Transcript AMERICAN JOBS CREATION ACT

New Tax Laws
Real Opportunities for Tax
Savings
Two New Acts

Working Families Tax Relief Act-signed by
President Bush 10/4/2004

American Jobs Creation Act of 2004-signed
by President Bush 10/22/2004
Working Families Tax
Relief Act of 2004

Extensions of benefits for individuals

Extensions of benefits for corporations

Uniform definition of a child

Technical corrections
Extensions of Benefits for
Individuals

Child tax credit

Marriage penalty relief

Increase AMT exemption

Use of personal credits against AMT

Extension of educator deduction
Extension of Benefits for
Businesses

Research credit extension

Expensing of environmental remediation
costs
American Jobs Creation
Act of 2004

General Business Considerations

Tax Shelter Changes

Individual Changes

Manufacturing and Production

International Tax Changes
General Business
Considerations

S Corporation changes

Deferred Compensation

Cost Recovery Changes

Other Business Items
S Corporation Changes

Number of allowable shareholders increases
to 100 (up from 75)

Family members count as a single
shareholder

Other changes:
– ESBT changes
– Transfers of suspended losses to spouse
or former spouse
– Inadvertent invalid QSub election relief
Deferred Compensation


Why change?
New, rigorous standards for when
compensation can be deferred from tax

What kind of plans are affected?

Key changes
– Timing of deferral election
– Distribution of amounts deferred
– Added anti-abuse provisions

What is the affect of failing to comply?
Action Points

Every deferred comp plan needs to be
reviewed

Don’t rush

Evaluate current election for 2005 deferrals

Advise participants about access to funds
Cost Recovery Changes



$102,000 immediate write-off of §179
property is extended for two years
New limit of $25,000 for SUV’s purchased
after October 22, 2004
Depreciable life for leasehold improvements
and certain restaurant property reduced
from 39 to 15 years
Other Business Changes



Restrictions on business airplanes and
entertainment facilities
Extended amortization for business start-up
or organizational costs
Increased withholding on supplemental
wage payments > $1 million
Other Business Changes
(cont.)



Charitable contributions of property
appraisal requirements
Clarification of FICA on options and stock
option plans
Capital gain on sale of stock acquired from
exercise of stock options to comply with
Federal conflict of interest requirements
Tax Shelter Changes

Why?

New penalties

No statute of limitations on undisclosed
reportable transactions

Tightens up on enforcement of existing
penalties

Tightens up on practitioners, as well as
taxpayers
Individual Changes


Changes in Charitable Contributions of
Property
Deduction for Sales Tax
Changes in Charitable
Contributions of Property



Standards established for the contribution of
intellectual property
Restrictions imposed on contributions of
vehicles
Increased reporting for contributions of
property
Deduction for Sales Tax

Taxpayer can elect to claim deduction for
state income taxes or deduction for state
sales taxes

Choose between documented expenses or
table amounts

Of particular interest to taxpayers in states
with no income taxes

Effective for 2004 and 2005 returns
Action Points




Accumulate records now for large purchases
Where subject to sales and income taxes,
consider combining large taxable purchase
into a single year
Special rule for vehicle purchases
Watch out for AMT
Political Outlook – Post
Election

White House Tax Plans

Senate Finance Tax Agenda
Under Current Law
Wages-T
Wages-S
Dividends
Long-Term Gains
Itemized Deductions
Exemptions
Taxable Income
Federal Tax
Payroll Taxes (ee & er)
Total Taxes
% of Total Income
Trust Fund Baby
$
-0$
-0$ 65,000
$ 65,000
$ (30,000)
$ ( 6,000)
$ 94,000
$
8,300
$
-0$ 8,300
6.3%
Working Couple
$ 65,000
$ 65,000
$
-0$
-0$ (30,000)
$ (6,000)
$ 94,000
$ 16,925
$ 19,900
$ 36,825
28.3%
White House Plan

President hopes to have bipartisan advisory panel on tax reform by
end of 2004

Tax proposals will be revenue neutral and promote economic
growth and jobs

Looking to simplify existing system-current system is complicated

Make it more fair

Should the existing system be modified or replaced

Reduce administrative burdens on taxpayers
White House Plan

Retain the 15% rate for qualified dividends and
long-term capital gains.

