Tax Planning and the New Tax Law 11/18/2010

Tax Planning and the
New Tax Law
brown, kaplan + liss llp
11/18/2010

Tax Planning and the New Tax Law
November 18, 2010
2 | P a g e
CONTENTS
Pages 1 – 11 Outline – Tax Planning and the New Tax Law
Pages 100 – 115 Articles
CIRCULAR 230 DISCLOSURE
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal
tax advice contained in or accompanying this document, unless otherwise specifically stated, is
not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties
under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party
any transaction or matter that is contained in or accompanying this document.

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brown, kaplan + liss llp –
November 18, 2010
Joe M. Liss, CPA, Managing Partner
Michael W. Felz, CPA, MST, Partner and Director of Taxation
Kristy McElroy, CPA, Manager
Scott Joschko, CPA, Manager
I. New tax laws
a. Small Business Jobs Act of 2010 (signed September 27, 2010)
i. Tax savings provisions
1. Liberalized “cost recovery” rules
a. Section 179 [see article at page 100]- Up to $500,000 of
equipment, furniture and certain other capitalized asset
purchases can be deducted in each of 2010 and 2011.
b. The reduction in this $500,000 limitation does not take
effect until $2,000,000 of property is place in service in
either tax year.
c. Taxpayers can elect to include in qualified asset purchases
up to $250,000 of certain real property – i.e. qualified
leasehold improvements, restaurant property, and retail
improvement property.
i. This doesn’t include air conditioning or heating
units, or property used for lodging (except transient
accommodations in hotels and motels), property
used outside the U.S., and property used by
governmental units, foreign persons or entities, and
tax-exempt entities.

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ii. Qualified leasehold improvements are
improvements to the interior of a nonresidential
property, made pursuant to a lease, in a portion to
be occupied by the lessee, and the improvement is
placed in service more than 3 years after the date
the building was first placed in service by any
person.
d. 50% bonus depreciation [see article at page 100] – most
new items of personal property, computer software and
certain leasehold improvements placed in service before
Jan. 1, 2011, qualify for 50% bonus depreciation in the year
placed in service.
e. Passenger automobiles – first year depreciation on
qualified business autos placed in service on or before Dec.
31, 2010, is increased by $8,000 over the “luxury” auto
limit of $3,060. Qualified business autos are allowed up to
$11,060 of depreciation in the year placed in service,
reduced proportionately for non-business use.
f. Cell phones [see article at Page 101] – Cell phones are
removed from “listed property” treatment.
i. Strict substantiation requirements and additional
limits placed on depreciation are removed.
ii. This provision enables the fair market value of
personal use of a cell phone or similar device
provided to an employee predominantly for
business purposes to be excluded from gross
income.
2. Incentives for investment in businesses
a. Start-up costs [see article at Page 102] – taxpayers can
deduct up to $10,000 of start-up expenses incurred in 2010,
with limitations if total start-up expenses exceed $60,000.
The limit returns to $5,000 for expenses after 2010.
b. Small business stock gain exclusion [see article at Page
103] – gain realized on the sale of “qualified small business
stock” acquired after Sept. 27, 2010 and before Jan. 1,

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2011, held for more than 5 years, subject to certain
limitations, is excluded from regular tax and AMT.
c. Unused “Eligible Small Business Credits” are allowed
5-year carryback – Credits earned in a taxpayer’s first tax
year beginning in 2010, but are unused in 2010, can be
carried back five tax years and forward 20 tax years.
i. “Eligible Small Businesses” are businesses that
1. Are either corporations the stock of which
isn’t publicly traded, partnerships or sole
proprietorships, and
2. Have average annual gross receipts for the
three-year period preceding the tax year of
no more than $50 million.
d. Shortened S Corporation built-in gain holding period
extended for 2011 – No tax is imposed on the net
unrecognized built-in gain of an S corporation if the fifth
year in the recognition period preceded 2011. Thus, a five
year period applies for 2011 (a seven year period applies
for 2010).
3. AMT liberalization
a. “Eligible Small Businesses” can offset AMT liability
with 2010 general business credits – Credits earned in the
taxpayer’s first tax year beginning in 2010 can be used to
offset AMT and regular tax except for 5% of regular tax in
excess of $25,000.
i. Where credits are limited to taxes attributable to
income from an activity (i.e. research and
development credits), those limits still apply.
4. Fringe benefits
a. Cell phones (see item 1.f. above)

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b. Health insurance for self-employed individuals [see
article on Page 104] – For 2010, in addition to the income
tax deduction previously allowed, self-employed
individuals are also allowed to deduct the cost of health
insurance in calculating net earnings from self-employment
for purposes of the self-employment tax.
5. Qualified and Nonqualified Retirement Plans
a. Retirement plan distributions may be rolled over to a
designated Roth account [see article on Page 105] –
Prior to this law, rollovers of distributions from a qualified
plan to a designated Roth account could be made only from
another designated Roth account.
i. Now, eligible rollover distributions from qualified
plans may be directly rolled over into a Roth IRA.
ii. Plans may need to be amended to allow for such
rollovers.
iii. Rollovers to a designated Roth account are
taxable
1. 10% early withdrawal penalty doesn’t apply
2. The taxable income is included ratably in
the individual’s gross income over the two-
year period beginning in 2011, though the
individual may elect not to have this two-
year deferral apply.
6. Information Reporting and Related Penalties [see article on
Page 106]
a. Rental Properties required to issue 1099s – A person
receiving rental income from real estate will be considered
to be engaged in a trade or business for information
reporting purposes.
i. Payments of $600 or more to a service provider (i.e.
plumber, painter, or accountant) in the course of
earning rental income will require an information

