Business Whitepaper 1: Fiscal Cliff & Tax Issues/ Assessing and Mitigating the 2014 Health Care...

January 2013 Roundtable University of Maryland Heritage Hall

January 29, 2013

Roundtable Panel

CBIZ and MHM Mid-Atlantic Leadership

Bill Smith, Managing Director

CBIZ MHM National Tax Office

Larry Kline, Line Managing Director

Tax Practice Leader

CBIZ MHM Bethesda

Stu Anolik, Managing Director

CBIZ MHM National Tax Office

International Tax Practice Leader

Zack Pace, Senior Vice President

CBIZ Benefits Consulting

Greg Allender

Senior Managing Director

CBIZ MHM Financial Services

Michael Marchini

President

CBIZ Insurance Services

Welcome!

“Housekeeping” - Circular 230 Notice

Any tax advice contained in this program is not

intended to be used and cannot be used for the

purposes of avoiding any penalties that may be

imposed by the Internal Revenue Code.

3

Today’s Agenda

• Roundtable Part 1 - Fiscal Cliff & Tax Issues

– Bill Smith, Larry Kline, Stu Anolik

• Roundtable Part 2 – Assessing and Mitigating the

2014 Health Care Reform Employer Penalties

– Zack Pace and Bill Smith

• Q & A

4

Roundtable Part 1 - Fiscal Cliff & Tax Issues

• Fiscal Cliff

• American Taxpayer Relief Act of 2012

5

– Payroll Tax Cut (Expired)

– Revised income tax rates

effective 2013

– Revised capital gains and

dividend rates

– AMT Patch retroactive for

2012, indexed 2013 and after

– Limitations to Personal Exemptions

and Itemized Deductions

– Estate and Gift Tax Provisions

– Extension of 179 and Bonus

Provisions

– Individual and Business Extenders

• New Medicare Taxes for 2013 under the Health Care Act

• State Taxes and International Tax Provisions

• Potential Tax Reform

Roundtable Part 2 – Assessing and Mitigating the

2014 Health Care Reform Employer Penalties

• Key Penalty Risks

• Five Steps to Determining

Your Risk

– Eligibility Waiting Period

– Employer Size

– 30 Hour Rule

– Premium Affordability Test

– Plan Design Affordability

6

• Variable Hour Employees

• Seasonal Employees

• The Exchanges

• Summary, Next Steps

Fiscal Cliff

Fiscal Cliff - Overview

Combination of tax increases due to the expiration of tax

provisions, new taxes under the Affordable Care Act, and the

$1.2T of mandatory spending cuts put in place by the Budget

Control Act of 2011 (known as “sequestration”). All would have

been effective as of January 1, 2013.

• 2001 and 2003 tax cuts

• Payroll tax cut

• Extenders

• Estate tax relief

Expiring Taxes New Taxes

• Health care taxes

• Automatic spending cuts

(“Sequestration”)

Spending

8

Fiscal Cliff – Impact

• CBO projected that the automatic spending cuts plus

expiration of tax cuts and extenders would send the US

into a recession in 2013

• Stock market could drop due to higher rates on capital

gains and dividends

• Nearly 90% of US taxpayers would pay more tax

• Middle income household average tax increase: $3,000

• IRS warned Congress if they don’t act by the end of the

year it could delay the tax filing season

9

American Taxpayer Relief Act of 2012

10

American Taxpayer Relief Act of 2012 –

Ordinary Income Tax Rates

• Current income tax rates of 10%, 15%, 25%, 28%, 33%

and 35% permanently extended

– Rates would have increased to 15%, 28%, 31%, 36% and 39.6%

• A 39.6% rate will apply to individuals with taxable income

over $400,000 ($450,000 for joint filers; $425,000 for

heads of households) beginning in 2013

– Caution: the rate could be as high as 43.4% on investment income

if subject to the 3.8% Medicare surtax

11


Capital Gains and Dividend Rates

• Current capital gains and qualified dividend rate of 15%

permanently extended for individuals with taxable income

of $400,000 or less ($450,000 or less for joint filers)

beginning in 2013

– Caution: the rate could be as high as 18.8% if the income is subject

to the 3.8% Medicare surtax

– Rate still 0% for taxpayers in 10%/15% ordinary income brackets

– Capital gain rate would have increased to 20% and qualified

dividend rate would have increased to ordinary income rates

12


Capital Gains and Dividend Rates (continued)