Make permanent the repeal of the Federal estate
tax

Supports foreign tax reforms and tax breaks for
manufacturers

Extend expiring middle-class tax breaks
White House Plan (cont.)

Tax credit to help the uninsured buy health
insurance

Credits for energy efficient homes

Expand incentives for college education

Preservation of mortgage and charitable
deductions
Senate Finance Tax
Agenda



Due to a GOP victory at the Polls, Senator
Grassley expects to resume the
chairmanship of the Senate Finance
Committee
Extend “Tax Relief Legacy in 2005”
Make permanent previously enacted tax
relief measures
– Extend key tax breaks
– College tuition deductibility
Senate Finance Tax
Agenda (cont.)

Close loopholes

Adopt permanent interest rate for
calculating pension liabilities

Enact Enron-inspired participant protections.

Make flexible spending accounts work
efficiently
QUESTIONS
International Tax
Provisions
Trivia Question
What is the estimated percentage of U.S.
corporations that paid no federal taxes
between 1996 and 2000?
•
•
•
•
26%
48%
61%
82%
Highlights of the American
Jobs Creation Act of 2004
Repeal of Exclusion for Extraterritorial Income

Phase-Out of the Extraterritorial Income Exclusion

Phase-In of the Deduction for Manufacturing/Production
Activities
Tax Reform & Simplification for U.S. Businesses

Incentive to Reinvest Foreign Earnings in U.S.

Foreign Tax Credit Reforms

Other Significant International Reforms
Repeal of the
Extraterritorial Income
Exclusion
Phase-Out of Extraterritoral
Income Exclusion (ETI)

Two year phase-out
‹ 2005 – 80%
‹ 2006 – 60%
‹ 2007 – no ETI benefit

Grandfather for transactions entered into it
‹ In the ordinary course of business
‹ Pursuant to a binding contract before 9/17/03
‹ Applies to leases, licenses and options
Action Points

Can export transactions be accelerated
into 2004?

Should associated expenses be deferred,
if possible?

Is the IC-DISC (Interest Charge Domestic
International Sales Corporation) an
alternative?
Manufacturing and
Production Activities

New deduction for domestic production
activity (IRC Section 199)
Domestic Production
Activity Deduction

Lesser of a percentage of:
- Taxable income, or
- Qualified domestic production
activities income (QDPAI)

Not to exceed 50% of wages paid
Phase-In of Deduction
Taxable Year Beginning In:
Percentage
2005 – 2006
3%
2007 – 2009
6%
2010 and later
9%
What is Qualified Production
Activity Income?

Income from certain domestic production
activities

Less:
- Costs attributable to producing the
income
What is Qualified Production
Activity Income? (cont.)

Taxpayer’s gross receipts derived from:
1. Any sale, exchanges or other disposition,
or any lease, rental or license, of qualifying
production property that was
manufactured, produced, grown or
extracted by the taxpayer in whole or in
significant part with the U.S.;
What is Qualified Production
Activity Income? (cont.)
2. Any sale, exchange or other disposition, or
any lease, rental or license, of qualified
films produced by the taxpayer;
3. Any sale, exchange or other disposition of
electricity, natural gas, or potable water
produced by the taxpayer in the U.S.;
What is Qualified Production
Activity Income? (cont.)
4. Construction activities performed in the
U.S.; or
5. Engineering or architectural services
performed in the U.S. for construction
projects located in the U.S.
What is Qualified Production
Activity Income? (cont.)

Exclusions:
1. Food and beverages prepared at a retail
establishment
2. Transmission or distribution of electricity,
natural gas or potable water
3. Property leased, licensed or rented by the
taxpayer for use by any related person
Deduction Offers
Complexity
Related Persons

Control group, affiliated service group
or entities under common control

Similar to rules under the ETI regime
Deduction Offers
Complexity (cont.)
Affiliated Groups

Members of an affiliated group (i.e., 50%
ownership) are treated as a single
corporation
Deduction Offers
Complexity (cont.)
Pass-Through Entities



Deduction is available
Limitation determined at the shareholder or
partner level
A shareholder or partner allocated W-2 wages
equal to lesser of:
1. Person’s allocable share of the wages,
2. 2x QPAI allocated to that person
Deduction Offers
Complexity (cont.)
Deduction Limited to Wages Paid

Wages determined on a calendar year
basis

Creates incentive to obtain services
through employees rather than
independent contractors.
Deduction Offers
Complexity (cont.)
DPGR’s

“In whole or in significant part” within the
U.S.

