The document summarizes key aspects of the current federal corporate tax environment and various entity structures. It notes that corporate tax rates have been stable in recent years and some incentives for capital expenditures are set to expire at the end of 2013. It then compares the tax implications of using a C corporation, S corporation, partnership, or LLC for different income levels, showing that the optimal structure depends on the specific situation. The document encourages accelerating capital purchases to take advantage of expensing and bonus depreciation rules before they are reduced in 2014.

1. Corporate Tax Update
By Leo Parmegiani
Executive Tax Forum - November 7, 2013

2. Federal Corporate Tax Environment
• Surprisingly less aggressive
• Tax incentives for purchasing capital items exist but
expiring
• New regulations on capitalization contain helpful safe
harbors and de minimis tests
• Tax rates have been stable for years (some
discussions)
Executive Tax Forum - November 7, 2013
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3. Tax Rates
Top Brackets
Net Investment
Income
Individuals
Earned
Income
39.6%
3.8%
__
39.6%
43.4%
Income tax rate
Plus: Tax on Net Investment Income
Plus: Tax on Earned Income
40.5%
.9%
Top Bracket on Earned Income
Top Bracket on Net Investment Income
40.5%
43.4%
Capital Gain Rate
Qualified Dividend Rate
20%
20%
Individuals who own flow through entities such as Partnerships, LLCs and S Corporations would pay
marginal tax at these rates (assuming they are in the highest tax brackets).
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4. Corporate Tax Rates
Taxable income over-
But not over-
The tax is:
Of the amount over-
0
$50,000
15%
0
$50,000
75,000
$7,500 + 25%
$50,000
75,000
100,000
13,750 + 34%
75,000
100,000
335,000
22,250 + 39%
100,000
335,000
10,000,000
113,900 + 34%
335,000
10,000,000
15,000,000
3,400,000 + 35%
10,000,000
15,000,000
18,333,333
5,150,000 + 38%
15,000,000
35%
0
18,333,333
Flat 34%
Flat 35%
Some discussions in Congress (potentially bipartisan) to reduce the highest rate to 25
percent - to be competitive with many countries around the world.
Executive Tax Forum - November 7, 2013
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5. What Entity Should You Choose?
As usual under the tax law the answer is “it Depends!”
Choices:
•
•
•
•
C Corporation
S Corporation
Partnership
Limited Liability Company (taxed as a sole proprietorship)
New Taxes and Increased Individual Tax Rates do not settle the issue
Many factors to consider including:
•
•
•
•
State and local tax impact
Benefit plans
Reasonable compensation rules
Cash flow available to pay salaries
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6. Entity Comparisons
USING C CORPORATION WITH NO SALARY
(All scenarios assume married filing jointly)
TAXABLE
INCOME
TAX
RATE
TAX
C CORP INCOME
$
500,000
CORPORATE TAX
500,000
34%
$ 170,000
DIVIDEND ($500,000 170,000)
330,000
15%
49,500
$ 80,000
3.8%
3,040
HIGH INCOME ADDIT MED. TAX ($330,000 250,000)
$
222,540
OVERALL TAX USING C CORP WITH NO
SALARY
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7. Entity Comparisons
USING C CORPORATION WITH SALARY OF
$300,000
TAXABLE
INCOME
C CORP INCOME
TAX RATE
TAX
$200,000
SALARY
300,000
CORPORATE TAX
200,000
30.625%
$ 61,250
DIVIDEND ($200,000 - 61,250)
138,750
15%
20,813
SOCIAL SECURITY TAX
113,700
12.40%
14,099
MEDICARE TAX
300,000
2.90%
8,700
138,750
3.8%
5,273
50,000
0.9%
450
300,000
25.9%
77,726
HIGH INCOME ADDIT MED TAX ON DIVIDEND
(LESSER OF AGI OR DIVIDEND)
HIGH INCOME ADDIT MED TAX ON WAGES ($300,000 - 250,000)
INDIVIDUAL TAX
OVERALL TAX USING C CORP WITH SALARY OF $300,000
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$ 188,310

