Tax issues power point

www.spencerfane.com Kansas City Omaha Overland Park St. Louis Jefferson City

Scott Blakesley

Jeff Crooks

Scott Blakesley

Jeff Crooks

2012 Tax Planning Strategies for Business Owners

Peter Hartweger

Bill High

Jeff Crooks

Doug HublerPete Hartweger

Doug Hubler

Pete Hartweger

Doug Hubler Bill High

David Seitter

Bill High

David Seitter

http://www.spencerfane.com/Index.asp?~=



Program Description

The team will cover important tax considerations impacting your business, including: • Income Tax• Medicare Surtax• Estate and Gift Tax• Charitable giving• Maximizing your overall business value



Potential Tax Rate Increases Effective January 1, 2013

New Medicare Surtax of 3.8% on investment income of individuals with adjusted gross income over $200,000 and married taxpayers with adjusted gross income over $250,000.

Expiration of the Bush Tax Cuts.

Reduction in Transfer Tax Exemptions.



Income Tax



Expiration of the Bush Tax Cuts

Currently includes a 15% maximum tax rate on long-term capital gains for individuals and qualified dividends.

Unless extended, the rate on long-term capital gains will return to 20%.



Tax Rates on Ordinary Income

Expiring Rate New Rate

10% 15%

25% 28%

28% 31%

33% 36%

35% 39.6%



Marriage Penalty

Currently, the bottom two tax brackets for married filing joint couples are exactly twice as wide for singles.

In 2013, the joint-filer brackets will contract, affecting most taxpayers.



Return of the Phase-out of Itemized Deductions

Eliminated in full in 2010.

In 2013, phase-out of itemized deductions (mortgage interest, state and local taxes, charitable contribution) increases to 80%.

Phase-out begins for AGI above $179,000 for joint-filers.



Return of the Phase-out of Personal Exemptions

Eliminated in full in 2010.

Personal exemption amount in 2012 is $3,800.

In 2013, phase-out of personal exemptions begins for Adjusted Gross Income (AGI) above $269,000 for joint filers.



Dividends

The distinction between ordinary and qualified dividends will expire on December 31, 2012.

The highest federal rate on dividends will return to 39.6%.



Medicare

Surtax



How will the Affordable Care Act (ACA) Impact Tax Payers?

The ACA’s revenue provisions impose a 3.8% tax on investment income for individuals with gross income of $200,000 or more and married tax payers with gross income of $250,000 or more per year.

The ACA revenue provisions will also impose a 0.9% Medicare health insurance tax.



New Tax on Investment Income

While certain exclusions apply, the 3.8% potential tax increase applies to:

• Capital gains (Long and Short term)• Dividends• Interest• Annuities• Royalties• Rents



Combined Impact of Income Tax Changes

Investment Income Current Tax Rate 2013 Tax Rate

Long-Term Capital Gains

15% 23.8%

Short-Term Capital Gains

35% 43.4%

Dividends 15% 43.4%

Interest, rents, royalties, annuities

35% 43.4%

Maximum Applicable Tax Rates



What can you do to protect your business?

If the tax increases apply to you, consider the following solutions: If you are considering selling your business in the near

future, make the sale before 2013. If you are selling your business and want to start a tax-

free transaction (1031 exchange, merger, reorganization), elect now to recognize all gain.

If you are considering a sale with a deferred payment plan, require full payment in 2012 (future installment payments will be taxed at the new capital gain rate).



What can you do to protect your business?

If you want to purchase a business that will be impacted by the rate increase, consider whether completing that transaction in 2012 would motivate sellers to negotiate a more favorable purchase price since sellers are currently paying lower taxes.

Since tax on dividends may exceed tax applicable to compensation, consider whether the compensation paid to shareholders is reasonable.



Estate Planning

and Transfer

Tax



Potential Issues with Estate Tax

Beginning January 1, 2013, without any Congressional Action…

Reduction in Estate Tax Exemption from $5,120,000 to $1,400,000.

Reduction in Generation Skipping Tax Exemption from $5,120,000 to $1,400,000.



Other Economic Changes Expected

Possible future loss of valuation discounts for family business interests.

Market conditions provide for reduced business values.

Possible increase of low interest rates currently allowed for any loans used in family transactions.



2012 is….

The best time to transfer business interests to the next generation.



Available Planning Options

Transfers to family members can be accomplished by gift or sale, depending on what benefits the transferring family member wants/needs to retain.

Transferring family member can retain significant control after the transfer.

Transferring family member may be able to retain (through a spouse) economic benefit in the transferred interests.

Use of trusts can provide asset protection benefits for transferees as well as future tax benefits.



Charitable Giving



Grow giving by converting tax dollars to giving dollars.

Taxes

GivingLifestyle/ Savings

Give more, pay less tax



More ways to assist in the

name of Christ

Full or partial interests

Income

Tax deduction

Charitable Shareholder

How it works

Buyer(if business is sold, now or in

the future)



25

Before After*

Giving $30,000 $330,000

Lifestyle $200,000 $200,000

Taxes $388,000 $268,000

Net cash flow for giving, saving, or investing

This table shows the impact of giving a 3% non-voting interest in a $10M family business (S-corp), with a $1 million of K-1 income.

*The “After” column sums $1.3M because the $300,000 charitable gift came from the company value, not out of the earnings. It represents just the first year, but the gift could be repeated annually for more giving.

Results: Asset-based giving



Calculate the Gift

Part I1. Your anticipated income:________________2. Your income X 30% =_________________

Part II3. The value of your business/other assets

=_______________4. _____% of your business to give

Part III5. What assets?


Documents

Tax issues power point