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Tax Strategies for Subcontractors
 

Tax Strategies for Subcontractors

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Webinar presentation given to the American Subcontractors Association.

Webinar presentation given to the American Subcontractors Association.

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Tax Strategies for Subcontractors Tax Strategies for Subcontractors Presentation Transcript

  • Tax Strategies For SubcontractorsAmerican Subcontractors Association Webinar Presented by Cord D. Armstrong, CPA, CCIFP Managing Director, CBIZ MHM, LLC
  • Circular 230 NoticeAny tax advice contained in this program is not intended to be used and cannotbe used for the purposes of avoiding any penalties that may be imposed by theInternal Revenue Code.
  • Agenda• Fiscal Cliff• American Taxpayer Relief Act of 2012 – Payroll Tax Cut (Expired) – Revised income tax rates effective 2013 – Revised capital gains and dividend rates – AMT Patch for 2012 – Limitations to Personal Exemptions and Itemized Deductions – Estate and Gift Tax Provisions – Extension of 179 and Bonus Provisions – Individual and Business Extenders• New Medicare Taxes for 2013 under the Health Care Act• Potential Tax Reform 3
  • Fiscal Cliff - Overview• Combination of tax increases due to the expiration of tax provisions, new taxes under the Affordable Care Act, and the $1.2T of mandatory spending cuts put in place by the Budget Control Act of 2011 (known as “sequestration”). All would be effective as of January 1, 2013.Expiring Taxes New Taxes • 2001 and 2003 tax cuts • Health care taxes • Payroll tax cut • Extenders • Estate tax relief Spending • AMT patch • Automatic spending cuts • Equipment expensing (“Sequestration”) 4
  • Fiscal Cliff – Tax Increases Billion 2001 and 2003 tax cuts $166 Payroll tax cut $125 AMT patch $119 Health care taxes $23 Stimulus tax cuts $21 Extenders $20 Estate tax $13 Capital asset expensing $8 Total Tax Increase $495 5
  • Fiscal Cliff – Impact• CBO projected that the automatic spending cuts plus expiration of tax cuts and extenders will send the US into a recession in 2013• Stock market could drop due to higher rates on capital gains and dividends• Nearly 90% of US taxpayers would pay more tax• Middle income household average tax increase: $3,000• IRS warned Congress if they don’t act by the end of the year it could delay the tax filing season 6
  • Fiscal Cliff – Key Issues (Post Election)• Major disagreement between Republicans and Democrats: The extension of the 2001 and 2003 tax cuts for families making $250,000 or more and individuals making $200,000 or more• The President seemed dead set on raising ordinary tax rates on the “wealthy”, but appeared to have backed off from the $200,000/$250,000 thresholds• Republicans proposed raising revenue through limiting or capping deductions but said any increases in rates are a non-starter 7
  • Fiscal Cliff – Timeline• December 3 – Geithner Proposal – Included two stages of tax increases and not much on spending cuts – Increase the two top marginal rates for higher income earners and raise taxes on their capital gains and dividends (no specific income levels) – $600 billion in undisclosed “additional taxes” – May include AGI-based phase-out of personal exemptions and itemized deductions 8
  • Fiscal Cliff – Timeline• Geithner Proposal (Continued) – AMT patch for individuals – Tax extenders for businesses (but not individuals) – Extension of the payroll tax cut or “alternative policy” – Extension of the bonus depreciation – Stage Two calls for open-ended tax reform for $1.6 trillion in tax increases with no deadline 9
  • Fiscal Cliff – Timeline• December 4 – Boehner’s counter offer – No increases in tax rates for high income earners – Plan would raise $800 billion through unspecified “tax reform” – $600 billion in savings from cuts to Medicare or by raising eligibility age 10
  • Fiscal Cliff – Timeline• December 16 – Boehner offers to raise marginal rates on income over $1 million – Includes new method of calculating benefits for entitlement programs known as “chained CPI” which would slow the growth of Medicare and other federal health programs 11
  • Fiscal Cliff – Timeline• December 17 – Obama counter offers with a proposal to raise the rates on household income above $400,000 – Includes $400 billion in entitlement savings, including changes in the CPI for Social Security – Delays across the board spending cuts from taking effect until Congress can pass an overhaul of the tax code – Proposes a permanent fix to AMT – Abandoned his call for renewal of the payroll tax cut or equivalent tax break 12