8. Entity Comparisons
USING C CORPORATION WITH SALARY OF $400,000
TAXABLE
INCOME
C CORP INCOME
TAX RATE
TAX
$ 100,000
SALARY
400,000
CORPORATE TAX
100,000
22.250%
$ 22,250
77,750
15%
11,663
SOCIAL SECURITY TAX
113,700
12.40%
14,099
MEDICARE TAX
400,000
2.90%
11,600
77,750
3.8%
2,955
150,000
0.9%
1,350
$ 400,000
27.09%
108,347
DIVIDEND ($100,000 - 22,250)
HIGH INCOME ADDIT MED TAX ON DIVIDEND
(LESSER OF AGI OR DIVIDEND)
HIGH INCOME ADDIT MED TAX ON WAGES ($400,000 - 250,000)
INDIVIDUAL TAX
OVERALL TAX USING C CORP WITH SALARY OF $400,000
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$ 172,263

9. Entity Comparisons
USING C CORPORATION WITH SALARY OF
$500,000
TAXABLE
INCOME
C CORP INCOME
$
SALARY
TAX
RATE
TAX
0
500,000
CORPORATE TAX
0
0%
SOCIAL SECURITY TAX
113,700
12.40%
14,099
MEDICARE TAX
500,000
2.90%
14,500
250,000
$
500,000
0.9%
2,250
29.13%
145,646
HIGH INCOME ADDIT MED TAX ON WAGES ($500,000 250,000)
INDIVIDUAL TAX
OVERALL TAX USING C CORP WITH SALARY OF $500,000
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$
0
$ 176,495

10. Entity Comparisons
USING LIMITED LIABILITY COMPANY - NO SALARY
OPTION
TAXABLE
INCOME
LLC INCOME
TAX RATE
TAX
$ 500,000
SELF EMPLOYMENT TAXABLE INCOME ( .9235)
461,750
SOCIAL SECURITY TAX
113,700
12.4%
$ 14,099
MEDICARE TAX
461,750
2.9%
13,391
HIGH INCOME ADDIT MED TAX ($461,750 - 250,000)
211,750
0.9%
1,906
$ 486,255
28.8%
140,203
FEDERAL TAX ($500,000 - .5 ($14,099+13,391)
$ 169,599
OVERALL TAX USING LLC WITH NO SALARY
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11. Entity Comparisons
USING S CORPORATION WITH SALARY OF
$300,000
TAXABLE
INCOME
S CORP INCOME
TAX RATE
TAX
$ 200,000
SALARY
300,000
SOCIAL SECURITY TAX
113,700
12.40%
$ 14,099
MEDICARE TAX
300,000
2.90%
8,700
50,000
0.9%
450
$ 500,000
29.13%
145,646
HIGH INCOME ADDIT MED TAX ON WAGES ($300,000 - 250,000)
INDIVIDUAL TAX
OVERALL TAX USING S CORP WITH SALARY OF $300,000
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$ 168,895

12. Entity Comparisons
USING S CORPORATION WITH SALARY OF
$400,000
TAXABLE
INCOME
S CORP INCOME
TAX RATE
TAX
$ 100,000
SALARY
400,000
SOCIAL SECURITY TAX
113,700
12.40%
14,099
MEDICARE TAX
400,000
2.90%
11,600
HIGH INCOME ADDIT MED TAX ON WAGES ($400,000 - 250,000)
150,000
0.9%
1,350
$ 500,000
29.13%
145,646
INDIVIDUAL TAX
OVERALL TAX USING S CORP WITH SALARY OF $400,000
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$ 172,695

13. Entity Comparisons
USING S CORPORATION WITH SALARY OF
$500,000
TAXABLE
INCOME
TAX
RATE
TAX
S CORP INCOME
$
SALARY
500,000
SOCIAL SECURITY TAX
113,700
12.40%
14,099
MEDICARE TAX
HIGH INCOME ADDIT MED TAX ON WAGES ($500,000 250,000)
500,000
2.90%
14,500
250,000
$
500,000
0.9%
2,250
29.13%
145,646
INDIVIDUAL TAX
OVERALL TAX USING S CORP WITH SALARY OF $500,000
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0
176,495

