New Tax Laws
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Transcript of New Tax Laws
New Tax LawsNew Tax Laws
Real Opportunities for Tax Real Opportunities for Tax SavingsSavings
Two New ActsTwo New Acts
Working Families Tax Relief Act-signed Working Families Tax Relief Act-signed
by President Bush 10/4/2004 by President Bush 10/4/2004
American Jobs Creation Act of 2004-American Jobs Creation Act of 2004-
signed by President Bush 10/22/2004signed by President Bush 10/22/2004
Working Families Tax Working Families Tax Relief Act of 2004Relief Act of 2004
Extensions of benefits for individualsExtensions of benefits for individuals
Extensions of benefits for corporationsExtensions of benefits for corporations
Uniform definition of a childUniform definition of a child
Technical correctionsTechnical corrections
Extensions of Benefits Extensions of Benefits for Individualsfor Individuals
Child tax creditChild tax credit
Marriage penalty reliefMarriage penalty relief
Increase AMT exemptionIncrease AMT exemption
Use of personal credits against AMTUse of personal credits against AMT
Extension of educator deductionExtension of educator deduction
Extension of Benefits Extension of Benefits for Businessesfor Businesses
Research credit extensionResearch credit extension
Expensing of environmental Expensing of environmental
remediation costsremediation costs
American Jobs American Jobs Creation Act of 2004Creation Act of 2004
General Business ConsiderationsGeneral Business Considerations
Tax Shelter Changes Tax Shelter Changes
Individual ChangesIndividual Changes
Manufacturing and ProductionManufacturing and Production
International Tax ChangesInternational Tax Changes
General Business General Business ConsiderationsConsiderations
S Corporation changesS Corporation changes
Deferred CompensationDeferred Compensation
Cost Recovery ChangesCost Recovery Changes
Other Business ItemsOther Business Items
S Corporation ChangesS Corporation Changes
Number of allowable shareholders Number of allowable shareholders increases to 100 (up from 75)increases to 100 (up from 75)
Family members count as a single Family members count as a single shareholdershareholder
Other changes:Other changes:– ESBT changesESBT changes– Transfers of suspended losses to Transfers of suspended losses to
spouse or former spousespouse or former spouse– Inadvertent invalid QSub election Inadvertent invalid QSub election
reliefrelief
Deferred Deferred CompensationCompensation
Why change?Why change? New, rigorous standards for when New, rigorous standards for when
compensation can be deferred from taxcompensation can be deferred from tax What kind of plans are affected?What kind of plans are affected? Key changes Key changes
– Timing of deferral electionTiming of deferral election
– Distribution of amounts deferredDistribution of amounts deferred
– Added anti-abuse provisionsAdded anti-abuse provisions What is the affect of failing to comply?What is the affect of failing to comply?
Action PointsAction Points
Every deferred comp plan needs to be Every deferred comp plan needs to be
reviewedreviewed
Don’t rushDon’t rush
Evaluate current election for 2005 Evaluate current election for 2005
deferralsdeferrals
Advise participants about access to Advise participants about access to
fundsfunds
Cost Recovery Cost Recovery ChangesChanges
$102,000 immediate write-off of §179 $102,000 immediate write-off of §179 property is extended for two yearsproperty is extended for two years
New limit of $25,000 for SUV’s New limit of $25,000 for SUV’s purchased after October 22, 2004purchased after October 22, 2004
Depreciable life for leasehold Depreciable life for leasehold improvements and certain restaurant improvements and certain restaurant property reduced from 39 to 15 yearsproperty reduced from 39 to 15 years
Other Business Other Business ChangesChanges
Restrictions on business airplanes and Restrictions on business airplanes and entertainment facilitiesentertainment facilities
Extended amortization for business Extended amortization for business start-up or organizational costsstart-up or organizational costs
Increased withholding on supplemental Increased withholding on supplemental wage payments > $1 millionwage payments > $1 million
Other Business Other Business Changes (cont.)Changes (cont.)
Charitable contributions of property Charitable contributions of property appraisal requirementsappraisal requirements
Clarification of FICA on options and Clarification of FICA on options and stock option plans stock option plans
Capital gain on sale of stock acquired Capital gain on sale of stock acquired from exercise of stock options to from exercise of stock options to comply with Federal conflict of interest comply with Federal conflict of interest requirementsrequirements
Tax Shelter ChangesTax Shelter Changes
Why?Why?
