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Tax Planning To Prepare For Today and Tomorrow
1. TAX PLANNING TO PREPARE FOR
TODAY AND TOMORROW
Presented by Plante & Moran’s Tax Team
webinars.plantemoran.com
2. Tax Planning to Prepare for Today and Tomorrow
Today’s Presenters
Mark Jolley, Tax Partner
Ann Arbor, MI
734.302.6923
mark.jolley@plantemoran.com
Kurt Piwko, Tax Manager
Macomb, MI
586.416.4948
kurt.piwko@plantemoran.com
Michael Petersmark, Tax Manager
East Lansing, MI
517.336.7527
michael.petersmark@plantemoran.com
webinars.plantemoran.com
3. Housekeeping Items
About Today’s Webinar
Slides are available for download from your
webcast console. A recording of today’s webinar
will be added to our website in a few days.
We will allow time at the end of the
presentation to respond to your questions, but
please feel free to submit questions at any time.
This is a CPE-eligible webinar. Throughout the
webcast participation, pop-ups will appear on
your screen. Participants must respond to at
least 75% of these pop-ups in order to receive
CPE credit.
3 webinars.plantemoran.com
4. Tax Planning to Prepare for Today and Tomorrow
Agenda
State of the Current Tax Year-end Tax Planning
Environment Consent Dividends
General §1202 Stock
Pending Legislation Roth IRA Conversions
Congressional Calendar IC-DISC
Expectation of Enactment of Tax Legislation Enacted in 2010
Tax Legislation
2010 HIRE Act
Tax Planning in the Current Health Care Act
Environment Education Jobs Act of 2010
Maximum Future Tax Rates 2010 Small Business Act
Considerations in Tax Planning
Other Current Developments
Rate of Return on Tax Planning
Uncertain Tax Position
Accounting Methods Reporting
Other Tax Planning Ideas Domestic Production Activities
Choosing a Form of Doing Deduction
Business International Tax Issues
4 webinars.plantemoran.com
5. State of the Current Tax Environment
General
Uncertainty
Penalties
Information reporting
Closing “loopholes”
Enforcement
5 webinars.plantemoran.com
6. State of the Current Tax Environment (cont.)
Pending Legislation on the Congressional Agenda
Estate tax reform
Tax extenders
Sunset of Bush tax cuts in 2011
Medicare “doc fix”
Annual appropriations
Other
6 webinars.plantemoran.com
7. State of the Current Tax Environment (cont.)
Pending Tax Legislation – Estate Tax Reform
2010 rules
No estate tax
Decedents receive a carryover basis in property inherited
2011 rules (current law)
