Principles of Taxation: Advanced Strategies by Jones/Rhoads-Catanach
Principles of Taxation: Advanced Strategies Slide 1-1 Chapter 1 Introduction Chapter 1 Introduction Slide 1-1 Copyright (c) 2004 by the McGraw Hill Companies Inc.
Decision Making Process Time Value of Money A dollar earned in the future is not as valuable as a dollar today Cash received or disbursed at different times in the future must be discounted Net present value (NPV) represents discounted value of all inflows and outflows associated with project Slide 1-2
Present Value Slide 1-3 Present value of a $1 after n periods based upon a discount rate of r
Present Value-Example What is the present value of $ 1 received in 10 years discounted at a 8% interest rate? Slide 1-4 Answer 46.32¢
Present Value- Annuity Present value of $ 1 received for n periods at a discount rate of r Slide 1-5
Present Value- Annuity Example Present value of an annuity of $ 1 to be received for 10 years discounted at an 8% rate Slide 1-6 Answer $ 6.71
Present Value and Taxation Timing of tax expenditures may be as important as amount Tax deferred is tax reduced Slide 1-7
Tax Rates For planning purposes only relevant rate is rate at which the transaction will be taxed Marginal rate- rate next dollar of income will be taxed May change Higher bracket due to more income Law change Slide 1-8
Factors Affecting Tax Planning Which entity undertakes the transaction Over what period does transaction take place In which jurisdiction does the transaction take place What is the character of the income Slide 1-9
Tax Planning Principles Taxes decrease if income earned by entity is subject to a low rate Taxes decrease if payment can be deferred to a later year Taxes decrease if income is generated in a low rate jurisdiction Taxes decrease if income is taxed at a preferential rate Slide 1-10
Choice of Entity Different entities have different tax rates Slide 1-11 Different entities have different tax rates Pass through entities allow shifting income to owner and one level of tax Partnerships S Corporation Limited Liability Companies
Tax Deferral Tax deferred is tax saved based upon time value of money Techniques Accelerate Deductions Defer Income Installment sale Slide 1-12
Low Tax Jurisdictions Foreign Country vs. United States Low tax vs. High tax states Slide 1-13
Income Character Certain types of income are taxed at preferential rates Interest from municipal bonds Long term capital gain income taxed to individuals Slide 1-14
Other Factors Carryforwards Credits Cost of Operations Net Operating Loss Capital Loss Credits Cost of Operations Slide 1-15
Restriction on Income Shifting Legislative Sec. 482 prohibits shifts between related entities that do no clearly reflect income Sec. 267 disallows losses on sales between related entities Slide 1-16
Restrictions on Income Shifting Judicial Prohibitions Lack of Business Purpose Substance over Form Step Transaction Doctrine Assignment of Income Doctrine Slide 1-17