Business Tax Planning Guide 2011

2010 - 2011
CBIZ MHM Business Tax Planning Guide

CONTENTS
2010 - 2011 CBIZ MHM

Business Tax Planning Guide
Table of Contents
RECENT TAX DEVELOPMENTS INTERNATIONAL TAXATION
Twists and Turns Leave Many International Superhighway
Unanswered Questions .......................................3 Congested by Tax Complexity ...........................25
Uncertainty Abounds ........................................3 Taxing Worldwide Income ................................25
Health Care Reform Dominates Foreign Tax Credit ..........................................25
Legislative Session ..........................................5
Income Tax Treaties .......................................26
The Hiring Incentives to Restore
Deferral of U.S. Tax on Foreign Earnings ........... 26
Employment Act...............................................8
Transfer Pricing .............................................26
GETTING STARTED
Mapping the Right Path to International Tax Filing Obligations ..................26
Long Term Success ............................................9 Taxation of Expatriates ...................................27
Choosing the Right Business Entity ...................9
EXIT STRATEGIES
Opportunities and Pitfalls: Planning Your Route: The Keys to
Specific Entities.............................................10 Winding Down or Moving On .............................28
RUNNING YOUR BUSINESS Mergers and Acquisitions ...............................28

Navigating the Long and Noncompete, Consulting and
Winding Road of Taxation .................................15 Employment Agreements ................................30
Recovering the Cost of Business Property ......... 15 Business Succession Planning ........................30
Dispositions of Business Property ...................17
CHECKLIST
Prevalent Tax Attributes and Issues .................20 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.
1 | CBIZ MHM BUSINESS TAX PLANNING GUIDE

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 deferral
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 the
introduction 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 worth 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
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.
PLANNING POINT – Tax planning ideas and opportunities for you to save money.
TAX TRAP – Potential tax traps that may cause problems for the unwary.
EXPIRING PROVISION – 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.
LEGISLATION PENDING – 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.
CBIZ MHM BUSINESS TAX PLANNING GUIDE | 2

RECENT TAX DEVELOPMENTS
Twists and Turns Leave Many

Unanswered Questions
Uncertainty Abounds Chart 1
No year in recent memor y compares Tax Provisions That Expired

to 2010 as it pertains to the federal at the End of 2009
tax landscape. It is no longer just a • AMT patch
question of what tax law changes
Congress and the Administration • Research and experimentation
might implement. We also have to ask credit
ourselves “What happens if Congress • 15 year cost recovery for
does nothing at all?” A stalemate in qualified leaseholds, retail and
Congress usually means the status restaurant property
quo prevails, but not this year. • Five-year NOL carryback
Significant tax cuts passed during the
Bush Administration in 2001 and
2003 (“the Bush tax cuts”) were
Chart 2
made temporar y to comply with
Congressional budget rules requiring Tax Provisions Due to Expire
future revenues to offset the costs. at the End of 2010
Fast forward to the present where • 33% and 35% top tax brackets
most of these tax breaks either expired for individuals
at the end of 2009 or will at the end of • 15% long term capital gains
2010 (See Charts 1 & 2). This means tax rate
that without Congressional action, the • 15% qualified dividends tax rate
tax law pertaining to these tax breaks
• Repeal of the overall limitation on
will revert back to where it stood in
itemized deductions and phase-
early 2001, raising taxes on virtually
outs of personal exemptions
all taxpayers (individuals, corporations
and other business entities and • Marriage penalty relief
estates). In addition to the Bush tax • 50% bonus depreciation
• Deferral of cancellation of
indebtedness income
• Increase in exclusion from sale
of qualified small business stock
to 75% or 100%
• Repeal of the estate tax

cuts, several other temporary tax take the opposite approach and
incentives meant to stimulate the accelerate income into 2010 and defer
sagging economy have either already deductions until 2011 (assuming you
expired or are set to expire at the end will ultimately recognize the income or
of 2010. deduction either way).
Add to this a change of power in For example, assume that by using

Washington, the desire to provide one of the ideas in this guide, you
economic stimulus and relief in were able to generate an additional
the wake of a recession and the $50,000 of deductions and can
competing need to control a spiraling control in which year you take the
budget deficit. The result is a flurry deduction. By deferring that deduction
of unanswered questions and until 2011, an individual in the
considerable uncertainty. Congress highest bracket would save an
addressed some of these issues as additional $2,300 in federal income
part of the Small Business Jobs Act taxes. Take the deduction in 2010
at the end of September, but many and you will need to earn a one-year
provisions remain in flux. Visit return of over 13 percent on that tax
www.cbiz.com/taxtracker to learn savings to equal the savings you
the current status of these tax would have realized by deferring the
provisions, what will happen if Congress deduction until 2011 (See Chart 3).
does not take action and what
proposals are under consideration. Whether it was due to political gridlock
or the lack of a sense of urgency,
Some of the suggestions in this guide Congress accomplished little related
are intended to minimize, or at least to taxes prior to the return from their
defer, income taxes by accelerating August recess. Congress did manage,
deductions into the current year and however, to pass some tax breaks
deferring income into next year. If you for job creation and one other very
are the owner of an S corporation, significant piece of legislation.
partnership or LLC, you may want to
Chart 3
When Do I Take the Deduction?
Amount of Deduction: $50,000
Deduct in 2010 Deduct in 2011
Highest Individual Highest Individual
35% 39.6%
Tax Rate Tax Rate
Tax Benefit Tax Benefit
$17,500 $19,800
from Deduction from Deduction
Additional Tax Savings by

Deferring Deduction until 2011: $2,300
One-year Return Required on

$17,500 to Earn $2,300: 13.14%

Health Care responsibility payment”). Exempt
individuals include certain lower-income
Reform Dominates individuals as well as undocumented
Legislative Session aliens, religious objectors, prisoners,
The predominant legislation to members of Native American tribes and
emerge from the 2010 Congressional certain hardship cases.
session was the landmark health Health care coverage may be obtained
care reform package. With calls through an employer-sponsored plan
for repeal and threats of lawsuits or independently through a state
before the ink from the President’s insurance exchange. Lower-income
signature was even dr y, it is uncertain taxpayers (who do not qualify for the
how many provisions from this exemption) may be eligible to receive
legislation will sur vive until their a premium assistance tax credit, free
effective dates. What is certain is health vouchers or other cost-sharing
that this legislation, should it stand, arrangements to ensure they are not
will greatly impact employers for spending more than a certain
many years to come. The discussion percentage of their income on health
that follows is a summar y of some care coverage.
of the major provisions of the
health care legislation, focusing on Large Employers
the impact to employers. Consult
your tax and benefits advisors or
Must Play or Pay
visit www.cbiz.com/healthcare Beginning in 2014, nondeductible
for more detailed information penalties will be assessed against a
on this expansive legislation. “large” employer that does not offer its
full-time employees the opportunity to
The Big Picture enroll in minimum essential coverage
As an alternative to establishing under an employer plan, if at least one
universal healthcare, Congress opted full-time employee is enrolled in an
to mandate health insurance coverage insurance exchange and receives a
– a mandate that is on the individual, premium assistance credit or cost-
not the employer. Large employers, sharing. For the purpose of the new
however, will be subject to “play or legislation, a large employer generally is
pay rules” (after 2013), whereby they defined as an employer who employed
will be required to offer full-time an average of at least 50 full-time
employees minimum essential employees during the preceding
coverage or face nondeductible calendar year. Employers under
penalties. Small employers that common control are aggregated for
provide adequate coverage will be purposes of the 50-employee threshold
eligible for a tax credit. The legislation and the 30-employee exemption from
included over $400 billion in revenue the penalty calculations. Full-time
raisers, the most prominent of which employees generally are defined as
are new FICA and Medicare taxes on employees working 30 or more hours
high-income individuals. per week. Solely for purposes of the
large employer test, an employer also
Individual Mandate must consider the number of full-time
employee equivalents made up by
Beginning in 2014, individuals not
part-time employees.
covered by Medicare or Medicaid (with
certain exceptions) will be required to The penalty is equal to $166.67 per
obtain minimum essential health care month multiplied by the number of
coverage for themselves and their full-time employees for the month.
dependents or pay a penalty The first 30 employees are subtracted
(euphemistically dubbed a “shared from the penalty calculation.