New penaltiesNew penalties
No statute of limitations on undisclosed No statute of limitations on undisclosed reportable transactionsreportable transactions
Tightens up on enforcement of existing Tightens up on enforcement of existing penaltiespenalties
Tightens up on practitioners, as well as Tightens up on practitioners, as well as taxpayerstaxpayers
Individual ChangesIndividual Changes
Changes in Charitable Contributions Changes in Charitable Contributions of Propertyof Property
Deduction for Sales TaxDeduction for Sales Tax
Changes in Charitable Changes in Charitable Contributions of Contributions of
PropertyProperty Standards established for the Standards established for the
contribution of intellectual propertycontribution of intellectual property
Restrictions imposed on contributions Restrictions imposed on contributions of vehiclesof vehicles
Increased reporting for contributions of Increased reporting for contributions of propertyproperty
Deduction for Sales Deduction for Sales TaxTax
Taxpayer can elect to claim deduction Taxpayer can elect to claim deduction for state income taxes for state income taxes oror deduction for deduction for state sales taxesstate sales taxes
Choose between documented Choose between documented expenses or table amountsexpenses or table amounts
Of particular interest to taxpayers in Of particular interest to taxpayers in states with no income taxesstates with no income taxes
Effective for 2004 and 2005 returnsEffective for 2004 and 2005 returns
Action PointsAction Points
Accumulate records now for large Accumulate records now for large purchasespurchases
Where subject to sales and income Where subject to sales and income taxes, consider combining large taxes, consider combining large taxable purchase into a single yeartaxable purchase into a single year
Special rule for vehicle purchasesSpecial rule for vehicle purchases Watch out for AMTWatch out for AMT
Political Outlook – Post Political Outlook – Post ElectionElection
White House Tax PlansWhite House Tax Plans
Senate Finance Tax AgendaSenate Finance Tax Agenda
Under Current LawUnder Current Law
Trust Fund BabyTrust Fund Baby Working Working CoupleCouple
Wages-TWages-T $ -0-$ -0- $ 65,000$ 65,000
Wages-SWages-S $ -0-$ -0- $ 65,000$ 65,000
DividendsDividends $ 65,000$ 65,000 $ -0-$ -0-
Long-Term GainsLong-Term Gains $ 65,000$ 65,000 $ -0-$ -0-
Itemized DeductionsItemized Deductions $ (30,000)$ (30,000) $ (30,000)$ (30,000)
ExemptionsExemptions $ ( 6,000)$ ( 6,000) $ (6,000)$ (6,000)
Taxable IncomeTaxable Income $ 94,000$ 94,000 $ 94,000$ 94,000
Federal TaxFederal Tax $ 8,300$ 8,300 $ 16,925$ 16,925
Payroll Taxes (ee & er)Payroll Taxes (ee & er) $ -0-$ -0- $ 19,900$ 19,900
Total TaxesTotal Taxes $ 8,300$ 8,300 $ 36,825$ 36,825
% of Total Income% of Total Income 6.3% 6.3% 28.3% 28.3%
White House PlanWhite House Plan
President hopes to have bipartisan advisory panel on tax President hopes to have bipartisan advisory panel on tax
reform by end of 2004reform by end of 2004
Tax proposals will be revenue neutral and promote Tax proposals will be revenue neutral and promote
economic growth and jobseconomic growth and jobs
Looking to simplify existing system-current system is Looking to simplify existing system-current system is
complicatedcomplicated
Make it more fairMake it more fair
Should the existing system be modified or replacedShould the existing system be modified or replaced
Reduce administrative burdens on taxpayersReduce administrative burdens on taxpayers
White House PlanWhite House Plan
Retain the 15% rate for qualified dividends Retain the 15% rate for qualified dividends
and long-term capital gains.and long-term capital gains.
Make permanent the repeal of the Federal Make permanent the repeal of the Federal
estate taxestate tax
Supports foreign tax reforms and tax breaks Supports foreign tax reforms and tax breaks
for manufacturersfor manufacturers
Extend expiring middle-class tax breaksExtend expiring middle-class tax breaks
White House Plan White House Plan (cont.)(cont.)
Tax credit to help the uninsured buy health Tax credit to help the uninsured buy health
insuranceinsurance
Credits for energy efficient homesCredits for energy efficient homes
Expand incentives for college educationExpand incentives for college education
Preservation of mortgage and charitable Preservation of mortgage and charitable
deductionsdeductions
Senate Finance Senate Finance Tax AgendaTax Agenda
Due to a GOP victory at the Polls, Due to a GOP victory at the Polls, Senator Grassley expects to resume Senator Grassley expects to resume the chairmanship of the Senate the chairmanship of the Senate Finance CommitteeFinance Committee
Extend “Tax Relief Legacy in 2005”Extend “Tax Relief Legacy in 2005” Make permanent previously enacted Make permanent previously enacted
tax relief measurestax relief measures– Extend key tax breaksExtend key tax breaks– College tuition deductibilityCollege tuition deductibility
Senate Finance Tax Senate Finance Tax Agenda (cont.)Agenda (cont.)
Close loopholesClose loopholes
Adopt permanent interest rate for Adopt permanent interest rate for
calculating pension liabilitiescalculating pension liabilities
Enact Enron-inspired participant Enact Enron-inspired participant
protections.protections.
Make flexible spending accounts work Make flexible spending accounts work
efficientlyefficiently
QUESTIONSQUESTIONS
International Tax International Tax ProvisionsProvisions
Trivia QuestionTrivia Question
What is the estimated percentage of What is the estimated percentage of U.S. corporations that paid no federal U.S. corporations that paid no federal taxes between 1996 and 2000?taxes between 1996 and 2000?