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return (typically Form 1099-MISC) to the IRS and
service provider.
ii. Exception – any individual who receives rental
income of not more than the minimal amount, as
determined under IRS regulations (yet to be issued),
and military members or intelligence employees if
the rental income is from their principal residence.
iii. Backup withholding – The backup withholding
rules continue to apply. If reportable payments are
made to a service provider who has not provided a
taxpayer identification number to the payer, the
payer is required to withhold 28% of the payment
and submit it to the IRS. Form W-9 is used to obtain
the payee’s taxpayer identification number.
b. Penalties
i. In addition to the backup withholding, penalties for
failure to file information returns increase from
$100 to $250 per return for intentional disregard
of the rules. The penalties for failure to furnish
information returns to payees also increase from
$100 to $250 per return.
1. Example – if you should have filed and
provided 10 Form 1099-MISC, but failed to
do so, your penalties total $5,000 (10 failure
to file penalties at $250 each, and 10 failure
to furnish penalties at $250 each), plus you
would be required to submit 28% of the
gross payments as backup withholding if
you didn’t obtain taxpayer identification
numbers.
ii. The various late filing penalties increase from $15
to $30 (“first tier” penalty for failures corrected
within 30 days), from $30 to $60 (“second tier”
penalty for failures corrected after 30 days but
before August 1st
of each year), and from $50 to
$100 (third tier penalty for failures corrected after
August 1). The penalties for failure to furnish

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information returns to payees have been changed to
match these late filing penalties.
iii. The maximum penalties increase to $250,000 (first
tier), $500,000 (second tier) and $1,500,000 (third
tier). Small business (businesses with average
annual gross receipts for the prior 3 years that don’t
exceed $5 million) have smaller limits: $75,000
(first tier), $200,000 (second tier) and $500,000
(third tier).
II. Other year-end business tax planning
a. Illinois
i. EDGE Tax Credit – Economic Development for a Growing Economy
1. Credit equal to amount of state income taxes withheld from the
wages or salaries of employees in newly created jobs or retained
jobs attributable to a particular project
2. Administered by the Department of Commerce and Economic
Opportunity (DCEO)
3. See:
http://www.commerce.state.il.us/dceo/Bureaus/Business_Develop
ment/Tax+Assistance/
ii. Illinois Research & Development Credit – the R&D credit has been
extended for tax years ending prior to January 1, 2011. The credit is equal
to 6.5% of eligible expenditures for increasing R&D in Illinois.
iii. Small Business Job Creation Tax Credit-for businesses with no more than
50 full-time employees
1. $2,500 credit per new employee hired and is applied towards
payment of Illinois withholding taxes.
2. New, full-time employees must be hired during the 12 month
period beginning July 1, 2010.
a. Only new Illinois employees qualify

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i. A full-time employee first employed within the
incentive period (7/1/2010 – 6/30/2011)
ii. Whose hire results in a net increase in the
applicant’s full-time Illinois employees, and
iii. Who is receiving a basic wage as compensation (no
less than $13.75 per hour or the equivalent salary
for a new employee)
b. The law limits the total monetary amount of credits
awarded to no more than $50 million, and credits shall be
allowed on first-come, first-served basis.
c. See: http://jobstaxcredit.illinois.gov/
iv. Angel Investment Credit [see Press Release on Page 107] – for taxable
years beginning after 12/31/10 and ending on or before 12/31/16, eligible
taxpayers may claim a nonrefundable income tax credit in the amount of
25% of the claimant’s investment made directly in a qualified new
business venture.
1. A “qualified new business venture” means a business that is
registered with the DCEO, and
2. A business must submit an application in each taxable year for
which the business desires registration.
3. See the DCEO website for qualifications – not yet available
b. Federal
i. Expiring provisions of the Economic Growth and Tax Relief
Reconciliation Act of 2001
1. Top rates increase from 35.0% to 39.6%
2. Long-term capital gain rates increase from 15% to 20%
3. Qualified dividend income rates increase from 15% to 39.6%
ii. Health Care and Education Reconciliation Act of 2010
1. In 2013, additional medicare taxes-

