Tax Planning
There are various ways to transfer a family business to the next generation.
The parents can sell the stock to “Gen 2”, but that usually produces the highest tax cost.
An outright gift of the stock produces a lower tax cost compared to a sale, but there’s a big drawback – no cash flow to the parents.
A transfer of stock through a trust is often the best way to transfer ownership of a family business to the next generation.
A Granter Retained Annuity Trust (“GRAT”) provides the parents with a stream of income for a period of years. At the end of the trust term, the stock passes tax free to the children (or grandchildren).
The parents can still retain control of the company by holding voting stock, while the trust holds nonvoting stock.
A sale of stock to an Intentionally Defective Grantor Trust (“IDGT”) is another method of transferring stock at a much lower tax cost.
This technique avoids capital gains tax on the sale, provides a stream of income to the parents, and “freezes” the value of the amount includable in the parents’ estate.
With the passage of last year’s tax bill, stock transfers through a GRAT or IDGT offer even greater tax savings opportunities to transfer a family business or other family assets.
More on that tomorrow.
General Business, Tax Planning
“Ever wonder why the IRS calls it Form 1040?
For every $50 you earn, you get $10 and they get $40.”
-Jay Leno
Let’s look at Jay’s math. You earn $50, the IRS gets $40. That’s an 80% tax hit.
Guess what? Sometimes it really happens. Combine income taxes and estate taxes – and you may have an 80% tax problem.
It happens sometimes when a family business is transferred to the next generation through a sale of stock.
Say annual profits from a family business are $500,000. The “Gen 2” shareholders pay $200,000 in combined federal and state income taxes. That leaves $300,000 that goes to the parents for the purchase of stock.
Of course the parents pay capital gain taxes on the $300,000 sales proceeds.
And then there can be estate and inheritance taxes down the road.
Add it all up – a triple tax cost that can reach 80%.
A taxable sale of a family business to the children usually produces the highest tax cost.
A transfer of stock using various trust techniques usually results in the lowest tax cost.
More tomorrow.
General Business
Illinois lawmakers passed the largest tax increase in Illinois history during the January lame duck session.
The tax rate was increased from 3% to 5% on the individual side, a 67% increase. The corporate tax rate was increased from 4.8% to 7% on the corporate side, a 46% increase.
Since then bills have been introduced in Springfield to repeal the tax hikes.
They include HB 175, introduced in the House by Rep. Mike Connelly and SB 1320, introduced in the Senate by Sen. Matt Murphy.
The Illinois Chamber Government Affairs Division reports that both bills did not make it out of committee last week.
In related news, over the weekend Caterpillar CEO Doug Oberhelman raised the possibility that CAT might be forced to move out of Illinois.
The CEO writes “ I want to stay here. But as the leader of this business, I have to do what’s right for Caterpillar…The direction that this state is headed in is not favorable to business.”
Caterpillar says the tax hike will cost the company $40 million.
The company employs 23,00 workers in Illinois.
Illinois Governor Pat Quinn dismissed the possibility and says “Caterpillar’s not leaving Illinois.”
You can contact Governor Quinn at http://www2.illinois.gov/gov/pages/contactthegovernor.aspx
And you can reach your representatives in the Illinois General Assembly at http://ilga.gov/
General Business
We hear the phrase “revenue enhancements” all the time. It usually means new taxes, fees, penalties and fines.
The Congressional Budget Office (CBO) has just released a report on a revenue enhancement that’s new to us.
The report, “Alternative Approaches to Funding Highways”, raises the prospect of taxing people based on how many miles they drive.
The thought is these taxes could be used to offset the costs of highway maintenance at a time when federal funds are short.
The report outlines the development of technology that would allow total vehicle miles traveled (VMT) to be tracked, reported and taxed. It also addresses the pros and cons of mandating the installation of this technology in all vehicles.
Right now fuel taxes are the primary source of funding for highway maintenance and construction. But the CBO notes that “electronic metering and billing are making per-mile charges a practical option.”
Electronic metering sounds a lot like electronic monitoring. And the report does address the issue of privacy concerns.
Of course, some people might try to disable the electric metering to save taxes. And that could bring the need for greater law enforcement.
We can just picture a scene from Smokey and the Bandit. The Bandit disables the meter on his Trans Am to avoid VMT taxes. And Sheriff Buford T. Justice on his CB . . . “Bandit, what we’re dealing with here is a complete lack of respect for the law.”
You can find the report summary in PDF format at http://www.cbo.gov/ftpdocs/121xx/doc12101/HighwayFunding_SummaryforWeb.pdf
And you can access the full report in PDF format at http://www.cbo.gov/ftpdocs/121xx/doc12101/03-23-HighwayFunding.pdf
General Business
The Senate approved a 3 week stopgap funding measure yesterday. The so-called Continuing Resolution (“CR”) will keep the federal government running through April 8.
Some legislators say this is the last CR, and that we better have a real budget with substantial cuts by the 8th – or else the government shuts down. No more CR’s after that they say.
I once had a continuing resolution back in 1974 – to stop smoking.
It started out as a New Year’s Resolution, but after a while, it became a continuing resolution.
I decided to quit smoking on Monday January 7, 1974. After a couple of days, I was back at it – so I decided I’d try it again the following week.
I went through the weekly on again, off again process for over 7 months. Then, on Monday August 12, 1974, it finally clicked. I haven’t had a cigarette since.