  • Fiscal Cliff – Timeline• December 18 - Boehner’s proposes his “Plan B” that would extend all Bush-era tax cuts for those making less than $1 million – Includes the AMT patch – Extend the 35% Estate Tax rate and the $5 million exemption – Lets sequestration go into effect • Immediately opposed by the White House 13
  • Fiscal Cliff – Timeline• December 20 – Plan B was pulled from a House vote due to lack of support• Boehner announces that the ball is now in the Senate’s court• December 21 – President leaves Washington for the Holiday• December 27 – Both sides blaming each other for inaction• Harry Reid in the Senate says the House needs to pass a bill to extend rates for most families and that speaker Boehner is running the House like a Dictator and is more concerned with holding on to his gavel than striking a deal 14
  • Fiscal Cliff – Timeline• December 30 (Sunday) – Senate leader Harry Reid (D) proposes raising rates on individuals making more than $360,000 and families making more than $450,000 – Minority leader Mitch McConnell (R) counters with individuals above $450,000 and couples who earn more than $555,000 – Senate Democrats are also against using “chained CPI” as a method for calculating future entitlement benefits 15
  • Fiscal Cliff – Timeline• December 30 (Sunday evening) – McConnell calls V.P. Biden into the negotiations to help come to a resolution – Talks continue between McConnell and Biden into Sunday evening and the two seem to agree on income levels of $400,000 (singles) and $450,000 (families) – McConnell finally takes chained CPI off the table 16
  • Fiscal Cliff – Timeline• December 31 (Late Monday) – Word comes out the both sides in the Senate are close to a deal – McConnell announces the they are in agreement on the tax issues (meaning they still can’t agree on the spending side) – The House later announces that there will not be a vote on any fiscal cliff deal (meaning that we will officially go over the cliff on New Years Eve) 17
  • Fiscal Cliff – Timeline• New Years Day – (2 a.m.) Senate passes the American Taxpayer Relief Act of 2012• Key Points include: – Taxes increases on the top 2% income earners – No significant spending cuts• January 1st - House members meet on the Senate bill and consider amendments to include spending cuts and send it back to the Senate• The word from the Senate is they will not vote on the bill if it is sent back to them• The House decides to put the Senate bill to an up-or-down vote and it passes• The President heads back to Hawaii and signs the bill the next day by autopen 18
  • American Taxpayer Relief Act of 2012 19
  • American Taxpayer Relief Act of 2012 –Expiration of the Payroll Tax Cut• An extension of the temporary 2% reduction of the social security payroll tax rate for employees and self- employed persons was not included in the bill – On January 1 2013, the employees’ share of FICA will increase from 4.2% to 6.2% 20
  • American Taxpayer Relief Act of 2012 –Ordinary Income Tax Rates• For 2013 the income tax rates will stay at 10%, 15%, 25%, 28%, 33% and 35% instead of moving to 15%, 28% 31%, 36% and 39.6% as would have occurred with the expiration of the tax cuts• However, a 39.6% rate will apply to individuals with income over $400,000 ($450,000 for joint filers; $425,000 for heads of households)• Caution: the rate could be as high as 43.4% on investment income if subject to the 3.8% surtax 21
  • American Taxpayer Relief Act of 2012 – CapitalGains and Dividend Rates• For 2013 the top rate for capital gains and dividends will permanently rise to 20% (up from 15%) for taxpayers with incomes exceeding $400,000 ($450,000 for joint filers)• Caution: the rate could be as high as 23.8% if subject to the 3.8% surtax• Good news for dividends as the rate on dividends was feared to go up as high as 39.6%• The rate is still 0% for taxpayers whose ordinary income is below the 25% rate 22
  • American Taxpayer Relief Act of 2012 – CapitalGain and Dividend Rates (Continued)• For taxpayers in the 25% ordinary bracket or above, but whose income level is below the $400,000/$450,000 thresholds, the rate on capital gains and dividends will remain at 15%• Caution: the rate could be as high as 18.8% if subject to the 3.8% surtax 23
  • American Taxpayer Relief Act of 2012 –Permanent AMT Relief• The AMT “Patch” Expired 12/31/11• The patch has routinely been extended in the past• The patch temporarily increases the AMT exemptions, which are not indexed for inflation – For example in 2011 the exemption for MFJ would be increased from $45,000 to $72,450• The Act makes the higher exemption amounts permanent which saves an estimated 30 million taxpayers from having to pay the AMT on their 2012 returns 24
