A higher return on experience.         2011 Tax Update10 timely topics in 100 minutes                                 webi...
Moderator            Annette Tenerelli-Lemke            Tax Partner            734.302.6407            Annette.Tenerelli-L...
A higher return on experience.Current Tax Climate                        and planning opportunities                       ...
Presenters             Mike Monaghan             Partner, National Tax Office             586.416.4943             Mike.Mo...
Agenda Current tax environment Pending tax reform proposals Tax planning opportunities                                 ...
Current Tax Law:Rising Tax Rates – Unearned Income                                 6   webinars.plantemoran.com
Example:2011-2013 Tax on Ordinary Income                                   7   webinars.plantemoran.com
PM Perspective Each planning situation is unique. Need to consider various tax reform proposals. Conventional planning ...
Pending Tax Reform Proposals Super Committee    6 Democrats and 6 Republicans    Assigned with determining $1.5 trillio...
Tax Planning Opportunities Short term accelerations     State and local tax deposits     Property taxes     Charitable...
Tax Planning Opportunities Election to forgo net operating loss carryback     Outlook on tax rates affects decision to c...
Tax Planning Opportunities Accelerated depreciation methods    Cost segregation adjustments    Section 179 elections   ...
Entity Choice Changing tax rates impact the entity choice decision.    Pass-through entities may be less advantageous if...
Example:2011-2013 Pass-through vs. C Corporation                                  14       webinars.plantemoran.com
A higher return on experience.Health Care Reform                                 webinars.plantemoran.com
Presenters             James Minutolo             Senior Manager, National Tax Office             513.744.4722            ...
Status of Legislation and Law SuitsEnacted March 23, 2010  Staggered effective dates from date of enactment through 2018....
Don’t Ignore Health Care Reform Many provisions are already effective. More become effective every year. Complete repea...
Selected Currently Effective Provisions Extended coverage for children to age 26 (2010 – except   grandfathered plans) S...
Selected Provisions Effective in 2012 Expanded 1099 reporting (2012 – Repealed) W-2 enforcement of health cost reporting...
Selected Provisions Effective in 2013 Increased Medicare Tax (0.9% additional on excess earned  income; 3.8% on excess un...
Selected Provisions Effective in 2014 Large employer health care mandate (penalties of $2,000 or   $3,000 per uncovered e...
Selected Provisions Effective in 2018 40% excise tax on “Cadillac” plans becomes effective                               ...
What Should I Be Doing Now? Have someone in your organization who is specifically  responsible for developing and impleme...
A higher return on experience.Tax Accounting Methods                and why they are important to you                     ...
Presenters             Kurt Piwko             Senior Manager, National Tax Office             586.416.4948             Kur...
What is a Method of Accounting? Method used to determine the amount of income or expense to  recognize    Controls both ...
Why is a Method of Accounting Important? Methods of accounting cannot be changed by the taxpayer  without the consent of ...
Tax Planning - Opportunities Changing between methods can accelerate deductions    Personal and real property taxes     ...
Tax Planning – Exposure Mitigation Changing from an impermissible method to a permissible method    Inventory reserves  ...
Tax Planning – Exposure Mitigation (cont.) Changing from an impermissible method to a permissible method    Other accrua...
Appendix: Other Accounting Method ChangeExamples Cash vs. Accrual    Cash method is generally available to most small bu...
Appendix: Other Accounting Method ChangeExamples (cont.) Cash and Volume Discounts    Many taxpayers record cash or volu...
A higher return on experience.                    Entity Choice                                 webinars.plantemoran.com
Presenters             Andy Covode             Senior Tax Manager             513.744.4730             Andy.Covode@plantem...
Terminology Pass-through entity – An entity taxed as an S corporation, a   partnership, or a sole proprietorship S corpo...
Non-Tax Considerations Legal liability protection of owners Expense of formation and operation      Organizational docu...
Non-Tax Considerations   Taxability of transfers of property to entity   Capital structure flexibility and basis   Rais...
Tax Considerations C corporation     Entity pays Federal tax on income earned     Shareholders taxed on dividends recei...
Schedule of Maximum Tax Rates                                40   webinars.plantemoran.com
Example – 2011 Tax on Operating Income                                 41      webinars.plantemoran.com
Example (cont.) - 2011 Tax on Distributions                                    42        webinars.plantemoran.com
Example (cont.) - Summary of 2011 Tax Rates C corporations generally pay less Federal tax than pass-through    entities o...
Summary There is no single answer for all businesses. The choice must be evaluated on a holistic basis to include consid...
A higher return on experience.Transaction Planning                                   webinars.plantemoran.com
Presenters             Mark Jolley             Partner, National Tax Office             734.302.6923             Mark.Joll...
Overview   C Corporation: Stock sale versus asset sale   Stock sale: Exclusion of gain on sale of Section 1202 stock   ...
C Corporation: Stock Sale vs. Asset Sale When a C corporation is ultimately sold in a taxable sale, the sale   may be str...
C Corporation: Stock Sale vs. Asset SaleExample: Sale of C CorporationAssumptions:                            Observations...
C Corporation: Stock Sale vs. Asset SaleExample: Adjustment for tax benefitObservations: Because of the purchase price ad...
Gain exclusion under Section 1202 Section 1202 provides that the gain on sale of §1202 stock may be   excluded from incom...
Section 1202 Stock - Qualifications Stock must be issued by C corporation. Stock must be acquired as original issue in e...
