United States exporters continue to benefit from powerful tax savings through the use of Interest Charge Domestic International Sales Corporations (IC-DISCs). By establishing an IC-DISC, the owners of a US operating company can save tax at the rate of up to 20% on commissions paid to the IC-DISC on qualifying foreign sales. Because Congress extended the preferential capital gains rates to qualifying dividends for another two years, the IC-DISC continues to be a viable tax saving tool.

Here’s How it Works
A United States exporter can pay income tax on ordinary operating profit at a rate as high as 35%. Once an IC-DISC is established, the operating company can pay to the IC-DISC a commission on foreign sales, which is generally equal to 4% of qualified export gross receipts or 50% of taxable income, whichever is greater. The commission is taken as a deduction by the operating company which in turn saves income tax at its bracket rate.  The IC-DISC does not pay tax on the income it receives. Rather, the IC-DISC distributes some or all of its profit to its shareholders as qualified dividends taxed to the shareholders at the preferential capital gains rate (as high as 15%).  Therefore, by establishing an IC-DISC, the owners of a US exporter may convert income which would normally be taxed at rates as high as 35% into qualified dividends taxed at rates as high as 15% (thus the 20% savings mentioned above).  It is important to note that only individuals, including shareholders of pass-through entities such as S corporations and limited liability companies, are entitled to the preferential capital gains rate on qualified dividend income.

The IC-DISC is not required to currently distribute all of its profit. For any amount not distributed, the shareholders will incur a small interest charge on the deferred income tax amount.  The IC-DISC tax regime gives U.S. exporters the ability to defer up to $10,000,000 of income per year almost entirely tax-free.  Because there are some costs involved in creating and maintaining an IC-DISC, history shows that in order to benefit from the creation of an IC-DISC, the operating company must generally have foreign sales of at least $500,000.  And because foreign sales cannot be counted until the IC-DISC is actually established, the sooner one establishes the IC-DISC the better.

Establishing and Operating the Entity
To receive the tax savings of an IC-DISC, it is first necessary to establish the entity. Tax benefits will only be applicable to income transferred to the IC-DISC after the entity is created. The IC-DISC is a domestic corporation that may be established in any state in the United States for which a valid IC-DISC election can be made on Form 4876-A.  All shareholders of the IC-DISC must sign form 4876-A.  Particular attention needs to be paid to the proper incorporation state, as some states offer additional tax savings over others.

To qualify as an IC-DISC for a taxable year, the IC-DISC must have, on every day of the year, at least $2,500 of capital and only one class of stock.  We recommend starting the company with $3,000 so as not to run afoul of this rule.

95% of the gross receipts must be qualified export receipts.  This criterion must be satisfied on an annual basis.  In addition, 95% of the entity’s assets must be qualified export assets.   This test must be satisfied on the last day of the entity’s tax year.  Qualified export assets include:

1. Customer accounts receivable
2. Commissions receivable (if paid within 60 days of year end)
3. Stock and securities in related foreign export corporations
4. Producer’s loans
5. Certain financial assets (PEFCO paper)
6. Cash not in excess of excess of working capital needs of the IC-DISC

The entity must not be a member of a controlled group of which a FSC (Foreign Sales Company) is also a member. The entity must also not be an ineligible corporation.  Examples include Personal Holding Company, a Financial Institution, and an Insurance Company operating under Subchapter L, Regulated Investment Company, Electing Small Business Corporation and China Trade Act Corporation among others.

Taxpayers should enlist the assistance of Hill, Barth & King LLC’s experienced tax practitioners to ensure that qualification requirements are met and maximum tax savings potential is achieved.

If you have any questions about the content above, please contact the HBK team member with whom you regularly work.

Joe Ledford is a Principal at Hill, Barth & King and leads the firm’s Manufacturing Group. Joe has over 23 years experience serving clients in the manufacturing industry.

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Now I am not talking about changing estimating software, construction methods or even replacing personnel. As a CPA in southwest Florida serving many construction clients both large and small, many of whom have struggled over the last three years seeing revenues drop considerably to levels that most of us would care not to remember; especially in the Lee County markets. Surprisingly, this may have provided some contractors with the ability to change tax accounting methods to one that will allow them to defer taxes on new business as hopefully the rebound takes off with more robust activity in the construction markets.

