Tax Update for the N.E. ACA Conference
•
1 gefällt mir•442 views
Jeff Solomon, Managing Partner, KN+S prepared this for the Angel Capital Association's conference in 2011.
Empfohlen
Weitere ähnliche Inhalte
Was ist angesagt?
Was ist angesagt? (20)
Andere mochten auch
Ähnlich wie Tax Update for the N.E. ACA Conference
Ähnlich wie Tax Update for the N.E. ACA Conference (20)
Mehr von Paige Rasid
Mehr von Paige Rasid (20)
Kürzlich hochgeladen
Kürzlich hochgeladen (20)
Tax Update for the N.E. ACA Conference
- 1. Tax Update for the N.E. ACA Conference Jeff Solomon, Managing Partner, KN+S KATZ, NANNIS + SOLOMON, P.C. 2011
- 2. Katz Nannis + Solomon, PC Boutique, regional CPA firm focused on entrepreneurial companies with an emphasis on technology –Much more than taxes! Work mostly with Angel and Venture backed Companies, Funds and family offices Work on Audits, Reviews and Corp. tax planning and set up Assist in negotiations and sales of companies at Exit Qualified professionals in tax and audit that know equity, revenue recognition and provide creative tax planning ideas We focus on the types of Companies YOU invest in and we can help them AVOID disasters down the road 45 Professionals, located on RT. 128 in Needham Will meet with any of your companies in an introductory meeting free of charge 2 KATZ, NANNIS + SOLOMON, P.C. 2011
- 3. TAX PLANNING BASICS Tax planning shouldn’t be just a year end activity Keep in mind that the Bush Tax Cuts expire in 2012. 3 KATZ, NANNIS + SOLOMON, P.C. 2011
- 4. It all happens in 2013 Rates go up New Surtax on investment income-”Unearned income Medicare Contribution tax” =3.8% of the lesser of 1) net investment income or 2) the amount by which modified AGI exceeds $250,000(mfj) An additional .9% on Wages if they are over $250,000 (Instead of 1.45% now 2.35% of Medicare tax) Long-term capital gains and qualified dividends taxed higher rates Estate taxes potential much higher 4 KATZ, NANNIS + SOLOMON, P.C. 2011
- 5. KNS OUTLOOK OF INCREASE IN RATES (and don’t forget state taxes!) OUTLOOK OF HOW TAX RATES WILL INCREASE FOR PERSONAL INCOME FROM 2011 TO 2013 IF CONGRESS DOES NOTHING ACTIVE INCOME QUALIFIED PASSIVE FROM FROM WAGES LTCG DIVIDENDS INCOME GP S CORP HIGHEST TAX BRACKET 35.00% 15.00% 15.00% 35.00% 35.00% 35.00% MEDICARE/SE TAX ON EARNED INCOM 1.45% 0.00% 0.00% 0.00% 2.90% 0.00% 2011 AND 2012 HIGHEST MARGINAL RATES 36.45% 15.00% 15.00% 35.00% 37.90% 35.00% EXPIRATION OF TAX CUTS IN 2013 4.60% 5.00% 24.60% 4.60% 4.60% 4.60% 2013 HIGHEST MARGINAL RATES 41.05% 20.00% 39.60% 39.60% 42.50% 39.60% NEW MEDICARE/HI TAX EFFECTIVE IN 2013 0.90% 3.80% 3.80% 3.80% 0.90% 0.00% 2013 TOP RATE 41.95% 23.80% 43.40% 43.40% 43.40% 39.60% INCREASE FORM 2011 TO 2013 5.50% 8.80% 28.40% 8.40% 5.50% 4.60%
- 6. The Rates ARE GOING UP!!! hrough 2012, long-term capital gains rate and qualified ividends will remain at 15% n 2013 they will increase to 20% and all dividends ill be at your highest marginal rate(39.6%VS 15% TODAY) 6 KATZ, NANNIS + SOLOMON, P.C. 2011
- 7. AMT-GUESS WHAT-YOU ARE NOT ALONE!!! State and local income tax deductions Real estate and personal property tax deductions Interest on home equity loan or line of credit not used to buy, build or improve your principal residence Miscellaneous itemized deductions subject to 2% of AGI floor Long-term capital gains and dividend income Accelerated depreciation adjustments and related gain or loss differences when assets are sold Tax-exempt interest on certain private-activity municipal bonds Incentive stock option exercises 7 KATZ, NANNIS + SOLOMON, P.C. 2011
