Presented by Walter Copeland, CPA Heather Kovalsky, CPA Brimmer, Burek & Keelan LLP
1. Cost Segregation Study What is a cost segregation study and how is it done? What is the IRS position on cost segregation? What are the benefits of cost segregation?
1. Cost Segregation (Cont.) Kinds of buildings that cost segregation applies to and examples Time periods for using cost segregation Loss carryback and carryforwards Doing cost segregation in the event of a sale Return on investment for cost segregation
1. Cost Segregation (Cont.) Example Taxpayer purchased $4 million in commercial real estate Owed $130,000 in tax before cost segregation study After study taxpayer paid zero tax in the current year, received a $100,000 refund from the resulting net operating loss carryback and had a net operating loss to carryforward to offset additional tax in future years.
2. Deduct New Equipment Purchases Write-off new equipment purchased in 2011. Deduction can create a net operating loss that not only results in zero income tax in the current year but also can create losses that can be carried back for a refund or forward to offset future income.
2. Deduct New Equipment Purchases (Cont.) Example XYZ Company has $500,000 in income before considering depreciation on the $1 million spent in 2011 on new equipment. After considering the new rules the company has a 2011 net operating loss (NOL) of $500,000, resulting in zero tax in 2011. But wait, there s more! The $500,000 NOL can be carried back for a refund or forward to offset future tax.
3. Gain Exclusion Pay zero tax on the sale of your small business stock that is held for five years. New legislation now allows 100% of the gain to be excluded from your taxable income if the qualified small business stock is acquired after September 27, 2010 and before January 1, 2012. This legislation also permits a 100% exclusion for Alternative Minimum Tax (AMT) purposes as well.
3. Gain Exclusion (Cont). Qualified Small Business Stock Requirements Applies to taxpayers other than corporations Stock originally issued after August 10, 1993 by a C Corporation with aggregate gross assets not exceeding $50 million at any time from August 10, 1993 to immediately before the issuance of the stock. The corporation must be active whereby 80% or more of its assets are used in the business. Ineligible businesses include certain personal service activities, banking and other financial services, farming, mineral extraction businesses, hotels and restaurants.
3. Gain Exclusion (Cont.) Example On November 1, 2011 an individual, Rich, acquires at original issuance 100 shares of qualified small business stock at a total cost of $1,000. Rich sells his stock on December 30, 2016 for $1 million. Rich will pay zero tax on the disposal of the qualified small business stock.
4. Ordinary Losses on Small Business Stock Take an ordinary loss up to $100,000 ($50,000 if married filing separately) on qualified small business stock dispositions. This loss can offset up to $100,000 in other income to pay zero tax. Depending on income, the loss can create a net operating loss that can be carried forward or back to offset taxable income in other years too.
4. Ordinary Losses on Small Business Stock (Cont). Small Business Stock is defined as stock in a domestic corporation if at the time the stock was issued, the corporation was a small business corporation (aggregate amount of money and other property received for the stock is $1 million or less), the stock was issued by the corporation for money or other property, and the corporation, during the period of its five most recent taxable years ending before the date of the loss, more than 50% of its aggregate gross receipts are from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges from stock.
4. Ordinary Losses on Small Business Stock (Cont). Example Taxpayer has $125,000 loss on disposition of its small business stock. Taxpayer s income from other sources is $75,000. The first $100,000 loss can be treated as an ordinary loss and the remaining $25,000 loss is treated as a capital loss (limited to $3,000 deduction each year). The $100,000 ordinary loss wipes out the $75,000 in taxable income to achieve zero tax. In addition, there is a $25,000 net operating loss that can be carried back or forward to offset income in another year. Plus, the taxpayer also has a $25,000 capital loss available for future years.
5. Debt Forgiveness Pay no income tax on the cancellation of debt if you are insolvent or in bankruptcy. Technical rules apply to determine if you are insolvent and the amount excludable from income.
5. Debt Forgiveness (Cont.) Example Taxpayer is in Title 11 bankruptcy and the only income is $350,000 from the cancellation of debt. The taxpayer will pay zero tax on this cancellation of debt income.
6. Income from Discharge of Debt on Main Home Based on recently changed rules, income from the cancellation of debt on your principal residence is excluded from income if discharged before January 1, 2013. The exclusion applies when a taxpayer restructures the acquisition debt on a principal residence, loses a principal residence in foreclosure, or sells a principal residence in a short sale.
6. Income from Discharge of Debt on Main Home (Cont.) Qualified principal residence indebtedness is Acquisition indebtedness on principal residence, up to $2 million ($1 million for married individuals filing separately). Acquisition indebtedness is defined as debt that was used to acquire, construct, or substantially improve the taxpayer s principal residence. Principal residence is the home where the taxpayer ordinarily lives most of the time. A taxpayer can have only one principal residence at a time.
6. Income from Discharge of Debt on Main Home (Cont.) Example Taxpayer is out of work and their only income is the discharge of qualified principal residence indebtedness. The taxpayer s qualified principal residence indebtedness that he is personally liable for is $500,000. The creditor forecloses and the home is sold for $350,000 in satisfaction of the debt. The $150,000 of cancellation of debt income is excluded from the taxpayer s income and the taxpayer pays zero tax.
7. Retirement Plans for Sole Proprietorships Basic limits for plans Combining various kinds of plans to achieve greater deductions Salary to family members to increase plan benefits Age issues
7. Retirement Plans for Sole Proprietorships (Cont.) Example of covering $300,000 of income with pension plan in one year Using pension plans to shield tax gain on sale of business
8. Hire Your Kids Redistribute income by hiring your kids to work in the family business and utilize their deductions to pay zero tax. Shift income to a lower tax bracket. The 10% rate bracket applies to the first $8,375 of taxable income in 2010. Utilize the child s standard deduction ($950 for 2010). Open an IRA for the child and make deductible contributions to the extent of the earned income or $5,000.
8. Hire Your Kids (Cont). Be careful because child s income can impact financial aid. Example Child receives $5,950 in wages. Child opens a traditional IRA that year and contributes $5,000. Child pays zero tax on the $5,950 in wages due to $5,000 deduction for the IRA contribution and the standard deduction of $950.
9. Roth IRA Conversion Convert to a Roth IRA and have nontaxable distributions from the Roth IRA in the future. With proper planning you can minimize the tax on the conversion and have zero tax in the future. Nondeductible contributions reduces the taxable amount on conversion. Convert when the market is low to minimize tax on conversion. Pay zero tax on future withdrawals and plan withdrawals around other income (no required minimum distributions) to achieve zero tax on other income too.
10. Evaluate Your Portfolio Consider investments in tax-free or taxdeferred holdings to pay zero tax. Municipal bonds Fixed annuities Growth stocks that do not pay taxable dividends