If I have your interest, read on. First off, this opportunity still may not be available to all contractors. Generally speaking, contractors are required to account for long-term contracts on a percentage completion method of accounting. Small contractors, those with average revenue over the preceding three (3) years under ten (10) million per year, were able to make the election to report tax revenue on a completed contract basis. What happened during the construction explosion and real estate market run up was that many contractors were required to switch from the completed contract method to the percentage completion method because their average revenues grew in multiples. This was more than likely an unpleasant tax surprise to the business owners during the year that the change was forced upon them.

Second, those companies that were forced into the accounting change in the boom years now can look to changing back in the, lets say more challenging times, as long as they now can comply with the average revenue test. The IRS surprisingly makes this change fairly easy. In many cases changes to accounting methods require prior consent of the service but in this scenario, this is what we call in the tax and accounting world, an automatic change. IRS Revenue Procedure 2002-28 indicates that the method change simply needs to be disclosed on the next timely filed tax return for the business. The election indicating the method change and the dollar impact of the change must be disclosed on IRS form 3115, which must be attached to the business return.

Third, lets be clear about a couple points. This method change does not eliminate taxes but merely defers them to a later date. Generally, tax planning ideas try to accomplish two things; (1) accelerate deductions or in this case (2) defer income. You can almost never completely avoid the tax man. The best you can do is to keep him out of your back pocket for as long and for as much as possible. Also, this method change may not be permanent. Just like back in the boom era, if your company grows above the average revenue thresholds, you will be forced back into the percentage of completion method. Without proper planning, the tax sting may make you feel like an NFL linebacker that just got fined for helmet to helmet contact. The difference in this case is you get hit with both, the cash drain and maybe the concussion too.

Don’t take me the wrong way based on the last comment, we at Hill, Barth and King, a premier accounting, tax and consulting firm in Fort Myers, Naples and Sarasota in southwest Florida will almost always recommend a tax strategy that defers income but many factors can come into play when making this type of a decision. No decision should be made in a vacuum without adequate discussion with your tax advisor. Please contact me or any of our construction niche members to discuss this or any other tax planning ideas.

Gerald (Jerry) Kimble, CPA is a Principal with Hill, Barth & King LLC in the Fort Myers, Florida office.  Jerry helps clients in Fort Myers, Cape Coral and other Southwest Florida communities.  He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1990.  Jerry can be contacted by phone at 239-482-5522 or gkimble@hbkcpa.com.

On December 6th President Obama announced an agreement with Congressional Republicans on a two-year extension of the Bush tax rates and the extension of several other tax cuts.  However, the House Democratic Caucus announced on December 9th that they would not support the tax cuts.  The sticking point for the House Democratic Caucus is the proposal to increase the estate tax exemption to $5 million and lower the estate and gift tax rate to 35%.  The political debate promises to continue and may well extend into January 2011 when the shift to a more Republican Congress will occur. The proposed Obama – GOP agreement includes the following:

• Extending the Income-Tax Rates for Two Years. The current income tax rates would be extended for two years, including the extension of the favorable 15% capital gain and dividend tax rate.
• Payroll Tax Cut. The agreement includes a one year payroll tax holiday by reducing the 6.2% social security rate to 4.2% for 2011 only.  The holiday would also apply to self-employed persons.  This payroll tax holiday would not reduce the employer’s payroll tax.
• Alternative Minimum Tax “Patch”. The AMT “patch” would increase the AMT exemption and allow certain personal credits, such as the child credit and education credits to reduce AMT.  Without this patch, an estimated 21 million households would see their taxes increase in 2011.
• Estate Tax Relief. The agreement would increase the estate tax exemption to $5 million and reduce the tax rate to 35% for decedents dying in 2011 and 2012.  This is a significant increase in the exemption and reduction in the tax rate.
• 100 Percent Expensing. The agreement allows ALL businesses a 100% bonus depreciation for qualified investments made between September 8, 2010 and the end of 2011.
• Research Tax Credit. The research tax credit had expired at the end of 2009.  The agreement would extend the research tax credit to 2010 and 2011.
• Itemized Deduction Limitation. The limitation on itemized deductions would be delayed for two years.  For higher income taxpayers, this limitation effectively increases the tax rate by more than one percentage point.
• Personal Exemption Phase-out. The phase-out of personal exemptions would be delayed two years for certain higher income taxpayers.  Over the last several years, this phase-out has been reduced.  Taxpayers who lose the benefit of their personal exemptions would have seen their taxes increase.
• Other Extenders. The state and local sales tax deduction, teacher’s classroom expense deduction, higher education tuition deduction and deduction for donations of conservative easements would be extended for two years.
• Marriage Penalty Relief. The plan would extend the marriage penalty relief for two years.
• Child Tax Credit. The child tax credit would stay at $1,000 per child and a portion would continue to be refundable for eligible taxpayers under the plan rather than being reduced to $500 per child and eliminating the refundable tax benefit.
• IRA Rollover to Charity. Before 2010, individuals over age 70-1/2 were able to contribute up to $100,000 directly from their IRA to charity.  This would be extended to rollovers made in 2010 and through January 31, 2011.
• Extension of Unemployment Benefits. The agreement extends emergency unemployment benefits at their current level for 13 months, preventing an estimated 7 million workers from losing their benefits as they search for jobs.
• Earned Income Tax Credit. The expanded Earned Income Tax Credit would be extended for two years.

