Enterprise Worldwide Annual Symposium - 2012

1. Enterprise WorldwideAnnual Symposium - 2012 Federal Tax Update June 14, 2012 Mark Luscombe Principal Analyst CCH, a Wolters Kluwer business

2. 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

3. 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

4. Some Special Sunset Cases • AMT relief • Higher education deduction • American Opportunity Tax Credit

5. 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

6. 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

7. 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

8. 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

9. Other Expired Provisions Business • Contributions of conservation real property, food inventory, book inventory, or computer equipment • Energy tax incentives • Employer-provided child care credit

10. 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

11. 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

12. 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

13. Payroll Tax Reduction • Started in 2011 • Replaced Making Work Pay Credit • Sunsetting at the end on 2012

14. 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

15. 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

16. 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

17. 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

18. 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

19. “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

20. 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

21. 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

22. 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

23. 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

24. 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

25. Questions?

26. Thank You!