55% tax rate
$1 million exemption
Proposals
45%, $3.5 million exemption
35%, $5 million exemption
Infinite other variations
Priority
Likely last tax item on the agenda
7 webinars.plantemoran.com
8. State of the Current Tax Environment (cont.)
Pending Tax Legislation – Tax Extenders
Provisions to be extended
AMT patch
Research and development credit
State and local sales tax deduction
Shorter depreciation for leasehold and restaurant improvements
New markets tax credit
Tuition and fees deduction
Proposed revenue raisers
Assess self-employment tax on professional S corporations and partnerships
Tax carried interest as ordinary income
Proposals
Extend most items 1 year
Extend most items 2 years
Extend “desirable” provisions permanently and let the rest expire
Priority
More important than estate tax, less important than Bush tax cuts
8 webinars.plantemoran.com
9. State of the Current Tax Environment (cont.)
Pending Tax Legislation – Bush Tax Cuts
Provisions expiring
Ordinary income, capital gain, and dividend tax rate decreases
Personal exemption phase-out elimination
Itemized deduction phase-out elimination
“Marriage penalty” relief
Increased child tax credit, dependent care credit, and adoption credit
Increase of §179 immediate fixed asset expensing
Employer provided tuition assistance non-taxable
Proposals
Permanently extend everything
Permanently extend cuts for “middle class” only
Extend all tax cuts for 2 years
Priority
Top tax priority but behind “doc fix” and appropriations
9 webinars.plantemoran.com
10. State of the Current Tax Environment (cont.)
Pending Non-Tax Legislation
Medicare “doc fix”
23% fee cut for Medicare service providers
Takes effect on December 1, 2010
Proposal exists to extend through the end of 2011
Annual appropriations
Government currently operating without a 2011 fiscal year budget
Operating on a “Continuing Resolution” expiring on December 3, 2010
Other
10 webinars.plantemoran.com
11. State of the Current Tax Environment (cont.)
Congressional Calendar
Congress returned to Washington on November 15
Week largely filled with party issues and organizing Congressional
leadership when the new Congress reconvenes in January
Began a one week recess on November 22 for Thanksgiving
Lawmakers returned to Washington on November 29
Intended to be beginning of actual work period
“Doc fix” and appropriations bill likely taken up first
Lawmakers intended to recess for the year on December 3
Staff have indicated that this is no longer realistic and Congress will stay
in session for an unspecified period
11 webinars.plantemoran.com
12. State of the Current Tax Environment (cont.)
Expectation on Enactment of Tax Legislation
Scenario 1 (Ideal)
All legislation passed before year-end
Scenario 2 (Possible)
Extenders and Bush tax cut legislation passed before year-end to allow
for necessary income tax planning
Scenario 3 (Unfortunately Realistic)