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-time
employees 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, the cost of health insurance
cannot exceed 9.5 percent of premiums to qualify for the credit.
household income.
From 2010-2013, the maximum credit
An employer must provide free choice is equal to 35 percent of the
vouchers to certain lower-income employer’s portion of the health
employees who do not participate in insurance premiums. The credit
the employer-sponsored plan if to do begins to phase out for employers
so would require an employee with more than 10 employees and/or
contribution of more than 8 percent of average annual wages over $25,000.
household income. The free choice After 2013, small employers will need
voucher is equivalent to the value of to purchase coverage through an
the coverage that the employer- insurance exchange to qualify for the
sponsored plan would have provided to credit, but the credit will increase to
the employee and is applied against 50 percent of the contribution (for up
the cost of coverage obtained through to two years).
an exchange.
Medicare Tax Increases on
Small Employer Health Higher-Income Taxpayers
Insurance Credit To help pay for all of this health care
While none of the aforementioned reform, Congress has imposed two
health care reform provisions become Medicare tax increases on higher-
effective until 2014, one provision income taxpayers, beginning in 2013.
that became effective immediately
was the small employer health The first tax increase is an additional
insurance tax credit. A small employer 0.9 percent Medicare tax on an
is defined as an employer with 25 or employee’s wages in excess of
fewer full-time equivalent employees $200,000 ($250,000 for joint filers).
with average annual wages of less Only the employee is subject to the
than $50,000. The small employer additional tax, as opposed to the 1.45
must contribute at least 50 percent of percent Medicare tax which is owed

PLANNING POINT: The by both the employee and the trusts also are subject to the tax on
additional 3.8 percent employer. The wages of married the lesser of their undistributed net
Medicare tax on investment income taxpayers are aggregated to determine investment income and the excess of
makes investments that do not the amount over the $250,000 their adjusted gross income (AGI) over
produce current taxable income, threshold. Employers are only required, the starting point of the highest
such as tax-exempt municipal however, to withhold the additional estate and trust income tax bracket
bonds and non-dividend paying Medicare tax when an employee’s ($11,200 in 2010 but will be adjusted
stocks, more attractive. wages exceed $200,000. The for inflation).
additional 0.9 percent Medicare tax is
also assessed on self-employment Net investment income includes
income, and none of the additional tax gross income from interest, dividends,
is deductible on page 1 of Form 1040. annuities, royalties and rents less
allowable deductions, as well as net
The second Medicare tax increase is gains attributable to the disposition
a 3.8 percent tax imposed on the of proper ty. For purposes of this 3.8
lesser of: percent Medicare tax, investment
income also includes all income from
■ An individual’s net investment a trade or business that is a passive
income, or activity with respect to the taxpayer or
from a trade or business that
■ An individual’s modified adjusted
consists of trading financial
gross income (MAGI) in excess of
instruments. Net investment income
$200,000 ($250,000 for joint filers)
does not include IRA or qualified
Although the Medicare tax is retirement plan distributions.
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
Married
Marital Status
Filing 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

The Hiring Incentives to Retention Tax Credit
Restore Employment Act As an incentive to retain those new
employees, the HIRE Act also includes
In March of 2010, Congress passed a retention tax credit. Employers
the Hiring Incentives to Restore receive a general business credit of
Employment (HIRE) Act. Intended as a $1,000 in 2011 for each qualifying
first step to boost a stagnant employee that satisfies a minimum
economy, the HIRE Act provided employment period.
incentives for businesses to invest in
new employees. A qualifying employee must satisfy the
same requirements necessary for the
Payroll Tax Holiday payroll tax holiday, plus these conditions:
In an attempt to spur job growth, the
■ Be employed by the employer on
HIRE Act temporarily exempted
any date during the taxable year;
employers from paying Federal
Insurance Contributions Act (FICA) tax ■ Be employed continuously by the
on the wages of newly hired workers employer for at least 52 weeks
who were formerly unemployed. The from the hire date; and
exemption applies to FICA taxes on
wages paid from March 19 - ■ Receive compensation during the
December 31, 2010. The exemption last 26 weeks of the period that is
does not apply to Medicare taxes and at least 80 percent of the
does not apply to the employee’s compensation paid during the first
portion of FICA taxes. 26 weeks of the period.
The exemption applies to wages paid For more information on the HIRE Act,
to an employee who: visit www.cbiz.com/HIRE.
■ Begins employment with the

employer after Februar y 3, 2010
and before Januar y 1, 2011;
■ Certifies that he has not been

employed for more than 40 hours
during the 60-day period ending on
the 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.

GETTING STARTED
Mapping the Right Path

to Long Term Success
EXPIRING PROVISION: Choosing the Right wages will generally be taxed at a
Without Congressional higher rate than dividends, because
action, the highest ordinary income
Business Entity wages are ordinary income with rates
tax rate will increase from 35 Whether you are a start-up company or up to 35 percent, and they are also
percent to 39.6 percent in 2011, an existing business, selecting the subject to employment tax. Qualified
and the 15 percent qualified best legal entity for your business dividends, on the other hand, are
dividend rate will revert to ordinary affects not only profitability and currently taxed at a maximum federal
income tax rates. To check the operations, but also your taxability, rate of 15 percent, without employment
current status of this provision, your benefits, your risk exposure and tax. It is always important to
visit www.cbiz.com/taxtracker. your ability to accumulate wealth as an remember that dividends must be paid
owner or executive. Your tax planning to all shareholders pro rata, while
should tie together your business compensation can be customized.
strategies with your personal tax,
S corporations, partnerships and
investment and estate planning goals.
limited liability companies (LLC)
An Income Tax Primer generally enjoy “pass-through” status
for tax purposes. This means that the
Apart from protecting the owners from
net profits or losses of the entity are
liabilities, income taxation is probably
reported directly on the owners’
the most important factor when
individual income tax returns, and the
choosing an entity structure. The C
entity pays no tax itself. As is so often
corporation or “regular” corporation is
the case, the devil is always in the
subject to “double taxation.” This
details, and the exceptions to these
means that the corporation pays tax on
rules contribute to an Internal Revenue
its net profits, and when dividends are
Code and Regulations that currently
paid to its shareholders, the
consumes almost 10,000 pages.
shareholders also pay tax on those
dividends. If a C corporation has net When considering which entity is best
losses, it must use them against its for you, do not limit your consideration
own income, either carrying the losses exclusively to the tax attributes
back to obtain refunds of prior years’ inherent in the various entity
taxes, or carrying them forward to structures. Think ahead to what types
offset future years’ income, or both. of assets the business will have, how
you will finance the business, what will
C corporation shareholder/employees
happen when you are winding down or
generally receive income as either
liquidating the business and how or
salary or dividends. The corporation
when you intend to take distributions
can deduct (within limits) compensation
from the business. Sometimes it
paid to employees, while dividends
makes sense to change your business
are not deductible, and therefore are
structure after you have been operating
paid after tax. At the employee level,
in your initial form, in order to

accommodate new goals or facts. tax, because the companies tend to EXPIRING PROVISION:
Make certain you thoroughly pay out the profits in bonuses at year Without Congressional
understand the tax consequences end. When it comes time to sell the action, the accumulated earnings
before making a change (See Chart 4). business, however, they can find tax will be imposed at the highest
themselves searching desperately for marginal individual tax rate
Chart 4 ways to avoid double taxation. beginning in 2011. This is currently
Common Entity Considerations Because C corporations do not get slated to be 39.6 percent.
any break for capital gains, holding
• Pass-through taxation vs. real estate inside a C corporation can
double taxation make the double tax problem even TAX TRAP: Some companies
• Flexibility to allocate tax items worse. Here are some additional unknowingly become PHCs
among owners issues to consider as a C corporation: during the winding down phase
following a reorganization or sale
• Flexibility to make distributions
other than pro rata
Corporate Penalty Taxes of assets, so careful planning is
In addition to the regular income tax, required.
• Flexibility in the types of owners
C corporations can also be subject to
(e.g., corporate, foreign)
the accumulated earnings tax. A
• Flexibility in methods of corporation that accumulates earnings
providing capital and profits (E&P) beyond its
• Owner participation in management reasonable business needs may be
subject to an additional 15 percent
• Liability protection for owners
tax on the accumulated taxable
• Tax rates income. Various exceptions may apply
• Treatment of liabilities for to reduce this tax, including a
tax purposes $250,000 accumulated earnings
• Type of property to be held credit ($150,000 in the case of
inside entity personal ser vice corporations).
• Ability to compensate employees Another penalty tax applies to

with equity participation Personal Holding Companies (PHCs).
• Exit strategies In general, a PHC is a closely-held
corporation which derives at least 60
• Ability to use losses percent of income from passive
sources, such as dividends, interest
• Employment tax consequences and rent. A PHC is taxed at the
• Employee benefits dividend rate on its undistributed PHC
income. There are exceptions for
• Impact of state taxes banks, finance companies and certain
other corporations.
• Estate and gift taxes (e.g., valuation
of business interests) For more information on the
accumulated earnings tax, visit
www.cbiz.com/AET.
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 different needs for
different people and businesses.
Smaller C corporations often avoid the
adverse impact of the corporate level