If a 3 pack a day smoker can bring his own C R to a successful resolution – then Congress should be able to bring their C R to a successful resolution. A real budget with substantial cuts.
You can find the latest C R in PDF format at http://www.gpo.gov/fdsys/pkg/BILLS-112hjres48pcs/pdf/BILLS-112hjres48pcs.pdf
And you can always check the latest tally on the U S Debt at http://www.usdebtclock.org/
General Business, Tax Planning
We posted this a year ago and it still holds true today - with a couple of changes . . .
The NCAA tournament picks came out Sunday and March Madness starts this week.
Most people know that gambling winnings are taxable. You certainly know if you received an official Form W-2G, Certain Gambling Winnings.
The form has 14 boxes that are completed by the “Payer.” The Payer is the one who kept the money that you lost overall. There’s no box for gambling losses. You’re on your own there.
You can deduct gambling losses (up to your winnings) as an itemized deduction on Schedule A. Of course, in a tax audit you have the burden to prove how much you lost.
The State of Illinois taxes gambling winnings, but doesn’t allow a deduction for offsetting gambling losses. I once had a client who lost over $500,000 at the casinos one year. But he received W-2Gs totalling about $2 million.
So we filed his federal return with $2 million of winnings offset by $2 million of losses. He didn’t owe any federal tax.
But he couldn’t deduct the offsetting losses on his Illinois return. So he had to pay $60,000 in taxes to Illinois on the $500,000 he lost. Ouch.
Talk about adding insult to injury.
You can find out more about gambling and taxes at the IRS website, http://www.irs.gov/taxtopics/tc419.html
And you can contact your Illinois state senator or representative to talk about those non deductible gambling losses, the recent 67% tax increase or whatever else is on your mind at http://www.ilga.gov/ .
Good luck in the tournament and those office pools. And keep good track of your winners and losers. You’ll need those records at tax time.
General Business
Illinois legislators passed an internet sales tax bill in the lame duck session in January.
The so-called “Amazon Tax” would force online retailers to collect the state’s 6.25 percent sales tax on Internet purchases made by Illinois residents.
Under HB 4659. an online retailer would be required to collect the tax as long as it has an affiliated advertisement contract or other in-state presence in Illinois.
Under Illinois law, the Governor has 60 days to veto a bill and return it to the legislature with a statement of objections. If the Governor takes no action within the 60 days, it automatically becomes law.
The bill was sent to Governor Quinn on January 10.
So it becomes law tomorrow, March 11, unless Quinn vetoes the bill today.
General Business, Tax Planning
U. S. auto sales jumped 27% in February according to market researcher Autodata Corp.
GM reported a 46% increase in car and truck sales over last February, with Toyota second with a 42% climb.
Analysts credit manufacturer and dealer incentives for a big part of the increase.
There may be another incentive at play.
The compromise tax bill signed into law in December increased the first-year bonus depreciation provision from 50% to 100% for new property acquired after September 8, 2010 and before January 1, 2012 and placed in service before January 1, 2012.
Perhaps unintended, the new 100% bonus depreciation also applies to “heavy” SUVs. That includes SUVs with a loaded gross vehicle weight over 6,000 pounds.
So if you buy a heavy SUV this year that’s used 100% for business – you can write off the full cost on your 2011 tax return.
The SUV tax loophole is back – at least for now.
General Business
Last month Illinois Governor Pat Quinn outlined his budget proposals for fiscal year 2012.
Quinn’s “Illinois Working” plan relies heavily on tax increases and nearly $8.75 billion in borrowing.
Today the non-partisan Illinois Policy Institute released a budget alternative, labeled “Budget Solutions 2012: A Sustainable Path for Illinois.”
The Institute’s plan does not rely on recent tax increases as revenue sources. And their plan does not include any new borrowing.
You can find the Institute’s plan at http://illinoispolicy.org/news/article.asp?ArticleSource=3929 .
You can find Quinn’s proposals at http://www2.illinois.gov/budget/Pages/default.aspx
General Business
The three words “Waste, Fraud and Abuse” go hand – in hand – in hand with some other “threes” – like Huey, Dewey and Louie. Or Larry, Darryl and Darryl from the Newhart Show.
How many times have we heard the phrase we’re going to “reduce Waste, Fraud and Abuse” in government?
But how often do we hear specifics about how government officials plan to go about reducing wasteful government spending? Not often.
Until now, that is.
The nonpartisan Government Accountability Office has just released a report titled “Opportunities to Reduce Potential Duplication in Government Programs, Save Tax Dollars, and Enhance Revenue”.
The GAO found 33 areas with “overlap and fragmentation” in various federal agencies.
For example, an analysis of 18 different programs across three federal agencies that deal with domestic food assistance found that – though multiple programs can ensure the needy have access to food- “administrative costs increase significantly,”with GAO estimating a $62.5 billion expense to the government from overlap and duplication.
Here’s another – “Little is known about the effectiveness of most (federal job training and employment) programs,” GAO says, resulting in a possible $18 billion in savings.
We hope our elected officials read the Report – as they look for ways to reduce the budget deficit and reduce federal spending.
You can find a summary of the Report at
http://www.gao.gov/products/GAO-11-318SP
Or you can find the full Report in PDF format at
http://www.gao.gov/new.items/d11318sp.pdf
