Transcript Analysis, Observations and Planning Points Jobs and Growth

Tax Update
October 21, 2003
Appleton, WI
Today's Presenter
Jeff Gross, CPA
Senior Tax Manager
Grant Thornton LLP
10 College Avenue, Suite 300
Appleton, WI 54911
Tel:
E-mail:
920-968-6700
[email protected]
Tax Update
Tax Update
I. JGTRA of 2003
II. Other Developments
Jobs and Growth Tax Relief
Reconciliation Act of 2003
- Projected to be the 3rd largest tax cut
ever
- Not permanent, many sunset
provisions
- Lurking AMT problem
Provisions impact businesses and individuals
• Business provisions
– Increased expensing
– Bonus depreciation
– Dividend rate reduction
• Individual provisions
– Dividend and capital gain rate reduction
– Individual rate reductions
– AMT relief
Business provision
Increased small business expensing of depreciable
property
• Limit increased from $25k to $100k per year
• Beginning of phase-out extended from $200k to
$400k
• Applies to new & used property
• Available for AMT
• Expires after 2005
• Eligible vehicles must weigh more than 6,000 lbs
• Off-the-shelf software qualifies
• WIS (and many other states) have not adopted.
Business provision
Increased bonus depreciation
• 30% first year bonus depreciation of 2001 Act
– Increased to 50%
– Effective for property placed in service after
5/5/03
– Expires 12/31/04
– Applies to new property only
Planning points
Bonus depreciation
• Perform a “Cost Classification Study” for new
buildings
• No adjustment for AMT
– Bonus Depreciation and
remaining depreciation
Individual and business provision
Reduced rate on dividends and capital gains
• 15% (5% lowest bracket individuals)
– Dividends effective 1/1/03
– Long Term Capital Gains effective 5/6/03
– Expiration
• Both after 2008
• 0% rate for lowest bracket taxpayers in 2008
• Consider gifting appreciated
capital gain property to
children > 14
Individual provision
Accelerates individual rate reductions of 2001 Act
• New rates 10%, 25%, 28%, 33% and 35%
• Retroactive to 1/1/03
– Means
• Paychecks over withheld first half of year
–Withholding tables adjusted
• Estimated payments may be too high
• More likely to be in AMT
• Top individual bracket now same as corporate
–Makes S corps and LLCs more attractive
Observation
Comparison of top individual rates
Top individual
federal tax rates
Ordinary income
Dividend income
Long-term
capital gains
1250 Deprec.
recapture
Collectibles
Old Law
38.6%
New Law
35.0%
38.6%
20.0%
15.0%
15.0%
25%
25%
28%
28%
S Corps and LLC's
• 35% individual rate vs 34% rate for most
corporations
– Contrast to almost 6% differential in recent past
39.6% vs 34%
S Corps and LLC's
• Capital gain preferences
– 20% rate differential for individuals, not for C
corps
• Careful on depreciation recapture of old ACRS
buildings
• Still "double tax" on corporations – just less
S Corporation opportunity
• Economic decline past several years
– Assets values may be depressed
– Helpful in minimizing BIG tax exposure
– BIG tax based on appreciation on date of
selection
– Built-in gains still taxed @ 35%
Planning points
S corporation opportunity
• S corporation with E&P from C corporation period
– Consider deemed E&P distribution 1368(e)(3)
• Take advantage of 15% rate
• Avoid excess passive investment income
issues
–1375 "sting" tax
–1362(d)(3) termination S status
Individual provision
AMT relief for individuals
• Increases exemption
– $4,500 to $40,250 single/$9,000 to $58,000
joint
• Merely a "band aid"
Observation
AMT Relief Not Adequate
• Not sufficient
– Only for 2003 and 2004 –back to phase in for 2005
• 2005 Taxpayers liable for AMT jumps from 3 mil to 13 mil
– 2010 expect 33 mil taxpayers in AMT
• 25 times more than in 2001
• 37% taxpayers with incomes $50k-$75K – avg AMT $1,075
• 73% taxpayers $75k to $100k – avg AMT $1,671
