The fiscal ramifications of the various stimulus and bailout packages will likely be felt for several years.  As the government looks for sources to raise revenues, it will be increasingly necessary to keep a keen eye on the Treasury and IRS when planning strategies for both business and corporate structures.

The impact of the combination of the expiration of the Bush tax cuts beginning in 2011 with the increase in the Health Insurance taxes beginning in 2013 has the potential to raise the top tax rates for wages by 5.5%, for long term capital gains by 8.8%, and for dividends by 28.4% assuming Congress does not limit the tax on dividends to 20%.

As we near 2011 where the majority of the impact will begin to be felt, those that own closely held businesses (especially in the form of a pass through entity) should use this time to plan to increase revenues, defer deductions, and accelerate planned restructurings in 2010 to maximize their after tax earnings.   By enacting certain strategies, the relative tax savings due to the rate differential may be significant enough, even on a net present value basis, to warrant the acceleration of income or deferral of deductions.

There are several strategies that can be employed.   Some are automatic and others may require the filing of a request with the IRS for an accounting method change.  The scope of this entry will focus solely on business transactions.  Your B2B CFO^® in conjunction with your tax advisor should cover scenarios involving IRS approval as they are more complex.

For business transactions, some general planning considerations should include:

ü  Adjustment of contractual terms so income accrues in an earlier year (accrual basis taxpayers).

ü  Acceleration of cash collections prior to year end (cash basis taxpayers).

ü  Change in accounting method for advance payments received (consult tax advice).

ü  Delay timing of economic performance to subsequent year (accrual basis liabilities).

ü  Defer payment of expenses until 2011 (cash basis taxpayers).

ü  Elect to capitalize certain prepaid expenses and deduct them over the period of benefit (accrual basis).

ü  Make a Section 59(e) election to capitalize R&D for eligible expenses.

ü  Make a Section 174 election to capitalize and amortize certain research expenditures.

ü  Check you capitalization elections under Section 263(a).

ü  Elect using alternative depreciation versus MACRS and electing out of bonus depreciation.

ü  Generally delay any compensation payments beyond 2 ½ months after year end as long as the liability was incurred by the last day of the year.

For accounting methods, planning considerations should include:

·         Changing inventory method from LIFO to FIFO now.

·         Consider changing to simplified allocation method for Section 263(a) cost capitalization.

·         Adopting the gross method to account for cash discounts.

For owners of C Corporations who wish to make a S Corporation election or  S Corporations, there are a couple of specific planning opportunities that merit mention:

Ø  If considering conversion to a S Corporation, take into account Built In Gains tax to be recognized over time, potential for Section 1031 exchanges, LIFO recapture, and future potential for Excess Net Passive Income Tax.

Ø  A Deemed Dividend election may be an excellent strategy if the S Corporation has currently suspended losses due to a lack of basis or expects significant future losses.   This may also be beneficial if the S Corporation has accumulated earnings and profits and anticipates future distributions in excess of its Accumulated Adjustments Account.

Ø  Take note of the AMT posture of shareholders prior to finalizing any restructuring as this may dilute some of the potential tax benefits.

Time will be rapidly running short for those who may wish to benefit from these or other specific planning strategies.    Strategies must be thought through, analyzed and executed in many cases by the end of this calendar year.  Don’t delay.   Contact your B2B CFO^® to discuss.

At B2B CFO^® we concern ourselves with the client’s success and aspire for them to attain their goals and dreams.

Cash.  We help you get it.

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