The New Test Every Tax Strategy Must Pass

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The new Health Care Bill had plenty of hidden tax traps in it. It makes sense that we’re just now discovering how much this is going to impact the small business owner since, after all, the Bill was over 2000 pages long and it’s going to take a while to go through it all.


One of the new standards we have from the Bill is Economic Substance. This has always been the rule, but now it’s actually in the IRS Code. Effective after March 2010, there must be an Economic Substance to tax planning. In other words, you can’t enter into any kind of tax planning move if it’s solely meant to save on taxes.

There are two things you must be prepared to prove, if the IRS ever questions you. Prove that both the:

  • Transaction changes in a meaningful way the taxpayer’s economic position (apart from the tax effects).
  • Taxpayer has a substantial purpose for entering into the transaction (apart from the tax effects).

Courts often found that transactions had “economic substance” if the taxpayer had a reasonable expectation of pre-tax profits. Many courts have ruled that the expected pre-tax profits did not need to be adjusted to take into account the present value of these profits. The new code that has been added says that “the present value of the reasonably expected pre-tax profit from the transaction” must be “substantial in relation to the present value for the expected net tax benefits that would be allowed if the transaction were respected.”

That’s the new law. Are you ready? Or more importantly, is your tax plan ready?

If you haven’t signed up yet for this month’s coaching classes on Audit Survival, please go to today to get registered. We had our first session last Tuesday, but you can still listen to it and be part of the next one on June 15, 2010.

The new Economic Substance test is an integral part of any strategy and you need to know what your return needs to show in case you are ever audited.

The coaching classes are just $67/month. You’ll find lots of information and direct access to Megan and me on these critical issues.

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