Webinar presentation given to the American Subcontractors Association.

1. Tax Strategies For
Subcontractors
American Subcontractors Association Webinar
Presented by
Cord D. Armstrong, CPA, CCIFP
Managing Director, CBIZ MHM, LLC

2. 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. Agenda
• Fiscal Cliff
• American Taxpayer Relief Act of 2012
– Payroll Tax Cut (Expired)
– Revised income tax rates effective 2013
– Revised capital gains and dividend rates
– AMT Patch for 2012
– 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
• Potential Tax Reform
3

4. 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 be
effective as of January 1, 2013.
Expiring Taxes New Taxes
• 2001 and 2003 tax cuts • Health care taxes
• Payroll tax cut
• Extenders
• Estate tax relief Spending
• AMT patch • Automatic spending cuts
• Equipment expensing (“Sequestration”)
4

5. Fiscal Cliff – Tax Increases
Billion
2001 and 2003 tax cuts $166
Payroll tax cut $125
AMT patch $119
Health care taxes $23
Stimulus tax cuts $21
Extenders $20
Estate tax $13
Capital asset expensing $8
Total Tax Increase $495
5

6. Fiscal Cliff – Impact
• CBO projected that the automatic spending cuts plus
expiration of tax cuts and extenders will 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
6

7. Fiscal Cliff – Key Issues (Post Election)
• Major disagreement between Republicans and
Democrats: The extension of the 2001 and 2003 tax
cuts for families making $250,000 or more and
individuals making $200,000 or more
• The President seemed dead set on raising ordinary tax
rates on the “wealthy”, but appeared to have backed off
from the $200,000/$250,000 thresholds
• Republicans proposed raising revenue through limiting
or capping deductions but said any increases in rates
are a non-starter
7

8. Fiscal Cliff – Timeline
• December 3 – Geithner Proposal
– Included two stages of tax increases and not much on spending
cuts
– Increase the two top marginal rates for higher income earners
and raise taxes on their capital gains and dividends (no specific
income levels)
– $600 billion in undisclosed “additional taxes”
– May include AGI-based phase-out of personal exemptions and
itemized deductions
8

9. Fiscal Cliff – Timeline
• Geithner Proposal (Continued)
– AMT patch for individuals
– Tax extenders for businesses (but not individuals)
– Extension of the payroll tax cut or “alternative policy”
– Extension of the bonus depreciation
– Stage Two calls for open-ended tax reform for $1.6 trillion in tax
increases with no deadline
9

10. Fiscal Cliff – Timeline
• December 4 – Boehner’s counter offer
– No increases in tax rates for high income earners
– Plan would raise $800 billion through unspecified “tax reform”
– $600 billion in savings from cuts to Medicare or by raising
eligibility age
10

11. Fiscal Cliff – Timeline
• December 16 – Boehner offers to raise marginal rates on
income over $1 million
– Includes new method of calculating benefits for entitlement
programs known as “chained CPI” which would slow the growth
of Medicare and other federal health programs
11

12. Fiscal Cliff – Timeline
• December 17 – Obama counter offers with a proposal to
raise the rates on household income above $400,000
– Includes $400 billion in entitlement savings, including changes in
the CPI for Social Security
– Delays across the board spending cuts from taking effect until
Congress can pass an overhaul of the tax code
– Proposes a permanent fix to AMT
– Abandoned his call for renewal of the payroll tax cut or
equivalent tax break
12

13. Fiscal Cliff – Timeline
• December 18 - Boehner’s proposes his “Plan B” that
would extend all Bush-era tax cuts for those making less
than $1 million
– Includes the AMT patch
– Extend the 35% Estate Tax rate and the $5 million exemption
– Lets sequestration go into effect
• Immediately opposed by the White House
13

14. Fiscal Cliff – Timeline
• December 20 – Plan B was pulled from a House vote due to lack of
support
• Boehner announces that the ball is now in the Senate’s court
• December 21 – President leaves Washington for the Holiday
• December 27 – Both sides blaming each other for inaction
• Harry Reid in the Senate says the House needs to pass a bill to
extend rates for most families and that speaker Boehner is running
the House like a Dictator and is more concerned with holding on to
his gavel than striking a deal
14

15. Fiscal Cliff – Timeline
• December 30 (Sunday)
– Senate leader Harry Reid (D) proposes raising rates on
individuals making more than $360,000 and families making
more than $450,000
– Minority leader Mitch McConnell (R) counters with individuals
above $450,000 and couples who earn more than $555,000
– Senate Democrats are also against using “chained CPI” as a
method for calculating future entitlement benefits
15

