1.
Cost
Segregation
Study
•
What is a cost segregation study and how is it
done?
1.
Cost Segregation (Cont.)
•
Kinds of buildings that cost segregation applies
to and examples
•
Time periods for using cost segregation
•
Loss carryback and carryforwards
1.
Cost Segregation (Cont.)
•
Example
— Taxpayer purchased $4 million in commercial real estate
— Owed $130,000 in tax before cost segregation study — After study taxpayer paid zero tax in the current year,
2.
Deduct New Equipment Purchases
•
Write-off new equipment purchased in 2011.
•
Deduction can create a net operating loss that
not only results in zero income tax in the
current year but also can create losses that can
be carried back for a refund or forward to
2.
Deduct New Equipment Purchases
(Cont.)
• Example
—XYZ Company has $500,000 in income before
considering depreciation on the $1 million spent in 2011 on new equipment.
—After considering the new rules the company has a 2011 net operating loss (NOL) of $500,000, resulting in zero tax in 2011.
3.
Gain Exclusion
•
Pay zero tax on the sale of your small business
stock that is held for five years.
•
New legislation now allows 100% of the gain to
be excluded from your taxable income if the
qualified small business stock is acquired after
September 27, 2010 and before January 1,
2012.
3.
Gain Exclusion (Cont).
• Qualified Small Business Stock Requirements
—Applies to taxpayers other than corporations
—Stock originally issued after August 10, 1993 by a C Corporation with aggregate gross assets not exceeding $50 million at any time from August 10, 1993 to
immediately before the issuance of the stock.
—The corporation must be active whereby 80% or more of its assets are used in the business.
3.
Gain Exclusion (Cont.)
•
Example
— On November 1, 2011 an individual, Rich, acquires at original issuance 100 shares of qualified small
business stock at a total cost of $1,000.
— Rich sells his stock on December 30, 2016 for $1 million.
4.
Ordinary Losses on Small Business
Stock
•
Take an ordinary loss up to $100,000 ($50,000
if married filing separately) on qualified small
business stock dispositions.
•
This loss can offset up to $100,000 in other
income to pay zero tax.
4.
Ordinary Losses on Small Business
Stock (Cont).
• Small Business Stock is defined as stock in a
domestic corporation if
—at the time the stock was issued, the corporation was a small business corporation (aggregate amount of money and other property received for the stock is $1 million or less),
—the stock was issued by the corporation for money or other property, and
4.
Ordinary Losses on Small Business
Stock (Cont).
•
Example
— Taxpayer has $125,000 loss on disposition of its
small business stock. Taxpayer’s income from other sources is $75,000.
— The first $100,000 loss can be treated as an ordinary loss and the remaining $25,000 loss is treated as a capital loss (limited to $3,000 deduction each year). — The $100,000 ordinary loss wipes out the $75,000 in
5.
Debt Forgiveness
•
Pay no income tax on the cancellation of debt if
you are insolvent or in bankruptcy.
5.
Debt Forgiveness (Cont.)
•
Example
— Taxpayer is in Title 11 bankruptcy and the only income is $350,000 from the cancellation of debt. — The taxpayer will pay zero tax on this cancellation of
6.
Income from Discharge of Debt on
Main Home
•
Based on recently changed rules, income from
the cancellation of debt on your principal
residence is excluded from income if
discharged before January 1, 2013.
•
The exclusion applies when a taxpayer
restructures the acquisition debt on a principal
residence, loses a principal residence in
6.
Income from Discharge of Debt on
Main Home (Cont.)
•
Qualified principal residence indebtedness is
— Acquisition indebtedness on principal residence, up to $2 million ($1 million for married individuals filing
separately).
— Acquisition indebtedness is defined as debt that was used to acquire, construct, or substantially improve the taxpayer’s principal residence.
6.
Income from Discharge of Debt on
Main Home (Cont.)
•
Example
— Taxpayer is out of work and their only income is the discharge of qualified principal residence
indebtedness.
— The taxpayer’s qualified principal residence indebtedness that he is personally liable for is
$500,000. The creditor forecloses and the home is sold for $350,000 in satisfaction of the debt.
7.
Retirement Plans for Sole
Proprietorships
•
Basic limits for plans
•
Combining various kinds of plans to achieve
greater deductions
•
Salary to family members to increase plan
benefits
7.
Retirement Plans for Sole
Proprietorships (Cont.)
•
Example of covering $300,000 of income with
pension plan in one year
8.
Hire Your Kids
•
Redistribute income by hiring your kids to work
in the family business and utilize their
deductions to pay zero tax.
•
Shift income to a lower tax bracket. The 10%
rate bracket applies to the first $8,375 of
taxable income in 2010.
•
Utilize the child’s standard deduction ($950 for
2010).
•
Open an IRA for the child and make deductible
contributions to the extent of the earned
8.
Hire Your Kids (Cont).
•
Be careful because child’s income can impact
financial aid.
•
Example
— Child receives $5,950 in wages.
— Child opens a traditional IRA that year and contributes $5,000.
9.
Roth IRA Conversion
•
Convert to a Roth IRA and have nontaxable
distributions from the Roth IRA in the future.
•
With proper planning you can minimize the tax on
the conversion and have zero tax in the future.
— Nondeductible contributions reduces the taxable amount on conversion.
— Convert when the market is low to minimize tax on conversion.
— Pay zero tax on future withdrawals and plan withdrawals around other income (no required
10.
Evaluate Your Portfolio
•
Consider investments in free or
tax-deferred holdings to pay zero tax.
— Municipal bonds — Fixed annuities