14. 2013 Year-End Business Tax Planning
• Generous tax deductions have been available for the purchase of capital
assets such as machinery, equipment, furniture and fixtures and in some
cases even real estate improvements.
• Taxpayers have been able to write-off from 50% - 100% of acquisition
costs under the bonus depreciation rules and up to $500,000 under the
Section 179 expensing law.
• These benefits are available through the end the 2013. A significant dropoff in benefits is slated for the new year unless Congress acts to extend
into 2014.
Takeaway – Immediate action may be required.
Accelerate Purchases to 2013!!
Caution – Taxpayer who has expiring NOL carryforwards
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15. Section 179 - Expensing limits for 2013
• For tax years beginning in 2013:
(1) Dollar limitation on the expensing deduction is $500,000; and
(2) Investment-based reduction dollar limitation starts to take
effect when property placed in service in the tax year exceeds
$2,000,000 (investment ceiling).
• Under current limits, deduction phases out completely when
eligible property exceeds $2,500,000 ($2,000,000 (investment
ceiling) + $500,000 (dollar limit)).
• For tax years beginning after 2013, maximum expensing limit is
scheduled to drop to $25,000, and investment ceiling is scheduled
to drop to $200,000.
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16. Section 179 Phaseout Example
• ABC Corp is a calendar-year taxpayer. In 2013, it buys and places in
service $2,300,000 of expensing-eligible 5-year MACRS property.
• ABC may only expense $200,000 of its 2013 purchases [$500,000
expensing limit − ($2,300,000 purchases − $2,000,000 beginning-ofphaseout amount)] and must depreciate the balance of its purchases
over its normal recovery period.
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17. Section 179 Planning
• Consider expensing election even where a less-than-full tax benefit is
available because of limitations. This way, the right to carry the
expensing deduction forward to other years will be preserved.
• As a general rule, a taxpayer should make the expensing election for
eligible property with the longest recovery period.
Example: In 2013, XYZ, a calendar-year taxpayer, buys and places in
service $500,000 of new 5-year MACRS property and $500,000 of new
7-year MACRS property. It doesn't purchase other property during the
year. If it elects to expense the 7-year property, XYZ can write off the
balance of its purchases over the 5-year MACRS recovery period. By
contrast, if it elects to expense the 5-year property, XYZ will have to
write off the balance of its purchases over the 7-year MACRS recovery
period.
•
Shortens the overall recovery period.
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18. Property Eligible for
Section 179 Expensing
• ... tangible personal property (generally, furniture, machinery and
equipment), depreciated under the MACRS rules regardless of its
depreciation recovery period;
• ... $250,000 of qualified real property; and
• ... Off-the-shelf computer software.
No requirement that the acquired property be new, thus, taxpayers may claim
expensing for otherwise eligible used property.
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19. First-Year Bonus Depreciation
• Under current law, a 50% first-year bonus depreciation allowance
applies to qualified property acquired and placed in service after
December 31, 2011, and before January 1, 2014.
• The adjusted basis of qualified property is reduced by the additional
50% depreciation deduction before computing the amount otherwise
allowable as a depreciation deduction for the tax year and any later
tax year.
• If Code Section 179 expensing is claimed, the amount expensed
"comes off the top" before the additional 50% first-year depreciation
allowance is computed.
• Then the taxpayer computes regular first-year depreciation.
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20. Bonus Depreciation Example
Scenario A
Hotel Inc., a calendar-year business, needs to buy $1,000,000 of five-year MACRS
property. If it does so before January 1, 2014, and places the property in service
before that date, Hotel Inc., in general, may claim a first-year depreciation
allowance of $600,000 [($1,000,000 × .50 = $500,000 bonus depreciation) +
($1,000,000 − $500,000 × .20 = $100,000 regular first-year depreciation)].
Scenario B
If Hotel Inc. waits until 2014 to buy the assets, and bonus first-year depreciation is
not extended, Hotel Inc.’s regular first-year depreciation allowance using the halfyear convention would be only $200,000 (20% of $1,000,000).
Quantified – Tax savings lost in 2013 would be $400,000 x 35% or $140,000.
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21. Combined Section 179 and
Bonus Depreciation Example
• Resort Inc., a calendar-year corporation, is close to buying $1,100,000 of new
five-year property. This will be its only equipment purchase for the year. Even
though it waits until the last quarter to buy the assets, Resort’s first-year
depreciation allowance will be $815,000:
Section 179 Expense plus
Bonus Depreciation
Cost Basis
$1,100,000)
Section 179
(500,000)
Adjusted Basis
$500,000
600,000)
50% Bonus Depreciation
(300,000)
Adjusted Basis
$300,000)
MACRS Depreciation (Mid-Quarter
Convention)
15,000
Total First Year Depreciation and Expensing Allowed
Executive Tax Forum - November 7, 2013
300,000
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$815,000

