cost recovery” rules a. Section 179 [see article at page 100]- Up to $500,000 of equipment, furniture and certain other capitalized asset purchases can be deducted in each of 2010 and 2011. b. The reduction in this $500,000 limitation does not take effect until $2,000,000 of property is place in service in either tax year. c. Taxpayers can elect to include in qualified asset purchases up to $250,000 of certain real property – i.e. qualified leasehold improvements, restaurant property, and retail improvement property. i. This doesn’t include air conditioning or heating units, or property used for lodging (except transient accommodations in hotels and motels), property used outside the U.S., and property used by governmental units, foreign persons or entities, and tax-exempt entities.
  • 4. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 4 | P a g e ii. Qualified leasehold improvements are improvements to the interior of a nonresidential property, made pursuant to a lease, in a portion to be occupied by the lessee, and the improvement is placed in service more than 3 years after the date the building was first placed in service by any person. d. 50% bonus depreciation [see article at page 100] – most new items of personal property, computer software and certain leasehold improvements placed in service before Jan. 1, 2011, qualify for 50% bonus depreciation in the year placed in service. e. Passenger automobiles – first year depreciation on qualified business autos placed in service on or before Dec. 31, 2010, is increased by $8,000 over the “luxury” auto limit of $3,060. Qualified business autos are allowed up to $11,060 of depreciation in the year placed in service, reduced proportionately for non-business use. f. Cell phones [see article at Page 101] – Cell phones are removed from “listed property” treatment. i. Strict substantiation requirements and additional limits placed on depreciation are removed. ii. This provision enables the fair market value of personal use of a cell phone or similar device provided to an employee predominantly for business purposes to be excluded from gross income. 2. Incentives for investment in businesses a. Start-up costs [see article at Page 102] – taxpayers can deduct up to $10,000 of start-up expenses incurred in 2010, with limitations if total start-up expenses exceed $60,000. The limit returns to $5,000 for expenses after 2010. b. Small business stock gain exclusion [see article at Page 103] – gain realized on the sale of “qualified small business stock” acquired after Sept. 27, 2010 and before Jan. 1,
  • 5. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 5 | P a g e 2011, held for more than 5 years, subject to certain limitations, is excluded from regular tax and AMT. c. Unused “Eligible Small Business Credits” are allowed 5-year carryback – Credits earned in a taxpayer’s first tax year beginning in 2010, but are unused in 2010, can be carried back five tax years and forward 20 tax years. i. “Eligible Small Businesses” are businesses that 1. Are either corporations the stock of which isn’t publicly traded, partnerships or sole proprietorships, and 2. Have average annual gross receipts for the three-year period preceding the tax year of no more than $50 million. d. Shortened S Corporation built-in gain holding period extended for 2011 – No tax is imposed on the net unrecognized built-in gain of an S corporation if the fifth year in the recognition period preceded 2011. Thus, a five year period applies for 2011 (a seven year period applies for 2010). 3. AMT liberalization a. “Eligible Small Businesses” can offset AMT liability with 2010 general business credits – Credits earned in the taxpayer’s first tax year beginning in 2010 can be used to offset AMT and regular tax except for 5% of regular tax in excess of $25,000. i. Where credits are limited to taxes attributable to income from an activity (i.e. research and development credits), those limits still apply. 4. Fringe benefits a. Cell phones (see item 1.f. above)
  • 6. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 6 | P a g e b. Health insurance for self-employed individuals [see article on Page 104] – For 2010, in addition to the income tax deduction previously allowed, self-employed individuals are also allowed to deduct the cost of health insurance in calculating net earnings from self-employment for purposes of the self-employment tax. 5. Qualified and Nonqualified Retirement Plans a. Retirement plan distributions may be rolled over to a designated Roth account [see article on Page 105] – Prior to this law, rollovers of distributions from a qualified plan to a designated Roth account could be made only from another designated Roth account. i. Now, eligible rollover distributions from qualified plans may be directly rolled over into a Roth IRA. ii. Plans may need to be amended to allow for such rollovers. iii. Rollovers to a designated Roth account are taxable 1. 10% early withdrawal penalty doesn’t apply 2. The taxable income is included ratably in the individual’s gross income over the two- year period beginning in 2011, though the individual may elect not to have this two- year deferral apply. 6. Information Reporting and Related Penalties [see article on Page 106] a. Rental Properties required to issue 1099s – A person receiving rental income from real estate will be considered to be engaged in a trade or business for information reporting purposes. i. Payments of $600 or more to a service provider (i.e. plumber, painter, or accountant) in the course of earning rental income will require an information