• 26%• 48%• 61%• 82%
Highlights of the Highlights of the American Jobs Creation American Jobs Creation
Act of 2004Act of 2004Repeal of Exclusion for Extraterritorial Repeal of Exclusion for Extraterritorial
IncomeIncome
Phase-Out of the Extraterritorial Income ExclusionPhase-Out of the Extraterritorial Income Exclusion
Phase-In of the Deduction for Phase-In of the Deduction for
Manufacturing/ProductionManufacturing/Production
ActivitiesActivities
Tax Reform & Simplification for U.S. Tax Reform & Simplification for U.S.
BusinessesBusinesses
Incentive to Reinvest Foreign Earnings in U.S.Incentive to Reinvest Foreign Earnings in U.S.
Foreign Tax Credit ReformsForeign Tax Credit Reforms
Other Significant International ReformsOther Significant International Reforms
Repeal of the Repeal of the
Extraterritorial Income Extraterritorial Income
ExclusionExclusion
Two year phase-outTwo year phase-out
‹ ‹ 2005 – 80%2005 – 80%
‹ ‹ 2006 – 60%2006 – 60%
‹ ‹ 2007 – no ETI benefit2007 – no ETI benefit
Grandfather for transactions entered into itGrandfather for transactions entered into it
‹ ‹ In the ordinary course of businessIn the ordinary course of business
‹ ‹ Pursuant to a binding contract before 9/17/03Pursuant to a binding contract before 9/17/03
‹ ‹ Applies to leases, licenses and optionsApplies to leases, licenses and options
Phase-Out of Phase-Out of Extraterritoral Income Extraterritoral Income
Exclusion (ETI)Exclusion (ETI)
Can export transactions be Can export transactions be accelerated accelerated
into 2004?into 2004? Should associated expenses be Should associated expenses be deferred, deferred,
if possible?if possible? Is the IC-DISC (Interest Charge Is the IC-DISC (Interest Charge Domestic Domestic
International Sales Corporation) an International Sales Corporation) an
alternative?alternative?
Action PointsAction Points
New deduction for domestic New deduction for domestic
production production
activity (IRC Section 199)activity (IRC Section 199)
Manufacturing and Manufacturing and Production ActivitiesProduction Activities
Lesser of a percentage of:Lesser of a percentage of:
- Taxable income, or- Taxable income, or
- Qualified domestic production - Qualified domestic production
activities income (QDPAI)activities income (QDPAI)
Not to exceed 50% of wages paidNot to exceed 50% of wages paid
Domestic Production Domestic Production Activity DeductionActivity Deduction
Phase-In of Phase-In of DeductionDeduction
Taxable Year Beginning Taxable Year Beginning In:In: PercentagePercentage
2005 – 20062005 – 2006 3%3%
2007 – 20092007 – 2009 6%6%
2010 and later2010 and later 9%9%
Income from certain domestic Income from certain domestic
production production
activitiesactivities
Less:Less:
- Costs attributable to producing - Costs attributable to producing
the the
incomeincome
What is Qualified What is Qualified Production Activity Production Activity
Income?Income?
What is Qualified What is Qualified Production Activity Production Activity
Income? (cont.)Income? (cont.)
Taxpayer’s gross receipts derived Taxpayer’s gross receipts derived
from:from:1. Any sale, exchanges or other
disposition, or any lease, rental or license, of
qualifying production property that was manufactured, produced, grown or extracted by the taxpayer in whole or
in significant part with the U.S.;
What is Qualified What is Qualified Production Activity Production Activity
Income? (cont.)Income? (cont.)
2. Any sale, exchange or other
disposition, or
any lease, rental or license, of
qualified
films produced by the taxpayer;
3. Any sale, exchange or other
disposition of
electricity, natural gas, or potable
water
produced by the taxpayer in the U.S.;
What is Qualified What is Qualified Production Activity Production Activity
Income? (cont.)Income? (cont.)
4. Construction activities performed in
the
U.S.; or
5. Engineering or architectural services
performed in the U.S. for construction
projects located in the U.S.
What is Qualified What is Qualified Production Activity Production Activity
Income? (cont.)Income? (cont.)
Exclusions:Exclusions:
1. Food and beverages prepared at a 1. Food and beverages prepared at a
retail retail
establishmentestablishment
2. Transmission or distribution of 2. Transmission or distribution of
electricity, electricity,
natural gas or potable waternatural gas or potable water
3. Property leased, licensed or rented by 3. Property leased, licensed or rented by
the the
taxpayer for use by any related taxpayer for use by any related
personperson
Deduction Offers Deduction Offers ComplexityComplexity
Related PersonsRelated Persons
Control group, affiliated service Control group, affiliated service
group or entities under common group or entities under common
controlcontrol
Similar to rules under the ETI Similar to rules under the ETI
regime regime
Deduction Offers Deduction Offers Complexity (cont.)Complexity (cont.)