• A 20% rate will apply to individuals with taxable income

over $400,000 ($450,000 for joint filers) beginning in 2013

– Caution: the rate could be as high as 23.8% if the income is subject

to the 3.8% Medicare surtax

13


Permanent AMT Relief

• The AMT “Patch” expired 12/31/11

• The patch has routinely been extended in the past

• The patch temporarily increased the AMT exemptions,

which are not indexed for inflation

– For example, in 2011 the exemption for MFJ increased from

$45,000 to $72,450

• The Act makes the higher exemption amounts permanent

which saves an estimated 30 million taxpayers from

having to pay the AMT on their 2012 returns

14


Permanent AMT Relief (continued)

• The higher exemptions amounts are retroactively

effective to the beginning of 2012

• The increases in the exemption amounts are as follows:

– Singles, from $33,750 to $50,600

– MFJ, from $45,000 to $78,750

– MFS, from $22,500 to $39,375

• The exemption amounts are now indexed for inflation

beginning in 2013

• In addition, many nonrefundable personal credits will now

reduce the AMT liability as well as the regular tax liability


Personal Exemption Phase-out (PEP)

• Beginning in 2013, the Act reinstates the previously

suspended Personal Exemption Phase-out for taxpayers

with AGI over the following thresholds:

– Single filers $250,000

– Married couples $300,000

– Heads of Household $275,000

• Under the phase-out, the total amount of personal

exemption that can be claimed is reduced by 2% for each

$2,500 (or portion thereof) by which the taxpayer’s AGI

exceeds the applicable threshold 16


“Pease” Limitation

• Beginning in 2013, the previously suspended limitation on

itemized deductions is reinstated for taxpayers whose

AGI are above the following thresholds (same as PEP)

– Single filers $250,000

– Married couples $300,000

– Heads of Household $275,000

17


“Pease” Limitation (continued)

• For taxpayers subject to the limitation the total amount of

their itemized deductions is reduced by 3% of the amount

by with the taxpayer’s AGI exceeds the above thresholds

• The reduction is limited to 80% of the otherwise allowable

itemized deductions

18


Estate and Gift Tax

• The estate and gift tax rates and lifetime exemption were

set to go back to 2001 levels with the expiration of the

Bush-Era tax provisions

– Top Rate of 55% (35% in 2012)

– Exclusion amount of $1 million ($5.12 million in 2012)

• Popular opinion was that Congress would eventually

come up with a 45% rate with a $3.5 million exclusion for

estates, while the gift tax exemption would go back $1

million

19


Estate and Gift Tax (continued)

• Under the Act, for individuals dying and gifts made after

2012, the $5 million exemption (adjusted for inflation)

remains for both estate, gift and GST taxes

– 2013 exemption projected to be $5,250,000

• The top rate is permanently increased from 35% to 40%

• The top rate kicks in on taxable estates and gifts over $1

million (after taking into account the exemption)

• The Act also maintains the portability rules for a

deceased spouse’s unused estate tax exemption 20


Expiration of the Payroll Tax Cut

• An extension of the temporary 2% reduction of the social

security payroll tax rate for employees and self-employed

persons was not included in the bill

– On January 1 2013, the employee’s share of FICA increased from

4.2% to 6.2%

– FICA portion of self-employment tax increased from 10.4% to

12.4%

21


Individual Tax Extenders

• The election to deduct state and local general sales taxes

instead of state income tax which expired at the end of

2011 was extended through 2013 and was retroactively

reinstated for 2012

• The child tax credit remains at $1,000 (was to revert back

to $500 after 2012)

• The exclusion in income from the discharge of

indebtedness for a personal residence was set to expire

at the end of 2012 and is now extended through 2013 22


Individual Tax Extenders

• Tax free distributions from IRAs for charitable purposes

– Originally expired at the end of 2011

– Under the new law, qualified distributions from IRA’s for

charitable purposes made prior to February 1, 2013 may be

deemed to be made in 2012

– Also, cash distributions taken from IRA’s after November 30,

2012 and transferred to charity prior to February 1, 2013 may

qualify as tax-free distributions in 2012 (assuming the

distributions otherwise qualify for the exclusion)