- 8. Avoiding AMT or reducing its impact Planning for AMT will be a challenge until Congress passes long-term relief AMT system isn’t regularly adjusted for inflation Congress legislates adjustments, typically as a “patch” 2012 not yet 8 KATZ, NANNIS + SOLOMON, P.C. 2011
- 9. Employment taxes Social Security and Medicare taxes Apply to earned income, such as salary and bonuses For 2012 At least through February 29th tax is still at 4.2% If not extended, Social Security tax will be back to 6.2% May be a recapture provision of the 2% Maximum taxable wage base for Social Security taxes is $110,100 STAY TUNED ON THIS ONE-SHOULD BE ANY DAY NOW……. Warning! All earned income is subject to the 2.9% Medicare tax 9 KATZ, NANNIS + SOLOMON, P.C. 2011
- 10. Owner-employees Partnerships and limited liability companies Trade or business income is subject to self-employment tax Even if income isn’t actually distributed to you Income isn’t taxed if you’re limited partner or LLC member S corporations Only income received as salary subject to employment tax Reduce tax by keeping salary low and increase distributions of company income (generally not taxed at corporate level) To avoid back taxes and penalties, salary must be “reasonable” C corporations Only income received as salary is subject to employment tax 10 KATZ, NANNIS + SOLOMON, P.C. 2011
- 11. KN+S IDEAS FOR ANGELS AND INVESTORS IN START UPS HAVE A GREAT TAX ADVISOR AND BUSINESS PARTNER HELPING YOU-ITS GOING TO COUNT MORE THAN EVER AFTER THIS YEAR For instance-should you start to convert some of your corporate bonds to tax free bonds to avoid the 3.8% tax on investment income….. What will this do to the market place??
- 12. Capital gains tax and timing Time – not timing – is generally the key to long-term investment success Timing can have a dramatic impact on tax consequences of investment activities 12 KATZ, NANNIS + SOLOMON, P.C. 2011
- 13. Loss carryovers Capital losses are netted against capital gains to determine capital gains tax liability Deduct up to $3,000 of losses per year against ordinary income Carry forward excess losses to future years(NO LIMIT) Lot of planning should be done between your CPA and financial advisor Determine if you have excess losses Time sales of other investments before year end to achieve your tax-planning goals 13 KATZ, NANNIS + SOLOMON, P.C. 2011
- 14. ANGELS-FYI-Small business Loss benefits(1244 stock) If you invest in a Small Business (domestic corp., original issue to you, capital invested at time < $1mm, active trade or business) UP TO $50,000 OR $100,000 SINGLE AND MFJ RESPECTIVELY CAN BE TREATED AS AN ORDINARY LOSS(NOT A CAP LOSS!)
- 15. Small business stock- 1202 STOCK Enjoy preferential tax treatment Convert capital losses to ordinary losses Defer tax on gain Exclude up to 50% of gain (must hold the stock for at least five years) What types of Corps qualify? Depending on acquisition date, exclusion may be 75% or 100%(AT END OF 2011) Rolls back to 50% in 2012 AT THE 50% EXCLUSION THE REAL BENEFIT GOES AWAY DUE TO AMT!!! PS-THE PAYROLL TAX EXTENDER HAS THIS 100% EXCLUSION TIED TO THE BILL!! STAY TUNED 15 KATZ, NANNIS + SOLOMON, P.C. 2011
- 16. ANGELS-DID YA KNOW ABOUT SECTION 1045 ROLLOVER GAINS? LETS CHAT In the case of of any sale of a qualified small business stock(<$50mm capitalization and active trade/business-c corp) that you have held for more than 6 months You can Rollover the gain into the cost of any new qualified small business If you Invest in the new business within 60 days You can invest in several small business companies-doesn’t have to be just 1! Your fund or partnership can be eligible to do this! Make election on your Schedule D by writing “section 1045 rollover” on the line showing the gain and then back out the gain on a separate line!
