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


http://slidepdf.com/reader/full/business-tax-planning-guide-2011 2/36| CBIZ MHM BUSINESS TAX PLANNING GUIDE

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


http://slidepdf.com/reader/full/business-tax-planning-guide-2011 3/36CBIZ MHM BUSINESS TAX PLANNING GUID

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

http://www.cbiz.com/taxtracker










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



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%






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

http://www.cbiz.com/healthcare

http://www.cbiz.com/healthcare



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



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



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.

http://www.cbiz.com/HIRE





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





http://slidepdf.com/reader/full/business-tax-planning-guide-2011 11/36CBIZ MHM BUSINESS TAX PLANNING GUIDE


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

http://www.cbiz.com/AET




http://slidepdf.com/reader/full/business-tax-planning-guide-2011 12/361 | CBIZ MHM BUSINESS TAX PLANNING GUIDE

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


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


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



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.

http://www.cbiz.com/SCorpDebt





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.

http://www.cbiz.com/CarriedInterest





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.

http://www.cbiz.com/LimitedPartners





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






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



http://www.cbiz.com/179D






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

http://www.cbiz.com/InventoryWritedowns






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






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



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

http://www.cbiz.com/NOLs





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.



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.






■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.”



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.

http://www.cbiz.com/UTP





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



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



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.



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



■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.



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



http://www.cbiz.com/EstatePlanning

http://www.cbiz.com/EstatePlanning




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



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



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:

3 | CBIZ MHM BUSINESS TAX PLANNING GUIDE

http://www.cbiz.com/tax




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



www.cbiz.com/tax

CBIZ MHM, LLC



Documents

Business Tax Planning Guide 2011