23


Section 179 Expensing

• The Section 179 expensing provision is retroactively

extended by the Act through 2014:

– The limit dropped from $500,000 in 2011 to $139,000 in 2012 and

was set to revert back to $25,000 in 2013

– The Act keeps in place the 2011 level of $500,000 for the years

2012 and 2013

– The deduction begins to phase out when total qualified purchases

for the year exceeds $2 million

– The Act also reinstated the 2011 provision that allows the

immediate deduction of up to $250,000 of qualified leasehold

improvements, restaurant and retail improvements

24


Bonus Depreciation

• The percentage dropped from 100% in 2011 to 50% in

2012 and was set to expire starting in 2013

• The Act extends the 50% bonus depreciation provision to

assets placed in service before January 1, 2014

• The original use of the property must begin with the

taxpayer, so used equipment will not apply for bonus

depreciation

25


Bonus Depreciation (continued)

• The property must have a recovery period of 20 years or

less

• Bonus depreciation is mandatory, but taxpayers can elect

out (the election applies to all property in the class or

classes of property for which the election is made)

26


Business Tax Extenders

• The following business tax provisions that had expired at

the end of 2011 were extended through 2013, retroactive

to the beginning of 2012, including, but not limited to the:

– The research and experimentation (R&E) credit

– The 15 year straight line cost recovery for qualified leasehold

improvements, qualified restaurant property and qualified retail

improvements

27


Business Tax Extenders (continued)

• The following business tax provisions that had expired at

the end of 2011 were extended through 2013, retroactive

to the beginning of 2012, including, but not limited to the:

– Five-year recognition period for S corporation built-in gains tax

(originally was a 10 year period)

– 100% exclusion of gain from sale of qualified small business stock

– New markets tax credit

– Work opportunity tax credit (WOTC)

28


Energy Incentives Extenders

• Several energy incentives, most of which had expired at

the end of 2011, were extended through 2013, including,

but not limited to the:

– Residential energy property credit

– Energy efficient new homes credit

– Energy efficient appliances credit

– Renewable electricity production credit, and

– Credit for biodiesel and renewable diesel used as fuel

29


Other Notable Provisions

• The automatic spending cuts scheduled to go into effect

on January 1st were deferred until March 1, 2013

• Taxpayers may now transfer amounts from a qualified

retirement plan to a qualified Roth plan (e.g. Roth 401(k))

without paying an early withdrawal penalty

30


Other Notable Provisions (continued)

• The provision that would have drastically reduced

Medicare payments to physicians has been deferred for

another year

• Federal long-term unemployment benefits have been

extended for one year

• The Federal milk subsidy has been extended for one year

31

New Medicare Taxes for 2013

32

New Medicare Taxes

• Effective in 2013

• Two new taxes:

– Additional 0.9% tax on earned income

– 3.8% surtax on unearned income

• Generally impacts couples with income over $250,000

and individuals with income over $200,000

• Enacted as part of 2010 healthcare reform legislation

(Affordable Care Act or “ACA”)

• IRS recently issued proposed reliance regulations on the

operation of the two new Medicare taxes 33

Additional 0.9% Medicare Tax on Earned Income

• Change in 2013:

– Additional 0.9% HI tax on wages (to 2.35%) and net SE income

(to 3.8%) in excess of the thresholds below

– Additional tax is on employee’s contribution only (or ½ of SE

individual’s contribution)

Filing Status Threshold

Married Filing Jointly $250,000

Single/Head of Household $200,000

Married Filing Separately $125,000

34

Additional 0.9% Medicare Tax on Earned Income

• Unlike the OASDI ceiling which is applied based on the

employee’s wages, the 0.9% additional Medicare tax is

applied based on the combined wages of married

couples filing jointly

• This causes additional complications as it pertains to

employee withholding

35

Withholding on 0.9% Medicare Tax

• Employers are required to withhold the additional 0.9%

tax on wages in excess of $200,000 whether married or

not

• Employers must disregard the wages received by the

employee’s spouse

36

Withholding on 0.9% Medicare Tax (continued)

• Implications:

– If an employee’s wages are below $200,000 but when combined

with the spouse’s wages they exceed $250,000, the couple may

be under-withheld

– If an employee’s wages are between $200,000 and $250,000 and

the spouse has no wages, the couple may be over-withheld

– The 0.9% tax is a tax for purposes of the underpayment of

estimated tax penalty

37

3.8% Medicare Tax on Unearned Income

• Surtax on Net Investment Income (NII)

• First time that FICA/Medicare taxes have been assessed

on unearned income

• Applies to individuals, trusts and estates

• Considered a tax for purposes of the underpayment of

estimated tax penalty

• The proposed regulations attempt to define NII subject to

the 3.8% tax

38

3.8% Medicare Tax – Individuals

• Individuals

– 3.8% of the lesser of:

• Net investment income, or

• Excess of Modified AGI over the threshold amounts below

– Modified AGI = AGI + foreign earned income exclusion

Filing Status Threshold

Married Filing Jointly $250,000

Single/Head of Household $200,000

Married Filing Separately $125,000

39

3.8% Medicare Tax – Trusts and Estates

• Trusts and Estates

– 3.8% of the lesser of:

• Undistributed net investment income, or

• AGI over the amount at which the highest tax bracket is applicable

($11,950 for 2013)

– Does not apply to simple trusts since, by definition, all income is

distributed annually (but would apply to income distributed to

beneficiaries)

– Does not apply to grantor trusts since they are disregarded for

income tax purposes (but would apply to income reported by

grantor) 40

3.8% Medicare Tax – Net Investment Income

• Net Investment Income – Defined as investment income

less otherwise allowable deductions properly allocable to

such income

41

3.8% Medicare Tax – Net Investment Income (cont’d.)

• Includes three categories:

– Gross income from interest, dividends, annuities, royalties and

rents (other than such income derived in the ordinary course of an

active trade or business)

– Other gross income from any passive trade or business or

business in the trading of financial instruments or commodities

– Net gains attributable to the disposition of property (other than

property held in an active trade or business)

• Less:

– Deductions properly allocable to such gross income or net gain

42

3.8% Medicare Tax – Key Points

• Taxpayer’s must have both NII and gross income over the

applicable thresholds in order to be subject to the tax

• The thresholds are NOT adjusted for inflation

– This may cause a problem similar to the AMT in the future

• The inclusion of passive activities in NII represents a

huge shift in traditional tax planning

– More emphasis will be placed on treating profitable activities as

active instead of passive to avoid the 3.8% surtax, however

• Passive losses may go unused

• Net income from an active trade or business may be subject to

self employment tax

43


• Only property sold that was not held in a trade or

business is included in net investment income

– In the case of sales of interests in a partnership or S corporation

we have to do some calculations in order to determine how much

of the gain or loss is attributable to an active trade or business

– The Proposed Regulations include a complex four step process to

achieve this

• The surtax also applies to income attributable to “working

capital”

44


• Net investment income reduced by “properly allocable”

deductions

– Examples include investment interest expense, investment fees,

expenses related to rents, trade or business deductions and state

and local income taxes

• Allocation of state and local taxes between net investment income and

other income can be determined under “any reasonable method”

• The proposed regs provide a safe harbor method of allocating state

and local taxes based on the ratio of NII to gross income

– Carryovers from years prior to 2013

• Capital losses, passive losses and investment interest expense

45


• The 3.8% Medicare tax does not apply to distributions

from qualified retirement plans

• However, those distributions still increase MAGI which

could either

– raise the taxpayer’s MAGI over the threshold amount,

thus subjecting the taxpayer to the tax, or

– increase the amount subject to the tax by increasing

the spread between MAGI and the threshold amount

46


• The 3.8% Medicare tax does not apply to investment

income excludible from taxable income (e.g. municipal

bond interest, excluded gain from sale of personal

residence)

47

3.8% Medicare Tax – Case Study Interest income from various corporate bonds and bank

accounts

$10,000

Tax-exempt interest income from various municipal bonds $8,000

Qualified dividend income from various mutual funds and

stock investments

$12,000

Net long-term capital gains from the disposition of various

mutual funds and stock investments

$40,000

Regular IRA distribution $100,000

Net rental income from a building that Joe owns $15,000

Distributive ordinary trade or business income from an LLC

in which Joe does not materially participate

$20,000

Distributive net Section 1231 gain from the same LLC $10,000

Distributive ordinary trade or business income from an S

corporation in which Joe materially participates

$60,000

Distributive net Section 1231 gain from the same S

corporation

$50,000

Income

Scenario:

3.8% Medicare Tax – Case Study

Net

investment

income is

calculated

as follows:

Interest income from various corporate bonds and bank

accounts

$10,000

Qualified dividend income from mutual funds and stock

investments

$12,000

Net long-term capital gains from the disposition of

investments

$40,000

Net rental income $15,000

Ordinary trade or business income from LLC in which Joe

does not materially participate

$20,000

Net Section 1231 gain from the LLC $10,000

Net investment income $107,000

49


Modified

adjusted gross

income is

calculated as

follows:

Interest income from various corporate bonds and bank

accounts

$10,000

Qualified dividend income from mutual funds and stock

investments

$12,000

Net long-term capital gains from the disposition of

investments

$40,000

Regular IRA distribution $100,000

Net rental income $15,000

Ordinary trade or business income from the LLC $20,000

Net Section 1231 gain from the same LLC $10,000

Ordinary trade or business income from the S corporation $60,000

Net Section 1231 gain from the same S corporation $50,000

Modified AGI $317,000


The 3.8%

Medicare

contribution

tax is

calculated

as follows:

Modified AGI $317,000

Less Threshold $200,000

Modified AGI in Excess of Threshold $117,000

Lesser of Net Investment Income and Modified AGI in

Excess of Threshold

$107,000

Medicare Tax Rate 3.8%

Medicare Contribution Tax $4,066

51

Planning Strategies to Reduce 3.8% Medicare Tax

• Convert to a Roth IRA so future qualified retirement plan

distributions don’t increase MAGI

– Although regular IRA distributions are not subject to 3.8% tax,

they are included in modified AGI

– In prior example, if IRA distribution was from Roth IRA, modified

AGI would have been reduced to $217,000, so the maximum

subject to 3.8% tax would be reduced to $17,000

– If modified AGI (minus threshold amount) is greater than net

investment income even without IRA distributions, no benefit to

switching to Roth

52


• Taxable conversion amount would be subject to 3.8% tax

– Time Roth conversion in a year with minimal NII

• Realign Investment Strategies

– Shift investments to growth securities that don’t produce

dividends, i.e. tax-exempt bonds, insurance (with cash buildups)

and annuities

– Take advantage of installment sale treatment to spread passive

income over several years

53


• Realign Investment Strategies (continued)

– Time gains and losses to offset

• Be careful of wash sale rules on loss positions

• Gains not subject to wash sale rules

– Shift investments to children

• Avoid 3.8% tax if MAGI less than threshold

• Kiddie tax may tax income at parents’ marginal rate (under 19

or under 24 and full time student)

54


• Passive Activities

– Evaluate profitable passive activities to see if changes could be

made to reach to the level of material participation

– Watch self-employment income from partnerships and LLC’s

– Review passive activity rules to see if passive activities can be

grouped with non passive activities to avoid passive income

• Factors to consider include similarities, common ownership,

geographical locations, interdependence of operations

• Consider passive loss investment opportunities to offset

passive income

55

Impact of State Taxes

Estate Taxes

• The state “Pick-Up” tax permanently repealed

• Many states have a lower exemption that the Federal

exemption

• Many states lost lots of revenues with these changes

• Watch for state legislators to look at this area for future

revenue increases

57

Business Provisions

• Bonus Depreciation extended

– As most states decouple anyway (31 states do), no new impact

– Concern for business – monitoring the differences between

Federal and state

– For multi-state business, can have multiple depreciation

schedules!

• Renewable Energy Credits

– No direct benefit, but potential increases in utilization of state

credits and/or increased sales tax receipts

58

Future Impact

• Will more states decouple from the Federal code?

• Politically, many states have one party in charge – could

make it easier to push through major tax changes.

59

International Tax Provisions

American Tax Relief Act of 2012 –


• Active Financing Exception

– Certain income from the active conduct of a banking, financing or

similar business, or from the conduct of an insurance business is

excluded from the definition of Subpart F income through 2013.

