August 29, 2007 Webinar Major Changes in Auto Deduction Strategies Mathew N. Sorensen, J.D. and Jim Park, L.L.M., J.D. Incredible Tax Deferral Strategies for Selling Your Business or Real Estate Theresa Fette-Warner, L.L.M., J.D. and Jason Helquist, L.L.M., J.D. www.kkolawyers.com Cedar City ~ Las Vegas ~ Beverly Hills ~ Salt Lake City Telephone 435.586.9366 / Facsimile 435.586.9491 Kyler Kohler & Ostermiller, LLP 2007
Instructor Notes Disclaimer- Although the information contained in this Presentation may be extremely useful and helpful, please understand that the presentation of this information does not constitute an attorney-client relationship. Moreover, the information contained in this Presentation is for general guidance only. It is strongly recommended that each individual or entity obtain their own legal advice, particularly applied to their own set of circumstances, facts and specific situation. Kyler Kohler & Ostermiller, LLP is not responsible or liable for any advice that is taken and applied in a situation without direct consultation and representation specific to that individual s or company s needs. Kyler Kohler & Ostermiller, LLP 2007
Part I Major Changes in Auto Deduction Strategies Mathew N. Sorensen, J.D. and Jim Park, L.L.M., J.D.
Maximize Vehicle expenses!! Auto Mileage versus Actual Mileage Business 2007-48.5 cents Medical/Moving 2007 20 cents Charitable 2007 14 cents -Fuel, repairs, maintenance, etc.. - Depreciation Actual - Own - Be aware of Depreciation limits * unless 6000lb+ vehicle then deduct up to $25,000 ** CHANGES in 2008 ** Personal and Commuting Non- Deductible - Still need to keep mileage records - Don t Forget Business % of Interest on Auto Loan *Always keep mileage records if there is personal use
Maximize Vehicle expenses!! Auto Actual versus Lease -Fuel, repairs, maintenance, etc.. - Depreciation Actual - Own - Be aware of Depreciation limits * unless 6000lb+ vehicle then deduct up to $25,000 - Still need to keep mileage records - Don t Forget Business % of Interest on Auto Loan Actual - Lease -Same - Lease Payments - Be aware of Lease add back schedule - Mileage limits & residual value? - Amortize down payment *Always keep mileage records if there is personal use
Hybrid Cars and Alternative Motor Vehicles The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with a tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing or even eliminating the taxpayer s tax obligation. The tax credit for hybrid vehicles applies to vehicles purchased or placed in service on or after January 1, 2006.
Hybrid Cars and Alternative Motor Vehicles Model Year 2007 Chevrolet Silverado 2WD Hybrid Pickup Truck $250 Chevrolet Silverado 4WD Hybrid Pickup Truck $650 Ford Escape Hybrid 2WD $2,600 Ford Escape Hybrid 4WD $1,950 GMC Sierra 2WD Hybrid Pickup Truck $250 GMC Sierra 4WD Hybrid Pickup Truck $650 Honda Accord Hybrid AT $1,300 Honda Accord Hybrid Navi AT $1,300 Honda Civic GX $4,000 Honda Civic Hybrid CVT $2,100 Lexus GS 450h $775 Lexus RX 400h 2WD and 4WD $1,100 Mercury Mariner 4WD Hybrid $1,950 Nissan Altima Hybrid $2,350 Saturn Aura Hybrid $1,300 Saturn Vue Green Line $650 Toyota Camry Hybrid $1,300 Toyota Prius $1,575 Toyota Highlander Hybrid 2WD and 4WD $1,300 Model Year 2008 Ford Escape 2WD Hybrid Model Year 2008 $3,000 Mercury Mariner 2WD Hybrid Model Year 2008 $3,000 Ford Escape 4WD Hybrid Model Year 2008 $2,200 Mercury Mariner 4WD Hybrid Model year 2008 $2,200 This reflects a decrease in the credit amount as of Oct. 1, 2006, due to the manufacturers meeting quarterly sales of 60,000 qualified hybrid cars See Quarterly Sales, below. This credit amount does not phase out. The full amount of the alternative fuel vehicle credit would be available for vehicles purchased on or before December 31, 2010. See www.irs.gov for Weekly updated information on Hybrid Sales and Credits
Hybrid Cars and Alternative Motor Vehicles Consumers seeking the credit may want to buy early since the full credit is only available for a limited time. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid or advance lean burn technology. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50 percent of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25 percent of the credit. No credit is allowed after the fifth quarter. See www.irs.gov for Weekly updated information on Hybrid Sales and Credits
Part II Incredible Tax Deferral Strategies for Selling Your Business or Real Estate Theresa Fette-Warner, L.L.M., J.D. and Jason Helquist, L.L.M., J.D.