Qualified Small Business Criteria Domestic C Corporation with aggregate gross assets less than   $50,000,000 from 8/10/93...
Section 1202 - Planning Acquisition or start-up tax vehicles     Form new companies between now and 12/31/2011 with spec...
Section 1202 - ExampleObservations: The elimination of tax at the shareholder level makes this same transaction   discuss...
Section 338(h)(10) Election Section 338(h)(10) allows the seller of stock in a corporation as sale   of assets to the buy...
Section 338(h)(10) Election Implications:S Corporation Deemed sale of assets could trigger built-in gains tax, if the   c...
A higher return on experience.               5 minute break                                 webinars.plantemoran.com
A higher return on experience.           Estate Planning                                 webinars.plantemoran.com
Presenters             Dawn Jinsky             Senior Tax Manager             248.223.3642             Dawn.Jinsky@plantem...
Current Law and Scheduled Changes for 2013                                61     webinars.plantemoran.com
Opportunities Take action today while the exemption is high, tax rates are low,   and interest rates are low! We may not ...
Personal Balance Sheet What is it?   Summary of personal assets and liabilities showing overall net worth   Outlines tit...
64   webinars.plantemoran.com
A New Planning Concept Called Portability Basic concept Common questions include:    What are the benefits?    What ar...
A higher return on experience.Investment Planning                                     webinars.plantemoran.com
Presenters             Jim Baird             Partner, Chief Investment Strategist – PMFA             269.567.4552         ...
Wealth Management Industry At a Glance                                 68      webinars.plantemoran.com
Market Volatility: Investors Cannot Control ItBut Can Use It To Their Advantage   Excessive levels    of volatility can   ...
Capital Losses: Points to Remember Capital Gains Tax Rates Rising? Given the severe  budget deficits and the historically...
Tax Benefits of Municipal Yields CreateOpportunity    Recent declines          in Treasury     yields, and the     expecta...
Other Considerations Asset location matters. Consideration of the tax  efficiency of a portfolio can result in superior a...
DisclosuresPast Performance Does Not Guarantee Future Results. All investments include risk andhave the potential for loss...
A higher return on experience.     State & Local Tax           Illinois, Ohio, & Michigan Updates                         ...
Presenters             Bob Woolley             Partner, Tax Services             614.222.9160             Bob.Woolley@plan...
Presenters             Curtis Ruppal             Partner, SALT Practice Leader             616.643.4069             Curtis...
Illinois Tax Act Highlights Corporate Income Tax Rate     Increased from 4.8% to 7% for taxable years beginning on or af...
Illinois Update Angel Investment Credit Program Unitary Business Group changes Electronic filing programs     New EFT ...
A higher return on experience.     State & Local Tax                                 Ohio Update                          ...
Ohio Budget Bill Highlights  Governor John Kasich signed Am Sub HB 153 on 06/30/11  Repealed the Ohio estate tax applica...
Ohio Update  Department of Taxation closed seven district offices including Akron,    Cincinnati, Cleveland, Dayton, Tole...
A higher return on experience.     State & Local Tax                                 Michigan Update                      ...
Michigan Tax Reform Highlights Effective repeal of MBT on 12/31/2011 CIT effective 1/1/2012; no direct business tax on f...
Michigan Update Importance of proper planning for transition from MBT to CIT    Fiscal year taxpayers    Timing of inco...
A higher return on experience.International Tax Planning  Issues for US Owned Foreign Business Operations                 ...
Presenters             Bill Henson             Partner, International Tax Services             248.375.7311             Bi...
US Tax Considerations US structure can make a difference    Partnership or S corporation    C corporation US treatment...
Deferral of Income Foreign corporation income not subject to tax until repatriated     Powerful planning technique     ...
Taxation of Dividends Tax rate depends on US status     C corporation, Partnership, S corporation, Individuals Capital ...
Taxation of Foreign Branch Branches or “Flow-Through” Entities taxed currently    Can elect flow-through treatment for s...
A higher return on experience.                   Tax Solutions                                 Year-end reminders         ...
Presenters             Nathan Buchalski             Senior Manager, Tax Solutions Practice Leader             734.302.6960...
Research & Development (R&D) Tax Credit   For new or improved products or processes   Qualifying cost   Wages, supplies...
Research & Development (R&D) Example Taxpayer is an Ohio software development company and has   35 developers making an a...
Domestic Producers Activity Deduction (DPAD) Qualifying Activities     MPGE Must be calculated on an item by item basis...
DPAD Example Taxpayer has taxable income of $4,000,000 and manufactures   products as well as resells third part products...
Cost Segregation/Fixed Asset Analysis Cost segregation for new buildings Review capitalize vs. expense                  ...
Cost Segregation Example with100%Bonus Depreciation Taxpayer is building an apartment building for $15 million.   Below i...
Thank You     Thank you for attending!     To view a complete calendar of upcoming Plante Moran webinars, visit webinars.p...
