# Presentation: 327584

## IMA11/15/2005

- 2005 & 2006 Tax Planning Including Recent Tax Law Changes

## 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

- 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

## 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

- 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

## 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

- 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

## 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

- 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

## 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

- 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

## 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

- 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

## 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

- 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

## 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 %

- 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 %

## 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

- 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

## 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

- 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

## 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

- 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

## In general, if the company’s 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

- In general, if the company’s 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

## 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

- 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

## 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

- 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

## 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

- 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

## 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 1⁄2 months of year-end is exempt

- 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 1⁄2 months of year-end is exempt

## 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

- 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

## 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)

- 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)

## 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		

- 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

## 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

- 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

## 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%

- 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%

## 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

- 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

## 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.

- 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.

## 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

- 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