In this edition;

• Illinois Income Tax Increase
• Why Do You Need To Establish the Value of a Business If You Are Not Getting Out Soon?

Our firm offers traditional accounting, tax advisory and audit services, but we also have a strong emphasis on Business Lifecycle Planning. Visit us at www.bikcpa.com or contact any of our professionals at 847.358.1170

Illinois Income Tax Increase

• The law is retroactive to January 1, 2011
• Illinois Personal Income Tax rate is increased from 3% to 5% between January 1, 2011 and December 31, 2014. The rate is scheduled to drop to 3.75% from January 1, 2015 to December 31, 2024. The rate is finally scheduled to drop to 3.25% starting on January 1, 2025.
• Corporate Income Tax rate rate is increased from the current 7.3% rate to 9.5% starting January 1, 2011 through December 31, 2014.  It is scheduled to drop to 7.75% between January 1, 2015 and December 31, 2024. It is then scheduled to revert to 7.3% starting on January 1, 2025. (NOTE: this includes the personal property replacement tax of 2.5%.)  S Corporation and Partnership replacement tax rates of 1.5% are not affected.
• State spending limitation and tax reduction - If the state spending from "state general funds" for any fiscal year for 2012 through 2015 exceeds established spending limitations set forth in the Income Tax Act, the income tax rates will be returned to 3% for personal and 7.3% for corporations.  Any spending pursuant to a governor-declared “fiscal emergency,” however, would not count toward the state spending limit.
• Estimated Payments for any taxpayer due after January 31, 2011 and before February 1, 2012 now mean the lesser of :
• 90% of the tax shown on the return for that tax year, or
• 150% of the tax shown on the previous year’s return.  This has increased so that these estimated payments reflect the new tax rates that will be in effect.  If it had remained at 100% of the previous year, your estimates would be insufficient since the previous year had lower tax rates.
• Property tax rebate program that was included in the original bill was eliminated in the final bill.  The current 5% of property tax paid credit under the personal income tax was retained.
• Net Operating Loss carryover deduction for corporations was suspended (except for S-corporations) for tax years 2011-2014.  After this period, deductions will again be allowed. Net operating loss carryovers for Partnerships are also not affected.
• Illinois Estate and Generation-Skipping Transfer Tax Act has been reinstated for deaths occurring after December 31, 2010.  It had previously been allowed to lapse December 31, 2009. The tax is equal to the full amount of the state tax credit that would have been allowed under the Internal Revenue Code in effect on December 31, 2001 but limiting the exclusion amount to $2 million.
• Local Government Distributive Fund (LGDF) - Currently 10% of the collections under the Illinois Income Tax Act are deposited in the LGDF for distribution to counties and municipalities based on their proportionate share of the state's population. They will not share in collections from the additional taxes that are imposed under this act.

Use Tax on Illinois-1040

Illinois legislators want to make citizens more aware of their Use Tax obligation by putting a Use Tax line on the tax return starting in 2010.  You can report your Use Tax on purchases you made in 2010 on line 22 as long as the Use Tax owed is $600 or less.  If over $600 you must file form ST-44.

What is Illinois Use Tax?

Illinois Use Tax is a sales tax that you, as the purchaser, owe on items that you buy for use in Illinois.  If the seller does not collect this tax, you must pay the tax to the Illinois Department of Revenue.  The most common purchases on which the seller does not collect Illinois Use Tax are those made via the internet, from a mail order catalog, or made when traveling outside Illinois.

 

Why Do You Need To Establish the Value of a Business If You Are Not Getting Out Soon?

Establishing the value of a business seems like an unnecessary action to take unless you are thinking about exiting. On the surface that strategy makes a lot of sense. Especially over the last few years when the economy has been down and the estate taxation laws have been in flux. We are providing you with a few reasons to consider formally conducting some level of a business valuation for your company.  

Let’s start with mistakes commonly made about the value of any company:

1. I read an article, stop right there. Any article on any business is educational, but not enough to gamble with taking the risk that it properly addressed your industry, geography, local economy, and other issues specific to your business, which may be your goodwill, client list, equipment, etc.
2. The business down the street sold in less than six months. Okay, but how much did it sell for? Could it have sold for more? What were the terms? Did they have unique features? Did the proceeds from the sale cover their debt?  What were the tax consequences?
3. About 20% of U.S. businesses use closing their doors as an exit strategy. Not because they went out of business. These are owners that want to retire. Thirty years of business and they assume the company has no resale value. For some that might be true, but most just missed the opportunity to have additional income from a sale.  

Immediate Reasons to Have a Valuation Done

1. Insurance. Life insurance for your family and/or to fund the buy/sell agreement in a partnership. The business may have less or more value than anticipated. You might need additional life insurance to cover debt or pay off a partner’s claim.
2. Establishing a Baseline. A valuation will establish a baseline worth of the business. It gives you a realistic perspective on the true value of the business today.
3. Creating Value. If you have a baseline measurement you can determine what steps are needed over the next few years to build additional value. In today’s market, there are more sellers than qualified buyers. So to sell the business, and to sell it at a premium, buyers need to see value.  While building value owners also should see increased profit as well.   

Long-Term Needs

1. Tax Planning. Your entire estate is impacted by the business. For some owners their largest asset if the business. Understanding its value enables you to develop the proper tax plans.
2. Establishing Timeframes. This is a critical element. It could take months or years to sell a business. The longer you can plan for the exit the better you can time your action points.

One last area to address is a family succession. If the plan is to eventually transfer the business to a family member(s) then today’s economy creates an interesting opportunity. You may still plan to be active and the primary owner for the next ten years, but business values are down so the iron may be hot. If business value is decreased there is a greater opportunity to reduce tax liabilities involved in a succession by establishing a lower than normal selling price today for tax purposes. This does not mean the owner has to leave the business. Other management contracts can be established, but selling early, and still running the business, is a viable succession strategy to retain family wealth.

Call us for a no-cost, introductory discussion of you situation. We have a Certified Valuation Analyst on our professional staff to assist in the conversations.