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					   IMA
11/15/2005

    2005 & 2006 Tax
    Planning Including
    Recent Tax Law
    Changes
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
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
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
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
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
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
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
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 %
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
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
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
Tax relief for Manufacturers (Cont.)

   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
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
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
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
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
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
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)
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
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
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%
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
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.
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

				
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