TAX TRAP: Distributions Personal Service Corporations S Corporations
made to shareholders that A Personal Ser vice Corporation (PSC) Many business owners like to operate
do not match share ownership is a corporation per forming ser vices in corporate form, in part because they
percentages can be treated by the in the fields of health, law, are comfortable using stock as the
IRS as creating a second class of engineering, architecture, accounting, form of ownership interest. For these
stock, thereby terminating S actuarial science, per forming arts or people, an S corporation can provide
corporation status. The same consulting. PSCs are subject to a the perfect vehicle to operate as a
applies to allocations of income. variety of special rules: corporation, while only paying one level
Options and warrants to purchase of tax, similar to a partnership. An S
common stock may also contain ■ PSCs are taxed at a flat 35 percent corporation needs careful planning and
provisions that create a second rate, and therefore do not benefit ongoing monitoring, however, in order to
class of stock. Review buy/sell from the lower, graduated rates. deal with the many issues surrounding
arrangements as well, because the This rate will increase to 39.6% in shareholder basis, distributions and
buyout provisions may cause the 2011 without Congressional action. maintaining S corporation status.
corporation to have an ineligible
shareholder or create a second ■ A fiscal year PSC is subject to a
“minimum distribution”
Eligibility for
class of stock.
requirement, which in effect evens S Corporation Status
out payments to employee- While the rules regarding eligibility to
PLANNING POINT: While shareholders for things like operate as an S corporation have
non-pro rata distributions compensation and rent, and may become increasingly more flexible in
or allocations of income will postpone part or all of the recent years, several limitations still
jeopardize S corporation status, deduction for these payments. must be monitored and navigated
the use of both voting and properly. An S corporation can now
■ PSCs can generally use the cash have up to 100 shareholders, however,
nonvoting shares of stock will not.
method of accounting, whereas a the type of persons or entities eligible
Use nonvoting shares as a way to
regular C corporation over certain to be shareholders is very specific
allow key employees or your
income levels generally must use (See Chart 5).
children to reap the economic
the accrual method.
benefits of S corporation ownership,
In addition to these restrictions, an S
while allowing you to maintain ■ PSCs and certain other small corporation can only have one class of
control over the company. businesses on the accrual method stock. Although stock can be
of accounting are permitted to nonvoting, this restriction also comes
reduce their accrued service income up in a wide variety of situations that
by an amount that, based upon are not as readily apparent.
experience, will not be collected.
Chart 5 Chart 5
Eligibility for S Corporation Status Eligibility for S Corporation Status
Corporate Requirements Eligible Shareholders
Eligible Shareholders
Must be domestic corporation Individuals must
Individuals must be
be U.S.
U.S. citizens
citizens or
or resident
resident aliens
aliens
Must be domestic corporation
Cannot have more than 100 shareholders Estates
Estates
Insurance companies are not eligible Grantor trust
Grantor trust with
with eligible
eligible grantor
grantor
Cannot have more than 100 shareholders
Financial institutions cannot be on reserve method
Electing
Electing small
small business
business trust
trust (ESBT)
(ESBT)
of accounting
Insurance companies are not eligible Qualifi
Qualified
ed subchapter
subchapter SS trust
trust (QSST)
(QSST)
Another
Another SS corporation
corporation (if
(if sole
sole shareholder
shareholder –– aa “QSSS”)
“QSSS”)
Financial institutions cannot be on reserve method Certain
Certain tax
tax exempt
exempt organizations
organizations
of accounting
Certain
Certain retirement
retirement plans
plans

Stock Basis, AAA and Distributions which exceed the TAX TRAP: If your debt basis
Distributions corporation’s AAA may result in in an S corporation has been
inadvertent dividends if the reduced by losses, any repayment
Shareholder stock basis and the
corporation has earnings and profits on that debt will result in income
corporate Accumulated Adjustments
(E&P) accumulated from the time it to the shareholder, unless the basis
Account (AAA) must be closely
was a C corporation. Delay has been fully restored. Do not
monitored in order to anticipate the
distributions if the amount in AAA at assume that if your remaining debt
tax impact of losses, distributions and
year end is uncertain. 1 basis is more than the repayment,
transactions.
that the repayment is tax free.
Tax-free distributions are allowed to Excess Passive
the extent of the shareholder’s stock Investment Income
basis. Shareholders must have basis S corporations that have accumulated PLANNING POINT1: Through
in their stock or in loans made directly E&P from the time prior to becoming 2010, qualifying dividends
to the corporation, and be “at risk” for an S corporation, along with are taxed at a maximum rate of 15
those amounts, in order to take substantial “passive” income, may percent. This is a good time for S
advantage of pass-through losses. have more to worry about than just the corporations with C corporation
Basis may be increased by capital timing of distributions. S corporations E&P to consider paying a
contributions or direct shareholder with net excess passive investment dividend to take advantage of the
loans to the corporation. Be cautious income that exceeds 25 percent of 15 percent tax rate.
of loans with guarantees, related gross receipts may be subject to tax at
party transactions, mirror loan the highest corporate income tax rate
transactions and circular loans. Loans PLANNING POINT2: Investing
(currently 35 percent). Passive
that achieve their desired business in publicly traded
investment income is income from
results may be structured to give partnerships may help to avoid the
rents, royalties, interest, dividends and
shareholders the basis they seek, excess passive income tax, because
annuities. Banks are excluded from the
but should be closely analyzed. the gross receipts allocated to each
passive income restrictions.
partner are not considered passive
For more information on If the corporation has net excess for purposes of this tax.
complications associated with passive investment income for three
loans to S corporations, visit consecutive years, S status is
www.cbiz.com/SCorpDebt. terminated as of the first day of the
following year. 2
When a shareholder has both stock
and debt basis, the stock basis is Built-In Gains Tax
reduced by losses first. After the
The built-in gains (BIG) tax imposes a
stock basis has been reduced to zero,
corporate level tax on the amount of
the shareholder’s basis in debt is
gains inherent in assets that were held
reduced by pass-through losses and
by a C corporation at the time it
then restored by the pass-through of
converted to an S corporation, or
subsequent years’ income.
assets that were acquired by the S
Loan repayments to the shareholder corporation in certain tax deferred
may produce taxable income for the transactions. If an S corporation
shareholder and should be timed to anticipates selling assets that will
minimize the tax impact. create the BIG tax, it should consider
offsetting the gains by recognizing
Advances to the corporation should be built-in losses or delaying the sale to
documented by a note, and any defer the tax. Estimated taxes must be
repayments on a reduced-basis note paid on net recognized built-in gains,
should be made more than 12 months and these estimates cannot be based
after the initial loan in order to obtain on the preceding year’s tax, if any.
capital gain treatment. Repayment of
open advances will result in ordinar y Generally, the BIG tax applies to
income if the debt basis of the assets sold within ten years from the
advance had been reduced by losses. date of the S election. Congress has

LEGISLATION PENDING: 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 venture
in 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.
TAX TRAP: The IRS closely recently decreased the holding period Liabilities and Losses
scrutinizes whether liabilities to seven years for assets disposed of Routine changes in partnership
of an LLC should be taken into during 2009 or 2010 and to five years liabilities may cause loss allocations
account in determining the amount for assets disposed of during 2011. to be adjusted, which can sometimes
for which a member is at risk, even
lead to unanticipated results. Even if
with single member LLCs. Partnerships and LLCs these changes do not affect
Remember that if the member is not Partnerships, and limited liability allocations, they may trigger income
ultimately liable for satisfying the companies taxed as partnerships to the partners in certain
liability, he is probably not at risk, (LLCs), have evolved as the entity of circumstances. One such example is
and he will not be able to deduct choice for many businesses today. when losses or withdrawals have been
losses from the LLC. Before Unless an LLC elects other wise when taken against debt basis. Take care
finalizing any LLC membership formed, it will be taxed as a when categorizing any partnership
agreements, consult with your tax partnership by default. These entities debt and be sure to monitor any
advisor to discuss whether the terms have the same pass-through taxation potential effects caused by shifting
align with your understanding of benefits as S corporations but provide levels of liabilities and debt.
the tax consequences. additional flexibility. References to
partnerships below are intended to Unexpected Income
include LLCs. Income and gain recognition can occur
PLANNING POINT: Typically,
a partnership will benefit by unexpectedly based upon partner
Special Allocations of Income contributions to the partnership,
making a tax election to increase While S corporations require a strict
the basis in the partnership’s assets, distributions to partners and transfers
per share, per day allocation of of partnership interests. Income
based upon the gain reported by a income and pro rata distributions,
partner who has sold his interest. recognition often depends on the
partnerships and LLCs provide position of the partnership at the end
Once made, this election applies to considerably more flexibility. As long
all future transfers of partnership of the taxable year. Year end planning
as the income tax allocations have can often mitigate unforeseen tax
interests and distributions of substantial economic effect (as
property to partners. consequences.
defined in the Regulations), you have
wide latitude in how you allocate
income and take distributions, such
as creating preferred interests for
certain partners.

Passive Losses Single Member LLCs TAX TRAP: Operating
Generally, passive losses from a A single member LLC owned by a businesses commonly hold
partnership or other pass-through corporation can choose to be taxed as real estate in a separate entity for
entities can only offset passive part of its corporate owner or as a a variety of tax and business
income, with unused passive losses separate corporate subsidiar y. A reasons. Do not fall into the self
carried to future years. Any single member LLC owned by an rental trap. If your partnership
suspended or unused loss generally is individual can choose to be taxed rents property to a separate
deductible upon disposition of the either as a sole proprietor, and report business in which you materially
entire interest in the passive activity. the business activity on the individual participate, the rental income that
owner’s Form 1040, or as a would normally be passive income
For more information on the passive corporation. While these entities are is recharacterized as active, while
loss rules, particularly with respect to often disregarded for federal income any rental losses remain passive
partnership, LLC and LLP members, tax purposes, remember that they losses. So you lose the ability to
visit www.cbiz.com/LimitedPartners. may still have employment, excise tax offset other passive losses against
or state franchise tax obligations. the rental income or use the rental
Rental Real Estate losses to offset active trade or
Rental real estate is a passive business income.
activity by definition, but real estate
professionals escape the limitation
on passive losses. A real estate
professional is someone who
spends 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.