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a. Hospital Insurance tax rate of .9% on earned income in
excess of $200,000 ($250,000 MFJ)
b. 3.8% unearned income Medicare contributions tax on the
lessor of “net investment income” or the excess of modified
adjusted gross income over $200,000 ($250,000 MFJ,
$125,000 MFS).
2. Expanded information reporting
a. In 2012, 1099-MISC requirements expand to corporate
providers and providers of property in addition to services
b. In 2011, employer-provided health insurance costs to be
reported on Form W-2 (reported only, not subject to tax)
(IRS Notice 2010-69 made this disclosure optional for
2011).
c. In 2010, Form 3921 is to be filed with IRS if stock is
transferred in connection with exercise of incentive stock
options.
d. In 2010, Form 3922 is required if stock is transferred under
an Employee Stock Purchase Plan.
3. “Economic Substance” Doctrine is codified – a transaction has
economic substance only if the taxpayer’s economic position
(other than its Federal tax position) is changed in a meaningful
way and the taxpayer had a substantial purpose (other than a
Federal tax purpose) for engaging in the transaction.
4. In 2018, a 40% nondeductible excise tax on insurance companies
or plan administrators for any health insurance plan with an annual
premium in excess of $10,200 for individuals ($27,500 for
families), with the premium amounts to be adjusted for inflation.
iii. Hiring Incentives to Restore Employment (HIRE) Act
1. A Qualified Employer’s 6.2% OASDI Social Security tax is
forgiven for wages paid on previously unemployed new hires for
any 2010 period starting after 3/18/2010 through 12/31/2010.

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2. A Qualified Employee must start work anytime after 2/3/2010 and
before 1/1/2011, and generally must have been unemployed for at
least 60 days before his/her start date.
3. Employers that hire new workers who qualify for payroll tax
forgiveness and keep them on the payroll for at least 52
consecutive weeks may be eligible for an up to $1,000 tax credit (if
lesser, 6.2% of wages).
iv. The Domestic Production Activity Deduction (DPAD, Sec. 199) increases
to 9% from 6% of domestic production activity income in 2010.

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Contents
Page
100 Expensing and bonus depreciation provisions in the 2010 Small
Business Jobs Act
101 Simplified business cell phone deduction rules in the 2010 Small
Business Jobs Act
102 Increased deduction for start-up expenditures in the 2010 Small
Business Jobs Act
103 100% exclusion of gain from the sale of certain small business stock
in the 2010 Small Business Jobs Act
104 Deductibility of health insurance for purposes of calculating self-
employment tax in the 2010 Small Business Jobs Act
105 Retirement plan and annuity changes in the 2010 Small Business
Jobs Act
106 Information reporting changes in the 2010 Small Business Jobs Act
107 Illinois Press Release – Angel Investment Tax Credit
109 Federal gift tax: liability based on lifetime gifts
110 Tax strategies for business people stepping up to a new car
112 S corporation as choice of entity
113 C corporation as choice of entity
115 Limited liability company as choice of entity

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Expensing and bonus depreciation provisions in
the 2010 Small Business Jobs Act
The recently enacted Small Business Jobs Act of 2010 includes a wide-ranging
assortment of tax changes generally affecting business. Two of the most significant
changes allow for faster cost recovery of business property. Here are the details.
Enhanced small business expensing (Section 179 expensing). In order to help small
businesses quickly recover the cost of certain capital expenses, small business taxpayers
can elect to write off the cost of these expenses in the year of acquisition in lieu of
recovering these costs over time through depreciation. Under pre-2010 Small Business
Act law, taxpayers could expense up to $250,000 for qualifying property—generally,
machinery, equipment and certain software—placed in service in tax years beginning in
2010. This annual expensing limit was reduced (but not below zero) by the amount by
which the cost of qualifying property placed in service in tax years beginning in 2010
exceeded $800,000 (the investment ceiling). Under the new law, for tax years beginning
in 2010 and 2011, the $250,000 limit is increased to $500,000 and the investment ceiling
to $2,000,000.
The new law also makes certain real property eligible for expensing. For property placed
in service in any tax year beginning in 2010 or 2011, the up-to-$500,000 of property that
can be expensed can include up to $250,000 of qualified real property (qualified
leasehold improvement property, qualified restaurant property, and qualified retail
improvement property).
Extension of 50% bonus first-year depreciation. Businesses are allowed to deduct the
cost of capital expenditures over time according to depreciation schedules. In previous
legislation, Congress allowed businesses to more rapidly deduct capital expenditures of
most new tangible personal property, and certain other new property, placed in service in
2008 or 2009 (2010 for certain property), by permitting the first-year write-off of 50% of
the cost. The new law extends the first-year 50% write-off to apply to qualifying property
placed in service in 2010 (2011 for certain property).
We hope this information is helpful. If you would like more details about any aspect of
the new legislation, please do not hesitate to call.

