Change happens. Are you making the most of it? Are you considering relocating your business or hiring employees? What about diving into research and development, or purchasing new, more efficient equipment to improve manufacturing processes?

If you are thinking about these or any other business-related initiatives, tax credits and incentive opportunities could have a significant impact. You may also be eligible for grants, low-interest financing or reduced utility costs, says Shawndel Rose, manager of State and Local Tax, Brown Smith Wallace LLC, St. Louis, Mo.

“Credits and incentives have been around for years, but as the economy changes, so does the nature of these opportunities. The financial position of the state you live in is impacted right along with your business, so why not make use of these tax opportunities while continuing to grow and develop your business,” says Rose.

Smart Business spoke with Rose about how tax credits and incentives work and what businesses can expect this year in light of the economy.

How do tax credits and incentives work for businesses?

Credits and incentives work in a number of ways for businesses. One way is to encourage economic development in the state. For example, many states encourage businesses to invest in new property or machinery and equipment. Relocating operations, expanding current operations and job creation are other focus areas.

Some of the most beneficial credits and incentives are based on maintaining or increasing a business’s work force.

A second way they work is to induce businesses to engage in certain activities, such as research and development and ‘going green.’ Oftentimes, they encourage businesses to relocate operations to a distressed or revitalization area.

Job training to increase employee skills and help develop the state’s work force is another encouraged activity. There are also rewards for hiring employees who may belong to a protected class, such as veterans or those considered difficult to employ.

As you can see, there are a host of opportunities to encourage business growth and to expand and enrich business operations while reducing your tax burden and, ultimately, saving money.

What is the difference between a credit and an incentive?

Credits are statutory and are designed to encourage specific activities. They can be based upon payment of other taxes. For example, if a business pays sales tax or property tax, it could generate a credit to be used to offset an income tax liability.

It’s important to know that some credits require preapproval from the government agency awarding the credit. Credits are typically claimed on a taxpayer’s state or local income, franchise, or net worth tax return and may be carried forward if unused in the current year. Some are even refundable.

Incentives are benefits that are negotiated with state or local economic development, taxation or other government officials as an inducement to locate or expand operations in a specific jurisdiction. Unlike credits, incentives must be negotiated well in advance of a firm commitment.

The financial benefit of the incentive may be reflected in a variety of ways, not necessarily on your state income tax return. Because they are contractual in nature and require each party to perform certain activities, the contract typically contains a recapture provision that requires repayment of the incentive and/or imposes a penalty if the contract requirements are not satisfied.

Incentives offer businesses negotiating power. For example, if a company is planning to build a new facility, it could approach the states of Illinois and Missouri and ask what benefits each can provide. The company can then compare the proposed benefits to determine which state’s package would result in a better financial outcome.

How can credits and incentives benefit businesses?

Cash flow is always a priority for businesses. Tax credits and incentives can help a business reduce or even eliminate certain costs to increase cash flow. Such costs may include human resource activity (i.e., training/screening costs), acquisition, site-preparation and public infrastructure (i.e., rail, sewer, etc.), just to name a few.

Companies may also have an opportunity to reduce telecommunication and utility costs.  These decreased costs, as well as cash grants and refundable tax credits, all result in increased cash flow.

In addition, successful negotiation can produce a reduced effective tax rate or preferential tax treatment, such as special apportionment.

What is the credit and incentive environment like today, and what does this mean for businesses?

That depends on the state. Generally, states are struggling financially and many are taking a step back to review credits and incentives to ensure that these tools are producing the intended results. In Missouri, for example, the governor created the Missouri Tax Credit Review Commission to assess the 61 current credit programs operating in Missouri and to make recommendations.

A report distributed in February noted that the commission recommended eliminating or not reauthorizing 28 credits and improving efficiency in another 30 credits. Connecticut and New Jersey are taking similar action.

For businesses, there are still great opportunities to use these tax-advantaged resources, but they should spend time with a tax professional who can provide direction so the company can realize the full benefit of potential credits and incentives that match its strategy.

Shawndel Rose is manager, State and Local Tax for Brown Smith Wallace, St. Louis, Mo. Reach her at srose@bswllc.com or  (314) 983-1356.

Published in St. Louis

As shares of a company change hands, there can be tax implications if those sales result in a “change of ownership.”

The IRS considers that a change of ownership occurs if there has been an increase of more than 50 percentage points between groups of 5 percent shareholders, says John Brogan, shareholder, tax, Burr Pilger Mayer.

“Once it is determined that an ownership change has occurred, it is necessary to calculate the amount of net operating loss carryover that can be used against taxable income in the years following the change,” he says.

Smart Business spoke with Brogan about Section 382 and how it can affect the taxes your company pays.

What is Section 382?