- 17. Understanding depreciation MACRS Generally more advantageous than straight-line method Larger deduction in early years of asset’s life Bonus depreciation 50% bonus depreciation for qualified assets placed in service from Jan. 1, 2008, through Sept. 8, 2010 100% bonus depreciation for assets placed in service from Sept. 9, 2010, through Dec. 31, 2011 50% bonus depreciation for assets placed in service from Jan. 1, 2012, through Dec. 31, 2012 No bonus depreciation after Dec. 31, 2012 17 KATZ, NANNIS + SOLOMON, P.C. 2011
- 18. Section 179 expensing election Allows you to write off rather than depreciate asset purchases Deduct up to $500,000 of purchases Deduction phases out dollar-for-dollar when 2011 asset purchases exceed $2 million Limits are scheduled to go down in 2012 ($139,000) Only Section 179 expensing can be applied to used assets 18 KATZ, NANNIS + SOLOMON, P.C. 2011
- 19. Manufacturers’ deduction and R&d Credits MFG DEDUCTION Deductible amount is 9% of the lesser of qualified production activities income or taxable income, limited by W-2 wages paid Available also to businesses engaged in nonmanufacturing activities, such as Construction and EngineeringEngineering Architecture Computer software production(many miss this!) Agricultural processing Deduction can be used against the AMT R&D Credit-RIGHT NOW EXPIRED IN 2012 BUT STAY TUNED ANGELS-IN THE EXTENDER BILL Often overlooked Improvements or enhancements to new or existing 19 products KATZ, NANNIS + SOLOMON, P.C. 2011
- 20. More tax breaks NOL deduction NOL can be carried back two years to generate current tax refund Any loss that’s not absorbed is carried forward up to 20 years Additional rules apply Tax credits Research credit extended through 2011 Elections exist to make it refundable Work Opportunity credit extended through 2011 Equals 40% of first $6,000 of wages paid to qualified employees $12,000 for wages paid to qualified veterans HIRE Act retention credit available through 2011 Workers must be retained for 52 consecutive weeks 20 KATZ, NANNIS + SOLOMON, P.C. 2011
- 21. Health care tax credit Through 2013 Available for employers with 10 or fewer FTEs, who on average earn less than $25,000 per year Partial credits available to businesses with fewer than 25 FTEs, who on average earn less than $50,000 Credit amount Maximum credit is 35% of premiums paid by employer Employer must contribute at least 50% of total premium 21 KATZ, NANNIS + SOLOMON, P.C. 2011
- 22. Exit planning Strategy to pass responsibility for running the company, transferring ownership and extracting money from the business Warning! Requires planning well in advance of the transition 22 KATZ, NANNIS + SOLOMON, P.C. 2011
- 23. Sale or acquisition Tax consequences can have a major impact on the transaction’s success … or failure Common types of transactions Asset or stock sale TRENDS WE HAVE SEEN? Taxable sale vs. tax-deferred transfer 23 KATZ, NANNIS + SOLOMON, P.C. 2011
- 24. Executive compensation Incentive stock options Buy company stock in the future at fixed price equal to or greater than stock’s FMV at grant date Don’t provide benefit until stock appreciates in value Key tax consequences Owe no tax when ISOs are granted Owe no regular income tax when you exercise the ISOs Additional tax consequences may occur depending on when you sell the stock DON’T FORGET THAT 409a VALUATION? MUST YOU GET IT? YES Warning! In the year of exercise, a tax “preference” item is created on the difference between the stock’s FMV and the exercise price; this can trigger the AMT. A future AMT credit may lessen this AMT “hit.” 24 KATZ, NANNIS + SOLOMON, P.C. 2011
- 25. Executive compensation Nonqualified stock options Tax treatment differs from ISOs NQSOs create compensation income on bargain element when exercised Don’t create an AMT preference item May need to make estimated tax payments or increase withholding to cover tax on the exercise Consider state tax estimated payments 25 KATZ, NANNIS + SOLOMON, P.C. 2011