22. Bonus Depreciation Example
• If the bonus depreciation rules are not extended and Section 179
is diminished as scheduled, the incentive depreciation allowance
would be only $25,000.
• Total Depreciation and Section 179 for 2014 would be only
$215,000 [$25,000 plus (20 percent ($1,100,000 - $25,000)] even if
the asset was placed in service in the first quarter of 2014.
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23. Last Year for Extra-generous
Luxury Auto Depreciation Limits
• First-year depreciation deduction for new vehicles that qualify for
bonus depreciation is:
– $8,000 more than the first-year depreciation limit that would otherwise apply.
• New vehicles bought and placed in service in 2013 that qualify for
bonus first-year depreciation
– boosted first-year dollar limit is $11,160 for autos and $11,360 for light trucks or
vans .
• Taxpayers thinking of buying a new auto, light truck or van for
business use should buy vehicle & place in service in 2013.
• After 2013, first year amount reduced by $8,000.
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24. Expensing of Real Estate?
• Historically, Code Section 179 expensing available only for tangible personal
property, but now limited-time-only exception for certain types of real
property.
• For any tax year beginning in 2010, 2011, 2012, or 2013, a taxpayer may elect
to treat up to $250,000 of qualified real property as Code Section 179
property. After 2013, eligibility unavailable unless Congress extends it.
• Qualified leasehold improvement property
• Qualified restaurant property
• Qualified retail improvement
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25. What is Qualified Leasehold
Improvement Property?
• Interior building improvement
• Made “under or pursuant to a lease” by either lessor or lessee,
• Portion of building occupied exclusively by lessee,
• Placed in service > 3 years after date building first placed in
service.
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26. Improvements Not Treated as
Qualified Leasehold Improvements
• Code doesn’t define eligible building improvements
• Rather, lists property types that can't be so treated, such as:
... enlargement of building,
... elevator or escalator,
... structural component benefiting a common area, and
... internal structural framework of building.
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27. Qualified Leasehold Improvements
• The following types of improvements appear to qualify:
1)
2)
3)
4)
electrical or plumbing systems (including sprinkler systems);
permanently installed lighting fixtures;
ceilings and doors
non-load-bearing walls.
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28. Qualified Restaurant and
Retail Property
• What is qualified restaurant property?
– If > 50% of building's square footage devoted to preparation, &
seating for on-premises consumption of prepared meals.
• What is qualified retail improvement property?
– Any improvement to interior portion of building that is nonresidential
real property if:
... That portion is open to the general public and used in retail trade
or business of selling tangible personal property to general public,
and
... Improvement placed in service > three years after building first
placed in service.
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29. Section 199 - Domestic
Production Activities Deduction
• Business can claim a deduction if have income from domestic
manufacturing or other domestic activities = 9 percent of
smaller of:
a)
b)
Qualified production activities income (QPAI) for a year
- or Its taxable income without regard to the Section 199
deduction
Overall limit – can’t exceed 50 percent of W-2 wages allocable to domestic
production activities
•
results in reducing overall tax rates.
35% less [35% X 9%] = 31.85%
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30. Section 199 - Domestic
Production Activities Deduction
Qualified Production Activities Eligible include:
Manufacture, production, growth or extraction property such
as clothing, goods or food, computer software produced
either in whole or significant part within the U.S. including:
1)
2)
3)
4)
Film Production
Production of Electricity and other utilities
Construction or Renovation
Engineering and Architectural Services performed in the
U.S.
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31. Year End Tax Planning for Section 199
Usually revolves around two issues:
1. Planning for the W-2 deduction cap by accelerating
compensation to increase overall limit.
2. Realignment of business operations to increase domestic
production income.
Example: having some manufacturing in an overseas
facility and then shipping it back to the U.S. for further
processing that represents at least 20% of the total COGS –
then all income may qualify for Section 199 treatment.
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32. Capitalization vs.
Repairs Final Regulations
Executive Tax Forum - November 7, 2013