  • 7. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 7 | P a g e return (typically Form 1099-MISC) to the IRS and service provider. ii. Exception – any individual who receives rental income of not more than the minimal amount, as determined under IRS regulations (yet to be issued), and military members or intelligence employees if the rental income is from their principal residence. iii. Backup withholding – The backup withholding rules continue to apply. If reportable payments are made to a service provider who has not provided a taxpayer identification number to the payer, the payer is required to withhold 28% of the payment and submit it to the IRS. Form W-9 is used to obtain the payee’s taxpayer identification number. b. Penalties i. In addition to the backup withholding, penalties for failure to file information returns increase from $100 to $250 per return for intentional disregard of the rules. The penalties for failure to furnish information returns to payees also increase from $100 to $250 per return. 1. Example – if you should have filed and provided 10 Form 1099-MISC, but failed to do so, your penalties total $5,000 (10 failure to file penalties at $250 each, and 10 failure to furnish penalties at $250 each), plus you would be required to submit 28% of the gross payments as backup withholding if you didn’t obtain taxpayer identification numbers. ii. The various late filing penalties increase from $15 to $30 (“first tier” penalty for failures corrected within 30 days), from $30 to $60 (“second tier” penalty for failures corrected after 30 days but before August 1st of each year), and from $50 to $100 (third tier penalty for failures corrected after August 1). The penalties for failure to furnish
  • 8. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 8 | P a g e information returns to payees have been changed to match these late filing penalties. iii. The maximum penalties increase to $250,000 (first tier), $500,000 (second tier) and $1,500,000 (third tier). Small business (businesses with average annual gross receipts for the prior 3 years that don’t exceed $5 million) have smaller limits: $75,000 (first tier), $200,000 (second tier) and $500,000 (third tier). II. Other year-end business tax planning a. Illinois i. EDGE Tax Credit – Economic Development for a Growing Economy 1. Credit equal to amount of state income taxes withheld from the wages or salaries of employees in newly created jobs or retained jobs attributable to a particular project 2. Administered by the Department of Commerce and Economic Opportunity (DCEO) 3. See: http://www.commerce.state.il.us/dceo/Bureaus/Business_Develop ment/Tax+Assistance/ ii. Illinois Research & Development Credit – the R&D credit has been extended for tax years ending prior to January 1, 2011. The credit is equal to 6.5% of eligible expenditures for increasing R&D in Illinois. iii. Small Business Job Creation Tax Credit-for businesses with no more than 50 full-time employees 1. $2,500 credit per new employee hired and is applied towards payment of Illinois withholding taxes. 2. New, full-time employees must be hired during the 12 month period beginning July 1, 2010. a. Only new Illinois employees qualify
  • 9. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 9 | P a g e i. A full-time employee first employed within the incentive period (7/1/2010 – 6/30/2011) ii. Whose hire results in a net increase in the applicant’s full-time Illinois employees, and iii. Who is receiving a basic wage as compensation (no less than $13.75 per hour or the equivalent salary for a new employee) b. The law limits the total monetary amount of credits awarded to no more than $50 million, and credits shall be allowed on first-come, first-served basis. c. See: http://jobstaxcredit.illinois.gov/ iv. Angel Investment Credit [see Press Release on Page 107] – for taxable years beginning after 12/31/10 and ending on or before 12/31/16, eligible taxpayers may claim a nonrefundable income tax credit in the amount of 25% of the claimant’s investment made directly in a qualified new business venture. 1. A “qualified new business venture” means a business that is registered with the DCEO, and 2. A business must submit an application in each taxable year for which the business desires registration. 3. See the DCEO website for qualifications – not yet available b. Federal i. Expiring provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 1. Top rates increase from 35.0% to 39.6% 2. Long-term capital gain rates increase from 15% to 20% 3. Qualified dividend income rates increase from 15% to 39.6% ii. Health Care and Education Reconciliation Act of 2010 1. In 2013, additional medicare taxes-
  • 10. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 10 | P a g e a. Hospital Insurance tax rate of .9% on earned income in excess of $200,000 ($250,000 MFJ) b. 3.8% unearned income Medicare contributions tax on the lessor of “net investment income” or the excess of modified adjusted gross income over $200,000 ($250,000 MFJ, $125,000 MFS). 2. Expanded information reporting a. In 2012, 1099-MISC requirements expand to corporate providers and providers of property in addition to services b. In 2011, employer-provided health insurance costs to be reported on Form W-2 (reported only, not subject to tax) (IRS Notice 2010-69 made this disclosure optional for 2011). c. In 2010, Form 3921 is to be filed with IRS if stock is transferred in connection with exercise of incentive stock options. d. In 2010, Form 3922 is required if stock is transferred under an Employee Stock Purchase Plan. 3. “Economic Substance” Doctrine is codified – a transaction has economic substance only if the taxpayer’s economic position (other than its Federal tax position) is changed in a meaningful way and the taxpayer had a substantial purpose (other than a Federal tax purpose) for engaging in the transaction. 4. In 2018, a 40% nondeductible excise tax on insurance companies or plan administrators for any health insurance plan with an annual premium in excess of $10,200 for individuals ($27,500 for families), with the premium amounts to be adjusted for inflation. iii. Hiring Incentives to Restore Employment (HIRE) Act 1. A Qualified Employer’s 6.2% OASDI Social Security tax is forgiven for wages paid on previously unemployed new hires for any 2010 period starting after 3/18/2010 through 12/31/2010.
