Individual project for corporate taxation
scho86
SampleIndividualProject.pptx
Corporate Taxation – MBA 7295 Business Structure Assessment Presentation
Happy Feet
By:
2
C-Corporation
Happy Feet C Corp was decided to be a closely held; separately taxable entity from Holly and Angela’s taxable income. Taxes are paid at the corporate level. Assets such as Holly & Angela’s homes are protected.
Happy Feet needed the legal ability to raise capital via the sale of stock in the beginning. Shareholders can easily transfer the ownership by selling their stock. Individual owner’s liability is limited to the value of stock they are holding in the corporation.
Tax on corporate income is paid first at the corporate level and again at the individual level on dividends.
3
Reasons for selecting a C-Corp with Happy Feet
Corporations have two main advantages. They provide the greatest shield from individual liability and are able to raise capital while transferring stock to shareholders. Corporations are subject to federal income tax so distributing earnings will help to reduce your tax impact through employer pension plans.
4
Business Ownership C-Corporation
Holly and Angela Forge Happy Feet Corporation
5
2010 Holly and Angela take their inheritance money and invest it in an invention they purchased the patent for. The company is registered in Delaware. Holly invests $5 million cash, and Angela invests $20 million. Of that $20million, used $500k for legal processes to purchase the patent.
IRC 351 applies as the company is held by more than 80%.
2011- Sales are slow, and manufacturing costs are high. Consultants hired to streamline processes to decrease costs and market more efficiently. IRC-172 Happy Feet has decided to carry forward their Net operating loss deduction.
2012 Happy Feet partners with Lori Grenier from ABC’s Shark Tank to mass produce and market invention. IRC 267 takes a place on the tax forms.
2013 Happy Feet is on an upswing with revenue recognition, but IRC 267 applies as we have a 3rd partner as a shareholder.
Happy Feet Incorporated
6
A tax preparer (our CFO) will be required sign off to complete the filing of
Happy Feet’s 2014 tax return.
Happy Feet Incorporated Balance Sheet
7
| (Millions of Dollars) | 12/31/2012 | 12/31/2013 | 12/31/2014 | 2012-2013 Change | 2013- 2014 Change |
| Assets | |||||
| Cash and Equivalents | 10,049.00 | 10,341.00 | 9,088.00 | -961.00 | 1,253.00 |
| Short-Term Investments | 1,167.00 | 3,161.00 | 6,124.00 | 4,957.00 | -2,963.00 |
| Total Cash & Short Term Inv. | 11,216.00 | 13,502.00 | 15,212.00 | 3,996.00 | -1,710.00 |
| Accounts Receivable | 5,409.00 | 5,314.00 | 6,170.00 | 761.00 | -856.00 |
| Other Receivables | 384.00 | 294.00 | 376.00 | -8.00 | -82.00 |
| Total Receivables | 5,793.00 | 5,608.00 | 6,546.00 | 753.00 | -938.00 |
| Inventory | 32,240.00 | 37,751.00 | 42,912.00 | 10,672.00 | -5,161.00 |
| Finance Division Loans and Leases, Current | 476.00 | 364.00 | 344.00 | -132.00 | 20.00 |
| Deferred Tax Assets, Current | 29.00 | 28.00 | 14.00 | -15.00 | 14.00 |
| Other Current Assets | 56.00 | 56.00 | 46.00 | -10.00 | 10.00 |
| Total Current Assets | 49,810.00 | 57,309.00 | 65,074.00 | 15,264.00 | -7,765.00 |
| Gross Property Plant and Equipment | 23,306.00 | 24,305.00 | 25,294.00 | 1,988.00 | -989.00 |
| Accumulated Depreciation | -13,993.00 | -14,645.00 | -15,070.00 | -1,077.00 | 425.00 |
Happy Feet Incorporated Balance Sheet Cont.