Some legislation impacting 2010 gets deferred until early 2011
Scenario 4
Who knows
12 webinars.plantemoran.com
13. Tax Planning in the Current Environment
Maximum Future Tax Rates
2010 2011 ‐ 2011 – 2013
Current Obama
Law Proposal
Maximum marginal 35.0% 39.6% 39.6% 43.4%*
income tax rate
Maximum long term 15.0% 20.0% 20.0% 23.8%*
capital gain rate
Maximum qualified 15.0% 39.6% 20.0% 23.8/43.4%*
dividend rate
C‐Corporation 35.0% 35.0% 35.0% 35.0%
* Includes 3.8% unearned Medicare contribution tax
13 webinars.plantemoran.com
14. Tax Planning in the Current Environment (cont.)
Considerations in Tax Planning
Traditional planning
Accelerate deductions
Defer income
Tax planning with looming tax rate increases
Accelerate income
Defer deductions
Uncertainty
Whether the tax rate increases will get postponed or eliminated by
Congress
If the tax rates get postponed or eliminated, will it occur prior to the
end of 2010
Even the best planning strategy can be derailed if Congress
retroactively changes the rules
Value of planning ideas involving timing can be more valuable
Should think of tax planning as investment opportunity
14 webinars.plantemoran.com
15. Tax Planning in the Current Environment (cont.)
Rate of Return from Accelerating Ordinary Income
The return on investment from accelerating the tax on ordinary
income is more than 13%
Ignores the consideration of state taxes
Ordinary Income 2010 2011
Taxable Ordinary Income 1,000,000 1,000,000
Tax Rate on Ordinary Income 35.00% 39.60%
Income Tax on Ordinary Income 350,000 396,000
Tax Savings by Accelerating Income 46,000
Investment Made 350,000
Tax-Free IRR from Accelerating Income 13.14%
15 webinars.plantemoran.com
16. Tax Planning in the Current Environment (cont.)
Rate of Return from Accelerating Capital Gains
The return on investment from accelerating the tax on capital gain
income is more than 33%
Ignores the consideration of state taxes
Capital Gain Income 2010 2011
Taxable Capital Gain Income 1,000,000 1,000,000
Tax Rate on Capital Gain Income 15.00% 20.00%
Income Tax on Capital Gain Income 150,000 200,000
Tax Savings by Accelerating Gain 50,000
Investment Made 150,000
Tax-Free IRR from Accelerating Income 33.33%
16 webinars.plantemoran.com
17. Tax Planning in the Current Environment (cont.)
Rate of Return from Accelerating Dividend Income
The return on investment from accelerating the tax on capital gain
income is 164%
Ignores the consideration of state taxes
Dividend Income 2010 2011
Taxable Dividend Income 1,000,000 1,000,000
Tax Rate on Dividend Income 15.00% 39.60%
Income Tax on Dividend Income 150,000 396,000
Tax Savings by Accelerating Income 246,000
Investment Made 150,000
Tax-Free IRR from Accelerating Income 164.00%
17 webinars.plantemoran.com
18. Tax Planning in the Current Environment (cont.)
Rate of Return from Accelerating Income
18 webinars.plantemoran.com
19. Tax Planning in the Current Environment (cont.)
Accounting Methods – One Year Items
Delay payment of certain liabilities deductible only if paid
within 2 ½ or 8 ½ months of year-end
Income & property taxes
Compensation
Retirement plan payments
Delay filing an accounting method change for one time
deduction accelerations
Prepaid insurance
Property taxes
Self-insured health insurance accruals
Depreciation corrections or cost segregations
Cash method taxpayers can accelerate cash receipts and
defer payment of expenses
19 webinars.plantemoran.com
20. Tax Planning in the Current Environment (cont.)
Accounting Methods – Multi-Year Items
Depreciation
Elect slower depreciation methods
Elect longer depreciation periods
Elect out of bonus depreciation or §179 expensing
Elect to amortize research and development expenses
Advisability of any multi-year planning item must be weighed
against the rate of return provided over that period
If cost of capital/opportunity cost is greater than the rate of
return, the planning idea may not be worth the investment
Risk of uncertainty of future tax law is magnified when
multiple years are at issue
20 webinars.plantemoran.com
21. Tax Planning in the Current Environment (cont.)
Other Tax Planning Ideas
Defer recognition of capital losses
If future appreciation potential on various investments are similar,
sell the investment with the lowest basis first
Accelerate recognition of capital gains
If the asset is intended on being held for only a relatively short
period of time, selling and rebuying to harvest gain at a lower rate
may be advisable
Consider existing capital loss carryforwards
Accelerate payments of dividends from related corporations
Defer payments of state and local income taxes, property taxes,
or charitable contributions
Consider itemized deduction phase-out that may be reinstated in
2011 as well as AMT implications
21 webinars.plantemoran.com
22. Tax Planning in the Current Environment (cont.)
Other Tax Planning Ideas (cont.)
Convert regular retirement accounts to Roth accounts
May be even more advantageous if net operating losses exist so
that itemized deductions would otherwise go unused
Elect to carryforward net operating losses instead of carrying
back
Alternative Minimum Tax (AMT)
There is no proposed increase in AMT rates
Increase in regular tax rates will cause a larger gap between
regular tax and AMT which will pull more taxpayers out of AMT
Getting pulled out of AMT may allow for increased tax planning
related to AMT limited deductions (e.g., state and local tax
deductions) or AMT limited credits (e.g., research and
development credit)
22 webinars.plantemoran.com
23. Tax Planning in the Current Environment (cont.)
Choosing a Form of Doing Business
C Flow- Cost/ 2013 Tax Rate 2010 Tax Rate
Corporation Through (Savings) Differential Differential
Tax on Operations 340,000 434,000 (94,000) -9.40% -1.00%
Tax on Dividends 157,080 - 157,080 15.71% 9.90%
Total Tax 497,080 434,000 63,080 6.31% 8.90%
Effective Rates 49.71% 43.40% 6.31%
Double tax generally makes a C corporation structure more expensive
overall (even if tax rates do increase)
The exit strategy from the business is also a critical factor with
significant tax consequences
Net present value of all cash flows throughout the life of the business,
including on disposition, must be evaluated to determine ideal structure
State taxes can have a significant impact on any analysis
23 webinars.plantemoran.com
24. Tax Planning in the Current Environment (cont.)
Choosing a Form of Doing Business (cont.)
Corporation can be beneficial if:
Income can be controlled to take advantage of lower tax brackets
Dividends can be limited over time
If all shareholders are also employees, cash flow needs can be
satisfied with wages instead of dividends
The business is held for a very long period of time
The business does not appreciate in value over time
Tax attributes such as net operating losses or credit carryovers
already exist
The business has significant current cash flow needs so that lower
current tax rates supersede all other considerations
24 webinars.plantemoran.com
25. Tax Planning in the Current Environment (cont.)
Choosing a Form of Doing Business (cont.)
