By: Dennis L. Monroe
Krass Monroe, P.A.
Tax savings may be your friend. Year-end tax planning for 2009 may be the most challenging in recent memory. This is particularly true in the franchise world because the uncertainty of when various businesses will become profitable again. Consequently, tax planning may unfortunately take a back seat. Forward-thinking businesses recognize that this may be a great year to implement tax ideas that will benefit them in future years.
Some of the uncertainty this year is related to specific temporary tax breaks scheduled to expire in 2009, and whether these will be extended and whether the rumored increase in both federal income tax and capital rates will transpire. Amid this uncertainty, there is increased pressure this year to maximize the value of any potential tax planning to cushion the poor financial performance many taxpayers are experiencing this year.
The following are some tax planning ideas that my partners Scott Husaby and John Berg have shared with me. You can see how I have applied these ideas to the franchise business world:
Net Operating Losses
- Net Operating Losses. The five-year NOL carryback provisions expire at the end of 2009. This is particularly important in the franchise world because many franchise businesses are showing current losses, and these losses can be utilized to receive refunds for previously paid taxes.
- Basis for Losses. If you own an interest in a partnership or S corporation, you may need to increase your basis in the entity by year-end so you can deduct a loss from it for this year.
- Bonus Depreciation. The 50% first year bonus depreciation was extended by the 2009 Recovery Act generally through 2009 only. Similarly, the $8,000 additional first year depreciation allowed for new vehicles placed in service ends in 2009. This bonus depreciation is particularly significant because it may eliminate most tax. As we know, certain restaurant leaseholds are favorably treated under the tax law.
- Code Section 179 Expensing. For 2009, the cap on Code Section 179 expensing remains at the 2008 level of $250,000 for qualifying purchases of new or used property, together with an $800,000 threshold for deduction phaseout. Businesses placing property in service for tax years beginning in 2010 will be limited to $125,000 maximum deduction with a $500,000 cap. As provided in the bonus depreciation section, Code Section 179 expensing is also a great opportunity to eliminate tax.
- Fifteen Year Cost Recovery. The 15 year cost recovery period for leasehold and restaurant improvements sunsets in 2009.
- Anticipate Tax Increases. The consensus is that someone must pay for all of the stimulus expenditures over the past year. The difficult question is not if taxes will go up, but rather when the increases will be effective. The longer any increase is delayed, the more likely it will be effective beginning in 2011. However, if year-end tax planning involves deferring income into 2010, the possibility of higher rates in 2010 must be considered.
- C Corporation Dividends. Consider paying dividends out of C corporations while the dividends are still subject to the 15% Federal long-term capital gains tax rate.
- Capital Gains. Consider accelerating large gains to take advantage of the 15% Federal long-term capital gains tax rate before it increases.
Other Business Opportunities
- Review Accounts Receivables. Determine which outstanding debts owed to the business are uncollectible in 2009 so they can be deducted as bad debts. Remember, cash basis businesses cannot deduct unpaid receivables for services. This may particularly advantageous for accrual-based franchise businesses that provide credit to their customers.
- Cancellation of Debt Income. Businesses can elect to defer cancellation of indebtedness income arising from a qualified reacquisition of certain of its business debt instruments. Taxpayers reacquiring certain debt after 12/31/08 and before 01/01/11 may elect to include the cancellation of indebtedness income in gross income ratably over a five tax year period. If you are one of the many multi-unit operators that has restructured or is restructuring, this opportunity should be reviewed closely.
Employee issues may be the most important for many franchise business, so consider Bonus Deferral and Employee Incentives.
- Bonus Deferral. It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2010 (again, however, you must take into consideration the possibility of higher income tax rates in 2010).
- Employee Incentives. Consider creative employee bonus/incentive programs that reward key employee performance without requiring current cash payments.
- Required Minimum Distributions. For 2009, the required minimum distribution requirements generally applicable to retirement plans are suspended. However, each individual plan must be consulted to determine if the plan requires distributions. If so, the plan should be amended to eliminate the requirement.
- Roth IRA Conversion. While there is still an AGI limit on conversions of traditional IRAs and Roth IRAs in 2009, beginning in 2010 this limitation is eliminated.
- Estate and Succession Planning. The current markets and interest rate environment have created a “perfect storm” for transferring assets to the next generations. With the uncertainty regarding the future estate tax rates, prudent clients are taking advantage of this situation to shelter significant portions of their estates from potential estate tax. This idea is particularly relevant to the franchise world because of the extremely low multiples that sales transactions seem to be commanding at this point.
Once again, we need to look at tax savings as a way to help improve cash flow for our businesses and finance the future. My next article will be an update on the latest developments in financing opportunities.
Dennis L. Monroe is a partner and Chairman of Krass Monroe, P.A., a law firm specializing in multi-unit franchise finance, mergers and acquisitions, and taxation. Krass Monroe, P.A. is located at 8000 Norman Center Drive, Suite 1000, Minneapolis, MN 55437-1178; (952) 885-5999. For previously published articles, and other Krass Monroe information, please refer to our Web site at www.krassmonroe.comor http://www.primerus.com/law-firms/monroe-moxness-berg-pa-minneapolis-minnesota-mn.htm.