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2011 Tax Update

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2011 Tax Update

  1. 1. A higher return on experience. 2011 Tax Update10 timely topics in 100 minutes webinars.plantemoran.com
  2. 2. Moderator Annette Tenerelli-Lemke Tax Partner 734.302.6407 Annette.Tenerelli-Lemke@plantemoran.com 2 webinars.plantemoran.com
  3. 3. A higher return on experience.Current Tax Climate and planning opportunities webinars.plantemoran.com
  4. 4. Presenters Mike Monaghan Partner, National Tax Office 586.416.4943 Mike.Monaghan@plantemoran.com Amy Ciminello Tax Specialist, National Tax Office 614.222.9044 Amy.Ciminello@plantemoran.com 4 webinars.plantemoran.com
  5. 5. Agenda Current tax environment Pending tax reform proposals Tax planning opportunities 5 webinars.plantemoran.com
  6. 6. Current Tax Law:Rising Tax Rates – Unearned Income 6 webinars.plantemoran.com
  7. 7. Example:2011-2013 Tax on Ordinary Income 7 webinars.plantemoran.com
  8. 8. PM Perspective Each planning situation is unique. Need to consider various tax reform proposals. Conventional planning methods for deferral of income and acceleration of deductions apply to short-term manipulations of income. Items with long term effects need more consideration due to scheduled increases in tax rates starting 2013. 8 webinars.plantemoran.com
  9. 9. Pending Tax Reform Proposals Super Committee  6 Democrats and 6 Republicans  Assigned with determining $1.5 trillion deficit-reduction measures over a 10-year period  Plan is due 11/23/11 9 webinars.plantemoran.com
  10. 10. Tax Planning Opportunities Short term accelerations  State and local tax deposits  Property taxes  Charitable contributions Long term accelerations  Planning for NOL  Installment sales Consider applicability of alternative minimum tax 10 webinars.plantemoran.com
  11. 11. Tax Planning Opportunities Election to forgo net operating loss carryback  Outlook on tax rates affects decision to carryback NOL  Other considerations: • Cash flow needs • Likelihood of future taxable income • Time value of money 11 webinars.plantemoran.com
  12. 12. Tax Planning Opportunities Accelerated depreciation methods  Cost segregation adjustments  Section 179 elections  Bonus depreciation on new assets • 100% through 12/31/2011 Other Accounting Methods 12 webinars.plantemoran.com
  13. 13. Entity Choice Changing tax rates impact the entity choice decision.  Pass-through entities may be less advantageous if individual rates increase and corporate rates stay the same.  With the individual tax rates subject to an increase (as high as 43.4% for tax year 2013), pass-through entities may be disadvantaged. 13 webinars.plantemoran.com
  14. 14. Example:2011-2013 Pass-through vs. C Corporation 14 webinars.plantemoran.com
  15. 15. A higher return on experience.Health Care Reform webinars.plantemoran.com
  16. 16. Presenters James Minutolo Senior Manager, National Tax Office 513.744.4722 James.Minutolo@plantemoran.com Robert Kouza Senior Tax Manager 248.223.3781 Robert.Kouza@plantemoran.com 16 webinars.plantemoran.com
  17. 17. Status of Legislation and Law SuitsEnacted March 23, 2010  Staggered effective dates from date of enactment through 2018.  With a few small exceptions, law remains effective and effective dates for many key provisions have passed or are looming in the near future.Law Suits  Multiple suits at varying points of progress.  11th Circuit Court of Appeals found individual mandate unconstitutional.  6th Circuit Court of Appeals found individual mandate constitutional.  Conflict among circuits sets up a Supreme Court challenge. 17 webinars.plantemoran.com
  18. 18. Don’t Ignore Health Care Reform Many provisions are already effective. More become effective every year. Complete repeal is unlikely. Law suits may overturn some provisions but unlikely to invalidate entire statute, especially the tax provisions. 18 webinars.plantemoran.com
  19. 19. Selected Currently Effective Provisions Extended coverage for children to age 26 (2010 – except grandfathered plans) Small employer health insurance credit (2010 – No more than 25 FTEs with average comp less than $25,000) Nondiscrimination rules for fully insured plans (2010 – enforcement deferred pending further guidance) W-2 reporting of health plan costs (2011 – enforcement deferred until 2012 for large employers; 2013 for employers issuing fewer than 250 W-2s in 2011) OTC medications not eligible for tax-free reimbursement (2011 – most plans should have been amended) 19 webinars.plantemoran.com
  20. 20. Selected Provisions Effective in 2012 Expanded 1099 reporting (2012 – Repealed) W-2 enforcement of health cost reporting for employers that issue 250 or more W-2s in 2011 20 webinars.plantemoran.com
  21. 21. Selected Provisions Effective in 2013 Increased Medicare Tax (0.9% additional on excess earned income; 3.8% on excess unearned income - $200,000 MAGI single, $250,000 MAGI MFJ) $2,500 cap on flexible spending account contributions 21 webinars.plantemoran.com
  22. 22. Selected Provisions Effective in 2014 Large employer health care mandate (penalties of $2,000 or $3,000 per uncovered employee for employers with 50 or more FTEs) Individual health care mandate (penalty on individuals who fail to carry qualifying coverage) Health care vouchers (repealed) State health care exchanges required to be active 22 webinars.plantemoran.com
  23. 23. Selected Provisions Effective in 2018 40% excise tax on “Cadillac” plans becomes effective 23 webinars.plantemoran.com
  24. 24. What Should I Be Doing Now? Have someone in your organization who is specifically responsible for developing and implementing a strategy to address health care reform. Identify your team of advisors and make sure they know you are going to be looking to them for guidance about how to deal with health care reform. Collect information – employee census and cost and utilization data. 24 webinars.plantemoran.com