There is no single answer for all business
The choice must be made on a holistic basis
Converting a business from a pass-through entity to a C
corporation, or vice versa, may have its own advantages and
disadvantages
Any evaluation involves a significant amount of projections and
assumptions which may prove to be inaccurate
Risk of projecting future tax law exists in this area more than
others
25 webinars.plantemoran.com
26. Year-end Tax Planning
Consent Dividends & Bypass Elections
Strategy accelerates dividends into 2010 that would have been paid
in a later year
Applies to S corporations that have accumulated earnings from a
period when it was taxed as a C corporation
A dividend is deemed paid to the shareholder and deemed contributed
back into the S corporation
Shareholder taxed on the dividend but receives basis in their stock for
the same amount
26 webinars.plantemoran.com
27. Year-end Tax Planning (cont.)
Consent Dividends & Bypass Elections (cont.)
Strategy applicable to both situations where tax rates are rising
and where tax rates remain the same
Consent dividends are best utilized in the following situations
Suspended losses exist
Tax basis or at-risk basis limitations
Immediate cash flow needs exist
Ownership is shifting to other related parties
Shareholder is elderly
Sale of the company may occur in the near future
Excess net passive income tax may be assessed at some point in the
near future
27 webinars.plantemoran.com
28. Year-end Tax Planning (cont.)
§1202 Small Business Stock
100% of the gain from the sale of eligible small business stock can
be excluded from income
Applies only to stock issued between September 27, 2010 and January
1, 2011
Gain excluded from income not subject to AMT
Requirements
Issuer of the stock must be a C corporation
Stock must be issued for money, property or compensation for services
Business must have assets less than $50 million
Business cannot be in an ineligible business such as financial services,
farming, professional services, hotel, restaurant and others
Stock must be held for at least 5 years to qualify
Excluded gain may not exceed the greater of $10 million or 10
times the original investment in the corporation
28 webinars.plantemoran.com
29. Year-end Tax Planning (cont.)
§1202 Small Business Stock (cont.)
While the application of this rule may be limited, there may be
opportunities to take advantage of it where it may not otherwise
be apparent
Form corporations in 2010 with an intent to acquire a qualifying
business at a later date
Capitalize new corporations with partnership interests
Business economics may stay the same but new form may
eliminate future tax on the sale of the business
May be able to take advantage of lower corporation income tax
rates in the meantime
Transfer existing C corporation to a new holding company in a taxable
transaction
Have a new C corporation acquire certain assets from related
companies
Little guidance exists on these rules so caution is urged with any
planning strategy implemented
29 webinars.plantemoran.com
30. Year-end Tax Planning (cont.)
Roth IRA Conversions
Certain retirement accounts can be rolled over into Roth IRAs
Includes traditional IRAs, nondeductible IRAs, and certain pension and
profit-sharing plans
Beginning in 2010, no income limitations exist to be eligible for
rollovers
Rollovers are generally taxable
For rollovers occurring in 2010, income from rollover is treated as
follows:
Default: Income spread evenly between 2011 and 2012
Election: Income taxed entirely in 2010
Consider impact of future tax rates on when rollovers occur and which
income recognition method is selected
Can be a powerful planning technique when NOLs exist from
business losses
30 webinars.plantemoran.com
31. Year-end Tax Planning (cont.)
Interest Charge Domestic International Sales Corporation (IC-DISC)
Converts ordinary income into qualified dividends
Can provide benefits if the ordinary income tax rates are higher than
dividend tax rates
Most indications suggest that this will continue to be the case at least
for another 2 years
Benefits based on goods manufactured in the U.S. and exported to
foreign countries
Benefits can be based on either taxable income or sales from exports
Example
$1 million of export sales could result in a $40,000 commission
Company would deduct commission at ordinary tax rates
Shareholder of IC-DISC records commission income as a dividend
Tax rate differential results in an overall $8,000 tax savings in
2010
31 webinars.plantemoran.com
32. Tax Legislation Enacted in 2010
Summary of Major Legislation
Hire Incentives to Restore Employment Act (“2010 HIRE Act”)
Signed March 18, 2010
Patient Protection and Affordable Care Act & Health Care and
Education Reconciliation Act of 2010 (“Health Care Act”)
Signed March 23, 2010 and March 30, 2010
Education Jobs and Medicaid Assistance Act (“Education Jobs Act of
2010”)
Signed August 18, 2010
Small Business Jobs Act of 2010 (“2010 Small Business Act”)