16. Fiscal Cliff – Timeline
• December 30 (Sunday evening)
– McConnell calls V.P. Biden into the negotiations to help come to
a resolution
– Talks continue between McConnell and Biden into Sunday
evening and the two seem to agree on income levels of
$400,000 (singles) and $450,000 (families)
– McConnell finally takes chained CPI off the table
16

17. Fiscal Cliff – Timeline
• December 31 (Late Monday)
– Word comes out the both sides in the Senate are close to a deal
– McConnell announces the they are in agreement on the tax
issues (meaning they still can’t agree on the spending side)
– The House later announces that there will not be a vote on any
fiscal cliff deal (meaning that we will officially go over the cliff on
New Years Eve)
17

18. Fiscal Cliff – Timeline
• New Years Day – (2 a.m.) Senate passes the American Taxpayer
Relief Act of 2012
• Key Points include:
– Taxes increases on the top 2% income earners
– No significant spending cuts
• January 1st - House members meet on the Senate bill and consider
amendments to include spending cuts and send it back to the
Senate
• The word from the Senate is they will not vote on the bill if it is sent
back to them
• The House decides to put the Senate bill to an up-or-down vote and
it passes
• The President heads back to Hawaii and signs the bill the next day
by autopen 18

19. American Taxpayer Relief Act of 2012
19

20. 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 employees’ share of FICA will increase
from 4.2% to 6.2%
20

21. American Taxpayer Relief Act of 2012 –
Ordinary Income Tax Rates
• For 2013 the income tax rates will stay at 10%, 15%,
25%, 28%, 33% and 35% instead of moving to 15%,
28% 31%, 36% and 39.6% as would have occurred with
the expiration of the tax cuts
• However, a 39.6% rate will apply to individuals with
income over $400,000 ($450,000 for joint filers;
$425,000 for heads of households)
• Caution: the rate could be as high as 43.4% on
investment income if subject to the 3.8% surtax
21

22. American Taxpayer Relief Act of 2012 – Capital
Gains and Dividend Rates
• For 2013 the top rate for capital gains and dividends will
permanently rise to 20% (up from 15%) for taxpayers
with incomes exceeding $400,000 ($450,000 for joint
filers)
• Caution: the rate could be as high as 23.8% if subject to
the 3.8% surtax
• Good news for dividends as the rate on dividends was
feared to go up as high as 39.6%
• The rate is still 0% for taxpayers whose ordinary income
is below the 25% rate
22

23. American Taxpayer Relief Act of 2012 – Capital
Gain and Dividend Rates (Continued)
• For taxpayers in the 25% ordinary bracket or above, but
whose income level is below the $400,000/$450,000
thresholds, the rate on capital gains and dividends will
remain at 15%
• Caution: the rate could be as high as 18.8% if subject to
the 3.8% surtax
23

24. 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 increases the AMT exemptions,
which are not indexed for inflation
– For example in 2011 the exemption for MFJ would be 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
24

25. 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
going forward
• In addition many nonrefundable personal credits,
including the residential energy credit will now reduce
the AMT liability as well as the regular tax liability
25

26. American Taxpayer Relief Act of 2012 –
Personal Exemption Phaseout (PEP)
• Beginning in 2013 the Act reinstates the previously
suspended Personal Exemption Phaseout for taxpayers
with AGI over the following thresholds:
– Single filers $250,000
– Married couples $300,000
– Heads of Household $275,000
• Under the phaseout 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
26

27. 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
• 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 27

28. 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 under the expiration
of the Bush-Era tax provisions
– Top Rate of 55% (35% in 2012)
– Exclusion amount of $1 million ($5 million in 2012, adjusted for
inflation to $5.12 million)
• The consensus was that they would eventually come up
with a 45% rate with a $3.5 million exclusion for Estates
and the Gift tax exemption would go back $1 million
28

29. 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
• 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
29

30. American Taxpayer Relief Act of 2012 – Section
179 Expensing
• The Section 179 expensing provision is retroactively
extended by the Act through 2014:
– The limit was 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
– Traditionally only tangible personal property qualifies for the
deduction but 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
30

31. 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 also 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
• 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)
• Bonus depreciation is not required to be allocated to long-term
contracts
31

32. 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
32

33. American Taxpayer Relief Act of 2012 –
Individual Tax Extenders
• Tax free distributions from IRA’s 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)
33