  25. 25. A higher return on experience.Tax Accounting Methods and why they are important to you webinars.plantemoran.com
  26. 26. Presenters Kurt Piwko Senior Manager, National Tax Office 586.416.4948 Kurt.Piwko@plantemoran.com Rob Shefferly Senior Manager, National Tax Office 586.416.4927 Robert.Shefferly@plantemoran.com 26 webinars.plantemoran.com
  27. 27. What is a Method of Accounting? Method used to determine the amount of income or expense to recognize  Controls both timing and amount  Does not change the overall amount of income a taxpayer will recognize over time but only when Includes both an overall method of accounting as well as the method to account for individual items  The cash or accrual method of accounting would be a taxpayer’s overall method of accounting  The method of depreciating an asset would be a method of accounting for a particular item 27 webinars.plantemoran.com
  28. 28. Why is a Method of Accounting Important? Methods of accounting cannot be changed by the taxpayer without the consent of the IRS  A formal set of procedures exists to change methods  Changing a method under the proper procedure generally provides audit protection  Even if previous method was incorrect, no penalties or interest can be assessed when a method is properly changed When a method is changed, a cumulative adjustment to income must be made  When changed voluntarily, any increase to income is spread over 4 years while a decrease to income is deducted immediately  When change is involuntarily (e.g., in an IRS audit), the entire impact is reported in a single year 28 webinars.plantemoran.com
  29. 29. Tax Planning - Opportunities Changing between methods can accelerate deductions  Personal and real property taxes • Property taxes may be deducted in the year in which a lien attaches or when the owner becomes personally liable as long as the taxes are paid within 8.5 months of yearend. • The “lien date” is different in each state, but in some states the date for the taxes due next year is at the end of the current year. • Example: A Michigan manufacturing business owes $200,000 in personal property taxes each year: $175,000 in July and $25,000 in December. For book purposes, the taxes are capitalized as prepaids and amortized over 12 months. As of December 31, the business has $115,000 of prepaid property taxes on its books.  This taxpayer could deduct the entire $115,000 of prepaid taxes and deduct the $175,000 due next July as well. 29 webinars.plantemoran.com
  30. 30. Tax Planning – Exposure Mitigation Changing from an impermissible method to a permissible method  Inventory reserves • In general, reserves for estimated losses on inventory are not deductible until actually realized. • Example: A taxpayer accrued reserved $300,000 related to inventory that was not getting sold as quickly and it expected and was becoming obsolete. This reserve was deducted for tax purposes when it was established.  An accounting method change could be filed to correct the impermissible method of accounting.  $75,000 of income would be recorded in the year of the change and each of the next 3 years.  The IRS would be barred from assessing tax in any tax year related to this issue, even if it were auditing an earlier year when this deduction was taken. 30 webinars.plantemoran.com
  31. 31. Tax Planning – Exposure Mitigation (cont.) Changing from an impermissible method to a permissible method  Other accruals for estimated losses • In general, reserves for estimated losses are not deductible until actually realized for tax purposes. • Example: In 2010, taxpayer accrued for a $500,000 lawsuit that it expected to lose. In 2011, it actually lost the suit and paid the other party. It deducted this amount in 2010 and discovered the issue in 2011.  An accounting method change could be filed for 2011 to correct the impermissible method of accounting. 31 webinars.plantemoran.com
  32. 32. Appendix: Other Accounting Method ChangeExamples Cash vs. Accrual  Cash method is generally available to most small businesses  Cash method can still be available to mid- and large-sized businesses as long as no inventory is maintained (and other various requirements are met) Compensation  Compensation can only be deducted if fixed by yearend and paid within 2.5 months after yearend • Includes payroll, bonuses, vacation pay, sick pay, etc. Payroll Taxes  Payroll taxes on all compensation can be deducted if the related compensation is fixed by yearend and the taxes are paid within 8.5 months of yearend 32 webinars.plantemoran.com
  33. 33. Appendix: Other Accounting Method ChangeExamples (cont.) Cash and Volume Discounts  Many taxpayers record cash or volume discounts as income when received instead of reducing the acquisition cost of the related inventory  For tax purposes, these amounts may be capitalized Depreciation  Opportunities typically exist to review fixed assets (and make necessary changes) to verify proper life, method, classification and immediate expensing opportunities have been fully taken advantage of Self-insured Medical Accrual (IBNR)  Generally represents cost of medical services provided to employees of a self-insured employer but for which claims have not yet been processed  Many employers do not deduct this amount, but much of it is deductible under certain circumstances 33 webinars.plantemoran.com
  34. 34. A higher return on experience. Entity Choice webinars.plantemoran.com
  35. 35. Presenters Andy Covode Senior Tax Manager 513.744.4730 Andy.Covode@plantemoran.com Derik Rynearson Tax Manager 269.982.6067 Derik.Rynearson@plantemoran.com 35 webinars.plantemoran.com