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Simplified business cell phone deduction rules in
For an example of genuine tax simplification, it would be hard to beat a provision in the
recently enacted 2010 Small Business Jobs Act. For the last several years, just about
everyone, it seems, even the IRS, has complained about the archaic rules governing the
tax treatment of employer-provided cell phones. Since 1989 (shortly after the first cell
phones were introduced), employers and employees have been required to keep a detailed
log of business and personal use on employer-provided cellular telephones and similar
mobile communication devices to substantiate costs that were allowable as business
expenses. In tax parlance, cell phones were included in the category of “listed property”
(i.e., items obtained for use in a business but which lend themselves easily to personal
use) and thus were subjected to strict substantiation rules. Employers who failed to meet
the substantiation requirements couldn't deduct the costs of the cell phones, and
employees who failed to meet the substantiation rules saw the amount that represented
personal use of the cell phone counted as taxable wages (instead of a tax-free working
condition fringe). Why the strict rules for cell phones? Back in 1989, cell phones were
considered an expensive luxury item only used by executives, and Congress believed that
an employee's use of an employer-provided cell phone to make personal calls should be
treated as a taxable fringe benefit, similar to an employee's personal use of an employer-
provided automobile.
Needless to say, times have changed. No longer considered a luxury item, cell phones
and other mobile communication devices are now part of daily business practices at all
levels, and the deduction limitations and documentation requirements no longer make
sense. Today, cell phones are more akin to a land line phone which for years an employee
may have occasionally used to make a personal call without tax consequence. Detailed
documentation is not required for use by an employee of his office phone, and there is no
reason that cell phones should be subject to stricter substantiation requirements. You may
have read in the news that the IRS Commissioner and Treasury Secretary joined in a
statement urging Congress to repeal the law. “The passage of time, advances in
technology and the nature of communication in the modern workplace,” the
Commissioner said, “have rendered this law obsolete. [We] ask that Congress act to make
clear that there will be no tax consequence to employers or employees for personal use of
work-related devices such as cell phones provided by employers.”
And lo and behold, that is precisely what Congress has done. The new legislation
removes cell phones and similar telecommunications equipment (including PDAs and
Blackberry devices) from the “listed property” rules. This makes it easier for employers
that provide cell phones to employees, as well as for employee who use their own cell
phones. As with other business property, taxpayers must still be able to demonstrate the
business use of the cell phone.

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Increased deduction for start-up expenditures in
If you've recently started a business, or if you're in the process of starting one now, you
should be aware of a recent tax law change that could make a big difference in your tax
bill. The recently enacted 2010 Small Business Jobs Act doubles the amount of start-up
expenses that someone starting a business in 2010 can write off this year. Here are the
details.
Generally, expenses incurred before a business begins don't generate any deductions or
other current tax benefits. However, under pre-2010 Small Business Jobs Act law,
taxpayers, whether they were individuals, corporations or partnerships, were permitted to
elect to write off up to $5,000 of “start-up expenses” in the year business began, and the
rest could be deducted over a period of 180 months. The $5,000 figure was reduced by
the excess of total start-up costs over $50,000. You were deemed to have made this
election unless you opted out.
The new law doubles the amount that can be written off for 2010 to $10,000 and
increases the phaseout threshold from $50,000 to $60,000. It is important to note that this
increased deduction is temporary, and only applies to tax years beginning in 2010.
Start-up expenses include, with a few exceptions, all expenses incurred to investigate the
creation or acquisition of a business, to actually create the business, or to engage in a for-
profit activity in anticipation of that activity becoming an active business. To be eligible
for the election, an expense also must be one that would be deductible if it were incurred
after the business actually began. An example of a startup expense is the cost of
analyzing the potential market for a new product.
As you can see, it's important to keep a record of these start-up expenses, and to make the
appropriate decision regarding the write-off election. As mentioned above, if you opt out
of the election, there is no current tax benefit derived for the eligible expenses covered by
the election. Also, you should be aware that an election either to deduct or to amortize
start-up expenditures, once made, is irrevocable.

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100% exclusion of gain from the sale of certain
small business stock in the 2010 Small Business
Jobs Act
The recently enacted 2010 Small Business Jobs Act of 2010 includes a wide-ranging
assortment of tax changes generally affecting small business. One of the changes could
help those who are starting a business this year. It provides a 100% exclusion of gain
from the sale of small business stock, with certain limitations. Here are the details.
Before the 2009 Recovery Act, individuals could exclude 50% of their gain on the sale of
qualified small business stock (QSBS) held for at least five years (60% for certain
empowerment zone businesses). To qualify, QSBS must meet a number of conditions
(e.g., it must be stock of a corporation that has gross assets that don't exceed $50 million
and that meets active business requirements). Under the 2009 Recovery Act, the
percentage exclusion for gain on QSBS sold by an individual was increased to 75% for
stock acquired after Feb. 17, 2009 and before Jan. 1, 2011.
Under the new law, the amount of the exclusion is temporarily increased yet again, to
100% of the gain from the sale of qualifying small business stock that is acquired in 2010
after Sept. 27, 2010 and held for more than five years. In addition, the new law eliminates
the AMT preference item attributable for that sale.
If you are considering investing in a small business, I would be happy to work with you
to determine whether the new total exclusion for QSBS would work to your advantage.
However, it should be noted that while the new provision for QSBS is ostensibly
intended to encourage investment in small businesses, it may be less effective in that
regard than desired, due to the restrictions on obtaining the total exclusion, specifically:
(1) the narrow window within which the small business stock must be purchased (i.e.,
between Sept. 27, 2010 and the end of 2010); (2) the long holding period requirement for
QSBS (the stock must he held for at least five years); and, most importantly, (3) the fact
that the tax break only applies to investments in C corporations, a form of business
organization that is not often used by small businesses, which, for tax purposes, are
typically operated as S corporations, partnerships, limited liability companies or sole
proprietorships.

