1751 Lake Cook Road,

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• 1751 Lake Cook Road, 400
• Deerfield, IL 60015
• T 847-205-5000

2009 Year end Tax Tidbits Planning Ideas
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Caution

• High level concepts will be discussed today to
  help create an awareness of various potential tax
  benefits.
• Each client is unique and could require an
  examination of the specific facts along with
  detailed tax law / regulations before
  implementation of these ideas.
• Please consult / involve the tax principal and /
  or manager on the account

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Fixed Assets

• 50 Bonus Depreciation for assets purchased and
  placed in service in 2009.
• 2010 in the case of certain longer-lived
  property. (i.e. subject to UNICAP, production
  period gt1 year,cost gt1MM, and recovery period of
  10 years or longer)
• IRC Section 179 for 09 up to 250,000 if
  qualifying expenditures do not exceed 800k.

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Fixed Assets

• Qualified Leasehold Improvements
• 15 year MACRS property
• Placed in service pre 1-1-10
• At least 3 years after bldg originally placed in
  service
• Can also qualify for 50 bonus in 2010.
• Related party leases do not qualify

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Fixed Assets

• IRC Section 179D Deduction based on property
  generating energy savings
• To qualify, the energy efficient property must
  reduce energy costs by 50 as compared to a
  reference building meeting certain engineering
  standards.
• Subject to a cap of 1.80 per square foot.
• Leadership in Energy and Environmental Design
  (LEED) certification should help in meeting
  criteria.

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Other Deprec / Benefits

• Extension of Election to Accelerate AMT/Research
  Credits in Lieu of Bonus Depreciation
• Use straight-line depreciation and then
  corporation is allowed to claim a refundable
  credit equal to the lowest of
• 20 of the additional 1st year depreciation that
  would have been available had bonus depreciation
  been claimed
• 6 of the taxpayers accumulated AMT credits and
  research credit carryforward generated from
  taxable years prior to 2006 or
• 30 million

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Corporate NOL Carrybacks

• 5 years rather than 2
• Average annual gross receipts must not exceed 15
  Million in the tax year of the NOL and the two
  preceding tax years.
• Applies to either NOLs arising in a taxable year
  ending in 2008 or NOLs arising in a taxable year
  beginning in 2008.
• Any election under this provision may be made
  only with respect to one taxable year.
• All members of a controlled group (50 ownership
  test) are treated as a single taxpayer.
• IL still does not allow carrybacks. Carryforward
  only

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S Corporations

• During 09 and 10 no corporate level tax on
  built-in gains of S Corp that converted from C
  Corp at least 7 tax years before the current
  year.
• Previous rule was 10 year taint.

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Business Credits

• New targeted groups for work opportunity tax
  credit.
• Unemployed veterans
• Collected unemployment for 4 weeks or more during
  the 1 year period ending on the hiring date.
• Disconnected youth
• Ages 16 to 24
• Not regularly attending school during the 6
  months prior to hiring
• Not regularly employed during the 6 months prior
  to hiring
• Not readily employable due to insufficient number
  of basic skills.
• NOTE Certification by state agency required.

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Business Credits

• Alternative Fueler Credit
• Available for propane-powered forklifts
• 50 cent refundable credit per propane gallon
• Must register with IRS as an alternative fueler
  before claiming the credit

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Business Credits

• COBRA Premium Assistance Credit
• Applies to individuals involuntary terminated
  between September 1, 2008 through December 31,
  2009 who elect COBRA insurance coverage.
• Eligible individuals pay 35 percent of normal
  COBRA payment. Maximum assistance period is 9
  months.
• Employer receives credit for the other 65 percent
  on their payroll tax return.
• AGI phase-out of eligibility for higher income
  individuals (125,000 S, 250,000 MFJ)

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Domestic Production Deduction

