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Presented by Walter Copeland, CPA Heather Kovalsky, CPA Brimmer, Burek & Keelan LLP

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1.

Cost

Segregation

Study

What is a cost segregation study and how is it

done?

(3)

1.

Cost Segregation (Cont.)

Kinds of buildings that cost segregation applies

to and examples

Time periods for using cost segregation

Loss carryback and carryforwards

(4)

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,

(5)

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

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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.

(7)

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.

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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.

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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.

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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.

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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

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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

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5.

Debt Forgiveness

Pay no income tax on the cancellation of debt if

you are insolvent or in bankruptcy.

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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

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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

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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.

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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.

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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

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7.

Retirement Plans for Sole

Proprietorships (Cont.)

Example of covering $300,000 of income with

pension plan in one year

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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

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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.

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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

(23)

10.

Evaluate Your Portfolio

Consider investments in free or

tax-deferred holdings to pay zero tax.

— Municipal bonds — Fixed annuities

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