A copy of the presentation given at the CBIZ Rountable event regarding the fiscal cliff and health care reform.

1. January 2013 Roundtable
University of Maryland Heritage Hall
January 29, 2013

2. Welcome!
Roundtable Panel
Bill Smith, Managing Director Zack Pace, Senior Vice President
CBIZ MHM National Tax Office CBIZ Benefits Consulting
Stu Anolik, Managing Director Larry Kline, Line Managing Director
CBIZ MHM National Tax Office Tax Practice Leader
International Tax Practice Leader CBIZ MHM Bethesda
CBIZ and MHM Mid-Atlantic Leadership
Greg Allender Michael Marchini
Senior Managing Director President
CBIZ MHM Financial Services CBIZ Insurance Services

3. “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

4. 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

5. Roundtable Part 1 - Fiscal Cliff & Tax Issues
• Fiscal Cliff
• American Taxpayer Relief Act of 2012
– Payroll Tax Cut (Expired) – Limitations to Personal Exemptions
– Revised income tax rates and Itemized Deductions
effective 2013 – Estate and Gift Tax Provisions
– Revised capital gains and – Extension of 179 and Bonus
dividend rates Provisions
– AMT Patch retroactive for – Individual and Business Extenders
2012, indexed 2013 and after
• New Medicare Taxes for 2013 under the Health Care Act
• State Taxes and International Tax Provisions
• Potential Tax Reform
5

6. Roundtable Part 2 – Assessing and Mitigating the
2014 Health Care Reform Employer Penalties
• Key Penalty Risks • Variable Hour Employees
• Five Steps to Determining • Seasonal Employees
Your Risk • The Exchanges
– Eligibility Waiting Period
• Summary, Next Steps
– Employer Size
– 30 Hour Rule
– Premium Affordability Test
– Plan Design Affordability
6

7. Fiscal Cliff

8. 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.
Expiring Taxes New Taxes
• 2001 and 2003 tax cuts • Health care taxes
• Payroll tax cut
• Extenders Spending
• Estate tax relief • Automatic spending cuts
(“Sequestration”)
8

9. 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

10. American Taxpayer Relief Act of 2012
10

11. 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

12. American Taxpayer Relief Act of 2012 –
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

13. American Taxpayer Relief Act of 2012 –
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

14. American Taxpayer Relief Act of 2012 –
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

15. American Taxpayer Relief Act of 2012 –
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

16. American Taxpayer Relief Act of 2012 –
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

17. American Taxpayer Relief Act of 2012 –
“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

18. American Taxpayer Relief Act of 2012 –
“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

19. American Taxpayer Relief Act of 2012 –
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

20. American Taxpayer Relief Act of 2012 –
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

21. American Taxpayer Relief Act of 2012 –
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

22. American Taxpayer Relief Act of 2012 –
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

23. American Taxpayer Relief Act of 2012 –
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

24. American Taxpayer Relief Act of 2012 –
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

25. American Taxpayer Relief Act of 2012 –
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

26. American Taxpayer Relief Act of 2012 –
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

27. American Taxpayer Relief Act of 2012 –
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

28. American Taxpayer Relief Act of 2012 –
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

29. American Taxpayer Relief Act of 2012 –
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

30. American Taxpayer Relief Act of 2012 –
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

31. American Taxpayer Relief Act of 2012 –
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

32. New Medicare Taxes for 2013
32

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 3.8% Medicare Tax – Net Investment Income
• Net Investment Income – Defined as investment income
less otherwise allowable deductions properly allocable to
such income
41

42. 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

43. 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

44. 3.8% Medicare Tax – Key Points
• 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

45. 3.8% Medicare Tax – Key Points
• 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

46. 3.8% Medicare Tax – Key Points
• 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

47. 3.8% Medicare Tax – Key Points
• 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

48. 3.8% Medicare Tax – Case Study
Interest income from various corporate bonds and bank $10,000
accounts
Income Tax-exempt interest income from various municipal bonds $8,000
Scenario: Qualified dividend income from various mutual funds and $12,000
stock investments
Net long-term capital gains from the disposition of various $40,000
mutual funds and stock investments
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 $20,000
in which Joe does not materially participate
Distributive net Section 1231 gain from the same LLC $10,000
Distributive ordinary trade or business income from an S $60,000
corporation in which Joe materially participates
Distributive net Section 1231 gain from the same S $50,000
corporation

49. 3.8% Medicare Tax – Case Study
Interest income from various corporate bonds and bank $10,000
Net accounts
investment Qualified dividend income from mutual funds and stock $12,000
income is investments
calculated
as follows: Net long-term capital gains from the disposition of $40,000
investments
Net rental income $15,000
Ordinary trade or business income from LLC in which Joe $20,000
does not materially participate
Net Section 1231 gain from the LLC $10,000
Net investment income $107,000
49

50. 3.8% Medicare Tax – Case Study
Interest income from various corporate bonds and bank $10,000
accounts
Modified Qualified dividend income from mutual funds and stock $12,000
adjusted gross investments
income is Net long-term capital gains from the disposition of $40,000
calculated as investments
follows:
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

51. 3.8% Medicare Tax – Case Study
Modified AGI $317,000
The 3.8% Less Threshold $200,000
Medicare
contribution Modified AGI in Excess of Threshold $117,000
tax is
calculated Lesser of Net Investment Income and Modified AGI in $107,000
as follows: Excess of Threshold
Medicare Tax Rate 3.8%
Medicare Contribution Tax $4,066
51

52. 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

53. Planning Strategies to Reduce 3.8% Medicare Tax
• 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

54. Planning Strategies to Reduce 3.8% Medicare Tax
• 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

55. Planning Strategies to Reduce 3.8% Medicare Tax
• 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

56. Impact of State Taxes

57. 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

58. 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

59. 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

60. International Tax Provisions

61. American Tax Relief Act of 2012 –
International Tax Provisions
• 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

62. American Tax Relief Act of 2012 –
International Tax Provisions
• 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

63. American Tax Relief Act of 2012 –
International Tax Provisions
• 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

64. 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

65. 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

66. 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

67. 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

68. Potential Tax Reform

69. 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

70. Top 5% Income Earners paid 58.7% of the Taxes
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%
Source: Tax Foundation, based on IRS returns 2009
70

71. Potential Tax Reform
• 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

72. 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

73. 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

74. 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

75. Industry Tax Rate
Agriculture, forestry, Fishing and Hunting 22%
Effective Actual
Mining 18%
Corporate Tax
Utilities 14%
Rates By Selected Construction 31%
Industry 2007- Manufacturing 26%
2008* 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

76. Corporate Reform Under the Framework
• 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
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77. Corporate Reform Under the Framework
• 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)
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78. 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?
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79. 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
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80. 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
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81. 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

82. Questions
before moving on to the
Health Care Reform segment