– Allows banks, finance, insurance and similar companies to defer

active financing income offshore for tax years beginning before

January 1, 2014.

61

• Look through rule for payments between related CFCs

– Look-through treatment applies to dividends, interest, rents, and

royalties received by one CFC from a related CFC; allows payments

to be treated as non-subpart F income.

– Look-through rules similar to those that a U.S. shareholder uses to

allocate interest, rent, royalty and dividend income received from a

CFC to separate foreign tax credit baskets applied



62

• 20% Withholding Rate on Sales of USRPIs

– The IRS may, to the extent provided in regulations, reduce the

withholding rate on distributions from a partnership, trust or estate

attributable to the disposition of a USRPI from 35% to 20%.



63

IRS Enforcement - Compliance

• Foreign Account Tax Compliance Act (“FATCA”)

– IRS has entered into several inter-governmental agreements to

facilitate enforcement of FATCA provisions.

– New in 2011: Form 8938 requires reporting of certain foreign

financial assets – may require disclosure of foreign bank accounts

that are already reported on FBAR.

64

IRS Enforcement - Compliance

• Report of Foreign Bank and Financial Accounts (“FBAR”)

– FBAR filing deadline extended to June 30, 2014 for certain

individuals with signature authority but no financial interest in foreign

accounts.

– January 2012 offshore voluntary disclosure program (“OVDP”)

continues to be available.

– Publicly, the IRS acknowledges its 2011 OVDP assumed willfulness

in imposing penalties, and is making an effort to avoid this “one size

fits all” approach within the 2012 OVDP

65

International Tax – Planning Examples

• IP Migration

– Transfer of intellectual property assets outside U.S. taxing jurisdiction

– Requires valuation of assets, tax-efficient structuring of the

transaction, and transfer pricing study to move taxable income in tax-

favored countries.

– May also involve use of an offshore company, e.g. Cyprus.

66

International Tax – Planning Examples

• Expatriation Planning

– US citizens and residents are subject to U.S. gift tax and estate tax

on transfers of any property; non-citizens and non-residents are

subject to gift tax and estate on transfers of real or tangible property

located in the US (including stock in a U.S. corporation).

– US taxpayers are taxable on gifts from “covered expatriates” –

nonresident aliens can take steps to avoid being a covered

expatriate (e.g., no green card).

– Use of foreign trusts to hold assets until heirs become expatriates.

– Before expatriating, a US person can make gifts up to the estate and

gift exclusion amount ($5 million adjusted for inflation, per the

American Taxpayer Relief Act of 2012).

67

Potential Tax Reform


• Upcoming Budget Negotiations

– Raising the Debt Ceiling

– Automatic Cuts Under Sequestration – March 1, 2013

• “We can’t simply cut our way to prosperity”. “The deficit

needs to be reduced in a way that is balanced. Everyone

pays their fair share.” [President Obama, January 2, 2013]

• “Simply put, the tax code is a nightmare. The Ways and

Means Committee will pursue comprehensive tax reform

in the new Congress.” [Rep. Dave Camp, Chairman of the House

Ways and Means Committee, January 2, 2013]

69

Top 5% Income Earners paid 58.7% of the Taxes

Source: Tax Foundation, based on IRS returns 2009

Category AGI Cut Off Number Share of

Income Tax

Top 0.1% $1,432,890 137,982 17.1%

Top 1% $343,927 1,380,000 36.7%

Top 5% $154,653 6,899,000 58.7%

Top 10% $112,124 13,798,000 70.5%

Top 25% $66,193 34,496,000 87.3%

Top 50% $32,396 68,991,000 97.7%

Bottom 50% <$32,396 68,991,000 2.3%

70


• The issue on individual rates my be settled but some

popular deductions may be in jeopardy down the road as

Congress looks to raise more revenue

• Various tax reform studies have looked at eliminating or

capping many popular deductions including:

– Mortgage interest deduction

– Charitable deductions

– Employer sponsored health insurance exclusion

– State and local taxes

– Interest exclusion on state and local bonds

71

Obama Tax Plan – Individuals

• What did not get in the new law

– Cap certain deductions or exclusions at 28% for taxpayers in the

36% and 39.6% brackets

– Eliminate the carried interest “loophole” for hedge fund managers

and other similar service providers

– Eliminate a special depreciation “loophole” for corporate jets (this

would increase the period for depreciation from 5 years to 7 years

and would raise $2 billion over 10 years)

– Replace the AMT with the “Buffett Rule” – taxpayers with income

over $1 million must pay an effective federal income tax rate of at

least 30%.

