When conducting year-end tax planning, organizations will need to be cognizant of upcoming changes enacted by the new federal tax laws in order to take advantage of credits and prepare for new requirements.
In the wake of recently passed legislation, many employers are struggling to understand what the new provisions will mean to them. With tax cuts set to expire and uncertainty remaining regarding further 2011 tax law changes, businesses are left with several what-if scenarios to consider during the planning process.
Smart Business spoke to Cindy Kushner of Crowe Horwath LLP about the federal tax law changes businesses need to be aware of when conducting year-end tax planning.
What positive changes should businesses take advantage of in this tax year?
The HIRE Act was enacted on March 18, 2010 to jumpstart hiring and investment in the work force; it benefits all businesses, including not-for-profits. The act provides two new tax benefits to employers who hire previously unemployed workers: payroll tax forgiveness and an employer income tax credit of up to $1,000 for retention of qualified new hires.
What tax relief will the Small Business Jobs Act of 2011 provide?
Signed into law by President Obama on Sept. 27, 2010, the primary goal of the act was to modify and expand the Small Business Loan program to benefit additional small businesses. The more significant modifications include:
- An extension of the 50 percent bonus depreciation for federal income tax purposes for assets purchased and placed in service in 2010 (impacting both large and small business)
- Exclusion from income 100 percent of the tax on gains from the sale of qualified small business stock purchased after Sept. 27, 2010, but before Jan. 1, 2011, and eliminating any difference in alternative minimum tax for such gain
- An increase in the expensing limit to allow immediate write-offs of up to $500,000 in capital expenditures during 2010 and 2011, to the extent the business does not put into service more than $2 million in fixed assets during the year.
Additional benefits for small businesses include (1) extension of the carry back of general business credits to five years for certain small businesses; (2) deduction of health insurance costs for calculating 2010 self-employment taxes; (3) deduction of company-owned cell phones; and (4) limitations on penalties for errors in tax reporting that disproportionately affect small businesses.
Many of the relevant provisions in the act do not require action by a specific date in order to claim the benefits, although it’s still unknown if some provisions will extend beyond 2010.
What other changes can businesses expect in 2011?
Potential tax increases include:
- The two highest marginal tax rates will increase from 33 to 36 percent and from 35 to 39 percent.
- The 15 percent tax rate on qualified dividends is set to expire at the end of 2010, rising from 15 percent to a maximum rate of 39.6 percent, meaning that they will be taxed as ordinary income.
- The maximum tax rate on long-term capital gains will rise from 15 to 20 percent.
- The estate tax will be restored at a higher, pre-Economic Growth Tax Relief Reconciliation Act rate.
What tax planning strategies should businesses implement for the 2010 tax year?
In order to ensure a dividend is taxable in 2010, companies must ensure they receive or are unqualifiedly subject to the demand of the dividend payment before Dec. 31, 2010 to guarantee the lower dividend rate. Evaluating dividend policies is a first step in planning for the possible rate changes. For those companies with strong balance sheets, this may be a good time to think about accelerating or raising the amount of dividend distributions to shareholders in 2010. Public companies might also explore stock distributions or spin-offs, which can significantly alter their earnings and profits profile.
Domestic manufacturers, agricultural producers, energy producers and construction companies should look into any domestic production deduction opportunities and complete any planning before the end of the current year. The deduction is 9 percent of a business’s qualified production activities for income tax years beginning in 2010 and effectively reduces the corporate income tax rate on domestic manufacturing income by 3 percent.
Businesses may defer the recognition of certain cancellation of debt (COD) income realized in calendar years 2009 and 2010 until 2014, in which case they will begin recognizing the income ratably over a period of five years. The reacquisition of a debt instrument by the lender must occur between Dec. 31, 2008 and Jan. 1, 2011.
Are there new reporting requirements that businesses should know about?
Beginning in 2010, corporations with audited financial statements will be required to file Schedule UTP to report any uncertain tax positions identified on their financial statements. The reporting requirement is phased in over the next five years and for 2010 the Schedule UTP is required for corporations with assets greater than $100 million. For 2012 the Schedule UTP will be required for corporations with assets greater than $50 million, and for 2014 corporations with assets greater than $10 million. Pass-through entities are not required to file for 2010.
Cindy Kushner is a tax partner with Crowe Horwath LLP. Reach her at (954) 202-8608 or Cindy.Kushner@crowehorwath.com.