Blake Christian
Blake Christian

Tax strategies for the rest of 2012

The current low(er) tax/low(er) interest rate environment provides unique opportunities for tax planning.

May 24, 2012
by Blake E. Christian, CPA

With the Bush tax rates scheduled to expire at year end, and income tax increases in 2013 and later from the phased-in health care legislation (see Christian, “New Healthcare Act,” Corporate Taxation Insider (April 29, 2010)), as well as other proposed tax increases being advanced in Congress, 2012 may be the last of the low-tax years.

Under Sec. 2010(c)(3), individual taxpayers also have a window through Dec. 31, 2012, to transfer up to $5 million of assets per taxpayer without triggering estate and gift tax. In addition, current maximum gift tax rates of 35% are a relative bargain (Sec. 2502(a)(2)).

Finally, we have some of the lowest interest rates on record. The current IRS-issued applicable federal rates (AFRs) are a bargain compared to the rates third-party lenders are charging and can offer some ability to plan (Rev. Rul. 2012-15).

Term of Loan

AFR for June 2012 (Monthly Compounding)

Short-term/demand loan - Not over 3 years


Mid-term - Over 3 years but not over 9 years


Long-term - Over 9 years


This unique convergence of low taxes and record low interest rates, during a period when real estate and business values are also at relatively low levels, offers business owners and certain employees unique opportunities to minimize income, estate, and gift taxes.

While an in-depth analysis is beyond the scope of this article, here are some examples of the myriad methods for taking advantage of the current economic and tax environment:

Refinance and restructure business debt: To the extent profitable businesses have not refinanced their debt, this should be a top priority. Converting variable rate term debt to a fixed rate structure is generally advisable. In addition, if equity owners have advanced funds to their business entity, they should consider refinancing through a third-party lender to diversify their risk. Some owners may desire to convert some of their advances/debt to additional equity in the company for long-term appreciation. Parties who have made low-interest AFR loans to the companies in the past may want to consider “refinancing” them with new AFR loans at the current historically low rates.

Employee loans: Some companies may loan employees money to purchase homes (often in a relocation), cars, or stock/LLC interests, etc. While there are potential employment and legal issues that should be fully considered before making those loans, once the parties are comfortable with those arrangements, the current low AFRs offer the ability to provide a no-tax employee benefit by offering key employees bargain loan terms.

Note: Care must be taken when advancing money to purchase company stock or an LLC interest since Sec. 83 (see below) can treat certain unsecured loans as “options” for tax purposes (Regs. Sec. 1.83-3(a)(2)). In such cases, the employee may be treated as not owning the equity interest until the loan is paid off--resulting in significantly higher ordinary vs. capital gain upon sale and potential short-term holding periods before sale.

Transfer of property for services (Sec. 83): This under-utilized strategy for rewarding key employees involves the transfer of property (e.g., stock, LLC units, land, vehicles, etc.) in exchange for past or future services. If the transaction is properly structured, low-value assets can be transferred to employees while minimizing overall taxes. In general, the employee recognizes ordinary income for the difference between: (1) the value of the asset transferred and (2) the cash or other property the employee pays to the employer. The employer is allowed a tax deduction for the amount of income reportable by the employee/service provider.

Generally, after the asset becomes “vested” the employee is taxed, and any post-vesting appreciation (or value decrease) will be subject to capital gain or loss treatment. With the current low business valuations, land values, etc., such transfers may make sense for certain taxpayers.

As an example, employers’ transfer of used passenger vehicles to employees can be beneficial for both parties. Because of the depreciation limits on most vehicles, the employer’s tax basis is generally much higher than the vehicle’s fair market value (FMV). In such cases, the employer can write off the tax basis upon transfer, yet the employee only recognizes the FMV as taxable income.

Additional discussion of Sec. 83 strategies can be found at Christian, “Section 83: Property in Exchange for Services,” Corporate Taxation Insider (Sept. 27, 2007).

Trigger capital gains in 2012: With the scheduled increase in the long-term capital gains rate for individuals, including S corporation shareholders, LLC members, and partners, from 15% to 20% beginning in 2013, taxpayers may want to sell certain appreciated assets to secure a permanent tax savings. If the asset is publicly traded stock, the taxpayer can immediately repurchase the stock if he or she believes it may continue to appreciate, and the taxpayer will have an increased tax basis--thereby reducing future gain. Because, unlike individuals, corporations do not have a lower tax rate for capital gains, C corporation shareholders will only receive a benefit from the lower rate upon disposing of their shares (or from “qualified” dividend distributions--Sec. 1(h)(11)(B)).

Accelerate “qualified dividends” into 2012: When the Bush tax rates expire, the current 15% tax rate for dividends will increase to 39.6%. Therefore, to the extent taxpayers can control dividend distributions, they should consider accelerating “qualified” dividends to this year to retain substantially more of the after-tax amounts.

Accelerate income into 2012: With the maximum federal rate scheduled to increase to 39.6% from the current 35%, S corporation and LLC/partnership owners may want to recognize income in 2012 rather than wait a year. Taxpayers subject to the alternative minimum tax (AMT) in 2012 will likely be even more motivated to accelerate income at a 26% or 28% marginal rate that applies under the AMT.

Defer 2012 expenses: Similar to accelerating income, taxpayers anticipating higher 2013 rates may prefer to defer claiming certain tax deductions, including making elections to claim bonus depreciation/Sec. 179 expensing, etc. Again, taxpayers subject to AMT in 2012 will generally be even more motivated to defer expenses into 2013 when all tax rates may be higher.

Philanthropic and estate planning: Even though business valuations are generally low, the very low interest rates can enhance the charitable element of charitable remainder unitrusts (CRUTs), grantor retained annuity trusts (GRATs), and similar estate planning tools.

Gifting of business interests: With business values generally lower than in previous years, consideration should be given to transferring minority interests to family members. The $5 million estate/gift tax-free transfer exemption, coupled with current case law holding that lack of transferability/control requires values to be discounted, can allow for leveraging of gifting. Taxpayers wishing to preserve some of their lifetime exemption or transfer amounts in excess of the $5 million unified credit should consider selling the business interests at a discount and accepting a portion of the payment in the form of a low-interest note (discussed above).

The techniques discussed above must be evaluated from both a federal and state perspective.

While predicting the future of federal and state tax systems and the economy is always difficult, predictions in an election year are all but impossible.

Even so, many of these techniques are worth evaluating, based on a variety of current tax and economic factors. Significant current and future income tax, estate tax, and gift tax can be saved by applying these strategies.

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Blake E. Christian, CPA, MBT, is a tax partner in the Long Beach, Calif., office of Holthouse, Carlin & Van Trigt LLP (www.hcvt.com). He can be reached at blakec@hcvt.com or 562-216-1800.