Signed September 27, 2010
14 other tax bills were enacted (so far) that impact 2010 taxes
Most provisions in this legislation had only minor impacts on tax law or
major impacts but to very narrow areas
32 webinars.plantemoran.com
33. Tax Legislation Enacted in 2010 (cont.)
2010 HIRE Act
6.2% employer OASID payroll tax abatement
Abated for wages earned from March 19, 2010 to December 31, 2010
Maximum benefit of $6,622 per employee hired
Applies only to unemployed individuals hired after February 3, 2010
Cannot have been employed for more than 40 hours during the 2
months prior to hiring
Business tax credit for hiring unemployed individuals
Credit is the lesser of $1,000 or 6.2% of the employees wages over a
52-week period
Applies to same employees described above
Only eligible if employee is retained for 52 consecutive weeks
33 webinars.plantemoran.com
34. Tax Legislation Enacted in 2010 (cont.)
2010 HIRE Act (cont.)
Extended increased §179 expensing levels through December 31,
2010
2010 Small Business Act increased this even further
Created a number of new disclosure and withholding requirements
for interests in foreign financial assets and foreign entities
Rules are very complicated and IRS has yet to provide detailed
guidance on their implementation
Penalties for failure to provide required disclosure face stiff penalties
Usually begin at $10,000 but can be significantly larger for some
issues
Any taxpayer who holds foreign assets or investments should consult
their tax advisor to determine
34 webinars.plantemoran.com
35. Tax Legislation Enacted in 2010 (cont.)
Health Care Act
Health Care Act reaches far outside of just tax
Visit the following link for several webinars sponsored by Plante &
Moran dedicated to the tax and non-tax implications of this new law
http://www.plantemoran.com/perspectives/webinars/Pages/tax-
webinars.aspx
2010 - Small employer health care tax credit
Credit equal to 35% of health care costs paid but only if the employer
covers at least half the cost of coverage
Employers with less than 10 employees and annual wages of less than
$25,000 may qualify for the full credit
Credit phases out for employers with up to 25 employees and up to
$50,000 of annual compensation
In many cases, the cost to comply with and calculate the credit may
exceed the credit itself
35 webinars.plantemoran.com
36. Tax Legislation Enacted in 2010 (cont.)
Health Care Act (cont.)
2010 – Codified economic substance doctrine
Requires transactions to meaningfully change the taxpayer’s economic
position and requires that the taxpayer have a substantial purpose for
engaging in the transaction
Federal tax benefits generally do not count
20%-40% strict liability penalty applies if transactions do not meet
requirements
2011 – Reporting of health benefit value on W-2
IRS has optionally deferred this reporting until 2012 (i.e., for benefits
paid in 2012)
Questions remain about what is considered health coverage and how
self-insured plan benefits are calculated
2011 – Over the counter drugs no longer eligible for reimbursement
from FSA or HSA
36 webinars.plantemoran.com
37. Tax Legislation Enacted in 2010 (cont.)
Health Care Act (cont.)
2012 – 1099 reporting requirement
Requires businesses to report essentially all payments in excess of $600 to
IRS on form 1099
Applies to payments made in 2012 and later years
A significant effort is underway to repeal this provision
2013 – Medicare surcharges
Applies if AGI exceeds $200,000 ($250,000 for joint returns)