- 26. Executive compensation Restricted stock Granted subject to substantial risk of forfeiture Income recognition normally deferred until stock is no longer subject to risk or you sell it You pay ordinary-income taxes based on stock’s FMV when restriction lapses Consider using Sec. 83(b) election to recognize ordinary income when you receive stock Make election within 30 days after receiving stock Allows you to convert future appreciation from ordinary income to long-term capital gains income Defers it until you sell the stock Keep in mind: Any taxes you pay can’t be refunded if you forfeit the stock or its value decreases 26 KATZ, NANNIS + SOLOMON, P.C. 2011
- 27. Transfer tax exemptions and rates What will happen in 2013 really? Will there be a claw back?? hmmm-maybe? Take advantage of the $5mm exemption limit NOW in 2012!!!! Talk to your estate attorney now or talk to KNS! 27 KATZ, NANNIS + SOLOMON, P.C. 2011
- 28. OTHER ISSUES TO KEEP IN MIND CHOICE OF ENTITY NOW? C CORPS BACK IN VOGUE? BE WARY OF WARRANTS ISSUED AND TRICKS ON ACCOUNTING FOR THOSE IS YOUR 409A VALUATION UP TO DATE? HOW OFTEN DO I NEED TO UPDATE? IS DEFERRED OFFICER SALARY REALLY OK TO USE? ISSUES? IS CONVERTIBLE DEBT INTEREST TAXABLE WHEN I CONVERT TO STOCK? OTHER QUESTIONS?
- 29. Thank you for attending Please contact me for assistance: jsolomon@knscpa .com 781-453-8700 If you want a copy of this presentation please see us at the break or give us a business card!!! KATZ, NANNIS + SOLOMON, P.C. 2011
Hinweis der Redaktion
- On behalf of [your firm name] , I’d like to welcome you to our presentation, “Save tax now … while you still can.” The title isn’t meant to be a scare tactic — although it should prompt you to take note of the new tax laws and how they can impact your personal tax situation, and, if you’re a business owner or executive, how they might affect your business’s tax situation. As you may know, the Tax Relief act of 2010 extended some expiring tax breaks and expanded others. Perhaps most notably, the new tax law extended lower income and capital gains tax rates. So, you’ll owe less tax this year than if the law had NOT been passed. But some provisions of the law are set to expire at the end of the year, while others — including the lower tax rates — will expire after 2012 unless Congress extends them. But don’t worry — we’ve got your back. Today, we’ll explore how to minimize your taxes over the next couple of years and help you gain a better understanding of both new and old tax-saving strategies. [Add your own introductory comments if you wish.]
- Before you take action to time income or expenses, you must determine whether you’re already likely to be subject to the AMT — or whether the actions you’re considering might trigger it. Many deductions used to calculate regular income tax aren’t allowed under the AMT system and thus can trigger AMT liability. Some income items also might trigger or increase the AMT. The slide lists the most common triggers that you need to be mindful of. If you aren’t careful, you might get caught in the AMT trap.
- It’s always wise to start with the basics and then build on them. Therefore, we’ll discuss why you need to understand and consider applicable tax rates and limits. The top alternative minimum tax rate (or AMT rate) of 28% is lower than the top regular income tax rate on your ordinary income, which is currently 35%. Ordinary income includes your salary, business income, interest and so forth. But the AMT rate typically applies to a higher taxable income base. You can run into problems if you plan only for regular income taxes. In addition, income-based phaseouts and other limits can increase your marginal rate for regular-tax or AMT purposes. That’s why you need to review your income, expenses and potential tax liability throughout the year, keeping in mind the many rates and limits that can affect how much tax you’ll owe. Only then can you time income and expenses to your advantage.
- Before you take action to time income or expenses, you must determine whether you’re already likely to be subject to the AMT — or whether the actions you’re considering might trigger it. Many deductions used to calculate regular income tax aren’t allowed under the AMT system and thus can trigger AMT liability. Some income items also might trigger or increase the AMT. The slide lists the most common triggers that you need to be mindful of. If you aren’t careful, you might get caught in the AMT trap.