  36. 36. Terminology Pass-through entity – An entity taxed as an S corporation, a partnership, or a sole proprietorship S corporation – A corporation that has made an election to be taxed as an S corporation instead of a C corporation Partnership – A legal entity taxed as a partnership. It may include general partnerships, limited partnership, limited liability company, or other joint venture arrangements Sole Proprietorship – A business not operating through a legal entity or operating through a limited liability company owned by only one owner C Corporation – A corporation that has not made an election to be taxed as an S corporation 36 webinars.plantemoran.com
  37. 37. Non-Tax Considerations Legal liability protection of owners Expense of formation and operation  Organizational documents  Management decisions  Annual meetings Capital structure flexibility Ownership transfer flexibility Legal recognition in other jurisdictions Other state law considerations 37 webinars.plantemoran.com
  38. 38. Non-Tax Considerations Taxability of transfers of property to entity Capital structure flexibility and basis Raising additional capital (e.g., IPO) Foreign treatment of international transactions Ownership limitations Employment taxes Fringe benefits and compensation of owners Disposition/termination/reorganization plans 38 webinars.plantemoran.com
  39. 39. Tax Considerations C corporation  Entity pays Federal tax on income earned  Shareholders taxed on dividends received (“double tax”)  States typically follow Federal treatment Flow-through entities  Entity pays no Federal income tax  Owners taxed on income earned by entity  Distributions can generally be made tax-free (“double tax relief”) States split on tax treatment 39 webinars.plantemoran.com
  40. 40. Schedule of Maximum Tax Rates 40 webinars.plantemoran.com
  41. 41. Example – 2011 Tax on Operating Income 41 webinars.plantemoran.com
  42. 42. Example (cont.) - 2011 Tax on Distributions 42 webinars.plantemoran.com
  43. 43. Example (cont.) - Summary of 2011 Tax Rates C corporations generally pay less Federal tax than pass-through entities on operating income. C corporations and their shareholders pay significantly more tax than pass-through entities when income is distributed. C corporations can be advantageous when the distributions can be deferred far enough into the future so that the net present value (NPV) of the future tax cost is low when compared to the current tax savings. 43 webinars.plantemoran.com
  44. 44. Summary There is no single answer for all businesses. The choice must be evaluated on a holistic basis to include consideration for all items including legal issues, employment issues, exit strategy, and federal taxes and state taxes. Converting a business from a pass-through to a C corporation or vice versa may not be a simple transaction and may have its own advantages and disadvantages depending on the current structure of the business. Any evaluation involves a significant amount of projections (i.e., future income levels, need for dividend distributions, appreciation of business, etc.) and assumptions (i.e., future tax rates, present value interest rates, etc.) which may prove to be inaccurate. Even when considering the increased cost of the disposition of the business, C corporations can still be advantageous when the tax on the sale of the business is deferred far enough into the future. State taxes are a critical component because they can significantly alter the spread between corporate and flow-through tax rates. 44 webinars.plantemoran.com
  45. 45. A higher return on experience.Transaction Planning webinars.plantemoran.com
  46. 46. Presenters Mark Jolley Partner, National Tax Office 734.302.6923 Mark.Jolley@plantemoran.com Emily Murphy Manager, National Tax Office 734.302.6904 Emily.Murphy@plantemoran.com 46 webinars.plantemoran.com
  47. 47. Overview C Corporation: Stock sale versus asset sale Stock sale: Exclusion of gain on sale of Section 1202 stock Stock sale: Election to treat sale of stock as deemed asset sale under Section 338(h)(10) 47 webinars.plantemoran.com
  48. 48. C Corporation: Stock Sale vs. Asset Sale When a C corporation is ultimately sold in a taxable sale, the sale may be structured as a stock sale or asset sale. 48 webinars.plantemoran.com
  49. 49. C Corporation: Stock Sale vs. Asset SaleExample: Sale of C CorporationAssumptions: Observations: FMV of assets = $1,000,000  In asset sale, the seller recognizes double tax, decreasing net Inside basis of assets = $100,000 proceeds on sale. Sole shareholder’s outside basis in  In reality, the sales price of the stock of = $75,000 company in stock sale would likely In the asset sale, the assets are be adjusted for lack of step-up to sold, then the company liquidates buyer. and provides cash to shareholder. 49 webinars.plantemoran.com
  50. 50. C Corporation: Stock Sale vs. Asset SaleExample: Adjustment for tax benefitObservations: Because of the purchase price adjustment related to the step-up of the underlying assets, the difference between a stock sale and asset sale is generally much smaller than shown in the previous slide. There may be other adjustments to the purchase price for stock versus asset sale for non-tax differences in stock vs. asset sale. 50 webinars.plantemoran.com
  51. 51. Gain exclusion under Section 1202 Section 1202 provides that the gain on sale of §1202 stock may be excluded from income  Exclusion limited to greater of $10,000,000 per taxpayer per company or 10 times aggregate basis of qualified stock disposed during the year.  May effectively eliminate double tax on sale of §1202 C corporation stock.  Section 1202 is most beneficial in the context of a stock sale, though the provision will still benefit in an asset sale followed by liquidation. 100% gain exclusion for qualifying stock acquired after 9/27/10 and before 1/1/12  Excluded gain is NOT an AMT preference item. There is a limited time to take advantage of the provisions of §1202 before the end of 2011  Not elective – If you have acquired §1202 stock and continue to meet the §1202 requirements, you are entitled to the gain exclusion upon sale. 51 webinars.plantemoran.com