It is a section of the Internal Revenue Code that imposes significant limitations on the use of net operating loss carryovers after certain changes of corporate ownership. A company needs to do an analysis to determine the occurrence of ownership change, which is oftentimes more than once over the history of a company. It’s basically an analysis of share transfers, and share issuances that occurred from inception to the current date. Warrants and options must also be factored in.

What limitations may be imposed on the use of losses when there has been a shift in the stock ownership of a corporation?

The limitation is calculated by taking the equity of the company immediately before the ownership change and multiplying that value by an IRS-prescribed amount, which changes every month; for ownership changes that occur in May 2011, that amount is 4.3 percent.

Say you have equity value for common and outstanding preferred stock of $10 million. You calculate the annual Section 382 amount by multiplying that by 4.3 percent. The result is $430,000, which is the company’s operating loss carryover prior to ownership change that can be used each year following the ownership change. So if you had $5 million of net operating carryover as of the ownership change, you could only use $430,000 a year in post change losses. The balance of the NOL would carry over until it expired.

If a corporation anticipated a shift in the ownership, why would it bother to analyze its historic share transfers?

In many cases, it is not apparent that an ownership change is about to occur. There are complex Treasury regulations, in which certain shareholder groups are treated as designated 5 percent shareholders, and it may be possible to avoid an ownership change if the company knows exactly where it is in terms of approaching the more than 50 percentage points cumulative increase.

How do you track ownership changes when stock is publicly traded?

With publicly traded companies, the IRS allows some administrative shortcuts. For example, transactions that occur between shareholders who don’t individually own 5 percent can be disregarded. If someone who has 1 percent of the company’s stock sells half of that to another person who doesn’t have 5 percent or more of the stock, you can disregard that — unless the transaction is done by someone who historically owned 5 percent of the stock in the company. For public companies, the IRS allows you to rely exclusively on shareholder filings with the SEC.

Are there similar assumptions for a non-publicly traded company?

The same assumptions can be made with a privately held company. For example, sales of stock between those holding less than 5 percent of the company can be disregarded.

The issue with private companies is that shares can be transferred without SEC filings, so you must actually investigate who owns shares at different points in time and examine those stock transactions.

With a privately held company, often a venture-backed entity, you typically have the issuance of common stock to the founder and key employees, with one or more rounds of preferred stock issued to investor groups. Testing is done based on the fair market value of those shares transferred, which adds complexity as the value of that stock fluctuates.

How has the recent increase in M&A activity impacted these rules?

In an M&A transaction, regardless of whether there is a taxable or tax-free acquisition, the share transaction needs to be factored into the equation, testing a loss corporation based on different testing dates and comparing ownership percentage following a merger.

For example, if a loss corporation acquires a profitable company in a tax-free merger, it is necessary to look at the historic shareholders of the loss company and — even though the loss company is the surviving company — look at historical ownership. If you assume no cross ownership before the transaction, that transaction could and often does create ownership.

How can business owners prepare for this type of analysis?

Companies should adopt shareholder rights plans to put them in control of their situation and adopt provisions in their articles of incorporation that render void a contract of stock if transfer of that stock would cause an ownership change. That allows them to act proactively if someone threatens a transaction that would cause a change in ownership.

Some companies may want to do an analysis yearly, particularly companies that are interested in preserving operating losses or that place a high value on net operating losses.

Once you know an ownership change has occurred, there are steps to push losses into the post-change period where the loss is not subject to limitations, or push income into the pre-change period so that losses can fully offset income that was accelerated.

John Brogan is a shareholder, tax, Burr Pilger Mayer. Reach him at (415) 288-6260 or jbrogan@bpmcpa.com.

Published in Northern California

In last month’s article, the concept of Tax Risk Management (TaxRM) was introduced. TaxRM is an enterprisewide process that is affected by a company’s board of directors, management and/or other personnel, and is designed to minimize tax liabilities and maximize compliance, each within the guidelines of tax laws.

Having provided a definition of TaxRM, this article focuses on elements of TaxRM processes and how they can identify opportunities associated with an organization’s strategy, operations and processes.

“TaxRM is most effective when it is treated as a component of the organization’s overall enterprise risk management (ERM) process,” says Walter M. McGrail, JD, CPA, a senior manager at Cendrowski Selecky PC. “TaxRM should be a key element of every business’s ERM process.”

Smart Business spoke with McGrail about the types of tax risks that exist and how TaxRM processes can help mitigate those risks.

What is the function of TaxRM processes?

When professionals think about tax risks, they generally think of audits and financial reporting issues. TaxRM is about much more than these elements. Among other things, a TaxRM process should quantify the impact and likelihood of tax risks, manage tax risks to a level commensurate with the organization’s stated TaxRM strategy and quantify the benefits associated with proper tax strategy implementation. The last point is a central element of TaxRM: Proper tax strategy implementation can assist an organization in maximizing its after-tax earnings available to shareholders.