RUNNING YOUR BUSINESS
Navigating the Long and

Winding Road of Taxation
EXPIRING PROVISION: The Recovering the Cost of Expensing Election –
bonus depreciation provision
was extended only through 2010 as
Business Property Section 179
For tax years beginning in 2010-2011,
part of last September’s Small Bonus Depreciation you now may generally elect to deduct
Business Jobs Act. The
Congress reinstated the 50 percent up to $500,000 of depreciable
Administration would like to see
bonus depreciation deduction for tangible personal property (including
this provision increased to 100
qualifying assets placed in service off-the-shelf computer software) in the
percent and extended through 2011.
during calendar year 2010, with limited year of purchase if your business has
Visit www.cbiz.com/taxtracker
application in 2011 for certain longer sufficient taxable income. The
to see the current status of
lived property. The provision generally increase in the expensing limit from
this provision.
applies to tangible personal property, $250,000 to $500,000 was a result
qualified leasehold improvements and of the Small Business Jobs Act of
purchased computer software. The 2010 (SBJA). The benefits of this
increased deduction applies for both election begin to phase out if more
regular tax and alternative minimum than $2,000,000 of qualifying
tax purposes. property is placed in ser vice during
the tax year. The maximum amount
that can be expensed is reduced dollar
for dollar, with the expensing election
completely phased out at $2,500,000.
If 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 retail
improvement property. This provision
marks the first time that the expensing
election has been extended to any type
of real property. 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

until there is sufficient taxable income lease when made to the interior PLANNING POINT1: While the
to absorb the remainder of the portion of nonresidential real property 15-year recovery period for
deduction. With respect to qualified that is at least three years old. Similar qualified leasehold improvements,
real property, any amount subject to provisions apply to qualified restaurant retail improvements and restaurant
the election that cannot be utilized in property and qualified retail property currently does not apply to
2010 or 2011 will be treated as improvement property. 1 assets placed in service after
placed in service in 2011 and subject December 31, 2009, make sure
to normal depreciation rules. Cost Segregation that you took advantage of this
Timing of asset purchases is not the provision when it was available.
Energy Efficient Commercial only way to maximize depreciation. Review your depreciation records
Building Deduction Make sure that assets are properly for the last few years and, if you
Taxpayers who build or renovate their categorized into the proper inadvertently failed to use the
real estate holdings may qualify for depreciable class. Mistakenly 15-year recovery period, you can
special tax benefits if they “go green.” depreciating a 5-year asset over 39 correct the matter through a
The energy efficient commercial years will dramatically reduce your change in accounting method or,
building deduction, or “179D depreciation deductions. in some instances, an amended
deduction,” allows businesses to tax return.
If you have recently purchased or built
immediately deduct the cost of
a building, remodeled existing space,
qualifying energy efficient property,
or plan to do so in the near future, LEGISLATION PENDING: As of
subject to a cumulative limitation of
consider a cost segregation study. A our publication date, no
$1.80 per square foot of floor space.
cost segregation study determines proposals had been introduced in
The improvements must result in a 50
whether an item is personal property Congress that would reinstate the
percent reduction in energy costs,
or a structural component of the 15-year recovery period. President
though a partial deduction of up to 60
building for depreciation purposes. By Obama’s budget, however, did
cents per square foot is allowed for
identifying the personal property contain such a provision. Visit
improvements to interior lighting, HVAC
components and their related costs www.cbiz.com/taxtracker to see
or the building envelope that meet
that can be depreciated over five, the status of this legislation.
certain energy targets. Unlike most
seven or 15 years, you can
current tax incentives, the 179D
dramatically accelerate your current
deduction extends through 2013,
depreciation deductions. Not only are PLANNING POINT2: As a
giving taxpayers time to plan upcoming
you shortening the depreciable life, bonus, because changing the
renovations to maximize the deduction.
you are changing to an accelerated depreciable life of an asset
For more information on the energy method. Real property must be constitutes an accounting method
efficient commercial building deduction, depreciated using the straight-line change, the present depreciation
visit www.cbiz.com/179D. method, but 5-year and 7-year method for property previously
property use 200 percent of the misclassified can be changed, and
Leasehold Improvements straight-line rate, and 15-year property the full amount of any prior
There are a number of tax rules uses 150 percent of the straight-line depreciation understatement can
specific to leases. Generally, the cost rate. The corporation or pass-through be deducted in the current year.
of leasehold improvements must be owner may lose some of the benefit of
depreciated over 39 years instead of a cost segregation study if the
the lease term. Should the tenant business or pass-through owner is
vacate the property before the end of subject to AMT.
the term, the tenant may deduct any
Typical assets that may be incorrectly
unrecovered cost. Qualified leasehold
classified as part of the building, but
improvement property placed in
should have short depreciable lives,
service prior to January 1, 2010, was
include: cabinets, decorative fixtures,
eligible to be depreciated over 15
partitions or removable walls, security
years using the straight line method,
equipment, parking lots, landscaping
rather than over 39 years. Qualified
and allocable architectural fees. 2
leasehold improvement property is any
improvement made by the lessor or
lessee pursuant to the terms of the

Inventory accounting method. Once on LIFO, you
If your business does not take a are also required to use it in any
physical inventory count at year end, external financial statements.
you may still be able to accrue a
If a corporation using the LIFO method
deduction for estimated inventory
files an S corporation election, it pays
shrinkage. Inventory shrinkage could be
tax on its LIFO recapture amount,
the result of bookkeeping errors,
which is the difference between the
breakage or undetected theft. To
inventor y value on FIFO and LIFO on
estimate shrinkage, you should
the date the S election is effective.
consider prior years’ experience and
This LIFO recapture amount must be
adjust for unusual or special
included in income on the final C
circumstances or factors. As with other
corporation return. The tax
inventory methods, the change to
attributable to the LIFO recapture,
inventory shrinkage requires application
however, is payable in four annual
to and consent from the IRS.
installments beginning with the final C
Inventory write-downs recorded at year corporation return. In addition, LIFO
end may or may not be deductible. may help defer any built-in gain
Write-downs can occur if the inventory is recognition related to inventor y if
obsolete, the inventory is “subnormal,” there are additional layers added
or the inventory is to be scrapped. Also, during S corporation years.
the company may be on a cost or a
lower-of-cost-or-market method. As a Dispositions of Business
general rule, subnormal finished goods Property
that are not completely obsolete must
be offered at reduced prices within 30 Installment Sales
days of year end in order to take an
Installment sales allow you to defer
inventory write down to market value.
your gain over a number of years when
Work-in-process and raw materials can
your payment is spread over time (for
be valued using any reasonable
example, when you take a promissor y
method since no market typically
note as part of the purchase price).
exists for these items. Inventory that is
Remember these points when
to be scrapped can be written down to
considering an installment sale.
its scrap value at year end.
■ Installment treatment is not
For more information on how to
available for publicly traded
take advantage of inventory
securities or inventor y.
write downs, visit
www.cbiz.com/InventoryWritedowns. ■ Depreciation recapture is recognized
in the year of sale regardless of the
LIFO Inventories amount of cash received.
Special rules apply to LIFO
inventories, but despite increased ■ Certain sales to related parties can
complexity, it is often well worth the either result in ordinar y income or
effort to plan for and maintain this acceleration of gain recognition.
inventor y method. LIFO is particularly
beneficial in times of inflation; ■ Subsequent disposition of the
however, once on the LIFO method, installment note will accelerate
you should monitor inventor y levels to the gain.
avoid invading LIFO inventor y layers ■ Distribution of an installment note
and triggering an increase in taxable to a shareholder (e.g. when a
income. LIFO inventor y accounting corporation liquidates after selling
requires an election and, if you are an its operating assets) generally will
existing business, a change in accelerate gain recognition.