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Deductibility of health insurance for purposes of
calculating self-employment tax in the 2010 Small
Business Jobs Act
assortment of tax changes generally affecting small business. One provision that could be
valuable to business owners this year concerns the calculation of self-employment tax.
Generally, business owners can't deduct the cost of health insurance for themselves and
their family members for purposes of calculating self-employment tax. The new law
allows business owners to deduct health insurance costs incurred in 2010 for themselves
and their family members in calculating their 2010 self-employment tax.
At issue is the 15.3% tax that self-employed individuals pay on their net earnings,
commonly referred to as self-employment tax. The self-employment tax rate is the sum of
12.4% for Social Security (old age, survivors, and disability insurance) and 2.9% for
Medicare (hospital insurance). The Social Security tax applies to the first $106,800 of net
earnings in 2010; there is no ceiling on the Medicare tax.
Back in 2003, small-business advocates won the first battle in this area by achieving
legislation allowing self-employed individuals to deduct the cost of health insurance for
income tax purposes. While this change enabled small-business owners to deduct the cost
of health care from their income, that income already had been exposed to self-
employment tax. Thus, the self-employed effectively paid self-employment tax on
income used to purchase health care.
According to a report by the Kaiser Family Foundation, employers paid an average health
insurance premium of $13,770 for family coverage in 2010. The 15.3% self-employment
tax on earnings used to pay this average premium would be $2,107.
Arguing that this was money that could be used to reinvest in and grow the business,
small-business advocates have pushed for legislation that would allow the self-employed
to deduct their health insurance premiums on their self-employment tax as well as their
income tax.
The new legislation does precisely that. For now, however, the change is limited to the
2010 tax year.
We hope this information is helpful. If you would like more details about this or any
other aspect of the new legislation, please do not hesitate to call.

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Retirement plan and annuity changes in the 2010
Small Business Jobs Act
The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment
of tax breaks and incentives for small business. Paying for the tax breaks, in large part,
are new provisions allowing taxpayers to convert 401(k) and government retirement
accounts into Roth accounts, in which they pay taxes up front on the money they
contribute, enabling them to withdraw it tax-free after they retire. Advocates of the new
provisions argued that the changes would increase flexibility in retirement preparation,
while generating immediate revenue for the government. There is also a provision
permitting partial annuitization of nonqualified annuity contracts. Here are the details.
Participants in governmental 457 plans allowed to treat elective deferrals as designated
Roth contributions. For tax years beginning after Dec. 31, 2010, the new law will allow
retirement savings plans sponsored by state and local governments (governmental 457(b)
plans) to include designated Roth accounts. Contributions to Roth accounts are made on
an after-tax basis, but distributions of both principal and earnings are generally tax-free.
Distributions from elective deferral plans may be rolled over to designated Roth
accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit
participants to roll over their pre-tax account balances into a designated Roth account.
The amount of the rollover will be includible in taxable income except to the extent it is
the return of after-tax contributions. If the rollover is made in 2010, the participant can
elect to pay the tax in 2011 and 2012. Plans will be able to allow these rollovers
immediately upon the Act's enactment.
Nonqualified annuity contracts. The new law permits holders of nonqualified annuities
(annuity contracts held outside of a qualified retirement plan or IRA) to elect to receive
part of the contract in the form of a stream of annuity payments, leaving the remainder of
the contract to accumulate income on a tax-deferred basis. The annuity payments must be
for a period of 10 years or more, or during one or more lives.

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Information reporting changes in the 2010 Small
Business Jobs Act
assortment of tax changes generally affecting small business. To offset a portion of the
cost of the various tax breaks and incentives in the Act, Congress beefed up certain
reporting requirements and penalties, in the hope that the added requirements will
generate revenue and lead to more effective tax collection. Here are the details of the new
reporting requirements.
Information reporting required for rental property expense payments. For payments
made after Dec. 31, 2010, the new law requires persons receiving rental income from real
property to file information returns with IRS and service providers reporting payments of
$600 or more during the year for rental property expenses. Exceptions are provided for
individuals renting their principal residences (including active members of the military),
taxpayers whose rental income doesn't exceed an IRS-determined minimal amount, and
those for whom the reporting requirement would create a hardship (under IRS regs).
Increased information return penalties. For information returns required to be filed after
December 31, 2010, the penalties in the tax code for failure to timely file information
returns to IRS will be increased. For example, the first-tier penalty will be increased from
$15 to $30, and the calendar year maximum will be increased from $75,000 to $250,000.
For small filers, the calendar year maximum will be increased from $25,000 to $75,000
for the first-tier penalty. The minimum penalty for each failure due to intentional
disregard will be increased from $100 to $250. The penalties for failure to furnish
information returns to payees will be similarly increased.