.9% surcharge on earned income
3.8% surcharge on unearned income
Interest, dividends, rents, royalties, capital gains, income from a
business that is a passive activity
Does not include tax exempt income or distributions from retirement
accounts
2013 – 7.5% floor on itemized medical expense deduction increases to
10%
Individuals aged 65 and older will be exempt from this rule until 2018
37 webinars.plantemoran.com
38. Tax Legislation Enacted in 2010 (cont.)
Education Jobs Act of 2010
Includes a variety of international tax and foreign tax credit
reforms
Eliminates foreign tax credit splitting
Reduces foreign tax credits on certain foreign asset acquisitions
Restricts treaty use to recourse U.S. income as foreign
Limits use of foreign tax credits on certain §956 deemed dividends
Repeals 80/20 rules and reinstates withholding
Repeals advanced earned income tax credit
38 webinars.plantemoran.com
39. Tax Legislation Enacted in 2010 (cont.)
2010 Small Business Act
Extends bonus depreciation into 2010
Increased §179 immediate fixed asset expensing
Applicable to 2010 and 2011 tax years
Maximum expense is $500,000
Benefits phase out if asset purchases exceed $2 million
Added certain leasehold, restaurant and retail property to the list of
assets eligible to be expenses
S corporation built-in gain tax suspended for 2011 if the S election
was made prior to 2007
Previous laws suspended the built-in gains tax in 2009 if the S election
was made prior to 2003 and in 2010 if the S election was made prior to
2004
Eliminates substantiation requirements and depreciation limitations
for employer provided cell phones
39 webinars.plantemoran.com
40. Tax Legislation Enacted in 2010 (cont.)
2010 Small Business Act (cont.)
Eligible small businesses (or their owners) able to carryback certain
2010 business credits 5 years instead of 1 and those credits may
offset AMT
An eligible small business must have less than $50 million of average
gross receipts over the prior 3 years
Increases the exclusion from income on gain from the sale of
qualified small business stock from 75% to 100%
Applies to stock issued between September 27, 2010 and December
31, 2010
Gain also excluded from AMT
Self-employed taxpayers able to deduct cost of health insurance
from self employment income for 2010
Eligible taxpayers able to rollover 401(k), 403(b) and 457(b)
accounts into Roth versions of those accounts
40 webinars.plantemoran.com
41. Other Current Developments
Uncertain Tax Position Reporting
Schedule UTP now requires corporations which have recorded FIN
48 liabilities for U.S. federal tax issues on their financial
statements to disclose information about those issues on their tax
returns
For 2010 and 2011, only corporations with $100 million or more of
assets are required to report
For 2012 and 2013, asset threshold decreases to $50 million
For 2014, asset threshold decreases to $10 million
Generally does not require reporting of recorded FIN 48 issues
occurring before 2010
41 webinars.plantemoran.com
42. Other Current Developments (cont.)
Domestic Production Activities Deduction
Deduction based on a percentage of qualifying income earned from
production activities occurring in the U.S.
For 2010, deduction percentage is increased from 6% to 9%
Deduction is a Tier 1 issue for the IRS
Issue required to be reviewed when under audit
9% deduction level will likely increase the scrutiny on future audits
42 webinars.plantemoran.com
43. Other Current Developments (cont.)
International Tax Issues
IRS has reorganized its Large & Mid-Size Business Unit (LMSB) and
renamed it the Large Business & International Unit (LB&I)
Reorganization will result in significantly more personnel being
allocated to auditing international tax issues
More audits will have international auditors or specialists assigned
from the beginning
IRS is continuing its enforcement of compliance initiatives
Looking for completion of proper disclosures, proper withholding
on payments made to foreign persons, proper application of
deferral and foreign tax credit rules
Penalties are becoming the norm when issues are encountered
whether the issues are intentional or unintentional
43 webinars.plantemoran.com
44. Other Current Developments (cont.)
International Tax Issues (cont.)
Report of Foreign Bank and Financial Account (Form 90-22.1 or
“FBAR”)
Required to be filed by any “person” that holds an interest in a foreign
financial account of greater than $10,000 at any time during the year
Person includes business entities as well as individuals and may
require reporting at multiple levels of a “tiered” business structure
An interest in an account may include a direct ownership interest or
simply signatory authority over an account
May require that CFOs and other financial personnel within a
business file an FBAR even though they do not own an account
Penalties for failure to file the report when required can result in
penalties ranging from $10,000 to 50% of the account balance (up to
$100,00) and criminal penalties can be assessed
44 webinars.plantemoran.com
46. Tax Planning to Prepare for Today and Tomorrow
Today’s Presenters
Mark Jolley, Tax Partner
Ann Arbor, MI
734.302.6923
mark.jolley@plantemoran.com
Kurt Piwko, Tax Manager
Macomb, MI
586.416.4948
kurt.piwko@plantemoran.com
Michael Petersmark, Tax Manager
East Lansing, MI
517.336.7527
michael.petersmark@plantemoran.com
webinars.plantemoran.com