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Corporate Tax Update
 

Corporate Tax Update

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Learn about the corporate tax environment going in 2014 and what entity type is the best selection from an income tax status perspective - O'Connor Davies - New York CPA Firm.

Learn about the corporate tax environment going in 2014 and what entity type is the best selection from an income tax status perspective - O'Connor Davies - New York CPA Firm.

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    Corporate Tax Update Corporate Tax Update Presentation Transcript

    • Corporate Tax Update By Leo Parmegiani Executive Tax Forum - November 7, 2013
    • 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 2
    • 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). Executive Tax Forum - November 7, 2013 3
    • 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 4
    • 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 Executive Tax Forum - November 7, 2013 5
    • 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 Executive Tax Forum - November 7, 2013 6
    • 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 Executive Tax Forum - November 7, 2013 7 $ 188,310
    • 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 Executive Tax Forum - November 7, 2013 8 $ 172,263
    • 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 Executive Tax Forum - November 7, 2013 9 $ 0 $ 176,495
    • 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 Executive Tax Forum - November 7, 2013 10
    • 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 Executive Tax Forum - November 7, 2013 11 $ 168,895
    • 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 Executive Tax Forum - November 7, 2013 12 $ 172,695
    • 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 Executive Tax Forum - November 7, 2013 13 0 176,495
    • 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 Executive Tax Forum - November 7, 2013 14
    • 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. Executive Tax Forum - November 7, 2013 15
    • 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. Executive Tax Forum - November 7, 2013 16
    • 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. Executive Tax Forum - November 7, 2013 17
    • 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. Executive Tax Forum - November 7, 2013 18
    • 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. Executive Tax Forum - November 7, 2013 19
    • 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. Executive Tax Forum - November 7, 2013 20
    • 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 21 $815,000
    • 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. Executive Tax Forum - November 7, 2013 22
    • 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. Executive Tax Forum - November 7, 2013 23
    • 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 Executive Tax Forum - November 7, 2013 24
    • 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. Executive Tax Forum - November 7, 2013 25
    • 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. Executive Tax Forum - November 7, 2013 26
    • 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. Executive Tax Forum - November 7, 2013 27
    • 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. Executive Tax Forum - November 7, 2013 28
    • 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% Executive Tax Forum - November 7, 2013 29
    • 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. Executive Tax Forum - November 7, 2013 30
    • 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. Executive Tax Forum - November 7, 2013 31
    • Capitalization vs. Repairs Final Regulations Executive Tax Forum - November 7, 2013
    • 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. Executive Tax Forum - November 7, 2013 33
    • 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. Executive Tax Forum - November 7, 2013 34
    • Cost Segregation Executive Tax Forum - November 7, 2013
    • 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. Executive Tax Forum - November 7, 2013 36
    • 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 . Executive Tax Forum - November 7, 2013 37
    • 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 Executive Tax Forum - November 7, 2013 38