1. Principles of Taxation: Advanced Strategies by Jones/Rhoads-Catanach

2. Principles of Taxation: Advanced Strategies
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Chapter 1
Introduction
Chapter 1
Introduction
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Copyright (c) 2004 by the McGraw Hill Companies Inc.

3. 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
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4. Present Value
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Present value of a $1 after n periods based upon a discount rate of r

5. Present Value-Example
What is the present value of $ 1 received in 10 years discounted at a 8% interest rate?
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Answer 46.32¢

6. Present Value- Annuity
Present value of $ 1 received for n periods at a discount rate of r
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7. Present Value- Annuity Example
Present value of an annuity of $ 1 to be received for 10 years discounted at an 8% rate
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Answer $ 6.71

8. Present Value and Taxation
Timing of tax expenditures may be as important as amount
Tax deferred is tax reduced
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9. 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
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10. 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
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11. 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
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12. Choice of Entity Different entities have different tax rates
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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

13. Tax Deferral Tax deferred is tax saved based upon time value of money
Techniques
Accelerate Deductions
Defer Income
Installment sale
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14. Low Tax Jurisdictions Foreign Country vs. United States
Low tax vs. High tax states
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15. Income Character
Certain types of income are taxed at preferential rates
Interest from municipal bonds
Long term capital gain income taxed to individuals
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16. Other Factors Carryforwards Credits Cost of Operations
Net Operating Loss
Capital Loss
Credits
Cost of Operations
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17. 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
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18. Restrictions on Income Shifting
Judicial Prohibitions
Lack of Business Purpose
Substance over Form
Step Transaction Doctrine
Assignment of Income Doctrine
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