– 97% if family has two or more children
• AMT expected to take back 1/3 of the benefit of tax rate cut
– AMT expected to generate $1 trillion next 10 years
Additional Observations
• If dividends and long term capital gains are a
disproportionate amount of total income, then
taxpayer will likely be in AMT
• Preferred stock more competitive with bonds
Strategy – Reduced Dividend Rate
• Rethink Mix of Salaries versus Dividends
– Shareholder pays less tax on dividend income
– Payment of dividends avoids payroll taxes
– Salaries are deductible by Corp; dividends are not
– Careful, may establish new compensation history
• Shareholder Loans
– Pay off via dividend
• Example: Loan of $100,000, interest of $5,000
distribute note as dividend – tax of $15,000
Strategy
Reduced Dividend Rate
• May encourage shareholders to be more
aggressive in personal expenses via company
– Constructive dividends don't look so bad
– Effect of denying a deduction and inclusion of
dividend income
Strategy
Reduced Dividend Rate
• Stock redemptions
– Prior law:
• If relatives owned shares of company
• To obtain capital gain treatment had to agree
not to work for or retain interest in company
for 10 years after redemption
– Now:
• Can obtain 15% rate and remain active in
business
Whats still on the table?
• Trade Bill
– Replace a US subsidy on exports
– Close loophole for SUV's
• Slash maximum expensing to $25,000 for
vehicles with GVW < 14,000 lbs.
• Election Year issue:
– Rolling back tax rate cuts for the 33% and 35%
brackets
Other Developments
• Split Dollar life insurance
– Pre 1/2/02 arrangement
• Can permanently exempt existing policy
equity from tax provided action taken by
12/31/03
– Post 9/17/03 arrangement
• Employer owned policy – economic benefit
regime
• Employee owned policy - loan
Other Developments
• IRS takes liberal stance on bonus depreciation
rules
– Treatment of reconditioned property
• Up to 20% of property can be used
reconditioned parts – still treat as new
– Like-kind exchange property
• Applies both to cash paid + carryover basis of
old property
Other Developments
• LIFO IPIC Method
– Automatic Consent available for first two years ending
on/after 12/31/01
– Incorrect computations – minimize prior year exposure
– Controlling costs better than industry
• IBNR – Self Insured Medical Claims
– IRS softening of General Dynamics decision
– IRS will grant method changes
– 3rd party submission of payment
Other Developments
• Change in Recovery Method
– Tax Court reaffirmed in two cases is not a change in
accounting method
• Taxpayer used 3 & 5 year life when it should have
used 10
• Court held the year is closed for adjustment
• Cite Green Forest Manufacturing and Brookshire
Brothers if faced with 481(a) adjustment in IRS audit
– Can still rely on Rev Proc 2002-9 for retroactive taxpayer
friendly cost segs
Other Developments
• ISO's
– Grant and Exercisement – generally no regular
tax consequences
– Careful with AMT on exercisement – bargain
element in income
• Employer Health plan and FSA reimbursements
– Expanded definition – over-the-counter drugs
tax-free
Other Developments
• Stock Redemptions
– Covenants not to compete in connection with
redemption subject to Sec. 197 15yr
amortization period
• Group of Rental and S Corp activities for passive
loss rules
– Loss from leasing activity can be treated as
nonpassive
Annual Limits/Etc.
Mileage Rate 37.5 cents/mile
Social Security wage base - $87,900 – ($87,000)
401(K), 403(b), 457 elective deferrals - $13,000 – ($12,000)
Catch-up contribution - $3,000 – ($2,000)
SIMPLE elective deferral - $9,000 – ($8,000)
Defined contribution plan maximum annual benefit - $165,000
– ($160,000)
Annual compensation limit - $205,000 – ($200,000)
Highly compensated employee - $90,000 – (unchanged)
ADDITIONAL QUESTIONS?