34. American Taxpayer Relief Act of 2012 –
Business Extenders (Beneficial to
Construction Industry)
• 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 15 year straight line cost recovery for qualified leasehold improvements,
qualified restaurant property and qualified retail improvements
• Five-year recognition period for S corporation built-in gains tax (originally was a
10 year period)
• Seven year recovery period for motorsports entertainment complexes
• Accelerated depreciation for business property on Indian reservations
• Work opportunity tax credit (WOTC)
• The research and experimentation (R&E) credit
• Railroad track maintenance credit
34

35. American Taxpayer Relief Act of 2012 –
Business Extenders (Beneficial to
Construction Industry)
• Several energy incentives, most of which had expired at
the end of 2011, were extended through 2013, including,
but not limited to the:
– Production credit for facilities that produce energy from wind
facilities
– Energy efficient new homes credit
– Credit for alternative fuel vehicle refueling property
– Cellulosic biofuel producer credit
– Credit for biodiesel and renewable diesel used as fuel
– Credit and outlay payments for ethanol
35

36. 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 (this is listed as a revenue raiser in the bill
to help pay for the deferred spending cuts)
• 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
36

37. New Medicare Taxes for 2013
37

38. 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
38

39. Additional 0.9% Medicare Tax on Earned Income
• Current structure:
– Employee:
• 6.2% OASDI tax on first $113,700 of wages (2013)
– Rate was reduced to 4.2% for 2012 and 2011
• 1.45% HI tax on all wages
• Employers subject to same tax of 7.65%
– Self-employed:
• 12.4% OASDI tax on first $113,700 (2013) of net SE income
– Rate was reduced to 10.4% for 2012 and 2011
• 2.9% HI tax on all SE income
• Above-the-line deduction for one-half of SE tax
– Deduction was full 7.65% despite 2% reduction in OASDI tax in 2012
and 2011
39

40. 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
40

41. 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
41

42. 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
• 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 42

43. 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
43

44. 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
44

45. 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)
45

46. 3.8% Medicare Tax – Net Investment Income
• Net Investment Income – Defined as investment income
less otherwise allowable deductions properly allocable to
such income
• 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 46

47. 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
47

48. 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”
48

49. 3.8% Medicare Tax – Key Points
• Net investment income is determined by taking into
account the gross income or net gain from the three
categories and reduced by allowable deductions that are
“properly allocable”
– Examples include, investment interest expense, investment fees,
expenses related to rents, trade or business deductions and
state and local income taxes
– The 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
49

50. 3.8% Medicare Tax – Key Points
• The 2% limitation for miscellaneous deductions and the
overall deduction limit of certain itemized deductions will
apply in calculating the NII
• Capital loss carryovers from years prior to 2013 can be
used to offset gains
• Investment interest expense carryover from years prior
to 2013 can be used in calculating NII
• Unused passive losses from years prior to 2013 can be
used in calculating NII
50

51. 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
• The 3.8% Medicare tax does not apply to investment
income excludible from taxable income (e.g. municipal
bond interest)
51

52. 3.8% Medicare Tax – Case Study
Assume the following income:
Interest income from various corporate bonds and bank $10,000
accounts
Tax-exempt interest income from various municipal bonds $8,000
Qualified dividend income from various mutual funds and stock $12,000
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 in $20,000
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 corporation $50,000 52

53. 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 $12,000
investments
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 $20,000
not materially participate
Net Section 1231 gain from the LLC $10,000
Net investment income $107,000
53

54. 3.8% Medicare Tax – Case Study
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 $12,000
investments
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
54

55. 3.8% Medicare Tax – Case Study
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 $107,000
Threshold
Medicare Tax Rate 3.8%
Medicare Contribution Tax $4,066
55

56. 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
56

57. Planning Strategies to Reduce 3.8% Medicare Tax
• 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
– 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) 57

58. 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, similarities, common ownership,
geographical locations, interdependence of operations
• The proposed regulations allow taxpayers a “fresh start”
regrouping election to replace any previous grouping election
• Consider Passive Loss investment opportunities to offset
Passive Income
58

59. Potential Tax Reform
59

60. 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
60

61. 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

62. 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
62

63. 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%.
63

64. 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
64

65. 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
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66. 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

67. 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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68. 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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69. Obama Proposals – International
• 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 US companies to
discourage taxpayers from keeping funds outside the US
(current estimate is up to $2 trillion in cash overseas)
• Protect US 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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70. 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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71. 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
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72. QUESTIONS?
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73. CBIZ MHM, LLC Contact Information
Cord D. Armstrong, CPA, CCIFP
Managing Director
 602.264.6835  carmstrong@cbiz.com
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74. Thank You
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