■ There is a restriction on tax year), you would have to discount EXPIRING PROVISION:
deferral for large installment sales. those payments back to today’s dollars Without Congressional
If you have outstanding installment by more than 10 percent to equal a action, the 15 percent long-term
receivables in excess of $5 million present value of $600,000. Shorten capital gain tax rate for non-
which arose in the same tax year, the deferral period and the results are corporate taxpayers that would
installment treatment does not even more dramatic. apply to pass-through gains from
help since you must pay an an installment sale will revert to
“interest charge” on the amount of Of course, other elements must be 20 percent in 2011. Visit
tax deferral. factored into the calculation, such as www.cbiz.com/taxtracker to see
state income taxes and whether the the current status of this provision.
If your partnership, LLC or S cash is available to pay the accelerated
corporation sold assets in 2010 in tax liability without borrowing. Also
exchange for a promissory note, remember that the election out of
consider electing out of installment installment sale treatment is made at
sale treatment to reduce your tax the entity level. You should consider
burden. Take a simplified example the impact of that election on all of
where a five year installment sale the owners before making it. Is your
results in $4 million of long-term S corporation still receiving payments
capital gains. If all of the gain is on an installment sale prior to 2010?
deferred until 2011 and beyond, the If so, consider triggering the
total federal tax paid would equal acceleration of the remaining gain
$800,000 instead of $600,000 if the into 2010 by distributing the
entire gain were recognized in 2010. installment note to a shareholder or
Even when spreading the tax payments selling it to a related par ty.
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

PLANNING POINT1: Although Like-Kind Exchanges close the purchase. Exchanges with
you cannot exchange Exchanging one property for another related parties are subject to
partnership interests directly and qualifying property is a “plain vanilla” additional restrictions. 2
defer tax, it may be possible to like-kind exchange with which most
achieve the same result through a people are familiar. The like-kind Related Party Transactions
different structure or by exchanging exchange rules can also apply to more The definition of “related party” varies
underlying like-kind assets. complicated transactions. With proper depending on the type of transaction,
planning, you can exchange like-kind but it is a concept that you should
property and defer tax on the always keep in mind. Related parties
TAX TRAP: The ability to transaction in the following situations: can include:
defer gain recognition by
executing a like-kind exchange is ■ You are selling two or more ■ An individual and a corporation of
a great planning opportunity, but properties. which he owns more than 50
it can also hurt you when asset percent of the stock.
values are depressed. Just as the ■ You have not found the property you
realized gain on the property you want to own at the time you sell the ■ Partnerships and their partners.
exchange is deferred from property you own.
■ S corporations and their
taxation, so is any realized loss.
■ A qualified intermediar y “buys” the shareholders.
Given the current real estate
market, make sure that any property you want before you sell
■ Two corporations having more than
transfers of property whose basis the property you own.
50 percent common ownership.
exceeds its value do not qualify for ■ You acquire and “park” the
like-kind exchange treatment. ■ A corporation and a partnership, if
replacement property before the
That way, you can recognize the the same persons own more than
property you are transferring is
loss in the current year. 50 percent of each entity.
relinquished.
■ Trusts and estates with common
■ You acquire an interest as a tenant
2
PLANNING POINT : The IRS grantors or beneficiaries.
in common as an investment.
recently ruled that certain
Whenever you are involved in a
types of intangibles, such as ■ You use a related party to
transaction with one or more related
trademarks, trade names and accomplish your exchange.
parties, you should consult with your
other customer-based intangibles,
Anytime you are going to sell business tax advisor to determine whether you
may qualify as like-kind property
property, consider whether a like-kind are facing any unforeseen tax
if they can be separately described
exchange would be viable and consequences. Here are some of the
and valued apart from goodwill
advantageous. Once you have sold areas where transactions among
(which will not qualify for
your property and received your related parties can affect the tax
like-kind treatment). This ruling
payment, the transaction is taxable treatment:
represents a major change in the
Service’s position on this issue. and it is too late to implement a
■ Accrual method taxpayers may not
While this opens up new planning like-kind exchange strategy. With the
deduct salaries, bonuses, interest,
opportunities, tread carefully to scheduled return of the 20 percent
rent and other expenses owed to
make sure that the property will long term capital gains rate in 2011,
related cash method parties until
qualify as like-kind and meet the however, make sure to analyze
payments are made (or the
other requirements for a tax- whether paying the tax at the current
recipient reports the income in
deferred exchange. lower rates on the sale might better
some cases).
suit your goals. 1
■ Losses on sales between related
If the like-kind exchange requirements
parties are often disallowed
are not rigorously followed, you can
or deferred.
end up with a taxable transaction.
These requirements include strict ■ Sales of depreciable property may
definitions regarding what type of result in ordinar y income rather
properties are “like-kind” with each than capital gain.
other, and short time frames to
identify replacement properties and

■ Property received in a like-kind member with the ability to utilize
exchange between related parties losses in subsequent years.
which is sold within two years will
trigger tax for the initial seller. Additionally, when a corporation with
an NOL has more than a 50 percent
■ Installment sale property which is change in ownership, its NOL
resold by a related party within available in future years may be
two years accelerates gain to the severely limited. Generally, the annual
initial seller. NOL available to offset other income
will be limited to the value of the
corporation at the time of the
Prevalent Tax Attributes ownership change multiplied by a
and Issues defined federal interest rate (currently
between 3 and 5 percent). Exceptions
Net Operating Losses (NOLs) to this rule may apply to corporations
A net operating loss is a valuable that emerge from bankruptcy owned
corporate attribute, because it allows a by former shareholders and certain
business to potentially obtain refunds creditors. Again, these rules are
of prior years’ taxes and generate extremely complex and fact specific,
future profits tax-free. Generally, so consulting with your tax advisor
corporations can carry back NOLs early in the planning will allow you to
two years to recover taxes paid in maximize your NOL utilization.
previous years or carry those losses
forward up to twenty years. NOLs For more information on net
generated in either 2008 or 2009 (or operating loss limitations, visit
in both years in the case of certain www.cbiz.com/NOLs.
small businesses), however, can be
carried back as many as five years. Debt Forgiveness
The Internal Revenue Code states
When planning for estimated tax succinctly that gross income
payments or projecting cash flow, includes “income from discharge of
remember that the benefits of a indebtedness.” That is where the
corporation’s NOL is reduced by the simplicity stops. An explanation of
alternative minimum tax (AMT). The all of the ways in which discharge
NOL is only available to offset 90 of indebtedness (also referred to
percent of the corporate alternative as cancellation of debt or COD) may
minimum taxable income, which leaves apply and how to avoid reporting
10 percent of the AMT unprotected. the income on COD are beyond
For corporations filing consolidated the scope of this Guide, but some
returns, the rules for utilizing the of these are highlighted below. Be
NOLs of a member entering or leaving sure to speak with your tax advisor
the consolidated group are extremely before engaging in any transactions
complex, and as a result, advance that change the balance of
planning is critical. For acquired outstanding debt other than through
companies, losses generated before simple borrowing or repayment.
entering the consolidated group are The tax consequences from the
SRLY losses – incurred in a “separate transfer of real estate in satisfaction
return limitation year” – and utilization of a debt are significantly different
of those losses is typically limited to depending upon whether the debt is
the taxable income generated by that recourse or nonrecourse. A transfer of
member. For members leaving the property in satisfaction of a recourse
consolidated group, complicated mortgage is bifurcated into two types
apportionments of the NOLs will be of income. The excess, if any, of the
required, but may leave the departing

debt over the fair market value (FMV) Exceptions to the taxability of COD are
of the underlying property is COD codified in Internal Revenue Code
income, and the excess of the FMV of Section 108. The two most common
the property over its basis is treated exclusions under Section 108 are for
like a gain on a sale of the property. bankruptcy and insolvency. COD
For property secured by a nonrecourse income will be excluded if the taxpayer
mortgage, the transfer is treated as a is a debtor in a federal bankruptcy
sale of the property for the amount of case and the debt was discharged
the mortgage, with the resulting gain either by order of the bankruptcy court
or loss taxed as a normal property or pursuant to a court approved
sale. No COD income is realized from liquidation plan. Insolvency exists if a
the transfer of property in satisfaction taxpayer’s liabilities exceed the FMV
of a nonrecourse liability, and as a of his assets, measured immediately
result, the Section 108 exclusions before the debt forgiveness. The
(discussed below) do not apply. Note “price” for using the bankruptcy or
that a reduction in or forgiveness of a insolvency exception is a
recourse or nonrecourse debt, rather corresponding reduction to the
than a transfer of the underlying taxpayer’s positive tax attributes,
property in satisfaction of the debt, including NOLs, tax credits, capital
will generate COD income. and passive loss carr yfor wards and
basis in depreciable assets.
An important distinction exists in the
treatment of COD income between an A taxpayer who is neither bankrupt nor
S corporation and partnership or LLC. insolvent has other possibilities
For S corporations, the bankruptcy available to defer or exclude COD
and insolvency tests, as well as the income. For example, COD from
reduction of tax attributes, are all business debt that a taxpayer
made at the corporate level. For reacquires before Januar y 1, 2011
partnerships and LLCs, this is done at can be deferred at the taxpayer’s
the partner or member level. This election until 2014, and then included
means that COD income from a ratably over the ensuing five years.
partnership or LLC could have a The reacquisition can be
different impact on the partners or accomplished with a cash payment, a
members depending upon their new debt instrument, stock or
individual financial conditions and partnership interests or a contribution
personal tax elections. And a to capital by either the debtor or
partnership must consent to a certain related persons or entities.
partner’s election to reduce his or her
share of the partnership’s depreciable Also, a taxpayer can elect to exclude
property. Another important the forgiveness of qualified real
distinction for S corporations is that property indebtedness (QRPI) from
COD income does not increase a income. QRPI is secured debt used to
shareholder’s basis in his stock. 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.