What types of tax risks exist?

Profitable organizations pay numerous taxes, including corporate income, sales, excise, payroll and withholding taxes. These taxes arise from decisions made in accordance with an organization’s strategy, operations and processes.

Tax risks are present within each of these elements due to uncertainty in the decision-making process and tax law changes. Among other things, tax risks might pertain to uncertainties in the application of tax law to numerous areas of the business; financial reporting decisions; acquisitions and divestitures; and asset purchases and sales.

Nearly every decision made by a for-profit corporation involves tax implications, and hence, tax risk. With some corporations paying upward of 40 percent of their profits in income taxes, the ramifications of tax risks can be highly significant and can negatively affect a business’s after-tax cash flow.

However, mitigation of tax risks can present numerous benefits to businesses while maximizing tax compliance.

Can you give specific examples of how TaxRM processes can identify opportunities associated with an organization’s strategy, operations and processes?

Let’s suppose an organization has a documented strategy stating that it wants to become a market leader in its industry. In order to achieve this goal, the organization must grow organically or acquire outside firms to increase its market share.

In some instances, the purchase of an external firm may provide significant tax benefits. For instance, if the acquisition is optimally structured from a tax standpoint, the target’s existing tax loss carry forwards may be preserved within the entity post acquisition.  TaxRM processes can also help guide organizational managers in their operational and process-level decision-making. For example, if an organization requires new machinery for manufacturing processes, leasing equipment may provide significant tax benefits when compared with capital expenditures associated with the purchase of a machine. However, the lease versus buy decision will hinge on numerous business-specific factors; it is not always optimal to lease equipment.

What are some prevalent risks that TaxRM processes can mitigate?

Business transactions, including asset acquisitions and divestitures, often present significant tax risks and opportunities for businesses. Involvement of the tax function or an external tax adviser in examining these transactions can yield significant benefits to the organization and potentially improve its profitability. This involvement might also save the business significant costs by ensuring a transaction is structured optimally from a tax standpoint.

For example, in some instances, business owners may desire to change the classification of their organization. If an organization that is taxable as a corporation elects to be classified as a partnership, this election will generally be treated as a full liquidation of the existing corporation and a subsequent formation of a new partnership. This classification change could thus cause the organization to realize harmful tax consequences, both immediately and in the future.

Involvement of the tax function or an external tax adviser in such decision-making can help managers make decisions in the best interests of the organization and maximize the after-tax cash flows of the business.

How can an organization achieve maximum benefits from a TaxRM process?

Again, in order to be most effective, a TaxRM process should be integrated into an organization’s ERM process. In this manner, tax risks can be evaluated simultaneously with other business risks, and the tax benefits and costs of an organization’s strategy, operations and processes can be regularly evaluated. Integrating TaxRM into the organization’s ERM process also signals to employees the importance the organization has placed on TaxRM. If employees can tangibly discern the organization’s emphasis on TaxRM, it is likely that they themselves will place greater emphasis on examining tax risks in their decision-making processes.

Walter M. McGrail, JD, CPA, is a senior manager at Cendrowski Selecky PC. Reach him at (248) 540-5760 or                                                 wmm@cendsel.com, or visit www.cendsel.com.

Published in Detroit

U.S. businesses whose goods are exported can significantly reduce their taxes through use of a long-standing U.S. tax incentive known as the “Interest Charge – Domestic International Sales Corporation” or “IC-DISC.”

“This frequently overlooked export tax incentive has been in the U.S. tax code since the 1970s and can reduce the U.S. tax cost of exporting companies by more than 50 percent,” says Douglas W. Wright, shareholder, International Tax and Transfer Pricing Services, Burr Pilger Mayer.

Smart Business spoke with Wright about how to take advantage of IC-DISC.

What products qualify for the IC-DISC tax incentive?

A company that manufactures, produces or grows products in the U.S. may qualify for IC-DISC benefits, provided that the products are destined for ultimate use or consumption outside the U.S. The primary requirements for the goods to qualify for IC-DISC benefits are that they must have been at least partly produced in the U.S. and consist of at least 50 percent U.S. content. This means that exported goods can qualify for IC-DISC even if they consist partly of imported components. You simply need to ensure that the customs duty value of the imported components is less than 50 percent of the ultimate sales price of the finished exported goods.

The U.S. company producing the goods does not need to be the actual exporter of the goods to qualify for IC-DISC benefits. In other words, a U.S. producer can sell its goods to a distributor or OEM in the U.S. that is the actual exporter and the U.S. producer can still qualify for IC-DISC benefits. Moreover, a company that exports U.S.-produced goods can qualify for IC-DISC benefits on its export sales even if it is merely a distributor and not the actual manufacturer of the goods.

