Pub. 1 2011 Issue 2

12 AUTOMOBILE DEALER NEWS ILLINOIS www.illinoisdealers.com just exactly how and what to include in this computation. This lack of clarity resulted in some very unfavorable results for some dealerships that were audited by the IRS. Clarification - the new IRS guidance allows two safe harbor methods for applying these rules. The first is the «retail sales fa- cility safe harbor method» and the second is the «reseller without production activities safe harbor method». Both of these methods provide specific guidance to automobile dealers allowing them to deduct specific costs when incurred. Action Items - It is imperative that all auto dealers discuss their current tax position related to capitalizing costs with their tax preparer. Although the IRS has issued these favor- able safe harbor methods, they will only apply if you request to adopt these methods with the IRS. This needs to be done by filing a Form 3115 with the IRS and properly informing them that your dealership elects to apply these new methods. Certain limitations to automatic adoption are not applicable if a dealership adopts these safe harbor methods for its first or second taxable year after November 9, 2010. Failing to apply for this “change in accounting method” with the IRS could subject a dealer under an IRS examination to harsh UNICAP issues originally addressed in a 2007 Technical Advise Memo- randum (TAM). Caution - with the proper adoption of these new safe harbor methods it may eliminate the need to capitalize storage and han- dling costs for your dealership. Be advised that your dealership may still be required to capitalize purchasing costs and any stor- age costs for off-site facilities. You will still need to review your purchasing costs to determine what costs, if any, the dealership is required to capitalize. The recently issued guidance from the IRS is very favorable for automobile dealers. It will allow expensing of certain items when incurred and will also reduce the risk of unfavorable tax adjustments upon an IRS examination. It is important that you understand these rules, discuss them with your tax professional, and make the proper elections with the IRS so that you are in compliance. You should be aware that Plante & Moran has worked with dealers who are not recurring clients in assisting these dealers CPAs in preparing the necessary Form 3115, men- tioned above. If we could be of help to you or your tax profes- sional, just let us know. Estate Matters – What Does the New Law Mean to You? On December 17, 2010, President Obama signed The Tax Re- lief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act) into law. Included among its provisions are new Federal estate and gift tax rates and limits. For 2011 and 2012, the maximum estate tax rate is 35 percent with a unified estate and gift exemption amount of $5 million.. Most planning documents are set up with formulas to comply with whatever estate or generation skipping transfer tax (GST) exemptions are in place at the time of one’s death. These formula provisions can produce significantly different results in an en- vironment where the exemption is $1 million, $3.5 million, or $5 million. The new law provides for “portability” between spouses of any exemption amount that remains unused at the first spouse’s death. This means that if John dies in 2011, having made taxable transfers during his lifetime or at death of $3 million, his wife, Jane, would receive his unused exemption amount of $2 million, providing her with a total exemption amount of $7 million. The Illinois estate exemption amount for 2011 is $2 million and has a top mariginal rate of 16%. Because of the differing federal and Illinois exemption amounts, careful planning is nec- essary to capture both exemption amounts. Ideally trusts should be structured take full advantage of the the Illinois exemption amount, where as of now there is no “portability” option which is discussed above. The new law also includes gift tax provisions that were much more substantial than expected. For the first time in nearly 10 years, you can transfer gifts tax-free, during your lifetime, equal to the same amount that you can transfer estate tax-free at your death. This gives rise to a variety of significant opportunities to transfer wealth to your children and grandchildren while you’re still alive. Beginning in 2013, the estate and GST exemptions are sched- uled to go back to the $1 million per taxpayer amount and a 55 percent maximum estate tax rate. Although we don’t know for certain what will happen two years from now, we do know that the current climate affords a variety of planning opportunities. When was the last time you reviewed your estate planning documents? It’s important to review how any formula clause in your will or trust impacts your spouse and other beneficiaries upon the first and second to die, especially if yours is a blended family. If your estate plan is set up to leave money to charity based on reducing your estate tax liability, review your documents to ensure they reflect your wishes in the current climate. In addition, pull out prenuptial and buy-sell agreements, and determine if they have any language that references the estate tax exemption. Have you ever wanted to transfer assets but not done so because of gift tax limitations? There are limitations on the amount that can be gifted to your beneficiaries during your lifetime without paying gift tax. Each person is allowed to gift an “annual exclusion” amount (the annual amount that can be transferred to a beneficiary free from gift tax). For 2011, this amount is $13,000 per beneficiary. Beyond annual exclusion gifts, individuals can use their lifetime Q good news — continued Q good news — continued on page 14