Does not include receipts from leasing,
licensing or renting property for use by a
related person. But, does include receipts
from selling property to a related party.
Deduction Offers
Complexity (cont.)
Individuals

Not limited by the 2% AGI on
miscellaneous itemized deductions

Subject to Section 469, passive activity
loss limitation
Allowable Deduction

Lesser of % of T. Inc. or QDPAI

Not to exceed 50 % of wages paid

Calculated on a controlled group basis

Passed through to sole proprietors and
owners of partnerships and S corporations

Deduction allowed against AMT
Action Points

Do you conduct a Domestic
Manufacturing Activity?

Do your accounting systems provide
sufficient information to measure direct
and allocable indirect costs?

Can and should the business be
restructured to maximize this deduction?
Tax Reform &
Simplification for U.S.
Businesses
Incentives to Reinvest Foreign
Earnings in U.S.

General rule: a USC may elect to claim an
85% DRD on repatriated earnings received
from a CFC during the election period
- Base: dividends qualify for DRD to extent >
avg. actual and deemed dividends in 3 of last
5 years (highest and lowest years
disregarded)
Incentives to Reinvest Foreign
Earnings in U.S. (cont.)

Ceiling - Dividends eligible for DRD may not
exceed:
‹ $500 million;
‹ APB 23 amount in financials certified before
7/1/03; or
‹ If no APB 23 amount in financials but tax
liability on APB 23 amount disclosed-the
grossed up amount using a 35% tax rate
Incentives to Reinvest Foreign
Earnings in U.S.

Ceiling Reduced: By increase in related party
indebtedness on part of CFC between 10/3/04
and close of taxable year DRD claimed
‹ All CFC’s of corporate “US Shareholder”
treated as one CFC
Incentives to Reinvest Foreign
Earnings in U.S. (cont.)

Reinvestment Plan: Dividends must be invested
in the U.S. pursuant to a plan approved by DC’s
president or CEO and BOD to qualify for DRD
‹ Permissible investments (without limitation)
include:
- Worker hiring and training;
- Infrastructure;
- Research & development;
- Capital investments; and
- Financial stabilization for job retention and
creation purposes
‹ Executive compensation is not a permissible investment
Incentives to Reinvest Foreign
Earnings in U.S. (cont.)

Offsets:
‹ Dividends not covered by DRD (15%)
cannot be shielded from tax by –
- Expenses
- NOL’s
‹ And the tax thereon cannot be offset by
credits other than FTC and AMT
credits
Incentives to Reinvest Foreign
Earnings in U.S. (cont.)

FTC: Foreign taxes attributable to Dividends
shielded from tax by DRD are lost; but DC
may specifically identify these Dividends –
making the limitation meaningless in many
situations
Incentives to Reinvest Foreign
Earnings in U.S. (cont.)

Disallowance of Deductions: Expenses allocated and
apportioned to the DRD amount are not deductible
‹ But floor colloquies indicate the rule
applies solely to expenses directly related
to the DRD amount

Effective Date: DRD available only for –
‹ First taxable year beginning after 10/21/04; or
‹ At DC’s election, the last taxable year beginning
before the date of enactment
Foreign Tax Credit Reforms

Carryforward period extended to 10 years
(effective: taxable year ending after 10/22/04)

Carryback period reduced to 1 year (effective:
taxable years arising in taxable years beginning
after 10/22/04)

FTC baskets: reduced from 9 to 2 (effective:
years after 12/31/06)
Foreign Tax Credit Reforms
(cont.)