8
| Net Property Plant & Equip. | 9,313.00 | 9,660.00 | 10,224.00 | 911.00 | -564.00 |
| Goodwill | 4,945.00 | 5,035.00 | 5,043.00 | 98.00 | -8.00 |
| Long-Term Investments | 1,043.00 | 1,180.00 | 1,204.00 | 161.00 | -24.00 |
| Finance Division Loans and Leases, Long Term | 4,296.00 | 4,056.00 | 3,627.00 | -669.00 | 429.00 |
| Loans Receivable, Long Term | 209.00 | 209.00 | 209.00 | 0.00 | 0.00 |
| Deferred Tax Assets, Long Term | 5,892.00 | 6,753.00 | 2,939.00 | -2,953.00 | 3,814.00 |
| Other Intangibles | 3,044.00 | 3,111.00 | 3,052.00 | 8.00 | 59.00 |
| Other Long-Term Assets | 1,434.00 | 1,583.00 | 1,291.00 | -143.00 | 292.00 |
| Total Assets | 79,986.00 | 88,896.00 | 92,663.00 | 12,677.00 | -3,767.00 |
Happy Feet Income Statement
9
| (Millions of Dollars) | 12/31/2012 | 12/31/2013 | 12/31/2014 | 2012-2013 Change | 2013- 2014 Change |
| Revenues | 68,735.00 | 81,698.00 | 86,623.00 | 12,963.00 | 4,925.00 |
| Total Sales/Revenue | 68,735.00 | 81,698.00 | 86,623.00 | 12,963.00 | 4,925.00 |
| Cost of Goods Sold | 55,739.00 | 68,556.00 | 73,193.00 | 12,817.00 | 4,637.00 |
| Gross Profit | 12,847.00 | 13,033.00 | 13,355.00 | 186 | 322 |
| Selling General & Admin Expenses, Total | 3,408.00 | 3,717.00 | 3,956.00 | 309 | 239 |
| R&D Expenses | 3,918.00 | 3,298.00 | 3,071.00 | -620 | -227 |
| Other Operating Expenses | 7,326.00 | 7,015.00 | 7,027.00 | -311 | 12 |
| Operating Income | 5,521.00 | 6,018.00 | 6,328.00 | 497 | 310 |
| Interest Expense | -477 | -442 | -386 | 35 | 56 |
| (Millions of Dollars) | 12/31/2012 | 12/31/2013 | 12/31/2014 | 2012-2013 Change | 2013- 2014 Change |
| Interest and Investment Income | 278 | 268 | 214 | -10 | -54 |
| Net Interest Expense | -199 | -174 | -172 | 25 | 2 |
| Other Non-Operating Income (Expenses) | 166 | 140 | 101 | -26 | -39 |
| Loss on Sale of Investments | -119 | -84 | -96 | 35 | -12 |
| Gain on Sale of Assets | 24 | 4 | 20 | -20 | 16 |
| EBIT | 5,393.00 | 5,910.00 | 6,232.00 | 517 | 322 |
| Income Tax Expense | 1,382.00 | 2,007.00 | 1,646.00 | 625 | -361 |
| Earnings from Continuing Operations | 4,011.00 | 3,903.00 | 4,586.00 | -108 | 683 |
| Net Income | 4,018.00 | 3,900.00 | 4,585.00 | -118 | 685 |
10
Happy Feet Income Statement Cont.
Corporate debt was used to purchase dividend producing securities, but the dividends received are not eligible for DRD treatment (Code Section 246A).
When Happy Feet owners (Holly & Angela) went on ABC’s Shark Tank in 2013 we partnered with Lori Greiner to further the success of our business to increase sales in Bed Bath & Beyond. We used the corporate debt to process this business deal.
So first, the corporate entity is taxed at 35% to earn the money required to issue the dividend. The remaining 65% is disbursed to Lori Greiner who pays 23.8% in federal taxes. This makes the ‘true’ tax rate for dividends 50.47%.
11
Tax Planning for Happy Feet
To help you in your planning it’s a good idea to seek the help of a CPA, Attorney and a Financial Planner.
Asset protection is important and here are some other things you must be taking into consideration like: Advance Directives, DNR, guardianship of your children, and planning for your business.
12
Planning – Think Ahead
Assets Titled in a Trust
Generally avoid probate (Court Supervised)
Maintain privacy (Compared to Wills which are public record)
Provide for control of assets both during life & after death.
Allow tax benefits
Can be structured to take care of your family after you pass.