Depreciable property acquired in ■ Payments to energy research EXPIRING PROVISION: The
contemplation of a discharge of QRPI consortia for energy research. R&E credit expired at the
does not increase the limitation. end of 2009. Often, the R&E credit
If your business has activities related faces extinction only to be extended
Another exclusion for solvent to the development or improvement of at the last minute. Proposals were
taxpayers is for purchase money debt. products, software, manufacturing or under consideration in Congress to
Under this provision, if a seller- other processes, techniques, formulas extend the R&E credit for at least
financed mortgage is reduced, the or similar activities, now is the time to another year, through 2010, or
basis of the property securing the assess whether your business is even to make it permanent. Visit
mortgage is lowered instead of taking full advantage of this valuable www.cbiz.com/taxtracker to see
generating COD income. It is treated incentive. Even if your company has the current status of this provision.
as if the purchase price of the been claiming the R&E credit for
property were adjusted downward. several years, have an advisor review
This basis reduction, like the others in your computations periodically. New TAX TRAP: Several states do
Section 108, defers the recognition of methods for computing the credit have not allow the DPAD as a
COD income rather than permanently been introduced over the last few deduction. Be sure to account for
eliminating it. Depreciation expense is years and you may not be using the your states’ rules when projecting
reduced on the taxpayer’s other method that is most advantageous for your state income tax liabilities.
properties, and an eventual sale of your unique situation.
the property will generate a larger
gain due to the basis reduction. The Although the domestic production
amount of the gain equal to the activities deduction (DPAD) has been
excluded COD income is treated as around for several years, many
depreciation recapture. companies are not taking maximum
advantage of it. In 2010, the
Individual taxpayers can exclude up to deduction increased to 9 percent of
$2 million of COD income arising from qualified production activities income
the reduction of the mortgage on, or (QPAI) – up from 6 percent in 2009.
foreclosure of, their principal Domestic production activities that
residence. This provision can be qualify for the deduction include:
combined with the other exclusion
provisions discussed above if part of ■ The manufacture, production,
the forgiven debt fails to qualify under growth or extraction of tangible
this provision. personal property;
■ Engineering and architectural

Tax Credits and Incentives
services;
The research and experimentation
(R&E) tax credit is intended to ■ Construction or renovation of
encourage domestic research and real property;
experimentation, and it applies to a
broad range of industries and ■ Electricity, natural gas or water
activities. Many states also have their production (subject to certain limits);
own R&E credits for qualifying work
■ Film production;
per formed within the state. The
federal credit is based on three types ■ Agricultural processing; and
of payments:
■ Computer software production.
■ Qualified research expenses
- certain expenses for product, Your tax advisor should be able to
process, software development and help you determine whether your
improvement activities. business qualifies for the deduction, if
there are ways to increase it and how
■ Payments to qualified organizations to capture the necessar y information
for research. in your accounting system.

FIN 48 and Schedule UTP ■ If the position does not satisfy the
FIN 48 requires that any tax position MLTN standard, no benefit may be
creating a tax benefit reportable on a reported on the financial
company’s financial statements statements. Conversely, tax
satisfy the requirement that it is liabilities may need to be reported.
“more likely than not” (MLTN) that the
FIN 48 can apply to certain pass-
position will ultimately be sustained
through and tax exempt entities. For
on its merits if challenged by the IRS
example, with S corporations, if there
(or relevant taxing authority). The
are issues related to whether the
MLTN standard assumes that the IRS
company is entitled to be taxed as an
has full knowledge of the tax position
S corporation, it must evaluate
and all of the relevant facts; in other
whether it is “more likely than not”
words, the company cannot consider
that its S corporation status would be
the likelihood of audit in arriving at its
maintained upon audit. If the answer
MLTN conclusion.
is negative, the company would have
FIN 48 applies to tax positions taken in to record the ensuing tax liabilities
all open tax years, not just the current accordingly. Also, other S corporation
year. This generally means that it tax positions have to be evaluated,
applies to positions taken up to three or such as potential recognition of
more years in the past. If a company built-in gains. For tax exempt entities,
has a net operating loss carryforward, issues such as the validity of its tax
the time can be even longer. exempt status and the existence or
amount of unrelated business taxable
Tax positions that must be evaluated income need to be analyzed.
include jurisdictional issues. For
example, a company that was FIN 48 requires disclosure of tax
unaware of or ignored income tax benefits that do not meet the MLTN
responsibilities in states, localities or test and do not qualify for financial
foreign countries has created an statement recognition. Annual filings
uncertain tax position. are required to report these positions
and changes to these positions.
A private company must undertake
the following steps when evaluating Piggybacking off of the concepts in
each tax position: FIN 48, the IRS is introducing a
controversial new tax form for 2010
■ Determine whether each tax tax returns – Schedule UTP. Large
position meets the MLTN standard. corporations (those with $100 million
The company must also determine or more in assets) will be required to
the appropriate level at which the report on the new Schedule UTP all
position is analyzed (called the uncertain tax positions (UTPs) for
“unit of account”) and document which a FIN 48 reser ve was recorded
why that level is appropriate. in their audited financial statements,
as well as UTPs for which no reser ve
■ If the position satisfies the MLTN was recorded due to an expectation to
standard, the company must litigate. In 2012, the asset threshold
determine the amount of benefit will be reduced to $50 million, and in
that should be recognized on the 2014 to $10 million. For each UTP,
financial statements from the tax taxpayers are required to include a
position. The benefit is measured description sufficient to apprise the
“at the largest amount of benefit IRS of the tax position and to rank the
that is greater than 50 percent likely positions by the size of the potential
of being realized upon settlement.” tax liability, identifying any position
that accounts for 10 percent or more
of the total reser ves.

Currently, partnerships, 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 audit
adjustments. 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 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.
In May of 2010, CBIZ MHM submitted

comments to the Commissioner of the
Internal Revenue Ser vice expressing
concerns over whether Schedule
UTP should be implemented
and the burdens the Schedule
would impose on taxpayers.
Visit www.cbiz.com/UTP
to read our comments.

INTERNATIONAL TAXATION
International Superhighway
Congested by Tax Complexity
Over the past decade, closely held and LLCs) are subject to tax on
companies have increasingly ventured income from all of their worldwide
overseas to sell products and provide activities. Thus, income earned by a
ser vices. At the same time, ever y U.S. person in a foreign countr y is
countr y wants to ensure that it is subject to U.S. federal income tax,
getting at least its fair share of tax even if that same income is subject to
from the revenues generated by tax in the foreign countr y.
multinational activities. This leads to
the possibility of double taxation.
Several international taxation changes
Foreign Tax Credit
were passed by Congress this year in To avoid double taxation, U.S. taxpayers
an attempt to close perceived may be able to claim a foreign tax credit
loopholes favoring corporations and for taxes paid to foreign jurisdictions.
high net worth individuals. More The amount of the credit is subject to
reform is expected in the coming certain limitations, including the
years. The need to understand the requirement that there be foreign
existing and evolving complexities of source income as well as the
international tax and the requirement that expenses be allocated
interrelationships with other taxing and apportioned among U.S. source
jurisdictions becomes increasingly income and foreign source income.
important as the burden of avoiding Therefore, characterization issues as
taxation by multiple jurisdictions falls well as location of the sales or services
squarely on the taxpayer. are critical in maximizing a company’s
foreign tax credit. Corporate U.S.
Taxing Worldwide Income taxpayers (excluding S corporations)
that own foreign corporations may be
The U.S. maintains a worldwide able to claim a deemed paid credit on
taxation system in which U.S. persons the foreign taxes paid by the foreign
(including individual citizens and subsidiar y. Unused foreign tax credits
residents, corporations, partnerships can be carried back one year and
for ward 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.

Income Tax Treaties necessar y to prevent the evasion of
taxes or to clearly reflect the income
The U.S. is also a party to a number of the organizations.
of income tax treaties that provide for
a reduction in withholding tax on For example, a U.S. company that sells
interest, dividends and royalties paid widgets in England for $100 with a per
to or from U.S. persons, and define unit cost of $40 would normally be
the types of business income that subject to U.S. tax on the $60 of profit.
may be subject to tax in each countr y. Assume the U.S. company forms a
Contact your tax advisor for a listing wholly-owned Bermuda subsidiary
of the countries with which the U.S. corporation and first sells the widgets
has an income tax treaty currently in to Bermuda for $45 and then Bermuda
force and the withholding tax rates of sells the widgets to England for $100.
such treaties. In this case, the U.S. company would
be subject to tax on $5 from the sale
to Bermuda, with the remaining $55
Deferral of U.S. Tax on profit deferred from U.S. tax since it is
Foreign Earnings held by the Bermuda company. In this
example, assuming there are no
The earnings of a foreign corporation activities in Bermuda, the IRS may
owned by a U.S. person are generally reallocate the income making all of the
not subject to U.S. taxation unless and profits ($60) subject to U.S. tax.
until such earnings are repatriated.
Under certain circumstances, if the By conducting proactive transfer
foreign corporation is considered a pricing that supports, through
controlled foreign corporation (CFC), contemporaneous documentation,
the deferral from U.S. tax is not certain activities and risks in
allowed. A CFC is generally defined as Bermuda, the company could maintain
any foreign corporation where more tax deferral on a substantial portion
than 50 percent is owned by U.S. of the profits in the above example.
shareholders. The U.S. shareholders
will generally be required to include in
income their pro rata share of
International Tax Filing
specifically defined types of income Obligations
earned by the foreign company,
One of the most common problems
denominated as “Subpart F income.”
for companies with overseas activities
The passive foreign investment company is the failure to file the necessar y
(PFIC) rules apply to foreign corporations forms, returns or reports. In recent
heavily engaged in investing in passive years, the IRS has increased the
assets or companies that generate penalties for noncompliance and
passive income. The rules are intended enforcement resources are being
to tax U.S. owners on income from directed to this area. The following is
foreign companies that are not engaged a list of the most common
in active business. international tax filings:
■ Form 5471 - U.S. companies that

Transfer Pricing own 50 percent or more of foreign
corporations must file Form 5471
If two or more businesses are owned providing information to the IRS
or controlled by the same owners, the regarding intercompany transactions.
IRS may reallocate gross income, Failure to file Form 5471 by its due
deductions, credits or allowances date will result in an automatic
between the businesses. The IRS will assessment of the $10,000 penalty
per form this reallocation when it is for each late Form 5471.