Recapture of OFL extended to dispositions of stock
of a CFC where taxpayer owned > 50% of CFC’s
stock

Repeal of 90% limitation on usage of AMT foreign
tax credit (effective: tax years beginning after
12/31/04)

Alternative method, elect by 12/31/08, to allocate
interest expense on a worldwide affiliated group
basis
Other Significant International
Reforms

Elimination of anti-deferral regimes of Foreign Personal
holding company and foreign investment company
(effective: tax years beginning after 12/31/04)

Repeal withholding tax on dividends from certain foreign
corporations with ECI > 25% or gross income
(effective: payments after 12/31/04)

Two new exceptions to definition of U.S. property under
Sec. 956 re: securities.
Other Significant International
Reforms (cont.)

Definition of FPHCI concerning commodity transactions
and sale of partnership interests

Foreign tax credit treatment of royalty payments and
payments for the sale of IP

Changes in rules governing former citizens or residents
who relinquish citizenship or terminate residency status
Real Estate
Environmental
Remediation Costs

Code Section 198 extended through 2005

Is extended for expenditures paid or
incurred after 12/31/2003?

Allows an expensing of qualified
remediation expenditures at a qualified
contamination site (“brownfields”)
Depreciation of Leasehold
Improvements

Current law provides for straight-line 39
years for LHI that are non-residential real
property

“Qualified LHI” placed in service before
1/1/2005 are eligible for 50% bonus
depreciation
AJCA Changes



Provides for a 15 year straight-line
recovery period
Applies to property placed in service after
10/22/2004 and before 1/1/2006
If a lessor makes a qualified LHI
subsequent owner’s who purchase are
not allowed the 15 year provisions
Qualified Leasehold
Property

Improvements to the interior of a
commercial building if:
– Improvement is made pursuant to a lease
– Portion of the building is to be occupied by
the lessee or sub-lessee
– Improvement is placed in service more than
3 years after the date the building was first
placed in service
What’s Not Qualified

Enlargement of the building

Elevator or escalator

Structural component benefiting a
common area

Internal Framework of the building
Partnership Changes

Cancellation of indebtedness on
partnership debt to equity conversion

Treatment of built-in losses and
partnership basis adjustments
Debt to Equity Conversion



Partnership exchanges a capital or profits
interest to creditor in satisfaction of debt
Partnership recognizes cancellation of
indebtedness income in the amount that would
be realized if the debt were satisfied with
money equal to the FMV of the partnership
interest
No income to extent FMV of partnership
interest=amount of the debt
Allocation of Income

Income is allocated to partners who held an
interest immediately prior to satisfaction of
the debt

Effective for cancellations occurring on or
after 10/22/2004

Will cause adverse tax consequences in real
estate debt workouts or restructures
Built-in Losses & Basis
Adjustments

AJCA Changes
– Built-in loss property now only taken into
account by contributing partners
– If contributing partner’s interest is sold or
liquidated the partnership’s basis is based
upon FMV on date contributed and built-in
loss is eliminated
– Effective for contributions after 10/22/2004
Built-in Losses & Basis
Adjustments (cont.)

AJCA provides for mandatory basis
adjustments upon sale or liquidation of an
interest with substantial built-in losses

Elective under current law per Section 754

Substantial loss=in excess of $250,000
Built-in Losses & Basis
Adjustments (cont.)

Applies to liquidations/transfers after
10/22/2004

Basis reductions under 734(b)(2) (liquidations)
cannot be allocated to basis of corporate stock
of a partner

Allocated to other assets but not below zero

Any excess=gain to the partnership
Individual Changes

Property received in a (§1031) like-kind exchange

Converted to use as a principal residence

5 year rule-must hold 5 years after 1031 exchange

Will not qualify for gain exclusion on personal
residences

Effective for sales or exchanges of residences after
10/22/2004
Real Estate Investment
Trusts

Expansion of straight debt safe harbor

Relief from Asset Test Violations

Modifications of REIT prohibited transaction
safe harbor for Timber REIT’S

Modification of FIRPTA treatment for foreign
investors

Other technical modifications
Exchange of Undivided
Fractional Interests (UFI’s)

What is the game?