72

Potential for Corporate Tax Reform

• February 2012-The President’s Framework for Business

Tax Reform (the Framework)

– Rough blueprint for the President’s plan

• To cut corporate tax rates to internationally competitive levels

• Simplify the corporate tax rules

• Reduce or eliminate tax loopholes in the current system

73

Corporate Reform Under the Framework

• Reduce top corporate rate from 35% to 28%

• Reduction or elimination of many popular deductions and

credits, for example:

– Accelerated depreciation

– Interest expense deduction

– LIFO inventory accounting

– Oil and gas tax preferences

– Other tax breaks for specific industries

• According to the Framework these tax expenditures create a

tax system that distorts business decision making and results

in a less efficient allocation of capital as seen by the various

tax rates by industry

74

Effective Actual

Corporate Tax

Rates By Selected

Industry 2007-

2008*

Industry Tax Rate

Agriculture, forestry, Fishing and Hunting 22%

Mining 18%

Utilities 14%

Construction 31%

Manufacturing 26%

Wholesale and Retail Trade 31%

Transportation and Warehousing 19%

Information 25%

Insurance 25%

Finance & Holding Companies 28%

Real Estate 23%

Leasing 18%

All Services 29%

Average Effective Actual Tax Rate 26%

*Source: U.S. Treasury, Office of Tax Analysis


• Proposes to strengthen U.S. manufacturing by offering

incentives, including cutting the top corporate rate on

manufacturing to 25% by

– Increase in Domestic Production Activities Deduction (DPAD)

– And an even lower rate (approximately 18%) for “advanced

manufacturing”

• Establish greater parity between large pass-through

entities and C corporations

– Previously the Treasury had proposed taxing any business with

more than $50 million in gross receipts as a corporation

76


• Framework calls for simplification for small businesses

and adding incentives, such as

– Allowing companies with up to $10 million in gross receipts to

use the cash method of accounting (current limit is $5 million)

– Allowing small businesses to expense up to $1 million under

IRC Section 179

– Expanding and simplifying the Small Business Health Care Tax

Credit (including an increase in the eligibility cut-off from 25 to

50 employees)

77

Potential State Reaction to Federal Tax Reform

• Multi-state tax issues – more states moving towards a

weighting of the sales factor and/or considering where the

revenues are generated from, versus sold to

• State sales tax nexus – could Congress actually take

action on this much delayed area?

78

International – Obama Proposals

• Retain the worldwide taxation system vs. territorial tax

system

– A territorial system would not tax the foreign income of U.S.

individuals or corporations

• Impose a minimum tax on foreign profits of U.S. companies

to discourage taxpayers from keeping funds outside the US

(current estimate is up to $2 trillion in cash overseas)

• Protect U.S. jobs by:

– Draw manufacturing investments to the U.S. by providing a 20% tax

credit for locating jobs and business activity in the U.S.

– Prohibiting tax deductions for shipping jobs overseas

79

Summary / Key Takeaways

• Fiscal Cliff

• The American Taxpayer Relief Act of 2012

– Payroll Tax Cut not included

– AMT Relief for 2012

– Equipment Expensing for 2012

• 2013 Changes

– Changes to Individual Income Tax rates

– Changes to the Estate and Gift rates

– New Medicare Taxes

• 0.9% Medicare tax on earned income

• 3.8% Medicare tax on unearned income

80

Summary/Key Takeaways

• Potential Future Tax Reform

– Effect on Individual Deductions

– Capping Itemized Deductions

– Buffet Rule

– Potential Corporate Tax Reform

• Broaden the tax base and lower the rate

– Establish parity between corporations and large passthroughs

– International Taxation

81

Questions before moving on to the

Health Care Reform segment

Business Whitepaper 1: Fiscal Cliff & Tax Issues/ Assessing and Mitigating the 2014 Health Care...

Business

Transcript of Business Whitepaper 1: Fiscal Cliff & Tax Issues/ Assessing and Mitigating the 2014 Health Care...