1-1 What is Effective Tax Planning?  Goal: Maximize after-tax value  How does this goal differ from tax minimization?  Consider both tax and non-tax factors  Consider alternative forms of business transactions and their tax effects, versus an after-the-fact tax compliance approach  Strategic, active participation in the tax system versus a passive, uninformed role

1-2 Impact of Taxation on After-Tax Value  Differences in tax treatment across different types of investment and financing decisions, and across different taxpayers, will influence both:  Before-tax return on investment  Example: Tax exempt municipal bonds typically pay lower before-tax rates of return than taxable corporate bonds  After-tax return on investment  Example: Long-term capital gains of individual taxpayers are often taxed at lower tax rates than similar gains earned by corporate taxpayers

1-3 Effective Tax Planning  3 Key Considerations:  All parties: Effective tax planning requires the planner to consider the tax implications of a proposed transaction to all parties to the transaction  Example: In negotiating an asset purchase, the buyer should also consider the tax implications of the transaction to the seller, as well as the manner in which the purchase will be financed  All costs: Effective tax planning requires the planner to recognize that taxes represent only one among many business costs. In the planning process all costs must be considered, including the costly restructuring of the business necessary to implement some tax plans  Example: Operating a business as a C corporation imposes double-taxation, yet provides substantial reduction in nontax costs via access to capital markets, liability protection,etc.

1-4 Effective Tax Planning continued  All taxes: Effective tax planning requires the planner, in making investment and financing decisions, to consider not only explicit taxes (tax dollars paid directly to tax authorities) but also implicit taxes (taxes paid in the form of lower before-tax rates of return on tax-favored investments)  Total tax = Explicit tax + Implicit tax  To receive tax favors, you typically either  pay implicit taxes or  pay more non-tax costs  Either way, the before-tax rate of return is lower