Presented by

Walter Copeland, CPA

Heather Kovalsky, CPA
Brimmer, Burek & Keelan LLP
1. Cost Segregation Study
• What is a cost segregation study and how is it
done?
• What is the IRS position on cost segregation?
• What are the benefits of cost segregation?
1. Cost Segregation (Cont.)
• Kinds of buildings that cost segregation applies
to and examples
• Time periods for using cost segregation
• Loss carryback and carryforwards
• Doing cost segregation in the event of a sale
• Return on investment for cost segregation
1. Cost Segregation (Cont.)
• Example
— Taxpayer purchased $4 million in commercial real
estate
— Owed $130,000 in tax before cost segregation study
— After study taxpayer paid zero tax in the current year,
received a $100,000 refund from the resulting net
operating loss carryback and had a net operating loss
to carryforward to offset additional tax in future years.
2. Deduct New Equipment Purchases
• Write-off new equipment purchased in 2011.
• Deduction can create a net operating loss that
not only results in zero income tax in the
current year but also can create losses that can
be carried back for a refund or forward to
offset future income.
2. Deduct New Equipment Purchases
(Cont.)
• Example
—XYZ Company has $500,000 in income before
considering depreciation on the $1 million spent in 2011
on new equipment.
—After considering the new rules the company has a 2011
net operating loss (NOL) of $500,000, resulting in zero
tax in 2011.
—But wait, there’s more! The $500,000 NOL can be carried
back for a refund or forward to offset future tax.
3. Gain Exclusion
• Pay zero tax on the sale of your small business
stock that is held for five years.
• New legislation now allows 100% of the gain to
be excluded from your taxable income if the
qualified small business stock is acquired after
September 27, 2010 and before January 1,
2012.
• This legislation also permits a 100% exclusion
for Alternative Minimum Tax (AMT) purposes as
well.
3. Gain Exclusion (Cont).
• Qualified Small Business Stock Requirements
—Applies to taxpayers other than corporations
—Stock originally issued after August 10, 1993 by a C
Corporation with aggregate gross assets not exceeding
$50 million at any time from August 10, 1993 to
immediately before the issuance of the stock.
—The corporation must be active whereby 80% or more of
its assets are used in the business.
—Ineligible businesses include certain personal service
activities, banking and other financial services, farming,
mineral extraction businesses, hotels and restaurants.
3. Gain Exclusion (Cont.)
• Example
— On November 1, 2011 an individual, Rich, acquires at
original issuance 100 shares of qualified small
business stock at a total cost of $1,000.
— Rich sells his stock on December 30, 2016 for $1
million.
— Rich will pay zero tax on the disposal of the qualified
small business stock.
4. Ordinary Losses on Small Business
Stock
• Take an ordinary loss up to $100,000 ($50,000
if married filing separately) on qualified small
business stock dispositions.
• This loss can offset up to $100,000 in other
income to pay zero tax.
• Depending on income, the loss can create a net
operating loss that can be carried forward or
back to offset taxable income in other years
too.
4. Ordinary Losses on Small Business
Stock (Cont).
• Small Business Stock is defined as stock in a
domestic corporation if
—at the time the stock was issued, the corporation was a small
business corporation (aggregate amount of money and other
property received for the stock is $1 million or less),
—the stock was issued by the corporation for money or other
property, and
—the corporation, during the period of its five most recent
taxable years ending before the date of the loss, more than
50% of its aggregate gross receipts are from sources other
than royalties, rents, dividends, interests, annuities, and
sales or exchanges from stock.
4. Ordinary Losses on Small Business
Stock (Cont).
• Example
— Taxpayer has $125,000 loss on disposition of its
small business stock. Taxpayer’s income from other
sources is $75,000.
— The first $100,000 loss can be treated as an ordinary
loss and the remaining $25,000 loss is treated as a
capital loss (limited to $3,000 deduction each year).
— The $100,000 ordinary loss wipes out the $75,000 in
taxable income to achieve zero tax. In addition, there
is a $25,000 net operating loss that can be carried
back or forward to offset income in another year.
Plus, the taxpayer also has a $25,000 capital loss
available for future years.
5. Debt Forgiveness
• Pay no income tax on the cancellation of debt if
you are insolvent or in bankruptcy.
• Technical rules apply to determine if you are
insolvent and the amount excludable from
income.
5. Debt Forgiveness (Cont.)
• Example
— Taxpayer is in Title 11 bankruptcy and the only
income is $350,000 from the cancellation of debt.
— The taxpayer will pay zero tax on this cancellation of
debt income.
6. Income from Discharge of Debt on
Main Home
• Based on recently changed rules, income from
the cancellation of debt on your principal
residence is excluded from income if
discharged before January 1, 2013.
• The exclusion applies when a taxpayer
restructures the acquisition debt on a principal
residence, loses a principal residence in
foreclosure, or sells a principal residence in a
short sale.
6. Income from Discharge of Debt on
Main Home (Cont.)
• Qualified principal residence indebtedness is
— Acquisition indebtedness on principal residence, up to
$2 million ($1 million for married individuals filing
separately).
— Acquisition indebtedness is defined as debt that was
used to acquire, construct, or substantially improve
the taxpayer’s principal residence.
— Principal residence is the home where the taxpayer
ordinarily lives most of the time. A taxpayer can have
only one principal residence at a time.
6. Income from Discharge of Debt on
Main Home (Cont.)
• Example
— Taxpayer is out of work and their only income is the
discharge of qualified principal residence
indebtedness.
— The taxpayer’s qualified principal residence
indebtedness that he is personally liable for is
$500,000. The creditor forecloses and the home is
sold for $350,000 in satisfaction of the debt.
— The $150,000 of cancellation of debt income is
excluded from the taxpayer’s income and the
taxpayer pays zero tax.
7. Retirement Plans for Sole
Proprietorships
• Basic limits for plans
• Combining various kinds of plans to achieve
greater deductions
• Salary to family members to increase plan
benefits
• Age issues
7. Retirement Plans for Sole
Proprietorships (Cont.)
• Example of covering $300,000 of income with
pension plan in one year
• Using pension plans to shield tax gain on sale
of business
8. Hire Your Kids
• Redistribute income by hiring your kids to work
in the family business and utilize their
deductions to pay zero tax.
• Shift income to a lower tax bracket. The 10%
rate bracket applies to the first $8,375 of
taxable income in 2010.
• Utilize the child’s standard deduction ($950 for
2010).
• Open an IRA for the child and make deductible
contributions to the extent of the earned
income or $5,000.
8. Hire Your Kids (Cont).
• Be careful because child’s income can impact
financial aid.
• Example
— Child receives $5,950 in wages.
— Child opens a traditional IRA that year and contributes
$5,000.
— Child pays zero tax on the $5,950 in wages due to
$5,000 deduction for the IRA contribution and the
standard deduction of $950.
9. Roth IRA Conversion
• Convert to a Roth IRA and have nontaxable
distributions from the Roth IRA in the future.
• With proper planning you can minimize the tax on
the conversion and have zero tax in the future.
— Nondeductible contributions reduces the taxable
amount on conversion.
— Convert when the market is low to minimize tax on
conversion.
— Pay zero tax on future withdrawals and plan
withdrawals around other income (no required
minimum distributions) to achieve zero tax on other
income too.
10. Evaluate Your Portfolio
• Consider investments in tax-free or tax-
deferred holdings to pay zero tax.
— Municipal bonds
— Fixed annuities
— Growth stocks that do not pay taxable dividends