Tax benefits of retirement plans

July 1, 2002
My CPA told me about an IRS tax credit that helps offset some of the costs of retirement plan setup. Can you give me some more information?

Charles Blair, DDS
John McGill, MBA, CPA, JD

My CPA told me about an IRS tax credit that helps offset some of the costs of retirement plan setup. Can you give me some more information?

The 2001 Tax Act added Section 45E to the law. Begin ning this year, it provides a nonrefundable credit equal to 50 percent of the first $1,000 of administrative and retirement education start-up costs for any small business that adopts a new qualified defined-benefit or defined-contribution retirement plan. The credit is only available for the first three years of the plan's existence. To qualify, the practice must not have more than 100 employees and the plan must cover at least one staff member. In addition to the 50 percent tax credit, the remaining portion of the costs incurred are fully deductible.

I own my office building, which is now fully depreciated and too small for my current practice. Some time ago, I bought a commercial lot in a more desirable part of town. I would like to begin construction on a new office building. Can I avoid capital-gains taxes on the sale of my current building if I reinvest the money into the new one within six months?

Possibly. The IRS recently issued Revenue Procedures 2000-37, allowing so-called "reverse" tax-free exchanges where the new office building is purchased prior to the sale of the old one. However, strict conformity with IRS requirements is necessary to qualify for tax-free treatment.

In DeCleene vs. Commissioner, 115 TC 457 (11/17/00), the taxpayer tried to set up a reverse tax-free exchange. He had the party interested in acquiring his office building purchase the land from him and own it while a new building was being constructed, which was financed by the taxpayer. Once completed, the buyer then gave the recently completed building to the taxpayer in exchange for the property that he wanted.

In this situation, the Tax Court held that there was a taxable sale of the property, not a like-kind exchange. The buyer had never acquired the benefits and burdens of ownership of the replacement property since there was an agreement between the parties that the two properties would be of equal value.

I recently sold my practice and shut down my retirement plan, rolling over the proceeds into my IRA. I am planning to wait until age 70 to begin drawing benefits from the IRA, but I understand that the distribution rules have changed. Is this correct?

Yes. Recently, the IRS issued new regulations under Section 401(a)(9) that substantially simplify the calculation of amounts required to be distributed from qualified retirement plans and IRAs. The new rules establish a single table that any doctor can use to calculate his/her minimum required distribution beginning at age 701/2, by plugging in his age and the prior year-end balance of this retirement account or IRA.

The new rules eliminate the need for doctors to recalculate their life expectancy and determine a designated beneficiary by age 701/2. The new rules will provide greater flexibility for most doctors, allowing them to substantially reduce the required distributions in most cases.

While the new table is applicable to virtually every situation, the regulations continue to permit a longer payout period if the beneficiary is a spouse and is more than 10 years younger than the employee.

The information provided in this column is based upon the current Internal Revenue Code, regulations, IRS rulings, and court cases as of the date of publication. This column is not to be construed as legal or tax advice with respect to any particular situation. Contact your tax attorney or other adviser before undertaking any tax-related transaction.

Dr. Blair is a nationally known consultant and lecturer, and is a member of the American Academy of Dental Practice Administration.

McGill is a tax attorney, CPA, and MBA, and is the editor of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($177 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217, or call (704) 424-9780.

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