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FOR IMMEDIATE RELEASE
June 24, 2010
Governor Quinn Signs Major Legislation to Improve State’s Economy, Create Jobs
New Law Creates Angel Investment Tax Credit, Doubles New Markets Tax Credit,
Launches Economic Development Pilot Program for Southern Illinois
MARION – June 24, 2010. Governor Pat Quinn today signed a bill into law that will
encourage investment into Illinois’ businesses and support Southern Illinois’ economy.
Senate Bill 2093 will create the Angel Investment Tax Credit to support direct investment
by Illinois entrepreneurs and start-up companies and will double the state’s existing New
Markets Tax Credit for new investment into small businesses in underserved
communities. In addition, it creates a pilot program – Sales Tax and (STAR) bonds – to
help develop a major retail and entertainment complex near Marion in Southern Illinois.
“Illinois has created more jobs this year than any other state in the Midwest. We must
continue to work day and night to ensure residents across the state have access to a good
paying job and direct investment into Illinois’ businesses and entrepreneurs is one of the
best ways to do that,” said Governor Quinn. “This new law will bring investment, spur
economic development and create jobs across Illinois.”
Governor Quinn first announced the Angel Investment Tax Credit in a speech he gave in
December as part of his Illinois Economic Recovery Plan. The new tax credit encourages
investment into innovative Illinois businesses that are working to get off the ground.
Under the new law, investors may claim 25 percent of an investment into a qualified
Illinois business venture - up to $2 million in investment for a $500,000 credit. The
program is capped at $10 million in tax credits, which will drive $40 million in
investment.
“Governor Quinn and the General Assembly should be congratulated for enacting the
Angel Tax Credit,” said David Miller, CEO of the Illinois Biotechnology Industry
Organization (known as iBIO®). “Passage of this measure sends a strong signal that
Illinois – always among the best in research – will take its rightful place as among the
best in generating and attracting high-paying technology jobs.”
The new law doubles the cap on Illinois’ existing New Markets Tax Credit program -
from $10 million to $20 million. The program provides tax credits for new investment
into small businesses in low-income communities. The increased cap could generate $125
million in private investment into Illinois businesses. Illinois began its New Markets Tax
Credit last year and exhausted the $10 million cap within six months.

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Senate Bill 2093 also creates the STAR bonds pilot program to allow a portion of the
sales tax revenues generated by a major retail and entertainment complex near Marion to
repay its development and construction costs.
The proposed 400 acre shopping and entertainment complex will be near Interstate 57
north of Illinois 13. The STAR bonds would help finance the cost of building the $378
million project. The legislation calls for the creation of at least 500 jobs during the first
five years of the pilot program.
Governor Quinn is focused on economic development and job creation in Southern
Illinois, which has seen unemployment range from 12 to 15 percent during 2010, among
the highest rates in the state. State sales taxes may only be used to finance up to 50
percent of the development costs.
Senate Bill 2093 was sponsored by Senator Gary Forby (D-Benton) and Representative
John Bradley (D-Marion). The law takes effect immediately except for certain provisions
that take effect on July 1 or January 1, 2011.
"Most importantly, this bill will put people back to work in Southern Illinois," said Sen.
Forby. "It has the potential to get more foot traffic through the doors of other surrounding
shops and the tax incentive will attract businesses that would have otherwise developed
in another state."
“Thank you, Governor Quinn for giving us an opportunity we have never had in Southern
Illinois,” said Rep. Bradley. “This has the potential to be the largest economic
development project in the history of our region. This fulfills Governor Quinn’s priority
of creating jobs throughout Illinois.”

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Federal gift tax: liability based on lifetime gifts
You recently asked how the federal gift tax liability is determined. (Although the estate
tax has been repealed for 2010, the gift tax continues to apply.) Unlike the income tax
which is based on taxable income for each year, the gift tax rate is based on the
cumulative amounts of taxable gifts you make over the course of your life. Thus, as you
make more and more taxable gifts, your gift tax bracket increases.
First, because of the annual exclusion, only gifts in excess of $13,000 to each donee are
“taxable” in 2010.
Next, the gift tax on the first $1 million of taxable gifts you make during your life is
covered by a gift tax credit. This credit wipes out the first $330,800 of gift tax liability.
This is the liability that would arise from $1 million of taxable gifts. Accordingly, only
after the taxable gifts you make during your life reach $1 million will any gift tax apply.
The tax on gifts made in the current year is the tax on total lifetime gifts minus the tax on
gifts made before the current year.
In 2010, the taxpayer makes an additional $250,000 in potentially taxable gifts. This
brings lifetime gifts up to $1 million. Before application of the gift tax credit, the gift tax
on $1 million of gifts would be $330,800: a $243,300 gift tax liability on the 2001 gifts,
plus $87,500 on the 2010 gift of $250,000, taxed at a marginal bracket of 35%. The
actual 2010 gift tax bill is zero, because the gift tax credit of $330,800 that applies in
2010 effectively exempts $1 million of gifts. Because the taxpayer has used up his
lifetime gift exemption, any otherwise taxable gifts he makes in later years will not be
exempted from tax by the gift tax credit.
The gift tax does not apply to certain medical and educational expenses.
Transfers to qualifying educational institutions for tuition are not subject to the gift tax.
The exclusion applies to tuition for full or part-time students paid directly to the
educational institution. Amounts paid for books, room, board, other supplies, or
entertainment are not eligible for the exclusion.
Amounts paid directly to the person or organization providing the medical service for
medical expenses are also excluded from the gift tax. The medical expenses must meet
certain requirements for deductibility and generally include expenses paid for diagnosis,
cure, mitigation, treatment, or prevention of disease. Amounts paid for medical insurance
are also eligible.
If you would like to discuss the role lifetime gifts can play in your overall estate plan or
have any additional questions, please call.