  • American Taxpayer Relief Act of 2012 –Permanent AMT Relief (Continued)• The higher exemptions amounts are retroactively effective to the beginning of 2012• The increases in the exemption amounts are as follows: – Singles, from $33,750 to $50,600 – MFJ, from $45,000 to $78,750 – MFS, from $22,500 to $39,375• The exemption amounts are now indexed for inflation going forward• In addition many nonrefundable personal credits, including the residential energy credit will now reduce the AMT liability as well as the regular tax liability 25
  • American Taxpayer Relief Act of 2012 –Personal Exemption Phaseout (PEP)• Beginning in 2013 the Act reinstates the previously suspended Personal Exemption Phaseout for taxpayers with AGI over the following thresholds: – Single filers $250,000 – Married couples $300,000 – Heads of Household $275,000• Under the phaseout the total amount of personal exemption that can be claimed is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s AGI exceeds the applicable threshold 26
  • American Taxpayer Relief Act of 2012 –“Pease” Limitation• Beginning in 2013 the previously suspended limitation on itemized deductions is reinstated for taxpayers whose AGI are above the following thresholds (same as PEP) – Single filers $250,000 – Married couples $300,000 – Heads of Household $275,000• For taxpayers subject to the limitation the total amount of their itemized deductions is reduced by 3% of the amount by with the taxpayer’s AGI exceeds the above thresholds• The reduction is limited to 80% of the otherwise allowable itemized deductions 27
  • American Taxpayer Relief Act of 2012 – Estateand Gift Tax• The Estate and Gift tax rates and lifetime exemption were set to go back to 2001 levels under the expiration of the Bush-Era tax provisions – Top Rate of 55% (35% in 2012) – Exclusion amount of $1 million ($5 million in 2012, adjusted for inflation to $5.12 million)• The consensus was that they would eventually come up with a 45% rate with a $3.5 million exclusion for Estates and the Gift tax exemption would go back $1 million 28
  • American Taxpayer Relief Act of 2012 – Estateand Gift Tax (Continued)• Under the Act, for individuals dying and gifts made after 2012 the $5 million exemption (adjusted for inflation) remains for both estate, gift and GST taxes• The top rate is permanently increased from 35% to 40%• The top rate kicks in on taxable estates and gifts over $1 million (after taking into account the exemption)• The Act also maintains the portability rules for a deceased spouse’s unused estate tax exemption 29
  • American Taxpayer Relief Act of 2012 – Section179 Expensing• The Section 179 expensing provision is retroactively extended by the Act through 2014: – The limit was dropped from $500,000 in 2011 to $139,000 in 2012 and was set to revert back to $25,000 in 2013 – The Act keeps in place the 2011 level of $500,000 for the years 2012 and 2013 – The deduction begins to phase out when total qualified purchases for the year exceeds $2 million – Traditionally only tangible personal property qualifies for the deduction but the Act also reinstated the 2011 provision that allows the immediate deduction of up to $250,000 of qualified leasehold improvements, restaurant and retail improvements 30
  • American Taxpayer Relief Act of 2012 – BonusDepreciation• The percentage dropped from 100% in 2011 to 50% in 2012 and was set to expire starting in 2013• The Act also extends the 50% bonus depreciation provision to assets placed in service before January 1, 2014• The original use of the property must begin with the taxpayer, so used equipment will not apply for bonus depreciation• The property must have a recovery period of 20 years or less• Bonus depreciation is mandatory, but taxpayers can elect out (the election applies to all property in the class or classes of property for which the election is made)• Bonus depreciation is not required to be allocated to long-term contracts 31
  • American Taxpayer Relief Act of 2012 –Individual Tax Extenders• The election to deduct state and local general sales taxes instead of state income tax which expired at the end of 2011 was extended through 2013 and was retroactively reinstated for 2012• The child tax credit remains at $1,000 (was to revert back to $500 after 2012)• The exclusion in income from the discharge of indebtedness for a personal residence was set to expire at the end of 2012 and is now extended through 2013 32