13
Asset Management & Protection
| Father | Holly | Angela |
| Son – Married | Daughter - Divorced | No children |
| 2 - Children under 18 | 1- adopted child | No grandchildren |
14
Family Dynamic
God blessed us with amazing growth. We will begin issuing shares of preferred and common stock to the trust for the next 4 years. Share price $10,000. Long growth, with a diversified portfolio is expected to benefit the owners and their families for many generations to come.
When the company has its 10 year anniversary we estimate the total value to be approx. $70 million dollars. High compensation plans for our executives helps to lower costs and ultimately reduce our tax liability.
The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death!
Gift tax applies to the transfer of gift of any property including money.
2015 Life time exclusion $5,430,000
15
Estate Tax and Gift Tax Provisions
Tax Savings – Minimize estate taxes on gross estate.
The wealthy may use a trust Sec. 2503 (C) taxable gifts & Crummey trusts to manage the asset of minors.
No double taxation – deduction is received for income distributed to its beneficiaries. The beneficiary then reports on their individual return.
16
Reason for Creating a Trust
The charitable lead trust provides payments to many charities for a fixed number of years. At the end the remainder of the trust asset pass on to non-charitable beneficiaries. This trust has strict federal tax laws in order to receive favorable tax treatment. Qualified 501C3 must be recipient.
17
Charitable Lead Trust – CLT’s
Angela will receive a charitable income tax deduction in the amount of $100,000 in year one.
All income earned by the trust, including capital gains and amounts paid to charity, will be considered earned by and, therefore, included in Angela’s gross income just as if the trust does not exist.
However, because Angela transferred tax-exempt securities to the trust, she will not be required to include the interest from the bonds in her gross income.
However, any gains from the sale or redemption of the bonds is produced will be taxable to Angela.
18
Example
Growth is transfer tax free compounding the longer the trust continues the greater the benefit
Provide long term security for your family for generations to come
Minimize the impact of taxes on your estate
Maximize what your heirs receive
Eliminate potential loss of assets because of a beneficiary’s mismanagement or misfortune.
Protect your assets from your beneficiaries creditors in the years ahead
19
Dynasty Trust & Benefits
Assume you transfer $1 million to a Dynasty Trust. The trust will benefit your child, grandchild, and great-grandchild for their lives after which time the remaining assets will pass outright to your great great-grandchildren.
Assuming the trust balance grows by a net of 6% - 8% annually.
In this case, when the trust ends, your great great-grandchild would receive about $84 million.
If instead, you gave this $1 million outright to your child, who in turn passed it down through each succeeding generation, your great great-grandchild would receive only about $8 million.
The Dynasty Trust has $76 million more in assets because of the magic of transfer tax-free compounding!
20
Dynasty Example:
| Exhibit A | Dynasty Trust | Outright Gift | |
| Grantor’s gift of $1 MM | $ 1,000,000 | $ 1,000,000 | |
| Value at child’s death | $ 4,549,383 | $ 4,549,383 | |
| Less: 55% Federal Estate Tax | $ 0.00 | $ (2,502,161) | |
| Total | $ 4,549,383 | $ 2,047,222 | |
| Value at grandchild’s death | $ 19,525,364 | $ 8,786,414 | |
| Less: 55% Federal Estate Tax | $ 0.00 | $ (4,832,527) | |
| Total | $ 19,525,364 | $ 3,953,886 | |
| Value at great-grandchild’s death | $ 83,800,336 | $ 16,969,568 | |
| Less: 55% Federal Estate Tax | $ 0.00 | $ (9,333,262) | |
| Great great-grandchild receives: | $ 83,800,366 | $ 7,636,306 |
21
Gifting Breakdown
22
1040 Estate & Trust – Income
Line 1 – Report the estate’s or trust share of all taxable interest that was received during the tax year Ex: Cash accounts, Notes Loans, US Treasury bills, US savings bonds and additional income received.
Line 4 – Capital Gain or (Loss) and include Sch. D
23
1040 Estate & Trust – Deductions
Line 12 – Fiduciary fees for administering the estate or trust during the year.
Line 14 – Attorney, accounting and tax return preparer fees
Line 18 – Income Distribution Deduction to any beneficiaries during the tax year and complete Schedule B. to determine the distribution. For each beneficiary a K-1 will be created.