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Tax strategies for business people stepping up to a
new car
The decision of whether to trade in an old business car or try to sell it for cash generally
should be based on factors such as the amount you can get on a sale versus a trade-in, and
the time and bother a sale will entail. However, important tax factors also may affect your
decision-making process. Here's an overview of the complex rules that apply to what
appears to be a simple transaction, and some pointers on how to achieve the best tax
results.
In general, the sale of a business asset yields a gain or loss depending on the net amount
you receive from the sale and your basis for it. “Basis” is your cost for tax purposes and,
if you bought the asset, usually equals your cost less the depreciation deductions you
claim for the asset over the years. Under the tax-free swap rules, trading in an old
business asset for a new, like-kind asset doesn't result in a current gain or loss, and the
new asset's basis will equal the old asset's remaining basis plus any cash you paid to trade
up. The rules generally are the same for business cars, with a couple of extra twists. Here
are some pointers.
As a general rule, you should trade in your old business car if you used it exclusively for
business driving, and its basis has been depreciated down to zero, or is very low. The
trade-in often avoids a current tax. For example, if you sell your business car for $9,000,
and your basis in it is only $7,000, you will have a $2,000 taxable gain, but if you trade it
in, a current tax is avoided. True, your basis in the new car will be lower than it would be
if you bought it without a trade-in, but that doesn't necessarily mean lower depreciation
deductions on the new car. Because of the so-called “luxury auto” annual depreciation
dollar caps, your annual depreciation deductions on the new car may be the same whether
you sold the old car or traded it in.
However, you should consider selling your old business car for cash rather than trading
it in if you used it exclusively for business driving and depreciation on the old car was
limited by the annual depreciation dollar caps. In this situation, your basis in the old car
may exceed its value. If you sell the old car, you will recognize a loss for tax purposes.
However, if you trade it in, you will not recognize the loss. By way of a simplified
example, let's assume a business person bought a $30,000 car several years back and used
it 100% for business driving. Because of the annual depreciation dollar caps, she still has
a $16,000 basis in the car, which has a current value of $14,500. Now, she wants to buy
another $30,000 car. If the old car is sold, a $1,500 loss will be recognized ($16,000 basis
less $14,500 sale price). If the old car is traded in for a new one, there will be no current
loss. Of course, if the old car's value exceeds its basis, the tax-smart move is to trade it in
and thereby avoid a gain.

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You also may be better off selling your old business car for cash rather than trading it in,
if you used the standard mileage allowance to deduct car-related expenses. For 2010, the
allowance is 50 cents per business mile driven. For 2009, the allowance was 55 cents per
business mile driven. The standard mileage allowance has a built-in allowance for
depreciation, which must be reflected in the basis of the car. The deemed depreciation is
23 cents for every business mile traveled during 2010, 21 cents for every business mile
traveled during 2008 and 2009, 19 cents for every business mile traveled during 2007, 17
cents for every business mile traveled during 2006 and 2005, and 16 cents for every
business mile traveled during 2004 and 2003. When it's time to dispose of a car, the
depreciation allowance may leave you with a higher remaining basis than the car's value.
Under these circumstances, the car should be sold in order to recognize the loss.
Did you use your car partially for business, partially for personal use? The rules are
more complicated in this situation, which can occur if you are self-employed, or an
employee required to supply a car for business use.
• If you sell the part-business, part-personal-use car, cost and depreciation must be
allocated between the business and personal portions. Gain or loss on the business
part is recognized; gain, but not loss, is recognized on the personal part.
• If you trade in the part-business, part-personal-use car, a special basis rule applies
for depreciation purposes only: The basis of the new car as computed under the
normal trade-in rules is reduced by any difference between (1) the depreciation
that would have been allowable had the old car been used 100% for business
driving, and (2) the depreciation claimed for its actual business use.
Are you thinking of leasing a business car? The complex rules that apply to purchased
business autos are one reason many businesses are leasing vehicles instead of buying
them. You simply deduct the business/investment use portion of annual lease costs, and,
if the vehicle is a “luxury” model, you add back to income during each lease year an
income inclusion amount derived from an IRS table. For auto leases that begin during
2010, the auto is a “luxury” if the auto's fair market value exceeds $16,700 ($17,000 for
certain trucks and vans treated as autos for purposes of the “luxury” auto rules). There
are, however, a few special angles you should be aware of:
• If you pay an additional sum up-front, it should be amortized over the life of the
lease.
• Any refundable deposit required as part of the lease deal can't be deducted at all.
All of this sounds very complicated, and it is. Before you sell or trade in your business
car or lease a new one, please give us a call and we'll set up a meeting to discuss your
options.