- Through 2012, the long-term capital gains rate is 0% for gain that would be taxed at 10% or 15% based on your ordinary-income rate. If you have adult children in one of these tax brackets, consider transferring appreciated or dividend-producing assets to them so they can enjoy the 0% rate. P.S.: The 0% rate also applies to qualified dividends. If you’re considering making a gift to a child who’s under 24 years old, make sure he or she won’t be subject to the kiddie tax. And, whatever the child’s age, consider the gift tax consequences.
- Before you take action to time income or expenses, you must determine whether you’re already likely to be subject to the AMT — or whether the actions you’re considering might trigger it. Many deductions used to calculate regular income tax aren’t allowed under the AMT system and thus can trigger AMT liability. Some income items also might trigger or increase the AMT. The slide lists the most common triggers that you need to be mindful of. If you aren’t careful, you might get caught in the AMT trap.
- With proper planning, you may be able to avoid the AMT — or at least reduce its impact. Unfortunately, planning for the AMT will be a challenge until Congress passes long-term relief. Unlike the regular tax system, the AMT system isn’t regularly adjusted for inflation. Instead, Congress must legislate any adjustments. In the past, it has done so in the form of a “patch,” which is really just an increase in the AMT exemption. As of now, such a patch is in effect for 2011, but not for 2012.
- In addition to income tax, you must pay Social Security and Medicare taxes on your earned income, such as salary and bonuses. The good news is: For 2011 only, the employee portion of the Social Security tax on your earned income has been reduced from 6.2% to 4.2%. The maximum taxable wage base for Social Security taxes for 2011 is $106,800 — the same as for 2010. So, the maximum tax savings from this break is $2,136. And there’s more good news: No other income-based limit applies to this break, so even high-income taxpayers can enjoy the maximum benefit. But, keep in mind that all of your earned income will still be subject to the 2.9% Medicare tax.
- There are special considerations if you’re a business owner who also works in the business. But they depend on how your business is structured. For example, if your business is set up as a partnership or a limited liability company, all trade or business income that flows through to you for income tax purposes is subject to self-employment tax — even if the income isn’t actually distributed to you. Keep in mind that this flow-through income isn’t subject to self-employment tax if you’re a limited partner or an LLC member whose ownership is equivalent to a limited partnership interest. If your business is set up as an S corporation, only the income you receive as salary is subject to employment tax. So, to reduce your tax liability, you may want to keep your salary relatively low and increase your distributions of company income, which generally isn’t taxed at the corporate level. But, to avoid potential back taxes and penalties, you must take a reasonable salary — what’s considered “reasonable” is determined by the facts and circumstances, but it’s generally what the company would pay an outsider to perform the same services. Finally, if your business is a C corporation, only income you receive as salary is subject to employment tax. This is a lot of tedious information, I know. So if you have any questions please contact your tax advisor.
- While time, not timing, is generally the key to long-term investment success, timing can have a dramatic impact on the tax consequences of your investment activities. The maximum capital gains tax rate on assets held more than 12 months is generally only 15%, but it’s 35% for assets held for a year or less. Holding on to an investment until you’ve owned it more than a year may help you substantially cut tax on any gain.
- Capital losses are netted against capital gains to determine capital gains tax liability. If your net losses exceed net gains, you can deduct only $3,000 of those losses each year against your ordinary income. And if you’re married filing separately, you can deduct $1,500 of your losses against ordinary income. But remember: You can carry forward excess losses to future years. Make sure you time sales of other investments before the end of the year so you can achieve your tax planning goals. For example, loss carryovers can be a powerful tax-saving tool in future years if you have a large investment portfolio, real estate holdings or a closely held business that might generate substantial future capital gains. If, on the other hand, it looks like it could take a long time to fully absorb a large loss carryover, you might want to realize gains before year end to absorb excess losses.
