As 2010 winds to a close, tax and accounting information and software provider CCH, a Wolters Kluwer business, has released a short list of four tax-planning moves for companies to make the most of current federal tax laws.
“In the event that existing federal tax cuts from 2001 and 2003 are not extended on Capitol Hill, corporate leaders should consider what steps to take before the end of the year to best position their businesses for 2011 and beyond,” said Mark Luscombe, JD, LLM, CPA, and Principal Federal Tax Analyst at CCH.
Luscombe recommended considering the following moves:
1. Accelerate dividends. The tax on dividends will revert to the individual rate if the tax cuts expire, so accelerating dividends into 2010 will give shareholders the current, lower tax rate. Given that advantage, even companies that hadn’t planned on issuing dividends might want to consider doing so. “A closely held company can declare dividends whenever it wants, provided that it has the necessary earnings and profits, so timing would not pose a problem,” Luscombe says.
2. Pay bonuses early. The top tax rate will rise from 35 percent to 39.6 percent, so executives will take home more from a bonus in December than from the same bonus given in 2011.
3. Sell underwater option stock. Employees who exercised incentive stock options earlier this year and have seen share values decline significantly might get caught in an Alternative Minimum Tax trap unless they sell before year-end. Otherwise, under AMT rules, they’ll owe tax at the higher value when the option was exercised. Corporate tax departments may want to share this knowledge with their company’s executives.
4. Roll 401(k) balances into a Roth option. Under the Small Business Tax Act, employers can now allow employees to roll pre-tax 401(k) balances into a Roth account option within the 401(k) plan. That triggers a taxable event, but once the balance is in the Roth, accumulations would be tax-free from then on. Companies without such a Roth option need to add one before year-end to enable rollovers taxable at lower 2010 rates.
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