Affiliated GroupsAffiliated Groups
Members of an affiliated group (i.e., Members of an affiliated group (i.e.,
50% ownership) are treated as a 50% ownership) are treated as a
single corporationsingle corporation
Deduction Offers Deduction Offers Complexity (cont.)Complexity (cont.)
Pass-Through EntitiesPass-Through Entities Deduction is availableDeduction is available Limitation determined at the shareholder Limitation determined at the shareholder
or partner levelor partner level A shareholder or partner allocated W-2 A shareholder or partner allocated W-2
wages equal to lesser of:wages equal to lesser of:
1. Person’s allocable share of the wages,1. Person’s allocable share of the wages,
2. 2x QPAI allocated to that person2. 2x QPAI allocated to that person
Deduction Offers Deduction Offers Complexity (cont.)Complexity (cont.)
Deduction Limited to Wages PaidDeduction Limited to Wages Paid
Wages determined on a calendar Wages determined on a calendar
year basisyear basis
Creates incentive to obtain services Creates incentive to obtain services
through employees rather than through employees rather than
independent contractors.independent contractors.
Deduction Offers Deduction Offers Complexity (cont.)Complexity (cont.)
DPGR’sDPGR’s
““In whole or in significant part” within the In whole or in significant part” within the
U.S.U.S.
Does not include receipts from leasing, Does not include receipts from leasing,
licensing or renting property for use by a licensing or renting property for use by a
related person. But, does include receipts related person. But, does include receipts
from selling property to a related party.from selling property to a related party.
Deduction Offers Deduction Offers Complexity (cont.)Complexity (cont.)
IndividualsIndividuals
Not limited by the 2% AGI on Not limited by the 2% AGI on
miscellaneous itemized deductionsmiscellaneous itemized deductions
Subject to Section 469, passive Subject to Section 469, passive
activity loss limitationactivity loss limitation
Lesser of % of T. Inc. or QDPAILesser of % of T. Inc. or QDPAI
Not to exceed 50 % of wages paidNot to exceed 50 % of wages paid
Calculated on a controlled group basisCalculated on a controlled group basis
Passed through to sole proprietors and Passed through to sole proprietors and
owners of partnerships and S corporationsowners of partnerships and S corporations
Deduction allowed against AMTDeduction allowed against AMT
Allowable DeductionAllowable Deduction
Action PointsAction Points Do you conduct a DomesticDo you conduct a Domestic
Manufacturing Activity?Manufacturing Activity? Do your accounting systems provide Do your accounting systems provide
sufficient information to measure sufficient information to measure direct direct
and allocable indirect costs?and allocable indirect costs? Can and should the business be Can and should the business be
restructured to maximize this restructured to maximize this deduction?deduction?
Tax Reform & Tax Reform & Simplification for Simplification for U.S. BusinessesU.S. Businesses
Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S.Foreign Earnings in U.S.
General ruleGeneral rule: a USC may elect to claim an : a USC may elect to claim an
85% DRD on repatriated earnings 85% DRD on repatriated earnings
receivedreceived
from a CFC during the election periodfrom a CFC during the election period
- Base: dividends qualify for DRD to - Base: dividends qualify for DRD to
extent > extent >
avg. actual and deemed dividends in 3 avg. actual and deemed dividends in 3
of lastof last
5 years (highest and lowest years 5 years (highest and lowest years
disregarded)disregarded)
Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S. Foreign Earnings in U.S.
(cont.)(cont.)
CeilingCeiling - Dividends eligible for DRD may - Dividends eligible for DRD may not not
exceed:exceed:
‹ ‹ $500 million;$500 million;
‹ ‹ APB 23 amount in financials certified APB 23 amount in financials certified before before
7/1/03; or7/1/03; or
‹ ‹ If no APB 23 amount in financials but taxIf no APB 23 amount in financials but tax
liability on APB 23 amount disclosed-the liability on APB 23 amount disclosed-the
grossed up amount using a 35% tax rategrossed up amount using a 35% tax rate
Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S.Foreign Earnings in U.S.
Ceiling ReducedCeiling Reduced: By increase in related : By increase in related
partyparty
indebtedness on part of CFC between indebtedness on part of CFC between
10/3/0410/3/04
and close of taxable year DRD claimedand close of taxable year DRD claimed
‹ ‹ All CFC’s of corporate “US Shareholder” All CFC’s of corporate “US Shareholder”
treated as one CFCtreated as one CFC
Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S. Foreign Earnings in U.S.