  52. 52. Section 1202 Stock - Qualifications Stock must be issued by C corporation. Stock must be acquired as original issue in exchange for money or property (not stock), or as compensation for services. Stock must be held for five years before sale. Business must meet the “qualified small business” criteria. Ineligible corporations include DISC, 936 Corporation, RIC, REIT, REMIC, Cooperative. 52 webinars.plantemoran.com
  53. 53. Qualified Small Business Criteria Domestic C Corporation with aggregate gross assets less than $50,000,000 from 8/10/93 through immediate post-issuance All business types eligible except for:  Certain professional service businesses  Banking, insurance, financing, leasing, investing, or “similar”  Farming and mining  Operating a hotel, motel, restaurant, or “similar” More than 80% of assets (by value) must be used to conduct qualified business activity  The determination of assets used in a qualified business activity is subject to additional rules, particularly for new corporations, corporations with investments in subsidiaries, and corporations with non-business real estate holdings Must meet this requirement for “substantially all” of taxpayer’s stock holding period 53 webinars.plantemoran.com
  54. 54. Section 1202 - Planning Acquisition or start-up tax vehicles  Form new companies between now and 12/31/2011 with specific plans to use funds in qualifying businesses afterwards (within 2 years) Restructuring existing businesses:  Special partnership recapitalizations underneath new holding company  Transfer existing C corporations under new holding company in taxable transaction  Have new company buy other selective assets from other related companies (maybe high basis or with other attributes) Stock options  Exercise stock options in eligible business and exclude gain in upon sale 54 webinars.plantemoran.com
  55. 55. Section 1202 - ExampleObservations: The elimination of tax at the shareholder level makes this same transaction discussed earlier much more lucrative – eliminating the individual tax of 90- 110K in this example – or 15% greater net proceeds to shareholders. 55 webinars.plantemoran.com
  56. 56. Section 338(h)(10) Election Section 338(h)(10) allows the seller of stock in a corporation as sale of assets to the buyer, even though the actual nature of the sale was a stock sale  Best of both worlds - Buyer desires stepped up basis in assets, but the parties have non-tax reasons for desiring a stock sale.  May result in additional tax cost to seller. The seller will demand gross-up of sales price for additional costs as result of election. Election can be made, at the agreement of both parties, when:  Purchaser is a CORPORATION  Target is • 80% or greater owned subsidiary of seller, or • an S corporation 56 webinars.plantemoran.com
  57. 57. Section 338(h)(10) Election Implications:S Corporation Deemed sale of assets could trigger built-in gains tax, if the corporation was previously a C corporation. The sale of assets may result in ordinary income related to sale of ordinary assets (inventory, depreciation recapture, etc.), taxed at higher rates than capital gains. Furthermore, if shareholders’ basis in stock is high, shareholder could recognize ordinary income on sale of ordinary assets, and then recognize capital loss on liquidation.  Entire gain could have been capital gain absent the election.  If taxpayer does not have other capital gains, they may be able to deduct only $3,000 capital losses each year. Nevertheless, the issues above can be addressed through a gross- up in the purchase price. 338(h)(10) elections can be a powerful tool in sale of S corporations. The costs/benefits must be analyzed based on facts of each transaction. 57 webinars.plantemoran.com
  58. 58. A higher return on experience. 5 minute break webinars.plantemoran.com
  59. 59. A higher return on experience. Estate Planning webinars.plantemoran.com
  60. 60. Presenters Dawn Jinsky Senior Tax Manager 248.223.3642 Dawn.Jinsky@plantemoran.com James Minutolo Senior Manager, National Tax Office 513.744.4722 James.Minutolo@plantemoran.com 60 webinars.plantemoran.com
  61. 61. Current Law and Scheduled Changes for 2013 61 webinars.plantemoran.com
  62. 62. Opportunities Take action today while the exemption is high, tax rates are low, and interest rates are low! We may not get another chance. Evaluate various estate planning strategies to determine which one is right for you. We’d be happy to meet with you to discuss any of the following:  Lifetime gifting  Grantor Retained Annuity Trust (GRAT)  Charitable Trusts (CRT, CLT)  Family LLC  Qualified Personal Residence Trust (QPRT)  More Gather information and develop your personal balance sheet. 62 webinars.plantemoran.com
  63. 63. Personal Balance Sheet What is it?  Summary of personal assets and liabilities showing overall net worth  Outlines titling of assets, liquid and illiquid assets Why is it important?  Manages the overall financial health of your family more effectively  Allows one to identify financial issues, set goals, and track progress 63 webinars.plantemoran.com
  64. 64. 64 webinars.plantemoran.com
  65. 65. A New Planning Concept Called Portability Basic concept Common questions include:  What are the benefits?  What are the advantages of utilizing a credit shelter trust? When would you not want to?  How do you make the election to use portability? 65 webinars.plantemoran.com
  66. 66. A higher return on experience.Investment Planning webinars.plantemoran.com
  67. 67. Presenters Jim Baird Partner, Chief Investment Strategist – PMFA 269.567.4552 Jim.Baird@plantemoran.com Mark Dixon Partner, Chief Investment Officer – PMFA 248.223.3576 Mark.Dixon@plantemoran.com 67 webinars.plantemoran.com
