Enterprise WorldwideAnnual Symposium - 2012

Federal Tax UpdateJune 14, 2012

Mark LuscombePrincipal Analyst

CCH, a Wolters Kluwer business

2012 Federal Tax Updates

• Sunset of 2001 and 2003 Tax Cuts

• Extension of Expired Provisions

• Supreme Court Ruling on Health Care Reform

• Expiration of Payroll Tax Cut

• Regulations on Capitalization of Tangible Assets

• Supreme Court Holding in Home Concrete

Sunset of 2001 and 2003 Tax Cuts• Individual rates• Capital gain and dividend rates• Marriage penalty relief• Phase-out of itemized deductions and personal

exemptions• Earned income credit• Child Tax Credit• Adoption Credit/Adoption assistance programs• Child and Dependent Care Credit• Education provisions

– Coverdell Education Savings Accounts– Educational assistance exclusion– Federal scholarships– Student loan interest deduction

Some Special Sunset Cases

• AMT relief

• Higher education deduction

• American Opportunity Tax Credit

Business-related Sunsets

• Dividends from RICs and REITs

• Collapsible corporations

• Accumulated earnings tax

• Personal Holding Company tax

• Small business stock

• Employer-provided Child Care Credit

• Tax-exempt bonds

Estate/Gift/GST Sunsets

• Rates • Exclusion amounts• Portability• State death tax credit/deduction• Gift tax• GST Tax• Qualified family owned business deduction• Qualified conservation easements• Installment payment of estate tax for closely-

held businesses

Other Expired ProvisionsIndividual

• State and local sales tax deduction• Teacher’s classroom expense deduction• Exclusion for charitable contribution of IRA proceeds• Parity for transit benefits• Mortgage insurance premium deduction• Cancellation of mortgage indebtedness exclusion for

personal residence• Nonbusiness energy credit for qualified energy efficient

home improvements• IRA distributions directly to charity for people over 70 1/2

Other Expired Provisions Business

• 100 percent bonus depreciation• Enhanced Code Sec. 179 expensing• Research credit• 100 % exclusion for Code Sec. 1202 small

business stock• Work Opportunity Tax Credit• 15-year recovery period for qualified leasehold

improvements, qualified restaurant property and qualified retail improvement property

• Reduction in the S Corp recognition period for built-in gain

• Basis adjustment to stock of an S Corp making charitable contributions of property

Other Expired Provisions Business

• Contributions of conservation real property, food inventory, book inventory, or computer equipment

• Energy tax incentives

• Employer-provided child care credit

Tax Provisions in Health Care Reform

• Individual mandate credit and penalty• Small business health care credit; business

penalty• Medicare contribution tax• Hospital services insurance tax• Economic substance doctrine• Medical insurance deduction for young adult

children• AGI threshold for medical expense deduction• FSAs, HSAs, and HRAs

– FSA contribution limit, non-prescription drugs– Penalty for unrelated withdrawals

Tax Provisions in Health Care Reform

• Tax on use of indoor tanning salons• Excise tax on “Cadillac” health plans• Tax on manufacturers and importers of branded

prescription drugs• Tax on manufacturers and importers of medical devices• Credit for developers of therapeutic projects• Black liquor excluded from cellulosic biofuels production

credit• Additional requirements imposed on not-for-profit

hospitals• IRS sharing information with HHS and SSA• Reporting employer-provided health insurance on Form

W-2

Tax Provisions in Health Care Reform

• Exclusion of health benefits provided by Indian Tribes• No tax on student loan forgiveness for health care

professionals serving underserved areas• Increased credit and amount for adoption assistance• No tax on free choice vouchers applied to health

premiums• Deduction limit on compensation by health insurance

providers• Code Sec. 833 deduction requires 85% of premium to go

to clinical services• Fee on sponsors of self-employed health plans• Payroll deduction for CLASS program• Business deduction to consider retiree drug subsidy

Payroll Tax Reduction

• Started in 2011

• Replaced Making Work Pay Credit

• Sunsetting at the end on 2012

Regulations on Capitalization of Intangible Assets

• Generally effective for tax years beginning on or after January 1, 2012• Materials and Supplies

– Expanded definitions– De minimis rule– Rotable and temporary spare parts

• Acquisitions– Transactions costs– Costs before placed in service date– De minimis rule

• Improvements– Unit of property

• Functional interdependent standard• Building and structural components• Plant and network assets• Leasehold improvements

– Betterments and Restorations– Adaptations to new use– Routine maintenance safe harbor

• General Asset Accounts• MACRS Dispositions• IRS directs hold-off on capitalization issues under audit