We will continue to monitor progress of this legislation and keep you informed.  Please contact a member of HBK if you have any questions.

James M. (Jim) Rosa, CPA, PFS is the Principal in charge of the Tax Department at Hill, Barth & King LLC.  Jim has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the last 23 years. He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1986.

On November 26th the Internal Revenue Service issued Notice 2010-84, providing guidance under Section 402A(c)(4) relating to rollovers from Section 401(k) to designated Roth accounts in the same plan.

The guidance, which also generally applies to rollovers from Section 403(b) plans applies to contributions after Sept. 27, 2010. The guidance is in the form of questions and answers for sponsors of these plans, and provides details on when amendments to the plan are required, the tax consequences of in-plan Roth rollovers, and what exceptions are permitted.

Specific Guidance for 401(k) Roth Rollovers

• For a participant in a 401(k) plan who is still working, an in-plan Roth rollover from the participant’s pre-tax elective deferral account is permitted only if the participant has reached age 59, has died or become disabled, or receives a qualified reservist distribution as defined in Section 72(t)(2)(G)(iii).
• The 20 percent mandatory withholding requirement does not apply to an in-plan Roth direct rollover
• In-plan Roth direct rollovers are not treated as a distribution in situations involving plan loans, spousal annuities, participant consent before an immediate distribution of an accrued benefit in excess of $5,000, and in situations involving elimination of optional forms of benefit.
• A plan that offers in-plan Roth rollovers must include a description of this feature in the written explanation the plan provides pursuant to Section 402(f) to an individual receiving an eligible rollover distribution.
• A participant who elects an in-plan Roth rollover cannot later unwind the in-plan Roth rollover, as can be done with rollovers to Roth IRAs.
• The taxable amount of the in-plan Roth rollover must be included in the participant’s gross income.

The guidance also stated that a plan amendment providing for in-plan Roth rollovers in a 401(k) plan is not required to be adopted by the end of the 2010 plan year. Instead, the deadline for adopting a plan amendment is extended to the later of the last day of the plan year in which the amendment is effective or Dec. 31, 2011, provided that the amendment is effective as of the date the plan first operates in accordance with the amendment.

James M. (Jim) Rosa, CPA, PFS is the Principal in charge of the Tax Department at Hill, Barth & King LLC.  Jim has worked as a CPA helping clients in Fort Myers, Cape Coral and other Southwest Florida communities for the last 23 years. He has been with Hill, Barth & King LLC, a top 75 accounting firm, since 1986.

The accounting and business consulting firms of Hill, Barth & King LLC (HBK) and Gilbert, Wallace, Stewart, Stramel & Sowers, P.A. (GWSSS) announced that they have signed an agreement to merge effective November 1, 2010.

The staff from the iconic Fort Myers firm GWSSS (in business since 1948), will relocate to HBK’s Fort Myers office. Not only will this move increase the breadth of talent of the firm and add more depth to their presence in Southwest Florida, it will prepare the firm for the impending economic growth.

“HBK’s resources will enable us to provide options and specialized services that our growing clients need,” said Sowers. “The depth of services HBK’s Tax Department offers, including estate planning, will enable us to continue to exceed client expectations”. Stramel agrees, stating “Our team is excited about joining HBK and we will continue in the future to provide our clients with the personal attention they have come to expect. Additionally, HBK Sorce Financial LLC investment, advisory and financial planning experience will allow our clients additional opportunities to meet their financial goals.”

