Without some action from Congress before year-end, tax rates are poised to increase for income, estate, gift, and generation-skipping taxes on Jan. 1, 2013. Despite this uncertainty, planning opportunities may need to be implemented prior to year-end to minimize taxes and preserve your wealth.
Transaction cost studies: Identifying opportunities in light of recent tax law developments While a new Revenue Procedure establishes a safe harbor election allowing qualifying taxpayers to deduct 70 percent of "success-based fees," it may not be the most beneficial route. A recent transaction cost study resulted in tax savings of more than $166,000 to a client who did not elect the 70 percent safe harbor.
Regulation Section 1.263(a)-5 Regulation Section 1.263(a)-5 requires a taxpayer to capitalize amounts paid to facilitate an acquisition of a trade or business, a change in capital structure, and other specified transactions. Under Sec. 1.263(a)-5(f), "success-based fees" (contingent upon the successful closing of a transaction) are specifically deemed to be paid to facilitate the transaction, except to the extent the taxpayer maintains sufficient documentation to establish that a portion of the fee is allocable to activities that do not facilitate the transaction.
Recent tax law developments Rev. Proc. 2011-29 (applicable for taxable years ending on or after April 8, 2011) establishes a safe harbor election in lieu of maintaining the documentation required under Sec. 1.263(a)-5(f) for "success-based fees." This safe harbor permits qualifying taxpayers to treat 70 percent of their success-based fees as currently deductible expenditures. The remaining 30 percent of the fees must be capitalized as an amount that facilitates the transaction.
Passive activity losses: Complying with section 469 rules Maximizing the use of losses from passive business activities requires an in-depth understanding of IRC section 469. The rules that govern passive activities and prohibit the use of passive activity losses to offset nonpassive income are among the most complex, ambiguous, and burdensome in the area of taxation. Revenue Procedure 2010-13 provides some additional guidance in applying the activity grouping rules, but there continues to be considerable disagreement among practitioners and the IRS over the correct application of these rules.
Ambiguities notwithstanding, the IRS is intent on strict compliance. Failure to correctly group activities and sufficiently document the taxpayer's active participation in individual business activities can result in disallowed losses and substantial penalties.
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