The Dynasty Trust has $76 million more in assets because of the magic of transfer tax-free compounding which will be a nice nest egg for Holly’s children and grandchildren.
Highlights for Happy Feet in 2014 - achieved a rapid growth on stock price; lowered cost in expenses in comparison to competitors.
By Partnering with a Shark Tank Exec-Happy Feet enhanced our ability to reach new markets for our C-Corp and increase profitability by 30% in 2014, while mitigating our tax liabilities both personally and from a corporate perspective.
Analysis
Happy Feet, Inc. was pleased with nearly a full in 2014 5 EPS, ROE, & Stock Price as our closest competitor Dr. Scholl's.
Happy Feet gained traction in the market in 2013–becoming a formidable competitor.
Lesson learned- Was continuing domestic manufacturing and not selling all capacity sooner, and/or offering discounted pairs, lead to extremely high inventory turnover. In the end we turned out a nice profit and successfully maneuvered Happy Feet total debt ratio decreased from 95% to 83%.
25
Analysis Cont.
Works Cited: References
IRC-246 Rules applying to deductions for dividends received
IRC-172 Net operating loss deduction IRC 382 Limitation on net operating loss carry forwards and certain built-in losses following ownership change
IRC -351 Transfer to corporation controlled by transferor
IRC 267 Losses, expenses, and interest with respect to transactions between related taxpayers
IRC Code 4947 Application of taxes to certain nonexempt trusts
IRC Code 2503 Taxable Gifts
IRC Code 401 Qualifies Pension & Stock bonus plans
IRC Code 170 Charitable, Contributions & Gifts
IRC Code 671 Trust Income Deductions & Credits
27
Works Cited: References
Coffee Shop
By:
Lauren Rogers
28
Sole Proprietorship
29
$25 Million Inheritance
$10 million in a revocable trust/ asset protection trust
Invest $8 million in stocks and bonds
$2.5 million to start up a small business
Catering & Coffee Shop
Sole Proprietorship
$4.5 million to purchase Oceanside properties
Generate income from rental properties
Take out life insurance policies on myself and my assets
My sole proprietorship will not be subject to taxation as its own entity.
I will be taxed according to my personal marginal rate on income.
I have the ability to contribute cash to, or withdraw profits from, my business without tax consequences.
I may contribute property to, or withdraw property from, my business without recognizing gain or loss.
30
Reasons for Selecting a Sole Proprietorship
Business losses may offset some of my individual income, such as earned salary from the sole proprietorship.
Non-Tax:
I prefer to work alone i.e. “Be My Own Boss”
My small business does not require partners
Accounting & record keeping purposes
31
Reasons for Selecting a Sole Proprietorship
Structured so that upon the my death, the assets specified in the trust agreement (up to a specified maximum dollar value) are transferred to the beneficiaries named in the trust.
Key benefit to this type of trust is that the spouse maintains rights to the trust assets and the income they generate during the remainder of his or her lifetime.
My surviving spouse may even tap into the principal of the trust assets for healthcare emergencies.
A type of trust that allows a married investor to avoid estate taxes when passing assets on to heirs.
My real estate and rental properties will be included here.
32
Estate Planning
Credit Shelter Trust
My Charitable Trust will have two charitable beneficiaries. If properly established under federal tax laws, a charitable trust will entitle a grantor to deduct a portion of the amount contributed to the charitable trust as a current charitable income tax deduction.
Charities of Choice:
National Alliance to End Homelessness
Animal Welfare Institute
Upon my death, the amount passed on to my charities will qualify for a charitable estate tax deduction.
33
Estate Planning
Charitable Trust
34
I will create an irrevocable trust, naming my husband as the beneficiary. Then I will transfer my life insurance policies into the trust and the beneficiary becomes owner of the policy.
I will no longer have any control over the insurance policies, but through the terms of the trust I can determine who will have control, how premiums will be paid, who will benefit from the trust, and how payments should be made.
Three important requirements:
* The trust must be irrevocable
* I cannot be the trustee of the trust
* The trust must exist for at least three years before death
Estate Planning Life Insurance Trust
The payout from my charitable trust can be used as a tax deduction on my income and estate after death.
Using a Credit Shelter Trust for my properties will significantly reduce taxes. Once my surviving spouse passes away, the properties will be passed on to our children without penalties.