Can services companies qualify for the IC-DISC tax incentive?

Companies providing architectural or engineering services related to non-U.S. construction projects can also qualify for IC-DISC benefits. These architectural and engineering services provisions are frequently overlooked, but are very broadly defined so that many companies and firms providing such services are likely to qualify. For this purpose, the qualifying services can be provided either within or outside the U.S., so long as they are provided with respect to a planned or existing construction project outside the U.S.

If a company qualifies, how does it establish an IC-DISC?

To take advantage of the IC-DISC provisions you must establish a separate IC-DISC company, but the IC-DISC company is a paper entity, without any actual operations, employees or tangible assets. It is virtually invisible to employees and customers, serving solely as a Congressionally mandated vehicle needed to qualify for IC-DISC tax benefits. The IC-DISC entity is required to be a C corporation and is generally newly formed to take advantage of the IC-DISC incentive. Once formed, the corporation makes an election to be treated as an IC-DISC within 90 days, effectively making it a nontaxable entity for federal tax purposes.

The ownership structure for the IC-DISC entity will be dependent upon the specific facts and circumstances of each client situation. An IC-DISC can be established either as a subsidiary owned by the client company or as a brother-sister corporation owned by the client company’s shareholders or owners. To ensure that IC-DISC benefits are obtained and maximized, we strongly recommend that companies interested in the IC-DISC opportunity obtain advice in structuring their IC-DISC arrangements from a qualified firm with IC-DISC expertise.

What are the tax benefits of the IC-DISC?

Significant and often permanent tax savings can be achieved through implementation of an IC-DISC. The tax code permits qualifying U.S. taxpayers to effectively exclude at least 50 percent, and often considerably more, of their export-related income from U.S. tax. For these purposes, since this is an export incentive regime, there are fairly generous rules for determining and maximizing the amount of export-related income eligible for IC-DISC benefits. In some cases we are able to completely eliminate current federal tax liability on qualifying export income.

We use a couple of primary vehicles for tax savings with the IC-DISC. One is the payment of a tax-deductible commission to the IC-DISC equal to 50 percent of the qualifying export income of the taxpayer. This effectively eliminates current federal tax on the commission income earned by the IC-DISC, which is a tax-exempt entity. It’s like moving export income into a tax-exempt IRA or 401(k).

A second vehicle we use to further increase tax benefits is IC-DISC factoring. The IRS recognizes use of an IC-DISC to ‘factor’ qualifying export receivables of its related company. With IC-DISC factoring, the IC-DISC purchases export receivables from its related operating company at an arm’s length discount, and then earns factoring income upon collection of the receivables. Similar to the commission vehicle, the factoring vehicle is virtually invisible to customers.

The commission and factoring income paid to the IC-DISC is accomplished entirely through bookkeeping entries and no cash is moved out of the operating company. We are careful to use the IC-DISC so as to not adversely impact working capital of our clients. In fact, we actually increase our clients’ operating capital by reducing the federal tax burden on their export-related income.

The implementation of an IC-DISC can result in both temporary and permanent tax benefits. Businesses can also use an IC-DISC as a way to provide incentives, naming management as shareholders, allowing them to benefit from the additional cash flow being created by an increase in global sales.

Douglas W. Wright is a shareholder, International Tax and Transfer Pricing Services at Burr Pilger Mayer Inc. He is a former “big four” international tax partner with more than 30 years of international tax consulting experience. As a leading expert on the IC-DISC U.S. tax incentive, his IC-DISC clients and related consulting activities cover the entire U.S. He can be contacted at dwright@bpmcpa.com or (925) 296-1044.

Published in Northern California

With the Texas budget deficit currently projected to exceed $27 billion, local taxing jurisdictions will be relying on the most stable of taxes to help make up this budget shortfall: property taxes.

Property taxes are administered at the local level, as Texas does not have a state property tax. Given that there is an estimated $150 to $250 million deficit in the Dallas Independent School District alone, property owners can expect their property values and tax rates to remain stable, and in some cases increase, despite declining values in the current market.

“The school districts count on property tax revenues to make up more than 50 percent of their funding,” says Jeff Mills, senior manager at Crowe Horwath LLP. “This adds pressure to all parties involved with the appraisal process to ensure that the overall taxable value is in line with their budgeted needs.”

Less than 10 percent of property owners appeal their tax assessments, effectively leaving money on the table when assessments are not in line with the current economic climate. Professional consultants can help taxpayers monitor their taxable values, become educated in the appraisal process, obtain available exemptions and ensure critical dates are met in the appeals process.

