Tax issues power point

2012 Tax Planning Strategies
for Business Owners

Scott Blakesley Pete Hartweger
Peter Hartweger Jeff Crooks
Bill High
Jeff Crooks Doug Hubler
Bill High Doug Hubler
David Seitter
www.spencerfane.com Kansas City  Omaha  Overland Park  St. Louis  Jefferson City

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
Maximum Applicable Tax Rates

Investment Income Current Tax Rate 2013 Tax Rate
Long-Term Capital 15% 23.8%
Gains
Short-Term Capital 35% 43.4%
Gains
Dividends 15% 43.4%
Interest, rents, 35% 43.4%
royalties, annuities


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


Give more, pay less tax

Grow giving
Taxes
by converting
tax dollars to
giving dollars.

Giving
Lifestyle/
Savings


How it works

Full or partial More ways to
interests Charitable assist in the
Income Shareholder name of Christ

Tax deduction

Buyer
(if business is
sold, now or in
the future)

Results: Asset-based giving
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.

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

*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.


Calculate the Gift

Part I
1. Your anticipated income:________________
2. Your income X 30% =_________________

Part II
3. The value of your business/other assets
=_______________
4. _____% of your business to give

Part III
5. What assets?

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