  • American Taxpayer Relief Act of 2012 –Individual Tax Extenders• Tax free distributions from IRA’s for charitable purposes – Originally expired at the end of 2011 – Under the new law, qualified distributions from IRA’s for charitable purposes made prior to February 1, 2013 may be deemed to be made in 2012 – Also, cash distributions taken from IRA’s after November 30, 2012 and transferred to charity prior to February 1, 2013 may qualify as tax-free distributions in 2012 (assuming the distributions otherwise qualify for the exclusion) 33
  • American Taxpayer Relief Act of 2012 –Business Extenders (Beneficial toConstruction Industry)• The following business tax provisions that had expired at the end of 2011 were extended through 2013, retroactive to the beginning of 2012, including, but not limited to the: • The 15 year straight line cost recovery for qualified leasehold improvements, qualified restaurant property and qualified retail improvements • Five-year recognition period for S corporation built-in gains tax (originally was a 10 year period) • Seven year recovery period for motorsports entertainment complexes • Accelerated depreciation for business property on Indian reservations • Work opportunity tax credit (WOTC) • The research and experimentation (R&E) credit • Railroad track maintenance credit 34
  • American Taxpayer Relief Act of 2012 –Business Extenders (Beneficial toConstruction Industry)• Several energy incentives, most of which had expired at the end of 2011, were extended through 2013, including, but not limited to the: – Production credit for facilities that produce energy from wind facilities – Energy efficient new homes credit – Credit for alternative fuel vehicle refueling property – Cellulosic biofuel producer credit – Credit for biodiesel and renewable diesel used as fuel – Credit and outlay payments for ethanol 35
  • American Taxpayer Relief Act of 2012 – OtherNotable Provisions• The automatic spending cuts scheduled to go into effect on January 1st were deferred until March 1, 2013• Taxpayers may now transfer amounts from a qualified retirement plan to a qualified Roth plan (e.g. Roth 401(k)) without paying an early withdrawal penalty (this is listed as a revenue raiser in the bill to help pay for the deferred spending cuts)• The provision that would have drastically reduced Medicare payments to physicians has been deferred for another year• Federal long-term unemployment benefits have been extended for one year• The Federal milk subsidy has been extended for one year 36
  • New Medicare Taxes for 2013 37
  • New Medicare Taxes• Effective in 2013• Two new taxes: – Additional 0.9% tax on earned income – 3.8% surtax on unearned income• Generally impacts couples with income over $250,000 and individuals with income over $200,000• Enacted as part of 2010 healthcare reform legislation (Affordable Care Act or “ACA”)• IRS recently issued proposed reliance regulations on the operation of the two new Medicare taxes 38
  • Additional 0.9% Medicare Tax on Earned Income• Current structure: – Employee: • 6.2% OASDI tax on first $113,700 of wages (2013) – Rate was reduced to 4.2% for 2012 and 2011 • 1.45% HI tax on all wages • Employers subject to same tax of 7.65% – Self-employed: • 12.4% OASDI tax on first $113,700 (2013) of net SE income – Rate was reduced to 10.4% for 2012 and 2011 • 2.9% HI tax on all SE income • Above-the-line deduction for one-half of SE tax – Deduction was full 7.65% despite 2% reduction in OASDI tax in 2012 and 2011 39
  • Additional 0.9% Medicare Tax on Earned Income• Change in 2013: – Additional 0.9% HI tax on wages (to 2.35%) and net SE income (to 3.8%) in excess of the thresholds below – Additional tax is on employee’s contribution only (or ½ of SE individual’s contribution) Filing Status Threshold Married Filing Jointly $250,000 Single/Head of Household $200,000 Married Filing Separately $125,000 40
  • Additional 0.9% Medicare Tax on Earned Income• Unlike the OASDI ceiling which is applied based on the employee’s wages, the 0.9% additional Medicare tax is applied based on the combined wages of married couples filing jointly• This causes additional complications as it pertains to employee withholding 41
  • Withholding on 0.9% Medicare Tax• Employers are required to withhold the additional 0.9% tax on wages in excess of $200,000 whether married or not• Employers must disregard the wages received by the employee’s spouse• Implications: – If an employee’s wages are below $200,000 but when combined with the spouse’s wages they exceed $250,000, the couple may be under-withheld – If an employee’s wages are between $200,000 and $250,000 and the spouse has no wages, the couple may be over-withheld – The 0.9% tax is a tax for purposes of the underpayment of estimated tax penalty 42