4 Strategies - 1031 Exchanges - Installment Sales - Charitable Remainder Trusts - Deferred Sales
The Transaction Taxpayer Replacement Property Exchange Property Qualified Intermediary Replacement Property Exchange $$ Seller Buyer
1031 Exchange Advantages Defer capital gains tax Greater selling flexibility since prices won t have to be inflated to cover capital gains Acquiring a replacement property with greater income potential Capability to consolidate hard to manage properties into one easy to manage property Exchange out of a hard to finance property into one that is more easily financed 12
1031 Exchange Disadvantages Lower depreciation schedule when new properties are acquired as opposed to other deferral techniques Losses on income tax return cannot be deducted if property is exchanged rather than sold Unforgiving time requirements in the 45-day identification and 180-day exchange time periods Limited access to the use of property s equity 13
Installment Sales What are they? A sale of property at a gain where at least one payment is to be received after the tax year in which the sale occurs A person is required to report the sale on the installment method unless he/she elects out in the year of sale If a person elects out, he/she must report all the gain as income in the year of the sale 14
Installment Sales Advantages A person only includes in income each year only part of the gain he/she receives, which enables them to spread out the capital gain over the period of the contract Installment sales tax qualification is automatic for persons who are not dealers A seller may elect not to report an entire gain at once, which is beneficial if the seller wants to utilize capital losses occurring that year against gains 15
Installment Sales Disadvantages A person cannot use the installment method to report gain from the sale of inventory or stocks and securities traded on an established securities market. If interest is not charged or the interest rate is too low, the law states that there is a minimum amount of interest (AFR rates) a seller is considered to have received. This imputed or unstated interest is taxable. Depreciation recapture must be paid in the year of sale. Seller has an assumed economic and legal risk that the Buyer may not care for the property properly or carry adequate insurance. 16
Charitable Remainder Trust (The Mechanics) Third Party Buyer Donor takes tax deduction over next 5 yrs Appreciated Asset(s) Trustee Sells Asset(s) to Third Party $$ Tax Deduction Step 1 Donor places Assets in Trust Step 2 Step 3 $$ Individually to Jim and Mary Jones Family Charitable Remainder Trust Annuity Donor: Trustee: Beneficiary: Step 4 $$$ $ Trustee Purchases Annuity for Beneficiary Irrevocable Life Insurance Trust $$$ Trust Corpus Donation to Charity Jones Family
Charitable Remainder Trust Pros Save Tax on Appreciated Asset Create Stream of Income Donate to Charitable Entity Receive Tax Deduction Provide Cash for Wealth Replacement Trust Cons Set-up Cost Irrevocable Difficult to operate business within Grantor may not qualify for life Insurance Tax Reporting
Deferred Sales Strategy What is it? The Deferred Sales Strategy allows the seller to transfer an appreciated asset (e.g. real estate, business interests, stocks, etc.) and defer the capital gains tax over the course of their lifetime The Deferred Sales Strategy is also a valuable estate planning tool, which is used by the seller to transfer the asset outside their taxable estate 19
Deferred Sales Strategy (The Mechanics) Asset CLIENT Transfer Asset Interest Deferred Sales Strategy Obligation to Client Sale of Property Net Proceeds BUYER 20
Deferred Sales Strategy Advantages Income Tax Savings - When appreciated property is sold, the seller defers recognition of gain until receipt of payments Estate Tax Savings - Removes transferred property and all future appreciation from the estate without use of gift or estate tax exemptions Estate Liquidity - Converts an illiquid asset into monthly payments Probate Avoidance - Avoids probate Asset Protection - A sell may place the transferred property beyond the reach of potential creditors and litigants if the transferor retains no interest in the transferred property 21
Deferred Sales Strategy Disadvantages Depreciation Recapture can not be deferred More complicated tax structure than other strategies Must adhere to the formalities imposed by Internal Revenue Service Regulations Fees to structure are often higher than strategies such as the 1031 Exchange Under IRS Regulations, the seller of the asset can not maintain control of the structure 22
For more information, please contact us at: KYLER, KOHLER & OSTERMILLER 856 South Sage Dr., Suite 2 Cedar City, Utah 89720 Tel: 801.586.9366 Fax: 801.586.9491 www.kkolawyers.com
For more information, please contact us at: KYLER KOHLER & OSTERMILLER, LLP Tel: 435.586.9366 Fax: 435.586.9491 www.kkolawyers.com