As year-end approaches, our clients and their CPAs are scrambling to determine if individual clients should shift income and deductions between this year and next, a task made complicated by uncertainty over 2011 tax rates triggered by the looming EGTRRA sunsets. While planning for individuals takes center stage, C corporations also should decide when and how to shift income and deductions between 2010 and 2011. As a general rule, C corporations will benefit from the deferral of income and the acceleration of deductions just as individuals normally would from year to year if tax rates remained constant. In this connection, corporations don't have to factor in the prospect of increasing tax rates—the EGTRRA sunsets will not affect corporate rates and there are no serious proposals on the table to raise corporate rates for 2011. Thus, in the typical case, a C corporation will benefit by deferring income to 2011 and/or accelerating deductions into this year.

However, acceleration of income may be advisable in some cases. Take, for example, a corporation subject to the 39% “bubble.” Corporate taxable income between $100,000 and $335,000 is taxed at the rate of 39% to phase out the benefits of the 15% and 25% brackets that cover a corporation's first $75,000 of taxable income.

Taxable income between $75,000 and $100,000, and between $335,000 and $10 million, is taxed at 34%. Taxable income over $10 million is taxed at 35% except that there is also a 38% “bubble” that applies to corporate taxable income between $15 million and $18,333,333 to eliminate the benefit of the 34% rate.

Assume a C corporation expects taxable income of about $90,000 for 2010 but expects its income to go well over $100,000 in 2011. Accelerating $10,000 in income from 2011 to 2010 will save about $500 in taxes, since the $10,000 will be taxed at only 34% instead of 39% ($10,000 times 5% equals $500). This represents a return of 14.7% on the $3,400 used to make the early tax payment ($500 divided by $3,400).

Observation: Similar considerations apply to situations where the acceleration of income from 2011 into 2010 will prevent the corporation from moving into other higher tax brackets next year, say from the 15% bracket into the 25% bracket, or from the 35% bracket into the 38% “bubble” that applies to corporate taxable income between $15 million and $18,333,333.

Qualifying for small corporation AMT exception. The tentative minimum tax of a corporation is zero for any tax year if the corporation's average annual gross receipts for all three-tax-year periods ending before that tax year do not exceed $7,500,000. The gross receipts test is applied by substituting $5,000,000 for $7,500,000 for the first three-tax-year period of the corporation that is taken into account under the test. In other words, the $7,500,000 amount is reduced to $5,000,000 for the corporation's first three-tax-year period.

Illustration: A calendar-year corporation was created on January 1, 2003. To qualify as a small corporation for 2010, (1) the corporation's average gross receipts for the three-tax-year period 2003 through 2005 must be $5,000,000 or less, and (2) the corporation's average gross receipts for the 2004 through 2006 period, the 2005 through 2007 period, the 2006 through 2008 period and the 2007 through 2009 period must be $7,500,000 or less. If the corporation qualifies for 2010, the corporation will qualify for 2011 if its average gross receipts for the three-tax-year period 2008 through 2010 also is $7,500,000 or less. If the corporation does not qualify for 2010, it cannot qualify for 2011 or any later year.

Thus, a corporation such as the one in the illustration should consider deferring income to 2011 if necessary to keep average annual gross receipts for the three-tax-year period 2008 through 2010 at $7,500,000 or less. This will preserve the AMT exemption for 2011.

Observation: Under Code Sec. 38(c), eligible small business (ESB) credits (defined below) determined in tax years beginning in 2010, may offset AMT liability and increases the extent to which ESB credits can offset regular tax liability. ESBs are businesses that (1) are corporations the stock of which is not publicly traded, partnerships or sole proprietorships and (2) have average annual gross receipts, for the three-tax-year period preceding the tax year, of no more than $50 million.

Accelerating or deferring income can save estimated tax break. Corporations (other than certain “large” corporations, see below) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year. Otherwise, they must pay estimated taxes based on 100% of the current year's tax. However, the 100%-of-last-year's-tax safe harbor isn't available unless the corporation filed a return for the preceding year that showed a liability for tax. A return showing a zero tax liability does not satisfy this requirement. Only a return that shows a positive tax liability for the preceding year makes the safe harbor available.

Recommendation: A corporation (other than a “large” corporation) that anticipates a small net operating loss for 2010 (and substantial net income in 2011) may find it worthwhile to accelerate just enough of its 2011 income (or to defer just enough of its 2010 deductions) to create a small amount of net income for 2010. This will permit the corporation to base its 2011 estimated tax installments on the relatively small amount of income shown on its 2010 return, rather than having to pay estimated taxes based on 100% of its much larger 2011 taxable income. Also, by accelerating income from 2011 to 2010, the income may be taxed at a lower rate in 2010, e.g., at 15% instead of at 25% or 34%. However, where a 2010 NOL would result in a carryback that would eliminate tax in an earlier year, the value of the carryback should be compared to the cost of having to pay only a small amount of estimated tax for 2011.

Recommendation: Generally speaking, a taxpayer will be treated as a “large” corporation only if it had taxable income of $1 million or more in any one of the three preceding tax years. As a result, a corporation that didn't reach that threshold in 2008 or 2009 but expects net income of $1 million or more in 2011 and later tax years will have an additional incentive for deferring income into (or accelerating deductions from) 2011. If such a shifting of income or deductions lets the corporation avoid reaching the $1 million threshold in 2010, it will be able to use the 100%-of-last-year's-tax safe harbor in 2011.