■ Form 5472 - Foreign companies Taxation of Expatriates
owning more than 25 percent of a
U.S. corporation must report Many businesses have employees
intercompany transactions. working outside the countr y who are
U.S. citizens or residents. As
■ Form 8858 - U.S. persons with previously discussed, the U.S. taxes
foreign “disregarded entities” (DRE) citizens and residents on their
must report the financial worldwide income. A qualifying
information and taxable income of individual who is living or working
the foreign DRE. abroad may elect to exclude up to
$91,500 (for 2010) of foreign earned
■ Form 8865 - U.S. persons who
income from U.S. taxation. In
control a foreign partnership must
addition, a qualified individual may
report intercompany transactions.
elect to exclude a certain amount of
■ Form 926 - U.S. persons must employer-provided foreign housing
report certain transfers of property expenses that are included in the
to foreign corporations. salar y of the individual.
■ TDF 90-22.1 (FBAR) - Each U.S. A qualified individual is one who has
person who has a financial interest met either the bona fide residence or
in, or signature or other authority physical presence test to establish a
over, certain foreign financial foreign tax home, which generally
accounts, must report that means that an individual must have
relationship each calendar year on an an overseas assignment of greater
FBAR. The accounts include bank, than one year. In either test, it does
securities or other types of financial not matter if there is more than one
accounts if the aggregate value of foreign countr y involved.
these accounts exceeds $10,000 at
Foreign earned income includes wages,
any time during the calendar year.
salaries and other compensation
The FBAR must be filed with the
amounts for services actually rendered
Department of the Treasury on or
overseas and while the individual had a
before June 30 of the succeeding
foreign tax home. The exclusion
year, and because it is not part of the
amounts are for a full calendar year,
tax return, extending your tax return
and are prorated by days for the first
will not affect your FBAR filing
and last year an individual qualifies if
deadline. In 2008, the IRS stated
less than the full calendar year.
that interests in foreign hedge funds
are “financial accounts” for purposes For foreign income taxed by a foreign
of this filing, but then proceeded to countr y that is not excluded under
exempt interests in those funds from provisions noted above, or does not
the reporting requirements for 2009 qualify for such provisions, an
and earlier years. individual is entitled to a foreign tax
credit as calculated on Form 1116.
Contact your tax advisor to determine
if you have filed all required reports, International tax is a complicated area
whether you qualify for an amnesty to which more businesses are
program and what action, if any, you becoming subject as they expand
need to take. overseas. To make sure that you
follow the requirements, and to plan
for minimizing the tax impact, contact
your international taxation specialist.

EXIT STRATEGIES
Planning Your Route: The Keys to

Winding Down or Moving On
Whether you are buying or selling a hand, would typically prefer a stock
business, or thinking about how to sale in order to benefit from the
transition out of your business, capital gains rates on the entire gain.
thoughtful planning is essential. There are an infinite number of
Among the many issues to consider, variations on these themes, involving
taxes typically loom large. Some of things such as consulting
the most critical choices involved are agreements, covenants not to
discussed in this section. compete and personal goodwill,
among others.
Mergers and Acquisitions
The impact of a business combination
In a traditional acquisition, the buyer or acquisition affects more than the
and seller will have opposing interests character or timing of income on the
regarding the structure of the sale. It can also affect other areas,
transaction. For instance, a buyer may including, but not limited to, the ones
want to purchase the seller’s assets, listed in the chart (See Chart 6).
thereby obtaining increased basis for Determining the effects of these
depreciation and amortization transactions requires a careful
deductions, as well as providing working relationship among clients,
protection from the seller’s historical attorneys and tax professionals.
liabilities. The seller, on the other
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, licenses
and registrations
• Depreciation recapture
• The effects on qualified and non-qualified retirement plans or compensation

One way to avoid the double tax and ■ The seller does not have to worr y
defer current taxation on the sale of a about the quality of buyer stock or
business is through a reorganization. other replacement property and the
C corporations may have an business risks that might come with
advantage when it comes to mergers a tax-deferred transfer.
and acquisitions, because they can
most easily meet the requirements for ■ The buyer benefits by receiving
tax-free reorganizations. If you are a stepped up basis in the
anticipating that your business will be acquired assets.
acquired (or go public) in the near
■ The buyer can eliminate the
future – or, if you are looking to
seller’s continued involvement in
acquire a business - consider whether
the business, unlike in a tax
C corporate status is to your
free reorganization.
advantage. Remember to consult with
your tax advisor early, however, as you ■ The parties do not have to meet
may need to operate as a C the technical requirements of a
corporation for a period of time prior tax-deferred transfer, which can
to the acquisition. drive up the costs of completing
the transaction.
You may not always want to avoid tax.
Although you generally want to defer ■ The seller can obtain the benefits of
the payment of tax whenever the substantially lower capital gains
possible, a taxable sale can have tax rates which exist today without
some advantages. 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.

In recent years, the IRS has made an the seller, and each should be PLANNING POINT: Even if
effort to provide more certainty as to analyzed to make sure that the the tax treatment of some
whether various costs, especially amounts applied to each component ancillary agreements is less
costs that provide a benefit beyond are reasonable. Additionally, there advantageous than the asset or
the current taxable year, can be may be situations where the selling stock sale, (e.g., ordinary income
deducted currently or are required to owner has personal goodwill, separate to the seller instead of capital
be capitalized. Guidelines have been from the goodwill of the business, gain), always consider allocating
issued with regard to tangible assets, which may be separately appraised reasonable value to these
intangible assets and related costs. In and sold. Chart 7 provides a summar y agreements. The existence of these
particular, the regulations’ treatment of the most common tax agreements must be disclosed to
of costs of acquiring or creating consequences of these types of the IRS in an asset sale. By failing
intangible assets may have a big tax agreements. to allocate a reasonable value to
impact. There are also guidelines on them, you allow the IRS to
how certain costs must be Business Succession determine its own value – one that
documented in order to be deducted. Planning may be considerably higher than
If you have just completed, or are you expected.
contemplating a merger or other sale Ever y business owner eventually faces
or acquisition, you should carefully the question: “What do I do with my
analyze the transaction details to business when I no longer want to run TAX TRAP: The IRS has
maximize deductible costs. it?” There are any number of possible subjected income from
answers to this question, including noncompete agreements to self
Noncompete, Consulting selling to employees, selling to employment tax when the parties
and Employment outsiders, establishing an ESOP and sign a single agreement that provides
transferring the business to family for both consulting and restrictions
Agreements members who are either active or on competition, without specifically
When buying or selling an entire inactive in the business. As you allocating reasonable amounts to
business, ancillar y agreements such contemplate these and other each component. Always consult with
as noncompetition, consulting or succession choices, you should also your tax advisor as part of your exit
employment agreements can almost seek to minimize the income, gift and or acquisition strategy to structure
be an afterthought. For instance, as a estate tax liability for yourself and the terms of your sales agreement in
prudent buyer, you need to protect your heirs. the most advantageous manner.
yourself from future competition by
For more information on
the seller. If you are the seller, you
estate planning in the wake EXPIRING PROVISION: No tax
certainly want to be compensated for
of this uncertainty, visit provision has sent taxpayers
that, and you want explicit conditions
www.cbiz.com/EstatePlanning. on a roller coaster ride like the
regarding when you are permitted to
“get back in the game.” Each of these estate tax. Between 2001 -2009, the
elements has its own tax estate tax exemption gradually
consequences for both the buyer and increased from $1 million to $3.5
million and the maximum estate
tax rate gradually dropped from 55
Chart 7 percent to 45 percent. Under current
Tax Consequences of Sales Agreements law, the estate tax was then
scheduled to be repealed in 2010
Buyer Treatment Seller Treatment Employment Taxes only to be reinstated in 2011 at the
Consulting Self employment pre-2001 exemption amount and
Ordinary deduction Ordinary income
Agreement (S/E) tax tax rates. As of our publication
Employment date, the estate tax exemption and
Ordinary deduction Ordinary income Payroll taxes tax rates going forward, and the
Agreement
possibility of making the change
Noncompete retroactive to January 1, 2010, still
15 year amortization Ordinary income Possible S/E Tax
Agreement had not been determined. Visit
Personal www.cbiz.com/taxtracker to see
15 year amortization Capital gain None
Goodwill the current status of this provision.