• Domestic Production Activity Deduction (DPAD)
• Refresher
• Qualifying activities
• Production of tangible personal property
  software, sound recordings, films
• Construction
• Engineering and architectural services supporting
  construction
• If revenues from non-qualifying sources comprise
  no more than 5 of total gross receipts, treat as
  qualifying (de minimis rule).
• Not unusual to have QPAI equal to taxable income.
• Deduction rate
• 6 for 2009 (2 effective tax benefit)
• 9 for 2010 (3 effective tax benefit)

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Domestic Production Deduction

• Update on treatment of prior period expenses.
  If
• You are using the IRC 861 method of allocating
  expenses to qualifying and non-qualifying
  activities, and
• Any part of expense relates to a prior year,
  (even one that pre-dates the DPAD),
• Then, the allocation of the prior period expense
  must be based on the extent to which those
  expenses ultimately generated DPGR
• even though it was incurred in a year that
  pre-dates the DPAD

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Domestic Production Deduction

• Eg.
• 20 of deferred comp is paid currently.
• It relates to a year before 2005
• 20 of the comp relates to qualifying activities
  in that year
• 16 of that deduction relates to DPGR (80 X 20)
• Cant simply say that entire 20 doesnt relate
  to DPGR because it was incurred in a year that
  pre-dates the DPAD

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Debt Relief

• Forgiveness of debt
• Allows for a deferral of 5 years of a
  reacquisition of debt in 2009 and 4 years for
  those in 2010.
• After that, 20 of COD income would be included
  in each of the next 5 years.

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Debt Relief

• Forgiveness of debt / IRC Section 108 Income from
  Discharge of Indebtedness
• Income is not included in gross income if
• The discharge occurs in a title 11 case
• The discharge occurs when the taxpayer is
  insolvent
• The indebtedness is qualified farm indebtedness
• In the case of a taxpayer, other than a C
  corporation, the indebtedness discharged is
  qualified real property business indebtedness
• The indebtedness discharged is qualified
  principal residence indebtedness which is
  discharged before 1/1/20013

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Debt Relief

• 108(h) Special rules relating to qualified
  principal residence indebtedness
• This exclusion applies to discharges occurring on
  or after 1/1/2007 and before 1/1/2013
• Only the portion of the discharged debt that
  applies to the qualified principal residence is
  excluded from gross income
• Reduce basis of the tax payers principal
  residence by the amount of debt forgiven that is
  excluded from gross income
• May not reduce basis of principal residence below
  zero
• Principal residence owned and used by the
  taxpayer as a principal residence for periods
  aggregating 2 years or more during a 5 year
  period

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Debt Relief

• Qualified principal residence indebtedness
• Qualified principal residence indebtedness means
  acquisition indebtedness
• Limit 2,000,000 (1,000,000 if married filing
  separately)
• The exclusion is not available if the discharge
  occurred on account of services performed for the
  lender
• The exclusion is not available if the discharge
  is based on any other factor not directly related
  to a decline in the value of the residence or to
  the financial condition of the taxpayer

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Other

• M-3 reporting
• Must disclose any change in accounting
  principle for financial accounting purposes.
• a change from one generally accepted accounting
  principle to another generally accepted
  accounting principle as described in Statement of
  Financial Accounting Standards (SFAS) No.
  154-Accounting Changes Error Corrections.

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Inventory

• Identify scrap and / or sub-normal goods
• Book reserves are not deductible for tax
• Goods that are scrapped or intended to be
  scrapped may be written down to scrap value
• Sub-normal goods - may write down value to bona
  fide selling price less direct cost of
  disposition. (FIFO only!)
• Bona fide offering price during period not
  later than 30 days after inventory date.

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Accounting method changes

• Automatic changes 3115 filing due w/ timely
  filed return, no fee.
• Non-Automatic changes 3115 filing due by last
  day of tax year! 3,800 fee.

