Changes being considered for corporations include:

• A reduction in the corporate tax rate, expected to be between 23 and 29 percent, down from 35 percent
  
• A move in the corporate tax system to a territorial system from a worldwide system
  
• An extension of the payroll tax rate reduction to 4.2 percent from 6.2 percent for another year, in place for 2011 and could be extended to 2012

In addition, consider how your employees and independent contractors are classified. Identifying companies that are misclassifying workers to minimize payroll tax liabilities is a high priority for the IRS. The IRS recently launched a new voluntary compliance program that allows employers to prospectively reclassify workers erroneously treated as independent contractors. However, you should analyze the ERISA consequences carefully before entering into this program.

Repair and maintenance expenses (R&M). Over the last few years, many taxpayers have changed their accounting method for R&M expenses. The IRS has indicated that it expects to issue final regulations in the next few weeks, and it is possible that the final regulations will not be as taxpayer friendly as the proposed regulations. We expect many businesses will be required to change these accounting methods once these new rules are issued.

Section 199. The domestic production activities deduction, or section 199 deduction, remains in effect for 2011 returns. A 9 percent reduction of taxable income in the simplest scenario, below are some planning opportunities to consider. For tax years before 2012, business taxpayers can include Puerto Rico-sourced activity in their US-based domestic production gross receipts.

If only a portion of business activities would qualify under section 199, it is then important to calculate your tentative section 199 deduction and the W-2 wage cap before year-end. Keep in mind, the deduction is the smaller of 9 percent of qualified production activities income or taxable income, not to exceed 50 percent of the related W-2 wages for the tax year.

If the wage cap will limit the otherwise available deduction, consider bonuses of additional compensation to maximize the section 199 deduction in the current year. Accrual taxpayers may be able to deduct a bonus (subject to regular salary deduction rules) that is declared before year-end but not paid until the following tax year.

Projecting out the anticipated section 199 deduction early can also help in determining whether to accelerate or defer income. Generally, the section 199 deduction will reduce the effective tax rate so it is important to review your marginal tax rate for this year and next to determine which planning strategies to implement.

If you are a manufacturing business with production facilities both overseas and in the US, consider realigning operations so that more of the production work occurs in the US to take advantage of additional section 199 expense eligibility. If at least 20 percent of the cost of goods sold related to the property production occurs in the US, all of the income from the products will qualify for the section 199 deduction.

Charitable contributions. C corporations are eligible for special charitable contribution deductions. For contributions of food and books made prior to Jan. 1, 2012, a C corporation can claim a charitable deduction equal to the lesser of (a) basis plus half the property’s appreciation or (b) twice the property’s basis. Book donations must be made to certain public schools with specific certification requirements. Donations made by trade or businesses conducted in pass-through entities or by individuals can get these same benefits but only if the deduction does not exceed 10 percent of the taxpayer’s aggregate net income for the year.

Also eligible for enhanced contribution deductions are donations of computer software, computers and their peripheral equipment, or fiber optic cable made to schools or libraries for educational purposes related to the donee’s function. Again, the deduction is equal to the lesser of (a) basis plus half the property’s appreciation or (b) twice the property’s basis.

Section 1202. Section 1202 is a section of the Internal Revenue Code that currently provides an exclusion for gains in certain small business stock sales by taxpayers that are not corporations. Taxpayers acquiring qualified small business (QSB) stock on or before Dec. 31, 2012, can exclude 100 percent of the gain from taxable income (excluded from AMT as well).

The QSB criteria include, but are not limited to:

• Stock acquired on original issuance by a domestic C corporation after Aug. 10, 1993
  
• The aggregate gross assets of the corporation have not exceeded $50 million at the time of and immediately after issuance
  
• At least 80 percent of the assets, by value, of the corporation are used in the active conduct of a qualified trade or business
  
• The stock has to be held at least five years before sale

Accounting method changes. The end of the year is always a good time to review current accounting methods for both book and tax purposes. A change in one could trigger a change in the other. For example, if you have changed your book method of accounting for inventory from LIFO to another method, you would have a mandatory change in tax accounting method since LIFO used for tax purposes must be consistent with books. If you record deferred revenue on your financial statements and have changed the way you recognize revenue on your books, you need to review whether you have retained a permissible method of accounting for tax purposes.

If you do not properly change your accounting methods by filing Form 3115, Application for Change in Accounting Method, the IRS has the opportunity to change your tax accounting methods under audit which could result in less favorable treatment going forward plus assessment of penalties and interest. Many 3115 filings are automatic changes and are due at the extended due date of the return for the year of the change. Other accounting method changes are non-automatic and require a filing fee and are due by year-end of the year of change.

Schedule UTP. Released in 2010 to be included in 2010 tax returns, Schedule UTP was designed by the IRS to require taxpayers to disclose uncertain tax positions. With the advent of ASC Topic 740 (previously FIN 48), accounting for uncertain tax positions, the IRS wanted to find a way to access similar information on a tax return. Currently, it is required only for corporations that prepare audited financial statements (or are included on the financials of a related entity); have recorded a reserve for US tax positions; or did not record a reserve because the company expects to litigate and prevail. There is a five-year phase-in for companies with asset values of: $100 million for 2010 and 2011; $50 million for 2012 and 2013; and $10 million for 2014 and beyond.

According to the IRS, a tax position "on a tax return is a tax position that would result in an adjustment to a line item on that tax return" if the position were not sustained.

The information disclosed on Schedule UTP includes, among others: whether the position is temporary or permanent, whether derived from a flow-through entity, the year taken, and a concise description of the position.

The IRS is currently studying compliance and enforcement, including whether to require it for pass-through entities. California has already issued requirements for its own Schedule UTP with other states expected to follow.

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