Supreme Court Decision in Home Concrete

• Six-year statute does not apply in overstated basis cases

• Based on prior Supreme Court decision in Colony interpreting similar language under 1939 Code

• In determining enforceability of an IRS regulation, still look to Mayo, Chevron, and Brand X

Other 2012 Tax Developments• IRS expands Fresh Start initiative

– Threshold for installment agreement without financial statement raised to $50,000

– Unemployed individuals may be eligible for penalty relief• FATCA

– Regulations issued in February– Alternative reporting regime by agreement with certain countries

• Temporary transportation funding extension through June, 2012• Foreign tax credit guidance• Regulations on local lodging expenses• Expanded innocent spouse relief• Ninth Circuit – Roth IRA is an ineligible S Corporation shareholder• IRS final regulations of Code Sec. 104(a)(2) exclusion from gross

income for amounts received on account of personal physical injuries or physical sickness

President Obama Tax Proposals

• Preserve Bush tax cuts for incomes under $200,000/$250,000 for joint filers

• Eliminate Bush tax cuts for those over those income limits

• Enact Buffet rule for those earning over $1 million• Limit itemized deductions to 28%• Estate tax at 2009 levels• Cut corporate tax rate to 28% while eliminating corporate

tax breaks• Tax carried interests as ordinary income• Reform taxation of insurance products• Repeal LIFO• Several specific international tax proposals

Romney Tax Proposals

• Reduce individual tax rates by 20%

• Preserve Bush tax cuts

• Repeal estate tax

• Corporate tax rate reduced to 25%

• Territorial international tax system

• Repeal health care reform

“Gang of Six” Proposals

• Reduce individual tax brackets to 8-12%, 14-22%, and 23-29%

• Repeal AMT• Reform tax expenditures for health, charitable

giving, homeownership and retirement, with a net revenue increase of $1.5 trillion

• Retain Child Tax Credit and Earned Income Tax Credit

• Corporate tax rate a single rate between 23 and 29%, eliminating tax expenditures to make it revenue neutral

Deficit Reduction Commission Proposals

– Tax reform that reduces rates, simplifies Code, broadens tax base, and reduces the deficit• Option 1: The Zero Plan

– Three individual rates and one corporate rate– Repeal AMT, Pease, and PEP– Treat capital gains and dividends as ordinary

income– Eliminate all $1.1 trillion of tax expenditures,

adding back any by increasing rates– Keep Child Tax Credit and Earned Income Tax

Credit

Deficit Reduction Commission Proposals

• Tax reform that reduces rates, simplifies Code, broadens tax base, and reduces the deficit

• Option 2: Wyden-Gregg Reform– Individual

» Three rates of 15%, 25%, and 35%

» Triple standard deduction to $30,000 ($15,000 for single filers)

» Repeal AMT, PEP and Pease

» Capital gain and dividends tax as ordinary income

» Repeal state and local tax deduction, cafeteria plans, and miscellaneous itemized deductions

» Limit mortgage deduction to exclude second residences, home equity loans, and mortgages over $500,000

» Limit charitable deductions with 2% of AGI floor

» Cap income exclusion for employer-provided health care

Deficit Reduction Commission Proposals

• Tax reform that reduces rates, simplifies Code, broadens tax base, and reduces the deficit

• Option 2: Wyden-Gregg Reform– Corporate

» Reduce rate to 26%» Make R&D Credit permanent» Eliminate or modify: 1. Domestic production

deduction, 2. LIFO, 3. Energy tax preferences for oil and gas, 4. Depreciation rules

• Option 3: Tax Reform Trigger

Tax Planning for 2012• Looks like no action on Bush tax cuts or expired

provisions at least until after election• Election outcome could influence whether we have

higher tax rates, the same tax rates, or even lower tax rates next year

• Should know Supreme Court ruling on health care reform by end of June

• Accelerate income and postpone deductions?• Realize capital gains• Defer realization of capital losses• Convert to tax-exempt income?

– Tax-exempt bonds– Roth IRAs

• Shift from dividend paying to capital gain investments?• Exercise stock options

Tax Planning for 2012

• Tax hit from getting married• Gifting in 2012?• Review trust distributions• Consider GST and Dynasty trusts in 2012• Consider buying life insurance• Rethink corporate vs. pass-through entities?• Review compensation vs. dividend strategies?• Declare dividends in 2012?• Reduce salary payments from S Corporations?• Do distribution of S Corporation built-in gain?• Look at 1031 exchanges?• Involve client in evaluating alternatives with advisor

Questions?

Thank You!