IMA 11152005

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IMA11/15/2005

• 2005 2006 Tax Planning Including Recent Tax Law
  Changes

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2004 Tax Law Changes - Individuals

• Limits on elective deferrals for 401k plans
• Increased to 14,000 (18,000 age 50 over)
• Simple plans are limited to 10,000 (12,000 age
  50 over)
• Sales tax allowed as itemized deduction
• Table amount based upon AGI
• Plus amounts spent on large ticket items
• Not available in 2006

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Individual tax law changes Cont.

• Maximum clean fuel vehicle tax deduction
• Maximum qualified electric vehicle credit of 10
  of cost or 4,000
• Standard mileage rate increased to 48.5 cents per
  mile effective September 2005 (22 cents for
  medical and moving)
• Sale of personal residence rules do not apply if
  home was part of a tax deferred exchange within
  last 5 years

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Small Business Tax Law Changes

• Deduction for meals increases to 70 for
  reimbursements related to DOT hour of service
  limits
• Section 179 expense increased to 105,000
• Off the shelf computer software can be expensed
  as part of Section 179
• New leasehold improvements can now be depreciated
  over 15 years place in service before 2006
• Can elect to deduct 5,000 of start-up costs

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Small Business changes (Cont.)

• S Corporation Changes
• Allow six generations of family members to be
  treated a one shareholder effective 1/1/05
• Increase of permissible shareholders to 100
• Allow transfer of suspended losses to ex-spouse
  in divorce
• Misc. other changes regarding banks and QSST

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International Tax Reforms

• Incentive to reinvest foreign earnings in the US
• Allows a 85 deduction for cash dividends sent
  from controlled foreign corporations to the US
  parents
• Deduction reduced by related party borrowings
• Must exceed historical base period averages
• Must have domestic reinvestment plan for
  dividends received
• Must be less than 500 million, unless already
  noted as being larger than this amount
• Applies to tax years ending after 2004

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Tax Shelter and other Abuses

• Failure to disclose tax shelters subject to large
  penalties
• Penalty is 10,000 to 100,000 for natural
  persons
• Penalty is 50,000 to 200,000 for other types of
  taxpayers
• Larger penalty is for those shelters already
  listed as tax shelters

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Tax shelters (Cont.)

• Contribution of property where FMV is less than
  basis by more than 250,000 must be written down
  to FMV
• Contributions of non-cash property by C
  corporations must make disclosure if it exceeds
  5,000 to get deduction

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Tax Relief for Manufacturers

• Beginning in 2005, manufacturers will get a new
  deduction for qualified income related to
  manufacturing. Deduction is equal to certain
  percentage of net income as follows
• For 2005 and 2006 equals 3
• For 2007 to 2009 equals 6
• After 2009 equals 9

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Tax relief for Manufacturers (Cont.)

• Deduction is limited to taxable income from the
  business
• Also limited to 50 of W-2 wages for the year
• Eligible taxpayers are C corps, S corps,
  partnerships, sole proprietorships, estates and
  trusts

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Tax relief for Manufacturers (Cont.)

• Eligible Income
• Income from manufacturing (including
  construction), reduced by the sum of
• Cost of sales related to such income
• Other deductions directly related to such income
• Share of all other deductions based upon such
  income
• Effective date for taxable years beginning after
  December 31, 2004

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Tax relief for Manufacturers (Cont.)

• Domestic production gross receipts (DPGR) are any
  items derived from any lease, rental, license,
  sale, exchange or other dispostion of
• Qualifying property that was manufactured,
  produced, grown, extracted or constructed,
• Qualified film produced by taxpayer, and
• Electricity, natural gas or potable water

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Tax relief for Manufacturers (Cont.)

• In general, if the companys revenues are less
  than 25,000,000, then a simplified method of
  calculating the deduction will be allowed.
• If over 25,000,000 in sales, then specific
  costs, etc. must be identified and calculated

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Executive Compensation

• Tax Act significantly changes the tax treatment
  of deferred compensation
• Adopts very broad definition of nonqualified
  deferred compensation
• Restricts the flexibility of distributions
• Shuts down the use of offshore rabbi trusts and
  other trusts the provide protection from
  creditors

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Executive Compensation (Cont.)

• Penalizes the failure to comply by making all of
  the deferred amounts taxable
• Imposes a 20 percent tax and interest at the
  underpayment rate plus 1 on participants
  affected by plan failure
• Is effective for amounts earned, vested, and
  deferred after December 31, 2004

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Executive Compensation (Cont.)

• Any plan that defers compensation income that is
  not a qualified retirement or benefit plan comes
  under these provisions
• Account based plans that allow employees to defer
  salary or bonus
• Supplemental Executive Retirement Plans (SERPs)
• Restricted stock units or phantom stock unit plans

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Executive Compensation (Cont.)

• Stock options, other than options on employer
  stock with an exercise price that is not less
  than the fair market value of the stock on the
  date of grant
• Stock appreciation rights (SARs) and
• Bonus plans under which payments is made after
  the bonus is earned
• Compensation paid with 2 ½ months of year-end is
  exempt

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Executive Compensation (Cont.)

• In general, elections must be made by last day of
  the year proceeding the year in which services
  are to be performed
• Prohibition on acceleration of distributions
• Failure to comply results in immediate taxation
  plus 20 penalty tax plus interest from time of
  deferral or vesting if later

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Executive Compensation (Cont.)

• Limited access to distributions
• Death
• Separation from service
• Disability
• Specified times or fixed schedule
• Following change of ownership or control
• Unforeseeable emergency (to be defined by IRS)

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Executive Compensation (Cont.)

• Key employee of publicly traded company must wait
  at least six months upon departure
• Officer with more than 130,000 of compensation
• More than 5 owner
• 1 owner with more than 150,000 of compensation
• Most of these rules to be issued by IRS
  regulations

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Cost Segregation Analysis

• Not a new law, however, substantial tax savings
  on any new building either purchased or built
  related to manufacturing, retail, distribution,
  etc.
• Obtain engineering or qualified report
• Allows you to allocate 39 year life property to 5
  or 7 year life
• Cost of studies vary, but usually in 3,000 to
  7,000 range

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Investment Considerations

• Maximum tax on dividends and capital gains
• Qualified dividends 15
• Long term capital gains 15
• Short term capital gains 35
• Building gain recapture 25
• Collectibles 25

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Investment Considerations (Cont.)

• Exclusion of capital gain from sale of Small
  Business Stock
• Can exclude 50 of gain
• Must hold for at least five years
• Limit of 10,000,000 or 10 times the adjusted
  basis
• Must be acquired at original issue after August
  10, 1993
• Total assets of corporation less than 50,000,000
• Must be a C corporation
• 7 of excluded gain is AMT preference item

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Stock Options

• Key issue
• Make sure that the exercise of any stock options,
  incentive stocks options, etc. does not have
  negative AMT surprises
• For example, many taxpayers exercise options and
  end up with AMT taxes greater than they can sell
  their stock for.

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Overview

• In general, at year-end, we
• Defer recognizing income
• Accelerate expenses
• Maximize equipment purchases
• Review investments for capital gains and dividend
  tax rates
• Make sure AMT does not affect these calculations
  and estimates