- By purchasing stock in certain small businesses, you’ll not only be diversifying your portfolio, but you’ll enjoy preferential tax treatment. For example, if you sell qualifying Section 1244 small business stock at a loss, you can treat up to $50,000 ($100,000, if married filing jointly) as an ordinary, rather than a capital, loss — regardless of your holding period. This means you can use it to offset ordinary income, reducing your tax by as much as 35% on this portion of the loss. If within 60 days of selling qualified small business stock — also known as QSB stock — you buy other QSB stock with the proceeds, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. Taxpayers that sell QSB stock generally are allowed to exclude up to 50% of their gain as long as they’ve held the stock for at least five years. But depending on the acquisition date, the exclusion may be greater — 75% or even 100%! Keep in mind that all of these tax benefits are subject to specific requirements and additional limits. We can help you decide whether an investment in small business stock is right for you.
- The cost of business assets generally must be depreciated over a period of years. In most cases you’ll want to use the Modified Accelerated Cost Recovery System, also known as MACRS, instead of the straight-line method, to get a larger deduction in the early years of an asset’s life. The Tax Relief act of 2010 encourages businesses to invest by significantly enhancing bonus depreciation. The act temporarily increases this additional first-year depreciation allowance to 100% and then provides a 50% allowance for 2012. The definition of “qualified assets” is any new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold-improvement property. The 2010 Tax Relief act also extends the provision allowing corporations to accelerate certain credits in lieu of claiming bonus depreciation for qualified assets acquired and placed in service through December 31st, 2012.
- Also consider the Section 179 expensing election. This tax law may allow you to write off — rather than depreciate over a number of years — qualified asset purchases. You can claim the election only to offset net income, not to reduce it below zero. For 2011, you can deduct up to $500,000 of qualified asset purchases, such as equipment, furniture and off-the-shelf software. But the break begins to phase out dollar-for-dollar when total asset acquisitions for the year exceed $2 million. For 2012, the expensing and phaseout limits are scheduled to drop to $125,000 and $500,000, respectively — though both amounts will be indexed for inflation. Section 179 may be less important while 100% bonus depreciation is available. But only Section 179 expensing can be applied to used assets, so it’s something worth considering.
- The manufacturers’ deduction, which you may know as the Section 199 or domestic production activities deduction, has been fully phased in, and is now 9% of the lesser of qualified production activities income or taxable income. The deduction is further limited by W-2 wages paid that are allocable to domestic production gross receipts. If you haven’t checked into this deduction because you thought it was only for manufacturers, think again: The deduction is available to other types of companies such as contractors, architecture and engineering firms, computer software producers, and agricultural processors. And, the deduction can be used against the AMT.
- A net operating loss, or NOL, occurs when operating expenses and other deductions for the year exceed revenues. Generally, an NOL may be carried back two years to generate a refund. Any loss that’s not absorbed is carried forward up to 20 years. Carrying back an NOL may provide a needed influx of cash. But carrying the entire loss forward can be more beneficial in some situations. Tax credits reduce your business’s tax liability dollar-for-dollar. So they’re particularly valuable. Last year’s Tax Relief act extended the research credit (also known as the “research and development” or “research and experimentation” credit) through 2011, and there’s been much discussion about making it permanent. The credit generally is equal to a portion of qualified research expenses. Because it’s complicated to calculate, be sure to talk with your tax advisor. The 2010 Tax Relief act also extended the Work Opportunity credit through the end of this year. Consider this credit if you hire employees from certain disadvantaged groups, such as food stamp recipients and disabled veterans. The credit equals 40% of the first $6,000 of wages paid to qualifying employees, and $12,000 for wages paid to qualified veterans. Finally, if you hired workers in 2010, you may be eligible for a retention credit. It generally applies to workers who qualified for payroll tax forgiveness under the HIRE Act of 2010 and are retained for 52 consecutive weeks. Now, let’s talk about a credit for providing health care coverage.
- Last year’s health care reform legislation, which includes numerous tax provisions that don’t go into effect until 2013 or later, provides many small businesses with a tax credit for purchasing health care coverage. The full credit is available for employers with 10 or fewer full-time-equivalent employees, also known as “FTEs,” who earn average annual wages of less than $25,000. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $50,000. For the tax years 2010 to 2013, the maximum credit is 35% of group health coverage premiums paid by the employer. To get the credit, you must contribute at least 50% of the total premium or of a benchmark premium. If you aren’t already providing health care coverage to your workforce, this tax credit might make doing so affordable. Just be sure your business doesn’t exceed the FTE limits. If you do, you’ll no longer qualify for the credit. Let’s take a look at your business structure….