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Bad Debts

• Bad debts must be charged off to take expense
  for tax purposes.
• Charge-off can occur to the extent that a
  specific reserve account for that debt is
  established.
• Various factors should be considered to determine
  worthlessness not necessarily bankruptcy.

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Bonus Accrual

• Greater scrutiny being made of bonus accruals
• Liability must be fixed at year end plus paid
  w/in 2.5 mo.
• Consider discretion of co to alter the bonus plan
  after year-end.
• Employment contingencies after year end may mean
  liability not fixed.
• Take measures to fix the liability board /
  management approval pre year end.

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Illinois

• Illinois senate is attempting to repeal the
  repeal of the subtraction on partnership returns
  for personal service income.
• 2nd year of required IL withholding for
  non-resident owners.
• 2008 was 1st year of new sourcing rules for
  services. Now must look to where benefit is
  received
• MPC is still available
• IL-477 credit restored

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International

• IC-Discs
• Initially, IC DISCs provided a modest benefit in
  deferring income tax, albeit while requiring an
  interest charge on deferred tax
• When the tax rate on qualified dividends was
  reduced, a permanent tax savings sprung into
  existence some income (a commission for export
  receipts) can be taxed at 15 capital gain tax
  rate (through 2010).

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International

• IC-Discs
• After 2010, there is speculation that the tax
  rate on qualified dividends may continue to be
  less than the ordinary income tax rate.
• So, there still are tax savings opportunities in
  the right circumstances.
• Form 5471 5472 disclosures

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Education

• Section 529 Expanded
• Qualified distributions now include payments for
  computers and other technology costs for 2009 and
  2010.

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Credits / Education

• Education Credits Hope credit expanded and
  renamed - American Opportunity Tax Credit
• Covers 4 years
• 40 refundable
• Benefit of up to 2,500 per student
• Income limits raised as compared to Hope Credit

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Retirement Distributions

• 2009 is final year that IRA distributions can be
  made via direct transfer of IRA funds to Charity
• Not includable in taxable income
• No charitable deduction
• More beneficial in terms of phase outs
• More beneficial from state liability perspective

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Retirement Distributions

• For 09 required minimum distribution rules dont
  apply to any qualified defined contribution plan
• NOTE The law change suspends the previous
  requirement that plans contain provisions
  requiring minimum distributions. It does not
  require the plan actually eliminate that
  requirement.
• Plan amendment is required to eliminate the
  requirement. Amended must be made by last day of
  the 1st plan year beginning on or after 1-1-11.

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Retirement Issues

• Effective 1-1-2010 individuals can roll
  traditional and non-deductible IRA funds to Roth
  IRA regardless of income level.
• 2010 Conversion income to be spread over 2011 and
  2012
• Post 2010 conversions income in conversion year

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Other

• Increased transportation fringe benefits
  exclusion
• Increased from 120 per month to 230 per month
  (indexed annually for inflation) through December
  31, 2010
• Exclusion of gain on sale of certain small
  business stock.
• Increased exclusion for gain on Section 1202
  stock held for at least 5 years to 75 from 50
  through December 31, 2010.

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Other

• Estimated tax payments for individuals possible
  deferral
• Must receive more than ½ gross income from their
  small business
• Small business is defined as a business with an
  average number of employees below 500 for the
  calendar year ending with or within the preceding
  taxable year of the individual.
• AGI must be below 500,000 (250,000 married
  filing separately)

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Circular 230

• In conformity with U.S. Treasury Department
  Circular 230 tax advice contained in this
  communication and any attachments is not intended
  to be used, and cannot be used, for the purpose
  of avoiding penalties that may be imposed under
  the Internal Revenue Code, nor may any such tax
  advice be used to promote, market or recommend to
  any person any transaction or matter that is the
  subject of this communication and any
  attachments. The intended recipients of this
  communication and any attachments are not subject
  to any limitation on the disclosure of the tax
  treatment or tax structure of any transaction or
  matter that is the subject of this communication
  and any attachments.