  68. 68. Wealth Management Industry At a Glance 68 webinars.plantemoran.com
  69. 69. Market Volatility: Investors Cannot Control ItBut Can Use It To Their Advantage Excessive levels of volatility can be painful for investors but can provide a window of opportunity to engage in tax- motivated Source: PMFA, Bloomberg transactions. 69 webinars.plantemoran.com
  70. 70. Capital Losses: Points to Remember Capital Gains Tax Rates Rising? Given the severe budget deficits and the historically low capital gains rates currently in force, the potential for capital gains rates to rise in the years ahead is significant. Capital Losses Can Be Carried Forward. While it would be clearly preferable to not incur a loss, taking advantage of opportunities created by market conditions can provide the opportunity to harvest losses. Stay invested. Selling positions at a loss doesn’t mean deviating from one’s long-term plan. 70 webinars.plantemoran.com
  71. 71. Tax Benefits of Municipal Yields CreateOpportunity Recent declines in Treasury yields, and the expectation for them to remain low for some time, have made municipal yields Source: PMFA, JP Morgan As of 10/28/11 attractive on an after-tax basis. 71 webinars.plantemoran.com
  72. 72. Other Considerations Asset location matters. Consideration of the tax efficiency of a portfolio can result in superior after-tax returns. Required minimum distributions. Does your IRA qualify and what withdrawal amount is needed? Early coordination is key. Coordination of tax planning ideas with your financial advisor and tax consultant, BEFORE year-end, will produce the best results. 72 webinars.plantemoran.com
  73. 73. DisclosuresPast Performance Does Not Guarantee Future Results. All investments include risk andhave the potential for loss as well as gain.Data sources for peer group comparisons, returns, and standard statistical data are provided bythe sources referenced and are based on data obtained from recognized statistical services orother sources believed to be reliable. However, some or all information has not been verifiedprior to the analysis, and we do not make any representations as to its accuracy orcompleteness. Any analysis non-factual in nature constitutes only current opinions, which aresubject to change. Benchmarks or indices are included for information purposes only to reflectthe current market environment; no index is a directly tradable investment. There may beinstances when consultant opinions regarding any fundamental or quantitative analysis may notagree.Plante Moran Financial Advisors (PMFA) publishes this update to convey general informationabout economic and market conditions and not for the purpose of providing investment advice.Investment in any of the companies or sectors mentioned herein may not be appropriate for you.You should consult a representative from PMFA for investment advice regarding your ownsituation. 73 webinars.plantemoran.com
  74. 74. A higher return on experience. State & Local Tax Illinois, Ohio, & Michigan Updates webinars.plantemoran.com
  75. 75. Presenters Bob Woolley Partner, Tax Services 614.222.9160 Bob.Woolley@plantemoran.com Julie Corrigan Senior Tax Manager, SALT 216.274.6509 Julie.Corrigan@plantemoran.com 75 webinars.plantemoran.com
  76. 76. Presenters Curtis Ruppal Partner, SALT Practice Leader 616.643.4069 Curtis.Ruppal@plantemoran.com Rachel Keller Senior Tax Manager, SALT 248.223.3759 Rachel.S.Keller@plantemoran.com 76 webinars.plantemoran.com
  77. 77. Illinois Tax Act Highlights Corporate Income Tax Rate  Increased from 4.8% to 7% for taxable years beginning on or after 1/1/11  Reduced to 5.25% for taxable years beginning on or after 1/1/15, and reduced back to 4.8% for taxable years beginning on or after 1/1/25  Additional Replacement Tax of 2.5% still applies Individual, Trust, and Estate Income Tax Rate  Increased from 3% to 5% for taxable years beginning on or after 1/1/11  Reduced to 3.75% for taxable years beginning on or after 1/1/15, and reduced to 3.25% for taxable years beginning on or after 1/1/25  Additional Personal Property Replacement Tax of 1.5% (PTEs) Suspension of Corporate Net Operating Loss Utilization Estimated Tax Prior Year Safe Harbor IL Estate Tax reinstated for persons dying after 12/31/10 77 webinars.plantemoran.com
  78. 78. Illinois Update Angel Investment Credit Program Unitary Business Group changes Electronic filing programs  New EFT filing thresholds • $20,000 aggregate tax liability for business taxes effective 10/1/10 • $12,000 aggregate payroll tax liability effective 1/1/11 • $200,000 for individuals • Enroll separately through IL to make required deposits  Roll-out electronic filing for the IL-1120-ST in March 2012. Other business income tax forms will follow (IL-1041, IL-1065, and IL-990-T)  Effective 2/1/12, TeleFile will no longer be available for filing Sales and Use Tax Returns (Form ST-1) by telephone 78 webinars.plantemoran.com
  79. 79. A higher return on experience. State & Local Tax Ohio Update webinars.plantemoran.com
  80. 80. Ohio Budget Bill Highlights  Governor John Kasich signed Am Sub HB 153 on 06/30/11  Repealed the Ohio estate tax applicable to the estates of individuals dying on or after 01/01/13  Enacted two amnesty programs – significant tax saving opportunities 1. Use Tax Amnesty Program available 10/01/11 – 05/01/13 2. General Tax Amnesty Program available 05/01/12 – 06/15/12  Creates nonrefundable small business investment credit “Invest Ohio”  Creates new refundable job retention tax credit against the CAT, corporate franchise tax, and the personal income tax for businesses  Extends the historic building rehabilitation tax credit, rather than letting the credit expire 06/30/11. 80 webinars.plantemoran.com