My investments (stocks, bonds) will be passed on to my spouse using a Transfer on Death form. At which point he may make investment decisions and/or place in a trust for our children after his own death.
The goal of the Life Insurance Trust is to avoid federal taxation. If a life insurance policy is owned by a grantor, the death benefits are included in the grantor's estate for federal estate taxes- because the grantor has the power to designate beneficiaries to receive the death benefits. This is why this must be an irrevocable living trust.
35
Analysis
The Fitness Equipment Store, LLC
By:
Lakeya Johnson
36
LLC – Limited Liability Company
$25 Million Inheritance
Contact a wealth planner & obtain a lawyer
Invest $6 Million in new Company
The Fitness Equipment Store, LLC
Limited Liability Company – Partnership with husband Steven Beck (Fitness Guru to the stars)
Four show rooms/retails stores in Delaware and Maryland
Plans to expand to Virginia, DC, and New Jersey in 2015
37
38
$25 Million Inheritance Cont.
Invest $2 Million in stocks and bonds
Donate $2 Million to local churches and several communities in Maryland and Delaware
Obtain life insurance for me and my husband to cover business and personal obligations
Place $10 Million in an Asset Protection Trust
Limits my personal liability for business debt
Provides the ability to transfer ownership of company at some point
Saves tax through pass through taxation
Enables the business to continue beyond my lifetime
Requires fewer Corporate formalities such as annual meetings and record keeping
39
Why Limited Liability Company?
Apply & received Federal Tax ID #
Choose LLC Name – The Fitness Equipment Store, LLC
File a certificate of formation with DE Division of Corporations
Appoint Registered Agent
Prepare an Operating Agreement
Pay State Tax Obligations - $250 Franchise Tax fee
40
Delaware Limited Liability Company
41
The Fitness Equipment Store, LLC 1065 Form
42
The Fitness Equipment Store, LLC Form 1065 Form Cont.
43
The Fitness Equipment Store, LLC 1040 Form
Paul Short, owner of Gym Source headquartered in New Jersey expressed interest in partnering with The Fitness Equipment, LLC
Details of Partnership
Gym Source is an accredited company
Mr. Short is respected in the industry and previously worked with my husband Steven
Reasons for partnership
Expansions Potential
Competition
44
New Partner?
Paul Short, owner of Gym Source proposal
Equipment
$2 Million Basis
$1Millions FMV
Cash $1Million
Equal Partners
45
New Partner Cont.
| Lakeya | Steven | Paul | Basis | FMV | ||
| Cash | 3 Million | 3 Million | 2 Million | 8 Million | 8 Million | |
| Equipment | 2 Million | 2 Million | 1 Million |
Shawn & Lakeya
2 Children – Shawn Jr. & Lisa
10 years after Business start-up
Business appraised
Turn appraised amount into shares/units
Each year the children will receive 25,000 units valued at $200 share
Unit distribution will save us 50% on gift taxes
46
Estate Planning
Charitable Remainder Trust
Purchase property
Transfer property to Cancer Society (Trustee)
Income portion payments – Lakeya (% of trust assets)
Terms – Lifetime
Property goes to Cancer Society
Tax Advantages
Income deduction
Estate Tax
Capital Gains Tax
47
Estate Planning Cont.
Irrevocable Life Insurance Trust
Trust owns the life insurance policy
No policy control
Premiums paid by me with money transferred to trust below the $28,000 gift tax amount
Trust receives death benefits at the time of my death
Funds will be transferred to by beneficiaries named on the policy
Avoid estate taxes – proceeds aren’t taxed
48
Estate Planning Cont.
Bypass Trust
Shawn & I will leave property to each other
Limited power to access trust during lifetime
Allowed to withdraw principal to provide for health, education, maintenance, or support the living spouse or children
Trust receives death benefits at the time of my death
Benefits
Property will be taxed one between spouses
Property not subject to estate taxes upon death of spouse
49
Estate Planning Cont.
IRC 701 – Partners, not partnership, subject to tax
IRC 721 – Nonrecognition of gain or loss on contribution
IRC 751 – Unrealized receivables and inventory items
IRC 704 – Partner’s distributive share
50
References