  • 11. brown, kaplan + liss llp Tax Planning and the New Tax Law November 18, 2010 11 | P a g e 2. A Qualified Employee must start work anytime after 2/3/2010 and before 1/1/2011, and generally must have been unemployed for at least 60 days before his/her start date. 3. Employers that hire new workers who qualify for payroll tax forgiveness and keep them on the payroll for at least 52 consecutive weeks may be eligible for an up to $1,000 tax credit (if lesser, 6.2% of wages). iv. The Domestic Production Activity Deduction (DPAD, Sec. 199) increases to 9% from 6% of domestic production activity income in 2010.
  • 12. brown, kaplan & liss llp Tax Planning and the New Tax Law November 18, 2010 99 | P a g e Contents Page 100 Expensing and bonus depreciation provisions in the 2010 Small Business Jobs Act 101 Simplified business cell phone deduction rules in the 2010 Small Business Jobs Act 102 Increased deduction for start-up expenditures in the 2010 Small Business Jobs Act 103 100% exclusion of gain from the sale of certain small business stock in the 2010 Small Business Jobs Act 104 Deductibility of health insurance for purposes of calculating self- employment tax in the 2010 Small Business Jobs Act 105 Retirement plan and annuity changes in the 2010 Small Business Jobs Act 106 Information reporting changes in the 2010 Small Business Jobs Act 107 Illinois Press Release – Angel Investment Tax Credit 109 Federal gift tax: liability based on lifetime gifts 110 Tax strategies for business people stepping up to a new car 112 S corporation as choice of entity 113 C corporation as choice of entity 115 Limited liability company as choice of entity
  • 13. brown, kaplan & liss llp Tax Planning and the New Tax Law November 18, 2010 100 | P a g e Expensing and bonus depreciation provisions in the 2010 Small Business Jobs Act The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging assortment of tax changes generally affecting business. Two of the most significant changes allow for faster cost recovery of business property. Here are the details. Enhanced small business expensing (Section 179 expensing). In order to help small businesses quickly recover the cost of certain capital expenses, small business taxpayers can elect to write off the cost of these expenses in the year of acquisition in lieu of recovering these costs over time through depreciation. Under pre-2010 Small Business Act law, taxpayers could expense up to $250,000 for qualifying property—generally, machinery, equipment and certain software—placed in service in tax years beginning in 2010. This annual expensing limit was reduced (but not below zero) by the amount by which the cost of qualifying property placed in service in tax years beginning in 2010 exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling to $2,000,000. The new law also makes certain real property eligible for expensing. For property placed in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that can be expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the cost of capital expenditures over time according to depreciation schedules. In previous legislation, Congress allowed businesses to more rapidly deduct capital expenditures of most new tangible personal property, and certain other new property, placed in service in 2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of the cost. The new law extends the first-year 50% write-off to apply to qualifying property placed in service in 2010 (2011 for certain property). We hope this information is helpful. If you would like more details about any aspect of the new legislation, please do not hesitate to call.
  • 14. brown, kaplan & liss llp Tax Planning and the New Tax Law November 18, 2010 101 | P a g e Simplified business cell phone deduction rules in the 2010 Small Business Jobs Act For an example of genuine tax simplification, it would be hard to beat a provision in the recently enacted 2010 Small Business Jobs Act. For the last several years, just about everyone, it seems, even the IRS, has complained about the archaic rules governing the tax treatment of employer-provided cell phones. Since 1989 (shortly after the first cell phones were introduced), employers and employees have been required to keep a detailed log of business and personal use on employer-provided cellular telephones and similar mobile communication devices to substantiate costs that were allowable as business expenses. In tax parlance, cell phones were included in the category of “listed property” (i.e., items obtained for use in a business but which lend themselves easily to personal use) and thus were subjected to strict substantiation rules. Employers who failed to meet the substantiation requirements couldn't deduct the costs of the cell phones, and employees who failed to meet the substantiation rules saw the amount that represented personal use of the cell phone counted as taxable wages (instead of a tax-free working condition fringe). Why the strict rules for cell phones? Back in 1989, cell phones were considered an expensive luxury item only used by executives, and Congress believed that an employee's use of an employer-provided cell phone to make personal calls should be treated as a taxable fringe benefit, similar to an employee's personal use of an employer- provided automobile. Needless to say, times have changed. No longer considered a luxury item, cell phones and other mobile communication devices are now part of daily business practices at all levels, and the deduction limitations and documentation requirements no longer make sense. Today, cell phones are more akin to a land line phone which for years an employee may have occasionally used to make a personal call without tax consequence. Detailed documentation is not required for use by an employee of his office phone, and there is no reason that cell phones should be subject to stricter substantiation requirements. You may have read in the news that the IRS Commissioner and Treasury Secretary joined in a statement urging Cong
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