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Course Summary

Our goal: Incorporate taxes into the Our goal: Incorporate taxes into the business and investment decision-making business and investment decision-making processprocess– Distinguish between tax planning and tax Distinguish between tax planning and tax

minimizationminimization– Use our knowledge of taxation strategically, to Use our knowledge of taxation strategically, to

initiate actions that maximize after-tax valueinitiate actions that maximize after-tax value– Consider both tax and non-tax factorsConsider both tax and non-tax factors– Identify and take advantage of tax clientelesIdentify and take advantage of tax clienteles

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Impact of Taxation on After-Tax Value

Differences in tax treatment across different Differences in tax treatment across different types of investment and financing decisions, and types of investment and financing decisions, and across different taxpayers, will influence both:across different taxpayers, will influence both:– Before-tax return on investmentBefore-tax return on investment

Example: Tax exempt municipal bonds typically pay lower Example: Tax exempt municipal bonds typically pay lower before-tax rates of return than taxable corporate bondsbefore-tax rates of return than taxable corporate bonds

– After-tax return on investmentAfter-tax return on investment Example: Long-term capital gains of individual taxpayers are Example: Long-term capital gains of individual taxpayers are

often taxed at lower tax rates than similar gains earned by often taxed at lower tax rates than similar gains earned by corporate taxpayerscorporate taxpayers

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Effective Tax Planning

3 Key Considerations:3 Key Considerations:– All parties: Effective tax planning requires the All parties: Effective tax planning requires the

planner to consider the tax implications of a planner to consider the tax implications of a proposed transaction to all parties to the proposed transaction to all parties to the transactiontransaction

Example: In negotiating an asset purchase, the Example: In negotiating an asset purchase, the buyer should consider the tax implications of the buyer should consider the tax implications of the transaction to the seller, as well as the manner in transaction to the seller, as well as the manner in which the purchase will be financedwhich the purchase will be financed

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Effective Tax Planning continued

– All costs: Effective tax planning recognizes All costs: Effective tax planning recognizes that taxes represent only one of many that taxes represent only one of many business costs. In the planning process all business costs. In the planning process all costs must be considered, including the costly costs must be considered, including the costly restructuring of the business necessary to restructuring of the business necessary to implement some tax plansimplement some tax plans

Example: Operating a business as a C corporation Example: Operating a business as a C corporation imposes double-taxation, yet provides substantial imposes double-taxation, yet provides substantial reduction in nontax costs via access to capital reduction in nontax costs via access to capital markets, liability protection,etc.markets, liability protection,etc.

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Effective Tax Planning continued– All taxes: Effective tax planning requires the All taxes: Effective tax planning requires the

planner, in making investment and financing planner, in making investment and financing decisions, to consider not only explicit taxes decisions, to consider not only explicit taxes (tax dollars paid to tax authorities) but also (tax dollars paid to tax authorities) but also implicit taxes (taxes paid via lower before-tax implicit taxes (taxes paid via lower before-tax rates of return on tax-favored investments) rates of return on tax-favored investments)

Total tax = Explicit tax + Implicit taxTotal tax = Explicit tax + Implicit tax

– To receive tax favors, you typically eitherTo receive tax favors, you typically either pay implicit taxes orpay implicit taxes or pay more non-tax costspay more non-tax costs Either way, the before-tax rate of return is lowerEither way, the before-tax rate of return is lower

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Other Takeaways

3 broad categories of tax planning3 broad categories of tax planning– Converting income from one type to anotherConverting income from one type to another

Ordinary versus capital gainOrdinary versus capital gain US-source versus foreign sourceUS-source versus foreign source

– Shifting income from one time period to Shifting income from one time period to anotheranother

Shifting from a high-tax rate to a low-tax rate yearShifting from a high-tax rate to a low-tax rate year

– Shifting income from one pocket to anotherShifting income from one pocket to another Use of a foreign versus a domestic subsidiaryUse of a foreign versus a domestic subsidiary

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Other Takeaways continued

Organizational form decisionOrganizational form decision– Corporations subject to double taxation, but Corporations subject to double taxation, but

potential for significant nontax savingspotential for significant nontax savings Compensation planningCompensation planning

– Saving for retirement via qualified plans Saving for retirement via qualified plans provides substantial benefits for both provides substantial benefits for both employee and employeremployee and employer

– Value of tax knowledge in planning for the Value of tax knowledge in planning for the exercise of stock optionsexercise of stock options

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Other Takeaways continued

Corporate tax planningCorporate tax planning– Section 351Section 351– Dividends-received deductionDividends-received deduction

Mergers and acquisitionsMergers and acquisitions– Tax and nontax factors affecting choice Tax and nontax factors affecting choice

between asset versus stock acquisition, between asset versus stock acquisition, taxable versus nontaxable acquisitiontaxable versus nontaxable acquisition

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Other Takeaways continued

Differences between GAAP and taxDifferences between GAAP and tax– Effective tax rate versus marginal tax rateEffective tax rate versus marginal tax rate– GAAP versus tax basisGAAP versus tax basis– GAAP versus tax goodwillGAAP versus tax goodwill