Tax Planning To Prepare For Today and Tomorrow

TAX PLANNING TO PREPARE FOR
TODAY AND TOMORROW
Presented by Plante & Moran’s Tax Team

webinars.plantemoran.com

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


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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


State of the Current Tax Environment

General
 Uncertainty
 Penalties
 Information reporting
 Closing “loopholes”
 Enforcement


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



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



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



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



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



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



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


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


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



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%



Rate of Return from Accelerating Capital Gains
 The return on investment from accelerating the tax on capital gain
income is more than 33%

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



Rate of Return from Accelerating Dividend Income
 The return on investment from accelerating the tax on capital gain
income is 164%

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



Rate of Return from Accelerating Income



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



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



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



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)



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



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



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


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


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



§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



§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



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



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


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


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



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



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



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



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



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



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



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


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


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



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



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


Q&A


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Tax Planning To Prepare For Today and Tomorrow

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