33. Capitalization Versus Repairs
• Final Regulations issued in September 2013
• Go way beyond what is a repair.
• Provide guidance on amounts paid to acquire, produce or
improve tangible property.
• Important new regulations will affect virtually ALL taxpayers.
• Generally effective for costs incurred in tax years beginning on
or after January 1, 2014.
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34. Some Highlights of the
New Capitalization Rules
• Unit of Property Modification for Buildings - Now required to analyze improvement costs relative to eight building
systems defined in the regulations (plumbing, electrical, HVAC, elevator, escalator, fire protection and alarm,
security and gas distribution) to determine proper treatment. Material improvements to any of these systems will
require capitalization even though the cost may be small relative to the entire building.
• Replacement of Major Components or Structural Parts of Buildings - Allow for a loss on the disposition or
replacement of a major component of a building (for example, a roof). Prior to final regulations, taxpayers were
required to continue to depreciate items which had already been replaced.
• De Minimis Safe Harbor - Allow a taxpayer to deduct amounts paid for tangible property if the costs are not greater
than specific dollar amounts determined at the invoice or item level if consistent with financial statements. The
dollar threshold is $5,000 per invoice or per item as substantiated. ($500 if no audited financial statements)
• New Annual Election - Small business taxpayers may elect a safe harbor for repairs, maintenance and
improvements to buildings as long as eligible property does not exceed 2 percent of the unadjusted basis of the
eligible building or $10,000.
• Overall Plan of Rehabilitation Doctrine Now Obsolete -The final regulations provide that indirect costs, such as
repairs incurred during a period of renovation, do not need to be capitalized if not related to the capitalized
improvement. The judicial doctrine which required all costs incurred as part of an overall plan of rehabilitation to be
capitalized is obsolete.
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35. Cost Segregation
Executive Tax Forum - November 7, 2013

36. What is Cost Segregation?
•
Cash Flow Improvement and Tax Deferral Strategy
–
Strategic Tax Savings tool - Designed to accelerate tax deductions and
improve cash flow through tax deferral.
–
Should be considered by all taxpayers that own, construct, renovate or
acquire real estate for business or investment purposes.
–
Primary goal is to identify construction related costs that can be
depreciated and deducted over a much shorter time frame.
–
Extremely valuable under current federal tax law which accelerates tax
write-offs for tangible personal (Non Real Estate) property.
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37. Improved Depreciation Write-offs
• Typically real estate is written off straight-line over 27½ and 39 year
periods for residential and non-residential property, respectively for tax
purposes.
• Thus, an annual depreciation deduction for a $1 million investment
would be only:
– Residential
$36,364
– Non-residential
$25,641
• A well-supported cost segregation study identifies costs which are
more appropriately categorized as land improvements, furniture and
fixtures and equipment (which generally have 5-15 year write-off
periods). Additionally, Accelerated Depreciation Methods would be
available .
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38. Suitable Property for Studies
•
Tax benefits are available for most commercial property
including:
–
Hotels/Motels/Resorts
–
Private Clubs and Golf Courses
–
Hi-tech Facilities
–
Restaurants, Shops and Banquet Halls
–
Parking Garages
–
Fitness and Recreation Centers
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