  • 3.8% Medicare Tax on Unearned Income• Surtax on Net Investment Income (NII)• First time that FICA/Medicare taxes have been assessed on unearned income• Applies to individuals, trusts and estates• Considered a tax for purposes of the underpayment of estimated tax penalty• The proposed regulations attempt to define NII subject to the 3.8% tax 43
  • 3.8% Medicare Tax – Individuals• Individuals – 3.8% of the lesser of: • Net investment income, or • Excess of Modified AGI over the threshold amounts below – Modified AGI = AGI + foreign earned income exclusion Filing Status Threshold Married Filing Jointly $250,000 Single/Head of Household $200,000 Married Filing Separately $125,000 44
  • 3.8% Medicare Tax – Trusts and Estates• Trusts and Estates – 3.8% of the lesser of: • Undistributed net investment income, or • AGI over the amount at which the highest tax bracket is applicable ($11,950 for 2013) – Does not apply to simple trusts since, by definition, all income is distributed annually (but would apply to income distributed to beneficiaries) – Does not apply to grantor trusts since they are disregarded for income tax purposes (but would apply to income reported by grantor) 45
  • 3.8% Medicare Tax – Net Investment Income• Net Investment Income – Defined as investment income less otherwise allowable deductions properly allocable to such income• Includes three categories: – Gross income from interest, dividends, annuities, royalties and rents (other than such income derived in the ordinary course of an active trade or business) – Other gross income from any passive trade or business or business in the trading of financial instruments or commodities – Net gains attributable to the disposition of property (other than property held in an active trade or business)• Less: – Deductions properly allocable to such gross income or net gain 46
  • 3.8% Medicare Tax – Key Points• Taxpayer’s must have both NII and gross income over the applicable thresholds in order to be subject to the tax• The thresholds are NOT adjusted for inflation – This may cause a problem similar to the AMT in the future• The inclusion of passive activities in NII represents a huge shift in traditional tax planning – more emphasis will be placed on treating profitable activities as active instead of passive to avoid the 3.8% surtax, however • Passive losses may go unused • Net income from an active trade or business may be subject to self employment tax 47
  • 3.8% Medicare Tax – Key Points• Only property sold that was not held in a trade or business is included in net investment income – In the case of sales of interests in a partnership or S corporation we have to do some calculations in order to determine how much of the gain or loss is attributable to an active trade or business – The Proposed Regulations include a complex four step process to achieve this• The surtax also applies to income attributable to “working capital” 48
  • 3.8% Medicare Tax – Key Points• Net investment income is determined by taking into account the gross income or net gain from the three categories and reduced by allowable deductions that are “properly allocable” – Examples include, investment interest expense, investment fees, expenses related to rents, trade or business deductions and state and local income taxes – The allocation of state and local taxes between net investment income and other income can be determined under “any reasonable method” – The proposed regs. provide a safe harbor method of allocating state and local taxes based on the ratio of NII to gross income 49
  • 3.8% Medicare Tax – Key Points• The 2% limitation for miscellaneous deductions and the overall deduction limit of certain itemized deductions will apply in calculating the NII• Capital loss carryovers from years prior to 2013 can be used to offset gains• Investment interest expense carryover from years prior to 2013 can be used in calculating NII• Unused passive losses from years prior to 2013 can be used in calculating NII 50
  • 3.8% Medicare Tax – Key Points • The 3.8% Medicare tax does not apply to distributions from qualified retirement plans • However, those distributions still increase MAGI which could either – raise the taxpayer’s MAGI over the threshold amount, thus subjecting the taxpayer to the tax, or – increase the amount subject to the tax by increasing the spread between MAGI and the threshold amount • The 3.8% Medicare tax does not apply to investment income excludible from taxable income (e.g. municipal bond interest) 51
