Planning Ahead for 2011

S Corporation Built-In Gains Tax : An S corporation generally is not subject to tax; instead, it passes through its income or loss items to its shareholders, who are taxed on their pro-rata shares of the S corporation's income. However, if a business that was formed as a C corporation elects to become an S corporation, the S corporation is taxed at the highest corporate rate on all gains that were built in at the time of the election if the gains are recognized during a special holding period. For tax years beginning in 2009 and 2010, the special holding period is shortened to seven years, and-since enactment of the Small Business Jobs Act-the special holding period is shortened to five years for tax years beginning in 2011.

Information Reporting Requirements for Transfers of Securities : The Energy Improvement and Extension Act of 2008 added three provisions to the Code that impose reporting requirements related to the transfer of securities. Every broker required to report the gross proceeds from the sale of a "covered security" must also report the customer's adjusted basis in the security and whether any gain or loss with respect to the security is long-term or short-term. "Covered securities" include most stock acquired beginning in 2011. Also beginning in 2011, a broker transferring covered securities to another account must furnish the receiving broker with a written statement that allows the receiving broker to satisfy the new basis reporting requirements. (The IRS, however, has decided not to assert penalties for failure to furnish the transfer statement for certain types of transfers occurring in 2011.) Moreover, if an issuer of stock takes a major corporate action (such as a stock split, merger, or acquisition) that affects basis, then-beginning in 2011-the issuer must report to the IRS and to each stockholder a description of the action and the effect the action has on basis.

If you have any questions, please do not hesitate to call. We would be happy to meet with you at your convenience to discuss the strategies and requirements outlined above. There is still time to implement these strategies to minimize your 2010 tax liability, as well as plan ahead to reduce your 2011 tax liability.

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