Smart Business spoke to Mills about what taxpayers in Texas should know about keeping their property taxes in line.

How is the property tax system structured?

Property taxes are administered at the local level via the county appraisal districts. Boards of directors are appointed by taxing units made up of school, city, county and special district representatives. The board of directors appoints the chief appraiser who oversees the appraisal of all of the properties in the district. The board of directors also appoints the Appraisal Review Board, made up of ‘independent’ citizens that are in charge of hearing appeals when an agreement cannot be reached between the taxpayer and the appraisal district informally. It is of note that the Appraisal Review Board is paid by the appraisal district and appraisers conduct multiple hearings throughout the year often with the same review board members.

How can taxpayers appeal their property tax values?

Frequently, taxpayers don’t understand the process of how to appeal their values. By the time tax bills are received, the deadline to appeal has already passed.

Properties are assessed as of January 1 of each year based on the ‘fair market value’ of the property: typically the price at which a property would transfer for cash or its equivalent under prevailing market conditions. Assessments notices are sent out in early May, but have been known to be mailed out much later. This is a crucial component of the appeal process, as a taxpayer only has 30 days to appeal from the date of the receipt of the assessment notice, or May 31, whichever is later. Not receiving an assessment notice or not knowing the critical dates may cause taxpayers to forfeit normal appeal rights. Other means of appeals can be very time-consuming and costly.

Once a timely appeal is filed, the taxpayer is required to receive 15 days’ advance notice before the hearing is scheduled to occur. Failure to receive notice is not necessarily grounds for rescheduling a new hearing.

How can people make sure they’re not paying more than their fair share of property taxes?

Whether you collect market data on your own or hire a property tax consultant, be prepared with an opinion of market value for your property and thorough support when challenged. Even if your assessed value stays the same or decreases slightly, the overall tax liability could still be higher. Tax rates are not set until October, several months after the protest deadline. It’s rare that the taxing units will vote to decrease their respective rates, especially during the kind of budget constraints they’re facing now.

Also, for owners of business and personal property, be aware that filing your fixed asset schedule in its entirety may cause an over-inflated assessment of market value. Conducting a fixed asset review may uncover several assets that are being assessed at a higher value due to lack of description on your asset ledger. In many cases, assets can be shifted to a faster depreciable life. A review can also help to identify ‘ghost assets,’ which are assets no longer located at the facility that have failed to be removed from the ledger.

What else should people know about saving on their property taxes?

Homeowners and business owners should understand or ask their advisers about the various exemptions available to them:

  • Homestead exemption
  • Freeport exemption (inventory shipped out of Texas)
  • In-transit inventory (inventory passing through the state and protected under the Commerce Clause)
  • Pollution control equipment
  • Agricultural exemption
  • Abatements — Property tax abatements do not include the school district portion of the property tax, which is the largest portion. Opportunities may exist to recoup a sizeable portion of this tax.

When in doubt, hire a licensed tax consultant; many will not charge a fee unless they are successful in reducing the assessed property value. These professionals have access to market data for various types of properties, and have experience with identifying savings opportunities and managing the appeals process. The No. 1 reason that taxpayers don’t achieve a reduction in a hearing is lack of preparation and support. I’ve seen numerous cases where taxpayers are trying to make an argument without knowledge of how their property is assessed.

While current market conditions may warrant a reduction in your appraised value, don’t expect a lower tax liability without knowing your rights, and appealing your values.

Jeff Mills, CMI, is a senior manager in the National Property Tax Practice at Crowe Horwath LLP and a licensed senior property tax consultant in Texas. Reach him at (214) 574-1037 or Jeff.Mills@crowehorwath.com.

Published in Dallas

Economic stress is impacting organizations of all shapes and sizes, particularly state governments.

Missouri, like most states, is aggressively enforcing tax laws to increase revenue. However, there is some light on the horizon, and scattered pockets of opportunity dotting the scene. Unlike the governors of some states, Missouri’s governor has not proposed any state tax increases to balance the budget. Instead, the governor is focused on reducing government spending by $1.8 billion in 2011.

And legislative efforts appear to follow suit. There are two proposed bills that support taxpayers: The first is a tax amnesty program and the second is a bill to repeal the Missouri franchise tax over a five-year period.

In addition, a recent Missouri Supreme Court decision held in favor of the taxpayer. The issue involved the application of a sales tax exemption on materials purchased and used by a real property contractor. The decision is very favorable for certain qualifying businesses.

However, collection efforts are on the rise in Missouri. The state has increased audit activities and the quantity and type of tax notices it is issuing.

According to Susan Nunez, principal, and Pam Huelsman, manager, in the Tax Services practice at Brown Smith Wallace LLC, more than ever, all states — including Missouri — are cracking down on state income and sales tax compliance.

