TAX NEWS - 2010

Three Ways Small Businesses Can Save on Taxes

This year's federal income tax rate is highly favorable to small businesses. If your company pays you a dividend in 2010, the maximum federal income tax rate will be only 15%. Likewise, 2010 corporate payouts or stock sales that generate long-term capital gains will be subject to a maximum 15% federal tax rate.

Those rates are set to expire after this year. Wall Street Journal columnist Bill Bischoff suggests three ways to take advantage of these low tax rates.


- Take Low-Taxed Dividends This Year

If your profitable C corporation has a healthy amount of earnings and profits (or E&P), shareholders should consider taking dividends this year, instead of risking a bigger (though deferred) tax hit down the road.


- Low-Taxed Stock Redemption Deal This Year

Another way to convert some of your C corporation wealth into cash is with a stock redemption deal, where you sell back some or all of your shares to the company, says Bischoff. To the extent of your corporation's E&P balance, any stock redemption payment is generally treated as a taxable dividend. The IRS provides several exceptions to this general rule, so you might want to consult your tax adviser.


- Sell Stock This Year

From a federal income tax perspective, selling shares this year and paying no more than 15% on the resulting gains (assuming you've held the shares for over a year) beats paying more than that on gains from sales in later years.