  81. 81. Ohio Update  Department of Taxation closed seven district offices including Akron, Cincinnati, Cleveland, Dayton, Toledo, Youngstown and Zainesville  Pass-Through Entity Tax Business Tax Division Alert: Addresses a Nonresident Individual’s Ability to File Form IT-1040 when an Individual Investor is Included in an IT-4708 Composite Return  Pass-Through Entity Tax Audit Issues:  Gain recognized by non-resident >20% equity investor selling an investment in a closely held Ohio business must be apportioned to Ohio  Related Member Addback Adjustments (>40% direct or indirect)  Compensation Addback (>20%)  Ohio Commercial Activity Tax Voluntary Disclosure Program 81 webinars.plantemoran.com
  82. 82. A higher return on experience. State & Local Tax Michigan Update webinars.plantemoran.com
  83. 83. Michigan Tax Reform Highlights Effective repeal of MBT on 12/31/2011 CIT effective 1/1/2012; no direct business tax on flow-through entity Beneficial ownership interest in a flow-through entity doing business in Michigan may create nexus for members and shareholders having no other Michigan activity MBT net operating losses will expire along with the MBT on 12/31/2011 Financial statement adjustments required as a result of MBT repeal Expanded Michigan withholding requirements in tiered entity structure Only credit retained under CIT is the Small Business Credit 83 webinars.plantemoran.com
  84. 84. Michigan Update Importance of proper planning for transition from MBT to CIT  Fiscal year taxpayers  Timing of income/deductions  Payment of winter 2011 industrial personal property taxes  Entity selection considerations  Proper planning for payment of 2011/2012 estimated taxes  Certificated credit holder election into the MBT post-2011 Personal property tax reform 84 webinars.plantemoran.com
  85. 85. A higher return on experience.International Tax Planning Issues for US Owned Foreign Business Operations webinars.plantemoran.com
  86. 86. Presenters Bill Henson Partner, International Tax Services 248.375.7311 Bill.Henson@plantemoran.com Kellie Becker Senior Tax Manager, International Tax Services 586.416.4904 Kellie.Becker@plantemoran.com 86 webinars.plantemoran.com
  87. 87. US Tax Considerations US structure can make a difference  Partnership or S corporation  C corporation US treatment of foreign income  Branch  Disregarded Entity • “Check-the-Box” elections  Foreign Corporation • “Per Se” Corporations 87 webinars.plantemoran.com
  88. 88. Deferral of Income Foreign corporation income not subject to tax until repatriated  Powerful planning technique  Must be able to keep cash offshore Notable exceptions to the rule  Loans to US shareholders  Use of foreign corporations as security for loans  “Subpart F” income 88 webinars.plantemoran.com
  89. 89. Taxation of Dividends Tax rate depends on US status  C corporation, Partnership, S corporation, Individuals Capital gains rate available to individuals  Treaty countries only Foreign Tax Credit  Generally available to corporations only • Preserves corporate/shareholder level taxation  Individuals do get a FTC for withholding taxes 89 webinars.plantemoran.com
  90. 90. Taxation of Foreign Branch Branches or “Flow-Through” Entities taxed currently  Can elect flow-through treatment for some foreign entities  Income or loss taxed currently in US  Allows for FTC for foreign corporate level taxes to individuals  Flow-Through losses can be “Re-Captured”  Foreign currency translation 90 webinars.plantemoran.com
  91. 91. A higher return on experience. Tax Solutions Year-end reminders webinars.plantemoran.com
  92. 92. Presenters Nathan Buchalski Senior Manager, Tax Solutions Practice Leader 734.302.6960 Nathan.Buchalski@plantemoran.com Jonathan Winterkorn Senior Tax Manager 513.744.4729 Jonathan.Winterkorn@plantemoran.com 92 webinars.plantemoran.com
  93. 93. Research & Development (R&D) Tax Credit For new or improved products or processes Qualifying cost Wages, supplies, contract research 93 webinars.plantemoran.com
  94. 94. Research & Development (R&D) Example Taxpayer is an Ohio software development company and has 35 developers making an average of $75,000 a year. These developers spend 80% or more of their time working on qualifying R&D projects. This client has the potential for a $150,000 Federal tax credit plus an additional $50,000 in Ohio R&D tax credits that can be applied towards Ohio’s CAT tax. 94 webinars.plantemoran.com
  95. 95. Domestic Producers Activity Deduction (DPAD) Qualifying Activities  MPGE Must be calculated on an item by item basis 95 webinars.plantemoran.com
  96. 96. DPAD Example Taxpayer has taxable income of $4,000,000 and manufactures products as well as resells third part products. Qualifying activities represent 83% of the gross receipts. Upon examination, it is determined that 93% of the taxable income comes from qualified activities. Without proper review and documentation of the qualified activities and associated cost, this client would have lost $120,000 of tax deductions. 96 webinars.plantemoran.com
  97. 97. Cost Segregation/Fixed Asset Analysis Cost segregation for new buildings Review capitalize vs. expense 97 webinars.plantemoran.com
  98. 98. Cost Segregation Example with100%Bonus Depreciation Taxpayer is building an apartment building for $15 million. Below is an illustration of tax benefit for doing a cost segregation with no bonus depreciation, 50% bonus depreciation, and 100% bonus depreciation.  No Bonus Depreciation: 1st year tax savings of $225,000; NPV of savings over the life of the building of $530,000.  50% Bonus Depreciation: 1st year tax savings of $940,000; NPV of savings over the life of the building of $665,000.  100% Bonus Depreciation: 1st year tax savings of $1,650,000; NPV of savings over the life of the building of $800,000. 98 webinars.plantemoran.com
  99. 99. Thank You Thank you for attending! To view a complete calendar of upcoming Plante Moran webinars, visit webinars.plantemoran.com webinars.plantemoran.com
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