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
jeff.gross@gt.com
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?