Tax Planning

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Tax Planning
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Tax Planning

• aka tax avoidance
• Perfectly legal no t/p has an obligation to pay
  more taxes that he owes
• Contrast to tax evasion

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A Framework for Tax Planning

1. Tax tax base x tax rate
2. Consider timing and character of income and
   deductions
3. Maximize deductions
4. Consider AMT
5. Watch out for tax traps
6. Consider all aspects of the transaction

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Tax tax base x tax rate

• How to lower base?
• Tax exempt income
• Deferred compensation
• How to lower rate?
• Installment sale method
• Income shifted to children age 14 or older
• Shift between tax years

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Consider timing and character of income and
deductions

• Capital gain/loss limitations
• Passive activity income/loss
• New operating losses and carryovers
• Personal interest expense
• Others?

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Maximize deductions

• Retirement plans and fringe benefits
• Debt financing versus equity financing

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Consider AMT

• Always factor in/compute alternative minimum tax
  in any projection or planning decision
• Explore ways to reduce AMT

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Watch out for tax traps

• Reasonable compensation issues
• Below-market loans
• Substance over form
• Step transaction
• Related party rules
• Tax law changes and effective dates
  
  
  
  

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Consider all aspects of the transaction

• Tax rate now and expected in future
• Marginal tax rate
• AMT
• Capital loss limitations
• Benefits of different business entity forms
• State and local taxes
• Recordkeeping obligations
• New and proposed legislation and regs and
  effective dates
• Interest/concerns of different types of taxpayers
  involved in a transaction
  
• Confidence level

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AICPA

• Statement on Standards for Tax Services (SSTS)
• Interpretation No. 1-2 Tax Planning
• Related to SSTS 1 Tax Return Positions
• Effective 12/31/03
• SSTS are enforceable standards

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Tax Planning Interpretation

• Purpose to help members who provide services in
  connection with tax planning
• Tax planning includes
• Recommending or expressing an opinion (written or
  oral) on
• a tax return position, or
• A specific tax plan developed by the member, the
  taxpayer or a third party
• Covers both prospective and completed transactions

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Tax Planning Interpretation - 2

• In providing services related to tax planning,
  the member should (5 key steps)
• Establish the relevant background facts
• Consider the reasonableness of the assumptions
  and representations
• Apply the pertinent authorities to the relevant
  facts
• Consider the business purpose and economic
  substance of the transaction, if relevant to the
  tax consequences of the transaction
• Arrive at a conclusion supported by the
  authorities

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Tax Planning Interpretation - 3

• Illustration 11 Client is conisdering a
  proposed transaction. Client and his attorney
  advise the CPA that the CPA is responsible for
  advising the client on the tax consequences of
  the transaction.
• Conclusion Follow the 5 basic steps (prior
  slide) and review all relevant draft transaction
  documents

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Tax Planning Interpretation - 4

• Illustration 13 CPA assiting client in
  connection with a proposed transaction
  recommended by an investment bank. Investment
  bank offers a law firms opinion on the tax
  consequences. CPA sees that it is based on a
  hypothetical statement of facts rather than
  clients facts.

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Tax Planning Interpretation - 5

• Conclusion CPA may rely on the opinion when
  determining whether the realistic possibility
  standard has been satisfied wrt the tax
  consequences of the hypothetical transaction if
  the CPA is satisfied about the source, relevance,
  and persuasiveness of the opinion. However, CPA
  should take steps to understand and evaluate the
  transaction as relevant to client and follow the
  5 key steps (prior slide).