“Although the Missouri Department of Revenue is increasing its collection efforts, there are still opportunities for taxpayers in both the state income tax and sales tax areas,” says Nunez.

Smart Business spoke with Nunez and Huelsman about the types of income tax elections and sales tax exemptions available to Missouri taxpayers that could present tax benefits for businesses.

What is the current tax climate in Missouri?

Missouri has been experiencing a sharp decline in revenue collections and the result is an increase in taxpayer notices and ramped-up collection efforts. For instance, the state is matching the data within its own system to identify taxpayers who might be registered for one type of tax but not another.

The state is also partnering with other states’ departments of revenue, the IRS and Customs to receive information regarding tax filings, residency and shipments made into the state. With the expansion of tax collection tools, taxpayers are more likely to receive some type of correspondence from the state.

These notices typically require a response within a given time period, and an untimely response may result in severe financial penalties. Although it may seem stressful and complicated, the key is for taxpayers to realize that they have rights. They should discuss such notices with a tax professional and respond to any notice received in a timely manner.

Taxpayers should also keep in mind that they may have opportunities to offset these increasing assessments. Consult with a tax professional to keep abreast of new rules and partner with someone who will help you advocate for your rights in the event of a notice, audit and/or assessment.

What notable income tax elections are available for Missouri taxpayers?

For Missouri income tax purposes, a couple of elections are available. First, a corporation that is a member of a federal consolidated group can choose to file as a separate legal entity in Missouri, or as part of the entire federal group. Depending on each taxpayer’s specific fact pattern, one election is likely more advantageous than the other.

Factors that generate tax differences include tax base and property, payroll and sales within and without the state.

Additionally, Missouri offers a ‘three factor’ apportionment election and a ‘single factor’ (sales only) apportionment election. The single factor calculation is unique and, again, depending on a taxpayer’s specific facts and circumstances, may prove to be beneficial.

Keeping up with these details can be burdensome for business owners, thus, taxpayers should consult with a state tax professional to assist in analyzing the various Missouri filing options.

What are some of the sales tax exemptions that present opportunities for taxpayers?

There are several exemptions in Missouri. The manufacturing exemptions apply to manufacturers of tangible property. There are very specific factors that a taxpayer must meet for these exemptions to apply, some of which are not obvious.

However, once these factors are met, the exemptions can provide substantial state and local tax benefits to qualifying taxpayers.

Missouri provides another exemption that applies to manufacturers and processors of product. The application of this exemption is similar to, but somewhat broader than the manufacturing exemptions discussed above. Qualifying taxpayers may reap tax benefits under this exemption as well; however, it should be noted that, unlike the manufacturing exemptions, this exemption does not apply to local sales tax.

So, while the tax traffic sign in Missouri might read ‘proceed with caution,’ the benefits gained from the proper application of Missouri’s income tax elections and sales tax exemptions can offset the overall rise in tax assessments.

SUSAN NUNEZ is principal, State and Local Tax, Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1215 or snunez@bswllc.com.

PAM HUELSMAN is manager, State and Local Tax, Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1392 or phuelsman@bswllc.com.

Published in St. Louis

Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.

“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says Mona Sarkar, J.D. MTax, a Vice President, Client Advisor and Wealth Team Manager for FirstMerit Bank. “Some things have changed and some have stayed the same.”

Smart Business spoke with Sarkar about how to prepare for the implications.

What has changed and what has stayed the same?

On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.

Over the past  decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.

Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries, or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.

The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.

What should businesses expect over the next two years?

There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.

Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’ I expect there will be an attempt to make it permanent prior to the national election in 2012.

What do business owners need to know about the changes in the estate tax exemption?

There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.

Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.

Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.

As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.

How should existing estate plans be handled?

People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.

While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.

If you have a document that is more than five years old, we recommend talking to your attorney to find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.

While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow,  you would still get the right result.

It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?

What other tax implications should businesses consider?

The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income  rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.

In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.

Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.

Mona Sarkar, J.D. MTax, is a Vice President, Client Advisor and Wealth Team Manager for FirstMerit Bank. Reach her at 1-888-384-6388 or Mona.Sarkar@firstmerit.com.

Published in Akron/Canton

Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.

“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says Curt Ramkissoon, the Vice President of Wealth Management Services with FirstMerit Bank. “Some things have changed and some have stayed the same.”

Smart Business spoke with Ramkissoon about how businesses can prepare for the implications.

What has changed and what has stayed the same?

On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.

Over the past  decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.

Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.

The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.

What should businesses expect over the next two years?

There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.

Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’

I expect there will be an attempt to make it permanent prior to the national election in 2012.

What do business owners need to know about the changes in the estate tax exemption?

There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.

Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.

Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.

As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.

How should existing estate plans be handled?

People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.

While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.

If you have a document that is more than five years old, we recommend talking to your attorney and find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.

While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow,  you would still get the right result.

It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?

What other tax implications should businesses consider?

The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income  rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.

In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.

Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.

Curt Ramkissoon is the Vice President of Wealth Management Services with FirstMerit Bank. Reach him at (614) 570-7570 or curt.ramkissoon@firstmerit.com.

Published in Columbus

Business owners need to be aware of the tax implications of recent federal legislation, including President Obama’s extension of former President Bush’s tax cuts and changes to the estate tax exemption.

“There are a lot of potential advantages on the plate, but there are also a lot of unknowns,” says James D. Roseman, a Vice President of Wealth Management and Business Development with FirstMerit Bank. “Some things have changed and some have stayed the same.”

Smart Business spoke with Roseman about how businesses can prepare for the implications.

What has changed and what has stayed the same?

On one hand, the new legislation extended tax cuts with regard to dividends, capital gains and rates on ordinary income, for another two years — through the end of 2012. On the other, the estate tax situation was modified.

Over the past  decade, the estate tax had an increasing exemption amount, which peaked in 2009 at $3.5 million, with a maximum tax rate of 45 percent. In 2010, there was no federal estate tax. Legislators then passed a $5 million exemption and a maximum estate tax rate of 35 percent for 2011 and 2012. In addition, the lifetime gift-giving exemption was capped at $1 million, while the estate tax exemption continued to increase.

Now, the new estate tax exemption and the gift tax exemption are the same. Someone can pass away with an estate of $5 million and pass federal estate tax-free to beneficiaries or they could literally give away $5 million of assets during their lifetime and pay no gift tax. It’s an either/or for the next two years.

The real question now is will the higher estate tax exemption be made permanent or will it revert to lower previous levels? As a result, you have a two-year window of advantages capped with uncertainty.

What should businesses expect over the next two years?

There is a drumbeat of concern about taxes wiping out a lifetime’s worth of building a business. The people pushing to make the estate tax exemption permanent say it will save the American small business.

Small business owners are saying ‘If my spouse and I each have a $5 million exemption, that will ensure our business passes on to the next generation without having to be sold to pay taxes.’

I expect there will be an attempt to make it permanent prior to the national election in 2012.

What do business owners need to know about the changes in the estate tax exemption?

There are business owners with a succession plan in place, who have already given away $1 million of stock in their business, but were kept from giving any more because they would be paying out-of-pocket on gift taxes.

Now, they have the opportunity to re-examine their plan. They’re able to make larger gifts or pass the business down to the next generation, without extraneous tax penalties.

Most estate planners are educating their clients as to what’s currently possible in the given environment. Our job is to be sure the consumer is educated as to the possibilities, so they’re able to make an informed decision Not everything in life can be driven by taxes, but it’s important to be aware of the tax situation.

As we get closer to the end of 2012, push will come to shove. Depending on whether lawmakers are considering making the changes permanent or if they are facing pushback, people will either sit back or there will be a race to accomplish major gifts in the last quarter of 2012.

How should existing estate plans be handled?

People should look at the documents they have in place, just to make sure that if something were to happen between now and 2012, or if in fact the new exemptions became permanent, their estate plan still works the way it’s intended.

While the documents fit at the time they were created, the current estate tax situation could turn that plan into a mess if it isn’t managed carefully.

If you have a document that is more than five years old, we recommend talking to your attorney and find out if it still works. Many factors can impact an estate plan: premarital agreements in the case of second marriages or children from previous marriages, etc. So when there are major changes in exemption amounts, like we’ve seen this year, it’s critical to examine your plan to make sure it still works.

While you may not want to engage in any major gift-giving now, you still have to make sure that if something happened to you tomorrow,  you would still get the right result.

It’s a two-sided coin — on one hand it could impact your plan if you do nothing, and on the other hand, are there advantages you should take because of the exemption?

What other tax implications should businesses consider?

The income tax part of it simply extended the tax cuts that were already in place in terms of dividends, capital gains and ordinary income  rates overall. To the extent that those were allowed to expire, you would have higher income taxes paid on dividends and capital gains and higher overall income tax brackets for ordinary income.

In terms of real actual revenue dollars, the estate tax is not a big item in the federal budget. Income taxes, capital gains taxes, and taxes on dividends are a much bigger concrete number. While they are not as high in any given situation, there are more people paying them.

Also, for anyone inheriting from an estate or beneficiary of estate for someone who passed away in 2010, there are elections that can be made. Talk to your attorney about it.

James D. Roseman is a Vice President of Wealth Management and Business Development with FirstMerit Bank. Reach him at (216) 618-1335 or james.roseman@firstmerit.com.

