Category Archives: income tax

What if you won the $1.5 Billion Powerball

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So, you take the cash option of $930 Million. What do you do now?
Let’s say you want to put some into a business, some into investment (including say buying your own tropic island). After taxes state and federal you will have approximately $490 Million left. So, let’s say you invest $400 Million. Assume an average 5% return on investment. At the end of 20 years you’d have $660 Million to play with after taxes.

If instead you took the money and put 1/2 into a Foundation that you controlled, the other half kept, you’d have about $245,000,000 left to invest, etc. However, if you were planning on giving to charity anyway, this allows you to use the money for charitable purposes and it grows tax free which allows more money to go to charity than using aftertax money to make gifts later. At the end of 20 years assuming a modest 5% growth rate, the charitable funds would be worth approximately $930 Million. The $245 Million which you’ve invested would be worth about $392 Million due to taxes on your investment income.

The moral is that if you are charitably minded do it at the beginning. That way, you have instead of $660,000 to give away over time, you have $1.17 Billion to control and of that $930,000 is available to charity.

Hidden Tax Bomb when Selling Your Business

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Let’s say in 2011, your accountant suggested it might be good to elect S Corporation treatment for your business which has been a C corporation for 5 years. You’ve got the hottest bar in town. Its worth $1 Million and you only invested $100,000 which is fully depreciated, but there are good years and bad years and you like the fact that you can deduct losses and avoid double taxation of income by using S. Fast forward to 2015. Porky comes by and wants to buy your name, assets. He’s offering $1.2 Million. You are so excited. Selling these assets would yield a gain at capital gains rates what could be better. Then you talk to your tax lawyer. He says wait. Under Section 1374 of the Internal Revenue Code there is a built in gains tax that looks back 10 years. Thus, if at the time of your S Election in 2011, your business was worth $1 Million, it must recognize that $1 Million at ordinary corporate rates. Thus, instead of the tax being $250,000 on the gain it is $565,000 give or take. A huge difference.

SPIN OFFS

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Suppose you own a corporation MYTABLES, Inc. that manufactures tables. Your company has an opportunity to go into the desk market, but wants to limit its exposure. So, it sets up a subsidiary, DESKO, LTD. MYTABLES, INC., owns all of the stock of DESKO. People love the desks. The Company needs capital to hire more people to make desks. The owners go on the Barracuda Tank and Cube Markan offers to give $1 Million for 18% of the Company, but wants DESKO separated from MYTABLES. So, how do you separate out DESKO from MYTABLES. Under Section 355 of the IRS Code you can do what is known as a spin-off and so long as the DESKO has a different line of business from MYTABLES (they do) and so long as the shareholders of MYTABLES still own 80% of the stock of DESKO, then you can spin off, so long as DESKO and MYTABLES continue in business. There are lots of technical rules under Section 355, but that is the gist of it.

New Tax Act passed

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I’ve been waiting on Congress to do its job and finally some legislation has come through. There is something in the new Tax Act for everyone.
First, the highlights:
The tax benefits of the 2001, 2003 Tax Acts were extended for two years. This means that the tax rates for 2010 will hold for two more years including on capital gains. With regard to Alternative Minimum Taxes, the relief is in the Act. So, there will not be a jump in people affected by AMT next year.

With regard to Estate and Gift Taxes two huge changes.
(1) Reunification of Gift and Estate tax exemptions. Since 2001, gift tax exemption was capped at $1 Million. Now it will be the same as the estate tax exemption of $5 Million.
(2) Estate tax unified credit increased to $5 Million for years beginning in 2011. There is also a retroactive election for 2010 relating to step-up in basis. If the estate is under $5 Million, it would appear that the one can elect to step-up the basis of the assets. If its above $5 Million we’ll need to assess your personal situation to decide whether you want to pay estate tax to get a step-up in basis. The rate will stay at the current 35% rate for estates over $5 Million. There is also portability for married couples. This means that if one spouse dies after December 31, 2010 and the other dies later and the first spouse used up $3 Million of his or her credit amount, the second spouse can take up to $7 Million of the first spouse’s unused credit. Given the limited period of this law, it might be wise to look at gifts, although there is a basis trade-off if that occurs. Either way, its a huge change in the law.
These changes are only for two years. So, after December 31, 2012, the exemption amount falls back to $1 Million and estate tax rate to 55%.

With regard to the 2% payroll tax holiday for 2011, it also applies to self-employed individuals.

Energy Efficient Home Credit is extended to through 2011. Energy efficient appliances credit is extended through 2011 as well. Credits for windows, wood stoves, water heaters will continue.

Deductions for school teachers shall be continued through 2011. Sales tax deduction continued through 2012. Tax free distributions to charities from retirement plans extended through 2011.
Lots of continuation of popular business credits, research credit, and other industry specific credits.