Know Your Options

Thala Taperman Rolnick
CPA, MT (Masters of Taxation)
www.thalacpa.com

There have been many tax changes in 2009. Some have come from changes in the law, some from court cases, and others from the IRS. Some are only in effect for the 2009 tax year, while others impact future years and future planning. Below are some notable changes for small business owners:

• Tax relief on corporate conversions. If you own an S-corporation that has converted from a C-corporation, you have to compare the fair market value of the corporation’s assets and liabilities to their tax basis at the time of conversion. If the total value is greater than the cost, the corporation has a built-in gain. Previously, if the appreciated assets were sold within 10 years of the conversion, that gain was taxed at the highest corporate rate. For 2009 and 2010, however, no corporate tax is due if the conversion happened at least seven years ago. If you have been holding off on selling those assets, will it be advisable to do so this year?

• Tax credits versus bonus depreciation. If you own a C-corporation that has “old” AMT credits or research and development credits, an election can be made for 2009 to use these credits instead of deducting bonus depreciation. While this may sound like a good idea, is it a good idea for your business?

• Deductible losses for LLCs. If you own an LLC that has current-year losses, passive loss rules could have prevented you from taking the deduction. After losing three court cases, the IRS is rewriting its regulations so that the loss may now be deductible. Do you fall under this change?

Another business issue has to do with a new IRS National Audit Program that began in February 2009. Agents are looking at 2,000 business’ payroll reports for each of the next three years. Unreasonable compensation paid to owners is one of the areas they are looking at. If you own an S-corporation, unreasonable compensation is a very low salary. If you own a C-corporation, unreasonable compensation is a very high salary. The determination is often made based on industry standards and salaries paid to other employees. Agents will also be looking to see if reported wages include taxable fringe benefits such as personal use of a company automobile. Has your business addressed these issues?

While a self-preparer software program may help you determine if you can take certain deductions, it can’t help you evaluate more complex transactions like the ones I’ve mentioned. These need to be addressed with someone experienced in business tax issues who is required to receive annual continuing education and who is allowed to practice before the IRS. Currently, the only individuals who meet these requirements are CPAs, EAs, attorneys, and enrolled actuaries.

Taperman Rolnick is speaking at America’s Small Business Summit on May 17–19, 2010. Register at www.uschambersummit.com.