“This merger was about as close to a perfect fit as you can get. Both HBK and GWSSS have similar philosophies of a culture based on strong values and building trusting, long lasting relationships with our clients,” Chris Allegretti, HBK’s Managing Principal and Chief Executive Officer states, “Our clients benefit from the collective experience of our industry groups which include construction, healthcare, condominium/homeowner associations and family-owned businesses. Our teams are focused on developing industry capabilities, attracting top people and continually building value for our clients.”

HBK ranks as the 71st largest accounting firm in the United States. With the addition of Gilbert, Wallace, Stewart, Stramel & Sowers, P.A., HBK and HBK Sorce Financial employ over 280 professional and support staff, who serve clients in offices located throughout Florida, Ohio and Pennsylvania.

R. Dean Piccirillo, financial advisor and principal with HBK Sorce Financial, LLC, is participating as a panelist for The Center for Due Diligence (CFDD) 2010 Advisor Conference held October 6-8, 2010 at the Fairmont Chicago-Millennium Park Hotel in Chicago, Illinois.

Piccirillo is one of four panelists for the session entitled “The Intersection of Inbound Marketing, New Media and SALES” which will address social media strategy, blogging, compliance issues, and practical tools for managing online efforts.  Piccirillo is one of a handful of financial advisor bloggers embracing the use of social media for business.

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The recently enacted 2010 Small Business Jobs Act includes a wide-ranging assortment of tax breaks and incentives for small business, paid for with various revenue raisers. Here’s a brief overview of the tax changes in the new law.

Tax Breaks and Incentives

• 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 Jobs Act law, taxpayers could expense up to $250,000 of 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 expensed can include up to $250,000 of qualified real property (qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property).

• 100% exclusion of gain from the sale of small business stock for qualifying stock acquired after date of enactment and before Jan. 1, 2011. 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 the corporation must meet 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 date of enactment and held for more than five years. In addition, the new law eliminates the alternative minimum tax (AMT) preference item attributable for that sale.
• General business credits of eligible small businesses for 2010 allowed to be carried back five years. Generally, a business’s unused general business credits can be carried back to offset taxes paid in the previous year, and the remaining amount can be carried forward for 20 years to offset future tax liabilities. Under the new law, for the first tax year of the taxpayer beginning in 2010, eligible small businesses can carry back unused general business credits for five years. Eligible small businesses consist of sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts for the prior three years.
• General business credits of eligible small businesses in 2010 aren’t subject to AMT. Under the AMT, taxpayers can generally only claim allowable general business credits against their regular tax liability, and only to the extent that their regular tax liability exceeds their AMT liability. A few credits, such as the credit for small business employee health insurance expenses, can be used to offset AMT liability. The new law allows eligible small businesses, as defined above, to use all types of general business credits to offset their AMT in tax years beginning in 2010.
• S corporation holding period. Generally, a C corporation converting to an S corporation must hold onto any appreciated assets for 10 years following its conversion or face a business-level tax imposed on the built-in gain at the highest corporate rate of 35%. This holding period is reduced where the 7th tax year in the holding period preceded the tax year beginning in 2009 or 2010. The 2010 Small Business Jobs Act temporarily shortens the holding period of assets subject to the built-in gains tax to 5 years if the 5th tax year in the holding period precedes the tax year beginning in 2011.
• 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).
• Special rule for long-term contract accounting. The new law provides that in determining the percentage of completion under the percentage of completion method of accounting, bonus depreciation is not taken into account as a cost. This prevents the bonus depreciation from having the effect of accelerating income.
• Boosted deduction for start-up expenditures. The new law allows taxpayers to deduct up to $10,000 in trade or business start-up expenditures for 2010. The amount that a business can deduct is reduced by the amount by which startup expenditures exceed $60,000. Previously, the limit of these deductions was capped at $5,000, subject to a $50,000 phase-out threshold.
• Limitation on penalty for failure to disclose certain reportable transactions (including listed transactions) on a return. The new law limits the penalty to 75% of the decrease in tax resulting from the transaction. The minimum penalty is $10,000 for corporations and $5,000 for individuals (for failure to report a listed transaction, the maximum penalty is $200,000 and $100,000, respectively). These changes are retroactively effective to penalties assessed after Dec. 31, 2006.
• Deductibility of health insurance for the purpose of calculating self-employment tax. The new law allows business owners to deduct the cost of health insurance incurred in 2010 for themselves and their family members in calculating their 2010 self-employment tax.
• Cell phones removed from listed property category. This means that cell phones can be deducted or depreciated like other business property, without onerous recordkeeping requirements.