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S corporation as choice of entity
One of the biggest advantages of an S corporation over a partnership is that as S
corporation shareholders you would not be personally liable for corporate debts. In order
to receive this protection, it is important that the corporation be adequately financed, that
various formalities required by our state be observed (e.g., filing articles of incorporation,
adopting by-laws, electing a board of directors, and holding organizational meetings), and
that the existence of the corporation as a separate entity be maintained.
Because you expect that the business will incur losses in its early years, an S corporation
is preferable to a C corporation from a tax standpoint. Shareholders in a C corporation
generally get no tax benefit from such losses. In contrast, as S corporation shareholders,
each of you can deduct your percentage share of these losses on your personal tax return
to the extent of your basis in the stock and in any loans you make to the entity. Losses
that cannot be deducted because they exceed your basis are carried forward and can be
deducted by you when there is sufficient basis.
Once the corporation begins to earn profits, the income will be taxed directly to you
whether or not it is distributed. It will be reported on your individual tax return and be
aggregated with income from other sources. Your share of the S corporation's income
will not be subject to self-employment tax, but your wages will be subject to social
security taxes.
Are you planning to provide fringe benefits such as health and life insurance? You should
be aware that the costs of providing such benefits to a 2% or more shareholder are
deductible by the entity but are taxable to the recipient. This treatment will apply to you
since each of you will own more than 2% of the entity.
As I mentioned, the S corporation could inadvertently lose its S status if either of you
transfers stock to an ineligible shareholder such as another corporation, a partnership, or a
nonresident alien. If the S election were terminated, the corporation would become a
taxable entity. You would not be able to deduct any losses and earnings could be subject
to double taxation—once at the corporate level and again when distributed to you. In
order to protect you against this risk, it is recommend that each of the shareholders sign
an agreement promising not to make any transfers that would endanger the S election.

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C corporation as choice of entity
Below is a summary of the major advantages and disadvantages of doing business as a C
corporation.
A C corporation allows the business to be treated and taxed as a separate entity from you
as the principal owner. A properly structured corporation can protect you from the debts
of the business yet enable you to control both day-to-day operations and organic
corporate acts such as redemptions, acquisitions, and even liquidations.
In order to ensure that the corporation is treated as a separate entity, it is important to
observe various formalities required by our state. These include filing articles of
incorporation, adopting by-laws, electing a board of directors, appointing a resident
agent, holding organizational meetings and keeping minutes thereof. Complying with
these requirements and maintaining an adequate capital structure will ensure that you do
not inadvertently risk personal liability for the debt's of the business.
Since the corporation is taxed as a separate entity, all items of income, credit, loss, and
deduction are computed at the entity level in arriving at corporate taxable income or loss.
One potential disadvantage to a C corporation for a new business is that losses are
trapped at the entity level and thus generally cannot be deducted by the owners. However,
since you expect to generate profits in year one, this might not be a problem.
Another potential drawback to a C corporation is that its earnings can be subject to
double tax—once at the corporate level and again when distributed to you. However,
since most of the corporate earnings will be attributable to your efforts as an employee,
the risk of double taxation is minimal since the corporation can deduct all reasonable
salary that it pays to you.
A C corporation can also be used to provide fringe benefits and fund qualified pension
plans on a tax-favored basis. Subject to certain limits, the corporation can deduct the cost
of a variety of benefits such as health insurance and group life insurance without adverse
tax consequences to you. Similarly, contributions to qualified pension plans are usually
deductible but are not currently taxable to you.
A C corporation also gives you considerable flexibility in raising capital from outside
investors. A C corporation can have multiple classes of stock—each with different rights
and preferences that can be tailored to fit your needs and those of potential investors.
Also, if you decide to raise capital through debt, interest paid by the corporation is
deductible.
Although the C corporation form of business seems appropriate for you at this time, you
may in the future be able to change the corporation from a C corporation to an S

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corporation, if the S corporation form is more appropriate at that time. This change will
ordinarily be tax free, except that built-in gain on the corporate assets may be subject to
tax if the assets are disposed of by the corporation within ten years of the change.

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Limited liability company as choice of entity
A limited liability company (LLC) is somewhat of a hybrid entity in that it can be
structured to resemble a corporation for owner liability purposes and a partnership for
federal tax purposes. This duality can provide the owners with the best of both worlds.
Like the shareholders of a corporation, the owners of an LLC (called “members” rather
than shareholders or partners) are generally not liable for the debts of the business except
to the extent of their investment. Thus, the owners can operate the business with the
security of knowing that their personal assets are protected from the entity's creditors.
This protection is far greater than that afforded by partnerships. In a partnership, the
general partners are personally liable for the debts of the business. Even limited partners,
if they actively participate in managing the business, can have personal liability.
Unlike a regular or “C” corporation, an LLC can be structured to be treated as a
partnership for federal tax purposes. This can provide a number of important benefits to
the owners. For example, partnership earnings are not subject to an entity-level tax;
instead, they “flow-through” to the owners, in proportion to the owners' respective
interests in profits, and are reported on the owners' individual returns. Thus, earnings are
taxed only once. In addition, since you are actively managing the business, you can
deduct on your individual tax return your ratable shares of any losses the business
generates. This, in effect, allows you to shelter other income that you and your spouse
may have.
An LLC that is taxable as a partnership can provide special allocations of tax benefits to
specific partners. This can be an important reason for using an LLC over an S corporation
(a form of business that provides tax treatment that is similar to a partnership). Another
reason for using an LLC over an S corporation is that LLCs are not subject to the
restrictions the Internal Revenue Code imposes on S corporations regarding the number
of owners and the types of ownership interests that may be issued.
In summary, an LLC would give you corporate-like protection from creditors while
providing you with the benefits of taxation as a partnership.

Tax Planning and the New Tax Law 11/18/2010

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