PLANNING POINT: You can Here are some tools that business medical expenses do not use any of
create a nonvoting class of owners need, as well as some issues your $1 million lifetime gift tax
ownership in order to shift future to bear in mind. exemption. In addition, annual
appreciation to family members, exclusion gifts and direct tuition or
while continuing to maintain Buy/Sell Agreement medical payments for grandchildren
control. Alternatively, you can A properly drafted agreement can (1) are exempt from generation skipping
give control immediately to give the departing owner (or his tax (GST). Amounts passing to your
family members who are active in estate) a buyer for his interest which spouse, whether via gift or upon your
the business. may other wise be unmarketable; (2) death, qualify for an unlimited marital
fix the method of determining the deduction; however, the assets are
price and method of payment for the then subject to estate tax in your
ownership interest; (3) restrict spouse’s estate. Finally, do not forget
transferability of the ownership the impact of possible state estate
interest in order to preser ve continuity taxes. Many states have their own
and harmony among the owners; and estate and gift tax regimes; in some
(4) help establish the value of the cases a state estate tax will be due
ownership interest for estate and gift even if there is no federal estate tax
tax purposes, making it a valuable due. As you develop your estate plan,
estate planning tool. be sure to consult with a qualified
adviser in the state where you live and
Life Insurance in states where you own property.
Life Insurance can be a very important
part of an estate and business Employee Stock Ownership
succession plan, because it can Plan (ESOP)
provide the necessary liquidity to pay If you own a corporation, you have the
estate taxes, fund a purchase of the option of selling your shares to an
decedent’s ownership interest under a ESOP for the benefit of your
buy/sell agreement or pay debts of the employees. You can defer paying
decedent. Ownership of a life income tax on the gain and diversify
insurance policy can be structured in a your holdings by reinvesting the sale
manner that will avoid the imposition proceeds into qualified investments
of income or estate taxes on the policy – generally, publicly traded stock. The
proceeds, but professional advice is business may also benefit by being
essential to make sure these benefits able to take enhanced tax deductions
are obtained. for funding the purchase of your stock.
An ESOP is often attractive to owners
Gift and Estate Planning who do not have children who wish to
Gifts of ownership interests can be a run the business, but it is a
ver y effective way to transfer complicated strategy that should only
ownership of a business to family be pursued after careful consideration.
members. Both annual exclusion gifts
(currently $13,000 per donee per Deferred Payment of Estate
year; $26,000 if you elect to “split Taxes
gifts” with your spouse) and larger The estate of a decedent who owned
gifts utilizing portions of a person’s an interest in a closely-held business
lifetime transfer credit reduce your may be able to defer the payment of
taxable estate, remove future asset estate taxes attributable to such
appreciation from your estate and interest for a period of up to 14 years,
transfer income producing property to at ver y favorable interest rates.
family members who may be taxed at
lower income tax rates.
Annual exclusion gifts and direct

payments you made for tuition and

CHECKLIST
Checklist: Tax Planning

Ideas And Opportunities
Pay any accrued expenses to cash basis related parties C corporations can donate inventory to certain qualifying
before December 31, 2010. An accrual basis business charities and receive an increased charitable deduction
can deduct these expenses in the current year only if paid that includes the inventory’s basis plus 50 percent of
by the end of the year. the profit.
Pay accrued compensation, including vacation pay, to Check to see if your estimated tax payments are
unrelated individuals within two and one-half months after sufficient, or whether you should adjust your final payment
year end in order to deduct the compensation this year. to minimize penalties.
Amounts paid later than that become subject to the
deferred compensation rules. Review your company’s employee benefit offerings for
better or more tax advantageous ways to reward
If businesses can repurchase their own debts at a employees.
discount in 2010, they can defer recognition of
cancellation of debt income until 2014. Consider making a $5,000 “catch up” contribution to your
qualified retirement plan (e.g., 401(k)), if you will be at
Take advantage of financial hardship by accelerating least age 50 by the end of the year. You can only use the
ordinary loss deductions from intercompany transactions. catch up contribution if your plan permits it.
These include deductions for bad debts or worthless
stock of a subsidiary. The subsidiary may avoid tax by Accelerate equipment purchases into 2010 to maximize
using the insolvency exception to eliminate the the first year bonus depreciation deduction and use the
requirement to report the income from the cancellation of increased Section 179 expense election of $500,000.
indebtedness or to avoid §332 liquidation treatment.
Consider a cost segregation study of acquired or
Businesses using the LIFO inventory method should constructed real property to identify those assets that
monitor their inventory levels before year end to avoid may qualify for faster depreciation.
invading LIFO inventory layers (and generating taxable
Consider reversing any undesirable transactions that
income).
took place during 2010 by year end in order to rescind
Dispose of obsolete inventory before year end. You can the transaction.
deduct the inventory you get rid of, but not by merely
Review Nonqualified Deferred Compensation arrangements
booking a reserve on your financial statements.
and reporting practices for compliance with Section 409A.
Review the accounting methods used in your business to
If you have received or exercised any stock options,
determine whether a change might be advantageous.
calculate any potential regular and alternative minimum
Consider the methods used for:
tax effect and take action to minimize.
■ Prepaid expenses
If your company has a net operating loss, estimate
■ Vacation pay
whether and when you will be able to utilize it, calculate
■ Advance payments any AMT effects and determine whether any ownership
■ LIFO inventory changes may limit your loss.

Review the tax impact of any transactions with related S corporations with E&P should consider electing to
parties. distribute C corporation earnings while the dividend rate
is 15 percent.
Construct or review an estate plan, and if applicable, a
business succession plan. Partnership allocations, and partnership agreements, can
be amended up through the tax return due date. Consider
Review your company’s shareholder or partner whether adjustments are needed.
agreements and buy/sell agreements for intent,
effectiveness and tax impact. If your partnership has had a change in ownership
interests during the year, calculate whether gain has
Assess whether your business activities qualify for the been triggered and whether remedial action can be taken
research and experimentation tax credit. by year end.
Analyze foreign sales or foreign operations for tax Shareholders and partners should review projected
minimization. flow-through passive or capital gains and losses and
assess whether offsetting passive or capital items can
Ensure that loans to or from the company are properly
be generated.
documented and charge an appropriate rate of interest.
If you have acquired a new business during the year, State and Local Taxes
review transaction expenses for potential deductions. If you are changing locations, expanding your current
location, hiring employees or training employees, check to
Partnerships and S Corporations see if you qualify for any state or local incentives.
Before year end, partners and S corporation shareholders
If your property tax deadlines are approaching, think about
should determine if they have sufficient basis in their
a property tax review to make sure you are paying the
partnership interest or S corporation stock and loans to
lowest tax possible.
utilize any current year losses.
If you sell products, have employees or an office location
S corporations that have sold built-in gain (BIG) property
in a new state or in more than one state, see if there are
during the year should consider offsetting these gains by
ways to minimize your overall state tax burden.
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.
Notes:
CBIZ MHM, LLC

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 Denver Orange County
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216.447.9000 612.339.7811 Topeka
990 SW Fairlawn Rd.
Columbia New Bedford Topeka, KS 66606
9755 Patuxent Woods Drive, Suite 200 700 Pleasant St. 785.272.3176
Columbia, MD 21046 New Bedford, MA 02740
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Business Tax Planning Guide 2011

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Business Tax Planning Guide 2011

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2010 - 2011

CBIZ MHM Business Tax Planning Guide

2010 - 2011 CBIZ MHM

RUNNING YOUR BUSINESS Mergers and Acquisitions ...............................28

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Twists and Turns Leave Many

No year in recent memor y compares Tax Provisions That Expired

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Add to this a change of power in For example, assume that by using

Additional Tax Savings by

One-year Return Required on

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Minimum Essential Coverage

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■ Begins employment with the

■ Certifies that he has not been

■ Is not employed to replace another

■ Is not related to a greater than 50

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Mapping the Right Path

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• Ability to compensate employees Another penalty tax applies to

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Navigating the Long and

SBJA further enhanced this deduction

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Term of Installment Note 5 years 2011-2015 Tax Rate 20%

Annual Gain Recognized under Installment Sale $ 800,000

Elect out of Installment Sale Treatment Elect Installment Sale Treatment

Year Tax on Installment Gain Tax Discounted at 10.425%

Tax on Entire Gain in 2010 $600,000 2011 $160,000 $144,895

2012 $160,000 $131,216

2013 $160,000 $118,828

2014 $160,000 $107,609

2015 $160,000 $ 97,450

Total $800,000 $599,998

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■ Engineering and architectural

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When FIN 48 was introduced, many

Disclosures on Schedule UTP will all

In May of 2010, CBIZ MHM submitted

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Legislation enacted in the summer of

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■ Form 5471 - U.S. companies that

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Planning Your Route: The Keys to

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