Published in Cleveland

After some challenging years in a recessionary economy, businesses aren’t the only ones feeling the crunch.

States — including Illinois — are hurting, and to regain strength, they are more closely enforcing tax law and, in some cases, increasing taxes.

According to Pam Huelsman and Susan Nunez from Brown Smith Wallace LLC’s Tax Services Practice, the state of Illinois is in a difficult financial position. The state currently imposes a multitude of taxes, and recent legislation increased the personal income tax rate by 67 percent, increased the corporate income tax rate by 46 percent and suspended the net operating loss carryover deduction for taxable years ending after Dec. 31, 2010, and prior to Dec. 31, 2014.

Senate Bill 2505 was signed into law by Gov. Pat Quinn on Jan. 13, 2011. The tax rate for individuals, trusts and estates will increase from 3 percent to 5 percent for taxable years beginning on or after Jan. 1, 2011, and prior to Jan. 1, 2015, with reductions thereafter. The corporate income tax rate will increase from 4.8 percent to 7 percent for taxable years beginning on or after Jan. 1, 2011, and prior to Jan. 1, 2015, with reductions occurring thereafter. The personal property replacement tax remains unchanged.

In addition to the income taxes on both personal and corporate income, the state imposes a Retailers’ Occupation Tax on sales of tangible personal property and a Service Occupation Tax on transfers of tangible personal property incidental to a sale of a service. Retailers and servicemen collect these taxes at rates which range from 6.25 percent to 9.75 percent, including both state and local taxes.

Both the Retailers’ Occupation Tax and Service Occupation Tax have a compensating use tax applied to tangible personal property acquired from out-of-state vendors. Certain exemptions from these taxes are available to qualifying taxpayers. But despite this foreboding tax climate, there are still opportunities for businesses to earn tax credits.

Smart Business spoke with Huelsman and Nunez about Illinois taxes and how your business can benefit from sound tax planning.

What is the current business tax climate in Illinois?

The financial situation in the state is serious. Illinois isn’t paying bills, and everyone is feeling the pain. The state imposes many taxes and, as shown by the rate increase for both personal and corporate income taxes, it will likely continue to look for ways to raise revenue through taxes.

What tax credit opportunities are available for businesses in Illinois?

The good news is that, despite heightened audit activity and increased taxes, there are tax breaks for businesses that qualify. An example is the Manufacturer’s Purchase Credit. Qualifying manufacturers earn a state sales tax credit of 50 percent of the state sales tax that would be paid on purchases of exempt manufacturing equipment. This credit can be applied toward the sales/use tax imposed on production-related purchases that do not qualify for the exemption.

Let’s say a manufacturing company purchases a $100,000 piece of manufacturing equipment, which would incur a state sales tax of $6,250 if not for the exemption. The company would earn a credit of half that amount, which is $3,125. It’s a win-win for companies: They are able to utilize the exemption and earn a credit to apply to tax owed on purchases of production-related equipment.

What opportunities are available for businesses to help them create jobs?

Effective June 30, 2010, businesses with 50 or fewer employees can take advantage of Small Business Job Creation Tax Credits. Every new job created and retained for one year earns credits against the state withholding tax.

The maximum credit is $2,500 per employee, and businesses must meet certain salary thresholds to qualify. The credit will be available beginning July 1, 2011, for those qualifying companies that have, since June 30, 2010, hired and retained new employees.

What are enterprise zones, and what benefits do those in Illinois provide?

The Illinois Enterprise Zone Program is designed to stimulate economic growth and neighborhood revitalization in economically depressed areas of the state. Illinois’ enterprise zones offer a multitude of tax benefits for businesses located in the zones, including sales and use tax exemptions for building materials, property tax abatements and investment tax credits for business income taxes.

To illustrate, Madison County has three enterprise zones and St. Clair County has four. You should consult your tax professional regarding these zone benefits.

What are some tax compliance issues that businesses should be aware of?

Many businesses understand and collect sales tax but are unaware of a compensating use tax due on purchases made from out-of-state vendors.

Given the current environment, it’s a particularly good idea to consult with a knowledgeable tax accountant to determine your potential use tax liability and avoid costly state audit liabilities.

Also, businesses should keep current with the applicable sales tax rates in their local jurisdictions. Businesses that do not collect the proper rate will be required to furnish additional taxes not collected from customers.

It’s definitely a case of pay now, or you’ll really pay later.

Pam Huelsman is manager, State and Local Tax, at Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1392 or phuelsman@bswllc.com. Susan Nunez is principal, State and Local Tax, at Brown Smith Wallace in St. Louis, Mo. Reach her at (314) 983-1215 or snunez@bswllc.com.

Published in St. Louis
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