(cont.)(cont.) Reinvestment PlanReinvestment Plan: Dividends must be invested: Dividends must be invested
in the U.S. pursuant to a plan approved by DC’sin the U.S. pursuant to a plan approved by DC’s
president or CEO and BOD to qualify for DRDpresident or CEO and BOD to qualify for DRD
‹ ‹ Permissible investments (without limitation)Permissible investments (without limitation)
include:include:
- Worker hiring and training;- Worker hiring and training;
- Infrastructure;- Infrastructure;
- Research & development;- Research & development;
- Capital investments; and- Capital investments; and
- Financial stabilization for job retention and - Financial stabilization for job retention and
creation purposescreation purposes
‹ ‹ Executive compensation is not a permissible investmentExecutive compensation is not a permissible investment
OffsetsOffsets::
‹ ‹ Dividends not covered by DRD (15%) Dividends not covered by DRD (15%)
cannot be shielded from tax by –cannot be shielded from tax by –
- Expenses- Expenses
- NOL’s- NOL’s
‹ ‹ And the tax thereon cannot be offset And the tax thereon cannot be offset byby
credits credits other thanother than FTC and AMT FTC and AMT
creditscredits
Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S. Foreign Earnings in U.S.
(cont.)(cont.)
FTCFTC: Foreign taxes attributable to : Foreign taxes attributable to
Dividends shielded from tax by DRD Dividends shielded from tax by DRD
are lost; are lost; butbut DC may specifically DC may specifically
identify these Dividends – making the identify these Dividends – making the
limitation meaningless in many limitation meaningless in many
situationssituations
Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S. Foreign Earnings in U.S.
(cont.)(cont.)
Disallowance of DeductionsDisallowance of Deductions: Expenses allocated and : Expenses allocated and
apportioned to the DRD amount are not deductibleapportioned to the DRD amount are not deductible
‹ ‹ But floor colloquies indicate the rule But floor colloquies indicate the rule
applies solely to expenses applies solely to expenses directlydirectly related related
to the DRD amountto the DRD amount
Effective DateEffective Date: DRD available only for –: DRD available only for –
‹ ‹ First taxable year beginning after 10/21/04; orFirst taxable year beginning after 10/21/04; or
‹ ‹ At DC’s election, the last taxable year beginningAt DC’s election, the last taxable year beginning
before the date of enactmentbefore the date of enactment
Incentives to Reinvest Incentives to Reinvest Foreign Earnings in U.S. Foreign Earnings in U.S.
(cont.)(cont.)
Foreign Tax Credit Foreign Tax Credit ReformsReforms
Carryforward period extended to 10 years Carryforward period extended to 10 years
(effective: taxable year ending after (effective: taxable year ending after
10/22/04)10/22/04)
Carryback period reduced to 1 year Carryback period reduced to 1 year
(effective: (effective:
taxable years arising in taxable years taxable years arising in taxable years
beginning beginning
after 10/22/04)after 10/22/04)
FTC baskets: reduced from 9 to 2 (effective: FTC baskets: reduced from 9 to 2 (effective:
years after 12/31/06)years after 12/31/06)
Foreign Tax Credit Foreign Tax Credit Reforms (cont.)Reforms (cont.)
Recapture of OFL extended to dispositions of Recapture of OFL extended to dispositions of stock stock
of a CFC where taxpayer owned > 50% of of a CFC where taxpayer owned > 50% of CFC’s CFC’s
stockstock Repeal of 90% limitation on usage of AMT Repeal of 90% limitation on usage of AMT foreign foreign
tax credit (effective: tax years beginning tax credit (effective: tax years beginning after after
12/31/04)12/31/04) Alternative method, elect by 12/31/08, to Alternative method, elect by 12/31/08, to allocateallocate
interest expense on a worldwide affiliated interest expense on a worldwide affiliated groupgroup
basisbasis
Other Significant Other Significant International ReformsInternational Reforms
Elimination of anti-deferral regimes of Foreign Elimination of anti-deferral regimes of Foreign
PersonalPersonal
holding company and foreign investment holding company and foreign investment
companycompany
(effective: tax years beginning after 12/31/04)(effective: tax years beginning after 12/31/04)
Repeal withholding tax on dividends from certain Repeal withholding tax on dividends from certain
foreign foreign
corporations with ECI > 25% or gross incomecorporations with ECI > 25% or gross income
(effective: payments after 12/31/04)(effective: payments after 12/31/04)
Two new exceptions to definition of U.S. property Two new exceptions to definition of U.S. property
underunder
Sec. 956 re: securities.Sec. 956 re: securities.
Other Significant Other Significant International Reforms International Reforms
(cont.)(cont.)
Definition of FPHCI concerning commodity Definition of FPHCI concerning commodity
transactionstransactions
and sale of partnership interestsand sale of partnership interests
Foreign tax credit treatment of royalty payments Foreign tax credit treatment of royalty payments
andand
payments for the sale of IPpayments for the sale of IP
Changes in rules governing former citizens or Changes in rules governing former citizens or
residents residents
who relinquish citizenship or terminate residency who relinquish citizenship or terminate residency
statusstatus
Real EstateReal Estate
Environmental Environmental Remediation CostsRemediation Costs
Code Section 198 extended through Code Section 198 extended through
20052005
Is extended for expenditures paid or Is extended for expenditures paid or
incurred after 12/31/2003?incurred after 12/31/2003?