Offsets (Revenue Raisers)

• 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 tax year for rental property expenses. Exceptions are provided for individuals renting their principal residences on a temporary basis (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. Effective for information returns required to be filed after Dec. 31, 2010.
• Application of continuous levy to tax liabilities of certain federal contractors. For levies issued after date of enactment, the new law allows IRS to issue levies before a collection due process (CDP) hearing on Federal tax liabilities of Federal contractors (taxpayers would have an opportunity for a CDP hearing within a reasonable time after a levy is issued).
• Allow participants in governmental 457 plans to treat elective deferrals as 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.
• Allow rollovers from elective deferral plans to designated Roth accounts. The new law allows 401(k), 403(b), and governmental 457(b) plans to permit participants to roll 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 as of date of enactment.
• Crude tall oil (a waste by-product of the paper manufacturing process) is excluded from eligibility for the cellulosic biofuel producer credit. The new law limits eligibility for the tax credit to fuels that are not highly corrosive (i.e., with an acid number of 25 or less), effective for fuels sold or used after Dec. 31, 2009.
• 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.
• Guarantee fees. Amounts received directly or indirectly for guarantees of indebtedness of a U.S. payor issued after date of enactment are sourced, like interest, in the U.S. As a result, amounts paid by U.S. taxpayers to foreign persons will generally be subject to U.S. withholding tax.

Please keep in mind that these are just highlights of the most important changes in the new law. If you would like more details about any aspect of the new legislation, please do not hesitate to call our Fort Myers Hill, Barth and King CPA office in Southwest Florida 239-482-5522.

Every tax-exempt organization (other than churches) is now required to file a Form 990 series tax return, including the smallest organizations.  This requirement began in 2007.  The IRS will revoke the tax-exempt status of any organization that fails to meet its annual filing requirement for three consecutive years.

The IRS has offered tax-exempt organizations the opportunity to salvage their tax-exempt status by filing the appropriate Form 990 for the 2007, 2008 and 2009 if filed by October 15, 2010.  A list of tax-exempt organizations that are at risk of losing their tax-exempt status can be found at this IRS site:  http://www.irs.gov/charities/article/0,,id=225889,00.html

If an organization loses its tax-exempt status, then it is required to re-apply by filing Form 1023 and paying the fees and costs of gaining IRS approval of their exempt status.

The Senate passed the 2009 Small Business Jobs Act on 9/16/10 and the legislation now goes to the House for consideration.  The House passed a similar bill in June 2010 which included several differences.  The House plans on taking up the legislation quickly.  We expect the Senate version of the bill to likely be the version passed since it has been more difficult to pass this legislation.

Some of the provisions of the Senate passed legislation include:

• Expansion of 50% bonus depreciation for assets placed in service in 2010
• Extend and expand Section 179 to 2010 and 2011 up to $500,000 (from $250,000) with the maximum additions would increase to $2,000,000 (from $800,000)
• Allow general business credits to reduce AMT for years beginning after 2009 for certain small businesses
• Allow a 5-year carryback of general business credits for certain small businesses
• The S corporation built-in gains period would be reduced to 5 years for years beginning in 2011
• Allow health insurance deduction for partners and more than 2% S corporation shareholders to be deductible in determining self-employment tax, only for the first year beginning after 12/31/09
• Remove cell phones from the definition of listed property for years beginning after 12/31/09
• Significantly increase the penalty for failure to file information returns

We will keep you informed of developments.  Additional tax legislation is being debated on whether to extend the 2001 Bush tax cuts and on the Federal estate tax.  There may be significant legislation passed before the end of this calendar year.

by R. Dean Piccirillo, CFP®, CRPS®, AIFA®
Principal/Senior Financial Advisor
HBK Sorce Financial LLC

Currently, for Americans living on $45,000 or more per year during retirement, 18% of that income is generated from personal savings and investments. For millions of Americans, the personal savings and investments component of our income consists largely of Individual Retirement Accounts (IRA). IRAs are tax deferred personal retirement funds that allow you to save up to $5,000 per year ($6,000 if you’re age 50 or older). Tax deferral means you’re not currently paying income taxes on dollars earned inside of these investment vehicles; instead, the tax is deferred until you withdraw your money. Consequently, your money is working harder for you during the accumulation phase.
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