- An exit strategy is a plan for passing on responsibility for running the company, transferring ownership and extracting your money from the business. As you can imagine, this requires planning well in advance of the transition.
- Whether you’re selling your business as part of your exit strategy or acquiring another company to help grow it, the tax consequences can have a major impact on the transaction’s success or failure. Here are a few key tax considerations: With a corporation, sellers typically prefer a stock sale for the capital gains treatment and to avoid double taxation. Buyers generally want an asset sale to maximize future depreciation write-offs. A transfer of corporation ownership can be tax-deferred if made solely in exchange for stock or securities of the recipient corporation in a qualifying reorganization. But the transaction must comply with strict rules. Although it’s generally better to postpone tax, there are some advantages to a taxable sale. For example, the parties don’t have to meet the technical requirements of a tax-deferred transfer. Another advantage is that the seller doesn’t have to worry about the quality of buyer stock or other business risks of a tax-deferred transfer. And finally, the buyer benefits by receiving a stepped-up basis in its acquisition’s assets and not having to deal with the seller as a continuing equity owner.
- Incentive stock options — or ISOs — receive tax-favored treatment but they must comply with many rules. ISOs allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value at the date of the grant. Because of this, ISOs don’t provide a benefit until the stock appreciates in value. If it does, you can buy shares at a price below what they’re then trading for, as long as you’ve satisfied the applicable ISO holding periods. The key tax consequences are that you owe no tax when the ISOs are granted. You also owe no regular income tax when you exercise the ISOs. If you sell the stock after holding the shares at least one year from the date of exercise and two years from the date the ISOs were granted, you must pay tax on the sale at your long-term capital gains rate. If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at your ordinary-income rate. As a warning, keep in mind that, in the year of exercise, a tax “preference” item is created on the difference between the stock’s FMV and the exercise price — also known as the “bargain element.” This can trigger the AMT. But a future AMT credit may lessen this AMT “hit.” There’s much more that can be said about ISOs, so be sure to pull one of us aside after the seminar. If we can’t answer your questions fully, we’ll set up a time to discuss it with you further.
- The tax treatment of nonqualified stock options or NQSOs, however, is different from that of ISOs. NQSOs create compensation income on the bargain element when exercised — regardless of whether the stock is held or sold immediately — but they don’t create an AMT preference item. This income is taxed at your ordinary-income rate. You may need to make estimated tax payments or increase withholding to fully cover the tax on the exercise. Also consider state tax estimated payments.
- Restricted stock is stock that’s granted subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes based on the stock’s fair market value when the restriction lapses and at your ordinary-income rate. But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, can be beneficial if the income at the grant date is negligible or the stock is likely to appreciate significantly before income would otherwise be recognized. Why? Because the election allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold. But keep in mind that there are some disadvantages with a Section 83(b) election: First, you must prepay tax in the current year. If a company is in the earlier stages of development, however, this may be a small liability. And second — and this might sting a bit — any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or its value decreases. But you’ll have a capital loss when you sell or forfeit the stock.
- The 2010 Tax Relief act retroactively brought back the estate tax for 2010 (along with the unlimited step-up in basis), but with an exemption increase and a rate reduction compared to 2009. It extended these levels through 2012. If you have a loved one who died in 2010 and you haven’t already consulted a tax advisor, be sure to do so. The option is available to follow the pre–2010 Tax Relief act estate regime instead of the new regime, but which is better depends on a variety of factors.
- This brings us to the end of our presentation. Please let us know if we can answer any questions you may have about any of the ideas we discussed. Also, feel free to stay and chat with us over refreshments, or let one of us know when we might be able to call or meet with you to discuss your tax planning needs. S vs c rop Top rate for ordinary income up to 39.6% Higher income inidv subject to reductions in personal exemptions and itiemzied deductiosn again after 2012 Thrsheduld for medi expenses from 7.5 to 10% of agi under age 65