Allows an expensing of qualified Allows an expensing of qualified
remediation expenditures at a qualified remediation expenditures at a qualified
contamination site (“brownfields”)contamination site (“brownfields”)
Depreciation of Depreciation of Leasehold Leasehold
ImprovementsImprovements Current law provides for straight-line Current law provides for straight-line
39 years for LHI that are non-39 years for LHI that are non-
residential residential realreal property property
““Qualified LHI” placed in service Qualified LHI” placed in service
before 1/1/2005 are eligible for 50% before 1/1/2005 are eligible for 50%
bonus depreciationbonus depreciation
AJCA ChangesAJCA Changes
Provides for a 15 year straight-line Provides for a 15 year straight-line
recovery periodrecovery period
Applies to property placed in service Applies to property placed in service
after 10/22/2004 and before 1/1/2006after 10/22/2004 and before 1/1/2006
If a lessor makes a qualified LHI If a lessor makes a qualified LHI
subsequent owner’s who purchase are subsequent owner’s who purchase are
not allowed the 15 year provisionsnot allowed the 15 year provisions
Qualified Leasehold Qualified Leasehold PropertyProperty
Improvements to the interior of a Improvements to the interior of a
commercial building if:commercial building if:– Improvement is made Improvement is made pursuant to a pursuant to a
leaselease
– Portion of the building is to be occupied Portion of the building is to be occupied
by the lessee or sub-lesseeby the lessee or sub-lessee
– Improvement is placed in service more Improvement is placed in service more
than 3 years after the date the building than 3 years after the date the building
was first placed in servicewas first placed in service
What’s Not QualifiedWhat’s Not Qualified
Enlargement of the buildingEnlargement of the building
Elevator or escalatorElevator or escalator
Structural component benefiting a Structural component benefiting a
common areacommon area
Internal Framework of the buildingInternal Framework of the building
Partnership ChangesPartnership Changes
Cancellation of indebtedness on Cancellation of indebtedness on
partnership debt to equity partnership debt to equity
conversionconversion
Treatment of built-in losses and Treatment of built-in losses and
partnership basis adjustmentspartnership basis adjustments
Debt to Equity Debt to Equity ConversionConversion
Partnership exchanges a capital or profits Partnership exchanges a capital or profits interest to creditor in satisfaction of debtinterest to creditor in satisfaction of debt
Partnership recognizes cancellation of Partnership recognizes cancellation of indebtedness income in the amount that indebtedness income in the amount that would be realized if the debt were would be realized if the debt were satisfied with money equal to the FMV of satisfied with money equal to the FMV of the partnership interestthe partnership interest
No income to extent FMV of partnership No income to extent FMV of partnership interest=amount of the debtinterest=amount of the debt
Allocation of IncomeAllocation of Income
Income is allocated to partners who Income is allocated to partners who
held an interest immediately prior to held an interest immediately prior to
satisfaction of the debtsatisfaction of the debt
Effective for cancellations occurring on Effective for cancellations occurring on
or after 10/22/2004or after 10/22/2004
Will cause adverse tax consequences Will cause adverse tax consequences
in real estate debt workouts or in real estate debt workouts or
restructuresrestructures
Built-in Losses & Basis Built-in Losses & Basis AdjustmentsAdjustments
AJCA ChangesAJCA Changes– Built-in loss property now only taken Built-in loss property now only taken
into account by contributing partnersinto account by contributing partners
– If contributing partner’s interest is sold If contributing partner’s interest is sold
or liquidated the partnership’s basis is or liquidated the partnership’s basis is
based upon FMV on date contributed based upon FMV on date contributed
and built-in loss is eliminatedand built-in loss is eliminated
– Effective for contributions after Effective for contributions after
10/22/200410/22/2004
Built-in Losses & Basis Built-in Losses & Basis Adjustments (cont.)Adjustments (cont.)
AJCA provides for mandatory basis AJCA provides for mandatory basis
adjustments upon sale or liquidation of an adjustments upon sale or liquidation of an
interest with substantial built-in lossesinterest with substantial built-in losses
Elective under current law per Section 754Elective under current law per Section 754
Substantial loss=in excess of $250,000Substantial loss=in excess of $250,000
Built-in Losses & Basis Built-in Losses & Basis Adjustments (cont.)Adjustments (cont.)