  • 3.8% Medicare Tax – Case Study Assume the following income: Interest income from various corporate bonds and bank $10,000 accounts Tax-exempt interest income from various municipal bonds $8,000 Qualified dividend income from various mutual funds and stock $12,000 investments Net long-term capital gains from the disposition of various $40,000 mutual funds and stock investments Regular IRA distribution $100,000 Net rental income from a building that Joe owns $15,000 Distributive ordinary trade or business income from an LLC in $20,000 which Joe does not materially participate Distributive net Section 1231 gain from the same LLC $10,000 Distributive ordinary trade or business income from an S $60,000 corporation in which Joe materially participates Distributive net Section 1231 gain from the same S corporation $50,000 52
  • 3.8% Medicare Tax – Case StudyNet investment income is calculated as follows: Interest income from various corporate bonds and bank accounts $10,000 Qualified dividend income from mutual funds and stock $12,000 investments Net long-term capital gains from the disposition of investments $40,000 Net rental income $15,000 Ordinary trade or business income from LLC in which Joe does $20,000 not materially participate Net Section 1231 gain from the LLC $10,000 Net investment income $107,000 53
  • 3.8% Medicare Tax – Case StudyModified adjusted gross income is calculated as follows: Interest income from various corporate bonds and bank accounts $10,000 Qualified dividend income from mutual funds and stock $12,000 investments Net long-term capital gains from the disposition of investments $40,000 Regular IRA distribution $100,000 Net rental income $15,000 Ordinary trade or business income from the LLC $20,000 Net Section 1231 gain from the same LLC $10,000 Ordinary trade or business income from the S corporation $60,000 Net Section 1231 gain from the same S corporation $50,000 Modified AGI $317,000 54
  • 3.8% Medicare Tax – Case StudyThe 3.8% Medicare contribution tax is calculated as follows: Modified AGI $317,000 Less Threshold $200,000 Modified AGI in Excess of Threshold $117,000 Lesser of Net Investment Income and Modified AGI in Excess of $107,000 Threshold Medicare Tax Rate 3.8% Medicare Contribution Tax $4,066 55
  • Planning Strategies to Reduce 3.8% Medicare Tax• Convert to a Roth IRA so future qualified retirement plan distributions don’t increase MAGI – Although regular IRA distributions are not subject to 3.8% tax, they are included in modified AGI – In prior example, if IRA distribution was from Roth IRA, modified AGI would have been reduced to $217,000, so the maximum subject to 3.8% tax would be reduced to $17,000 – If modified AGI (minus threshold amount) is greater than net investment income even without IRA distributions, no benefit to switching to Roth 56
  • Planning Strategies to Reduce 3.8% Medicare Tax• Realign Investment Strategies – Shift investments to growth securities that don’t produce dividends, i.e. tax-exempt bonds, insurance (with cash buildups) and annuities – Take advantage of installment sale treatment to spread passive income over several years – Time gains and losses to offset • Be careful of wash sale rules on loss positions • Gains not subject to wash sale rules – Shift investments to children • Avoid 3.8% tax if MAGI less than threshold • Kiddie tax may tax income at parents’ marginal rate (under 19 or under 24 and full time student) 57
  • Planning Strategies to Reduce 3.8% Medicare Tax• Passive Activities – Evaluate profitable passive activities to see if changes could be made to reach to the level of material participation. – Watch self-employment income from partnerships and LLC’s – Review passive activity rules to see if passive activities can be grouped with non passive activities to avoid passive income – Factors to consider, similarities, common ownership, geographical locations, interdependence of operations • The proposed regulations allow taxpayers a “fresh start” regrouping election to replace any previous grouping election• Consider Passive Loss investment opportunities to offset Passive Income 58
  • Potential Tax Reform 59
  • Potential Tax Reform• Upcoming Budget Negotiations – Raising the Debt Ceiling – Automatic Cuts Under Sequestration – March 1, 2013• “We can’t simply cut our way to prosperity”. “The deficit needs to be reduced in a way that is balanced. Everyone pays their fair share.” – President Obama, January 2, 2013• “Simply put, the tax code is a nightmare” “The Ways and Means Committee will pursue comprehensive tax reform in the new Congress” – Rep. Dave Camp, Chairman of the House Ways and Means Committee, January 2, 2013 60
  • Top 5% Income Earners paid 58.7% of theTaxesCategory AGI Cut Off Number Share of Income TaxTop 0.1% $1,432,890 137,982 17.1%Top 1% $343,927 1,380,000 36.7%Top 5% $154,653 6,899,000 58.7%Top 10% $112,124 13,798,000 70.5%Top 25% $66,193 34,496,000 87.3%Top 50% $32,396 68,991,000 97.7%Bottom 50% <$32,396 68,991,000 2.3%Source: Tax Foundation, based on IRS returns 2009