Partnership owns property & want to dispose of

Some partners want gain some want deferral

Partnership interests do not qualify as §1031
(Like-kind) property
WHAT DO YOU DO? WHAT DO YOU DO?
Exchange of Undivided
Fractional Interests (Con’t)






Plan ahead
Distribute Property out to partners as UFIs
(Tenants-in-Common)
Hold property for a period of time
Enter into sales contract with purchaser to sell all
UFIs
Each owner than can take cash and pay tax or have
cash from buyer go to a qualified intermediary and
effectuate a §1031 exchange
In Rev Proc 2000-46 IRS would not rule on these
transactions
Revenue Procedure 2002-22

Rev. Proc allows 15 conditions where the
IRS will consider UFI’s in Real Property not
to be a partnership interest

Co-ownership in real property under local
law (legal costs)

Not more than 35 co-owners
Revenue Procedure 2002-22
(cont.)

Separate loans for each co-owner (Banks hate
this)

Co-owners have right to manage property or
hire a property manager if approved annually

Each owner has right to sell or transfer co-
interest

These conditions are not all inclusive
Practical Considerations
of Ruling 2002-22




Should hold at least two months before sell
UFI’s
Watch Court Holding if negotiations have
proceeded to such a point before distribution –
i.e. advanced planning
Generally these UFI’s are used more for the
reinvestment of §1031 proceeds-But be careful
you will end up owning property with an
inflated purchase price
If this is the case take your 15% tax & run
Revenue Ruling 2004-86




Will a Delaware Statutory Trust (DST) help
solve problem for banks and legal issues of
owning 35 UFI’s
DST in Ruling treated as a grantor trust, but
the trustee had only limited powers
If trustee had additional powers = business
entity and not a grantor trust & UFI concept
doesn’t work
Land exchanged for interest in grantor
trust=considered an exchange
Revenue Ruling 2004-86
(cont.)

Additional powers will cause problems and deem
treatment as one entity:
– Dispose of contributed property and acquire new property
– Renegotiate lease with tenant
– Enter into new leases with tenant
– Renegotiate obligation used to purchase property
– Refinance obligation or borrow to purchase property
– Invest cash
– Make structural modifications to property
Bramblett Transactions



Partnership or S-Corporation owns property
with large inherent capital gain
Taxpayer wants to develop property and sell
“lots”
which would convert all inherent gain into
ordinary income
WHAT DO YOU DO? WHAT DO YOU DO?
Bramblett Transactions
(cont.)

Consider selling to a related entity – (needs
to be a corporation

Sell on the installment method – Old owner
entity recognizes capital gain, therefore
inherent gain is taxed at 15% - only gain
related to development is tax as a developer
Bramblett Transactions
(cont.)
KEYS:

Appraisal

Note with fixed payment terms, reasonable rate of
interest & proper form. Down payment should be
a substantial amount and payments cannot be tied
to sales in Development entity

Development Entity has own financing and capital
Bramblett Transactions
(cont.)

Separate business cards and helpfully
new employee or two

Helpful if a different ownership % in
ownership of Development entity.
THE ENERGY
INDUSTRY
Oil & Gas Update

Update of Recent Law Changes

Update of Oil & Gas Industry in Denver

Is Energy Really That Expensive Today?

What is Driving Energy Prices?
Tax Law Update


Credit for Production from Marginal Oil &
Gas Production
Suspension of 100% Net Income
Limitation on Percentage Depletion for Oil
& Gas from Marginal Production
Tax Law Update (cont.)


Phase-Down of the Electric Vehicle Credit
is Partially Repealed
Credit for Electricity Produced from Wind
Energy, Closed-Loop Biomass and Poultry
Waste Facilities is extended until 2006
What’s Going on in Denver

Seen the Sale/Merger of Several Large
Independent E&P Companies

Several of the Management Teams from
these Companies are Forming new
Companies
What’s Going on in Denver
(cont.)

These Companies will be Private, Niche Oil
& Gas Companies

Opportunity to Revitalize Denver as an
Energy Growth Hub
Is U.S. Energy Still Cheap?
Price per Barrel of Household Items:

Regular Unleaded Gas………….. $77.28

Coca Cola……………….........….$102.59

Bottled Water……………….....…$126.18

Milk……………………………….. $183.96

Budweiser……………………...…$372.59

Jack Daniel’s……….................$4,460.17

Chanel #5 Parfum …….…$1,344,000.00
What is Driving Energy
Prices?

China – Chinese Economy is White Hot

Instability Throughout the Oil Producing
World, Not Just the Middle East

Supply and Demand Reality Check