Applies to liquidations/transfers after Applies to liquidations/transfers after
10/22/200410/22/2004
Basis reductions under 734(b)(2) Basis reductions under 734(b)(2)
(liquidations) cannot be allocated to basis (liquidations) cannot be allocated to basis
of corporate stock of a partnerof corporate stock of a partner
Allocated to other assets but not below Allocated to other assets but not below
zerozero
Any excess=gain to the partnershipAny excess=gain to the partnership
Individual ChangesIndividual Changes Property received in a (§1031) like-kind Property received in a (§1031) like-kind
exchangeexchange
Converted to use as a principal residenceConverted to use as a principal residence
5 year rule-must hold 5 years after 1031 5 year rule-must hold 5 years after 1031
exchange exchange
Will not qualify for gain exclusion on personal Will not qualify for gain exclusion on personal
residences residences
Effective for sales or exchanges of residences Effective for sales or exchanges of residences
after 10/22/2004after 10/22/2004
Real Estate Investment Real Estate Investment TrustsTrusts
Expansion of straight debt safe harborExpansion of straight debt safe harbor
Relief from Asset Test ViolationsRelief from Asset Test Violations
Modifications of REIT prohibited Modifications of REIT prohibited
transaction safe harbor for Timber REIT’Stransaction safe harbor for Timber REIT’S
Modification of FIRPTA treatment for Modification of FIRPTA treatment for
foreign investorsforeign investors
Other technical modificationsOther technical modifications
Exchange of Undivided Exchange of Undivided Fractional Interests Fractional Interests
(UFI’s)(UFI’s) What is the game?What is the game?
Partnership owns property & want to dispose Partnership owns property & want to dispose
of of
Some partners want gain some want deferralSome partners want gain some want deferral
Partnership interests do not qualify as §1031 Partnership interests do not qualify as §1031
(Like-kind) property(Like-kind) property
WHAT DO YOU DO? WHAT DO YOU DO?WHAT DO YOU DO? WHAT DO YOU DO?
Exchange of Undivided Exchange of Undivided Fractional Interests Fractional Interests (Con’t)(Con’t) Plan aheadPlan ahead Distribute Property out to partners as UFIs Distribute Property out to partners as UFIs
(Tenants-in-Common) (Tenants-in-Common) Hold property for a period of timeHold property for a period of time Enter into sales contract with purchaser to sell Enter into sales contract with purchaser to sell
all UFIsall UFIs Each owner than can take cash and pay tax or Each owner than can take cash and pay tax or
have cash from buyer go to a qualified have cash from buyer go to a qualified intermediary and effectuate a §1031 exchangeintermediary and effectuate a §1031 exchange
In Rev Proc 2000-46 IRS would not rule on In Rev Proc 2000-46 IRS would not rule on these transactionsthese transactions
Revenue Procedure 2002-Revenue Procedure 2002-2222
Rev. Proc allows 15 conditions where Rev. Proc allows 15 conditions where
the IRS will consider UFI’s in Real the IRS will consider UFI’s in Real
Property not to be a partnership Property not to be a partnership
interestinterest
Co-ownership in real property under Co-ownership in real property under
local law (legal costs)local law (legal costs)
Not more than 35 co-ownersNot more than 35 co-owners
Revenue Procedure 2002-Revenue Procedure 2002-22 (cont.)22 (cont.)
Separate loans for each co-owner (Banks hate Separate loans for each co-owner (Banks hate
this)this)
Co-owners have right to manage property or Co-owners have right to manage property or
hire a property manager if approved annuallyhire a property manager if approved annually
Each owner has right to sell or transfer co-Each owner has right to sell or transfer co-
interestinterest
These conditions are not all inclusiveThese conditions are not all inclusive
Practical Practical Considerations of Considerations of Ruling 2002-22Ruling 2002-22
Should hold at least two months before Should hold at least two months before sell UFI’ssell UFI’s
Watch Court Holding if negotiations have Watch Court Holding if negotiations have proceeded to such a point before proceeded to such a point before distribution – i.e. advanced planningdistribution – i.e. advanced planning
Generally these UFI’s are used more for Generally these UFI’s are used more for the reinvestment of §1031 proceeds-But the reinvestment of §1031 proceeds-But be careful you will end up owning be careful you will end up owning property with an inflated purchase priceproperty with an inflated purchase price
If this is the case take your 15% tax & runIf this is the case take your 15% tax & run
Revenue Ruling 2004-Revenue Ruling 2004-8686
Will a Delaware Statutory Trust (DST) Will a Delaware Statutory Trust (DST) help solve problem for banks and legal help solve problem for banks and legal issues of owning 35 UFI’sissues of owning 35 UFI’s
DST in Ruling treated as a grantor trust, DST in Ruling treated as a grantor trust, but the trustee had only limited powersbut the trustee had only limited powers
If trustee had additional powers = If trustee had additional powers = business entity and not a grantor trust & business entity and not a grantor trust & UFI concept doesn’t workUFI concept doesn’t work
Land exchanged for interest in grantor Land exchanged for interest in grantor trust=considered an exchangetrust=considered an exchange
Revenue Ruling 2004-Revenue Ruling 2004-86 (cont.)86 (cont.)