  • Potential Tax Reform• The issue on individual rates my be settled but some popular deductions may be in jeopardy down the road as Congress looks to raise more revenue• Various tax reform studies have looked at eliminating or capping many popular deductions including: – Mortgage interest deduction – Charitable deductions – Employer sponsored health insurance exclusion – State and local taxes – Interest exclusion on state and local bonds 62
  • Obama Tax Plan – Individuals• What did not get in the new law – Cap certain deductions or exclusions at 28% for taxpayers in the 36% and 39.6% brackets – Eliminate the carried interest “loophole” for hedge fund managers and other similar service providers – Eliminate a special depreciation “loophole” for corporate jets (this would increase the period for depreciation from 5 years to 7 years and would raise $2 billion over 10 years) – Replace the AMT with the “Buffett Rule” – taxpayers with income over $1 million must pay an effective federal income tax rate of at least 30%. 63
  • Potential for Corporate Tax Reform• February 2012-The President’s Framework for Business Tax Reform (the Framework) – Rough blueprint for the President’s plan • To cut corporate tax rates to internationally competitive levels • Simplify the corporate tax rules • Reduce or eliminate tax loopholes in the current system 64
  • Corporate Reform Under the Framework• Reduce top corporate rate from 35% to 28%• Reduction or elimination of many popular deductions and credits, for example; – Accelerated depreciation – Interest expense deduction – LIFO inventory accounting – Oil and gas tax preferences – Other tax breaks for specific industries• According to the Framework these tax expenditures create a tax system that distorts business decision making and results in a less efficient allocation of capital as seen by the various tax rates by industry 65
  • Effective Actual Corporate Tax Rates By Selected Industry 2007-2008* Industry Tax RateAgriculture, forestry, Fishing and Hunting 22%Mining 18%Utilities 14%Construction 31%Manufacturing 26%Wholesale and Retail Trade 31%Transportation and Warehousing 19%Information 25%Insurance 25%Finance & Holding Companies 28%Real Estate 23%Leasing 18%All Services 29%Average Effective Actual Tax Rate 26%*Source: U.S. Treasury, Office of Tax Analysis
  • Corporate Reform Under the Framework• Proposes to strengthen U.S. manufacturing by offering incentives, including cutting the top corporate rate on manufacturing to 25% by – Increase in Domestic Production Activities Deduction (DPAD) – And an even lower rate (approximately 18%) for “advanced manufacturing”• Establish greater parity between large pass-through entities and C corporations – Previously the Treasury had proposed taxing any business with more than $50 million in gross receipts as a corporation 67
  • Corporate Reform Under the Framework• Framework calls for simplification for small businesses and adding incentives, such as – Allowing companies with up to $10 million in gross receipts to use the cash method of accounting (current limit is $5 million) – Allowing small businesses to expense up to $1 million under IRC Section 179 – Expanding and simplifying the Small Business Health Care Tax Credit (including an increase in the eligibility cut-off from 25 to 50 employees) 68
  • Obama Proposals – International• Retain the worldwide taxation system vs. territorial tax system – A territorial system would not tax the foreign income of U.S. individuals or corporations• Impose a minimum tax on foreign profits of US companies to discourage taxpayers from keeping funds outside the US (current estimate is up to $2 trillion in cash overseas)• Protect US jobs by: – Draw manufacturing investments to the U.S. by providing a 20% tax credit for locating jobs and business activity in the U.S. – Prohibiting tax deductions for shipping jobs overseas 69
  • Summary/Key Takeaways• Fiscal Cliff• The American Taxpayer Relief Act of 2012 – Payroll Tax Cut not included – AMT Relief for 2012 – Equipment Expensing for 2012• 2013 Changes – Changes to Individual Income Tax rates – Changes to the Estate and Gift rates – New Medicare Taxes • 0.9% Medicare tax on earned income • 3.8% Medicare tax on unearned income 70
  • Summary/Key Takeaways• Potential Future Tax Reform – Effect on Individual Deductions – Capping Itemized Deductions – Buffet Rule – Potential Corporate Tax Reform • Broaden the tax base and lower the rate – Establish parity between corporations and large passthroughs – International Taxation 71
  • QUESTIONS? 72
  • CBIZ MHM, LLC Contact Information Cord D. Armstrong, CPA, CCIFP Managing Director  602.264.6835  carmstrong@cbiz.com 73
  • Thank You 74