Additional powers will cause problems and deem Additional powers will cause problems and deem
treatment as one entity:treatment as one entity:– Dispose of contributed property and acquire new Dispose of contributed property and acquire new
propertyproperty
– Renegotiate lease with tenantRenegotiate lease with tenant
– Enter into new leases with tenantEnter into new leases with tenant
– Renegotiate obligation used to purchase propertyRenegotiate obligation used to purchase property
– Refinance obligation or borrow to purchase propertyRefinance obligation or borrow to purchase property
– Invest cashInvest cash
– Make structural modifications to propertyMake structural modifications to property
Bramblett Bramblett TransactionsTransactions
Partnership or S-Corporation owns Partnership or S-Corporation owns
property with large inherent capital gainproperty with large inherent capital gain Taxpayer wants to develop property and Taxpayer wants to develop property and
sell “lots”sell “lots” which would convert all inherent gain which would convert all inherent gain
into ordinary incomeinto ordinary income
WHAT DO YOU DO? WHAT DO YOU DO?WHAT DO YOU DO? WHAT DO YOU DO?
Bramblett Bramblett Transactions (cont.)Transactions (cont.)
Consider selling to a related entity – Consider selling to a related entity –
(needs to be a corporation(needs to be a corporation
Sell on the installment method – Old Sell on the installment method – Old
owner entity recognizes capital gain, owner entity recognizes capital gain,
therefore inherent gain is taxed at 15% therefore inherent gain is taxed at 15%
- only gain related to development is - only gain related to development is
tax as a developer tax as a developer
Bramblett Bramblett Transactions (cont.)Transactions (cont.)
KEYS:KEYS:
AppraisalAppraisal
Note with fixed payment terms, reasonable Note with fixed payment terms, reasonable
rate of interest & proper form. Down rate of interest & proper form. Down
payment should be a substantial amount and payment should be a substantial amount and
payments cannot be tied to sales in payments cannot be tied to sales in
Development entityDevelopment entity
Development Entity has own financing and Development Entity has own financing and
capitalcapital
Bramblett Bramblett Transactions (cont.)Transactions (cont.)
Separate business cards and Separate business cards and
helpfully new employee or twohelpfully new employee or two
Helpful if a different ownership % in Helpful if a different ownership % in
ownership of Development entity. ownership of Development entity.
THE ENERGY THE ENERGY INDUSTRYINDUSTRY
Oil & Gas UpdateOil & Gas Update
Update of Recent Law ChangesUpdate of Recent Law Changes
Update of Oil & Gas Industry in DenverUpdate of Oil & Gas Industry in Denver
Is Energy Really That Expensive Today?Is Energy Really That Expensive Today?
What is Driving Energy Prices?What is Driving Energy Prices?
Tax Law UpdateTax Law Update
Credit for Production from Marginal Credit for Production from Marginal
Oil & Gas ProductionOil & Gas Production
Suspension of 100% Net Income Suspension of 100% Net Income
Limitation on Percentage Depletion Limitation on Percentage Depletion
for Oil & Gas from Marginal for Oil & Gas from Marginal
ProductionProduction
Tax Law Update (cont.)Tax Law Update (cont.)
Phase-Down of the Electric Vehicle Phase-Down of the Electric Vehicle
Credit is Partially RepealedCredit is Partially Repealed
Credit for Electricity Produced from Credit for Electricity Produced from
Wind Energy, Closed-Loop Biomass Wind Energy, Closed-Loop Biomass
and Poultry Waste Facilities is and Poultry Waste Facilities is
extended until 2006extended until 2006
What’s Going on in DenverWhat’s Going on in Denver
Seen the Sale/Merger of Several Seen the Sale/Merger of Several
Large Independent E&P CompaniesLarge Independent E&P Companies
Several of the Management Teams Several of the Management Teams
from these Companies are Forming from these Companies are Forming
new Companiesnew Companies
What’s Going on in DenverWhat’s Going on in Denver(cont.)(cont.)
These Companies will be Private, These Companies will be Private,
Niche Oil & Gas CompaniesNiche Oil & Gas Companies
Opportunity to Revitalize Denver as Opportunity to Revitalize Denver as
an Energy Growth Huban Energy Growth Hub
Is U.S. Energy Still Cheap?Is U.S. Energy Still Cheap?
Price per Barrel of Household ItemsPrice per Barrel of Household Items:: Regular Unleaded Gas………….. $77.28Regular Unleaded Gas………….. $77.28 Coca Cola……………….........….$102.59Coca Cola……………….........….$102.59 Bottled Water……………….....…$126.18Bottled Water……………….....…$126.18 Milk……………………………….. $183.96Milk……………………………….. $183.96 Budweiser……………………...…$372.59Budweiser……………………...…$372.59 Jack Daniel’s……….................$4,460.17Jack Daniel’s……….................$4,460.17 Chanel #5 Parfum …….…$1,344,000.00Chanel #5 Parfum …….…$1,344,000.00
What is Driving Energy What is Driving Energy Prices?Prices?
China – Chinese Economy is White HotChina – Chinese Economy is White Hot
Instability Throughout the Oil Producing Instability Throughout the Oil Producing
World, Not Just the Middle EastWorld, Not Just the Middle East
Supply and Demand Reality CheckSupply and Demand Reality Check