Tax Update October 21, 2003 Appleton, WI

1. Tax UpdateOctober 21, 2003Appleton, WI

2. Today's Presenter Jeff Gross, CPA Senior Tax Manager Grant Thornton LLP 10 College Avenue, Suite 300 Appleton, WI 54911 Tel: 920-968-6700 E-mail: jeff.gross@gt.com

3. Tax Update Tax UpdateI. JGTRA of 2003II. Other Developments

4. Jobs and Growth Tax Relief Reconciliation Act of 2003 - Projected to be the 3rd largest tax cut ever - Not permanent, many sunset provisions - Lurking AMT problem

5. Provisions impact businesses and individuals • Business provisions • Increased expensing • Bonus depreciation • Dividend rate reduction • Individual provisions • Dividend and capital gain rate reduction • Individual rate reductions • AMT relief

6. Business provisionIncreased small business expensing of depreciableproperty • Limit increased from $25k to $100k per year • Beginning of phase-out extended from $200k to $400k • Applies to new & used property • Available for AMT • Expires after 2005 • Eligible vehicles must weigh more than 6,000 lbs • Off-the-shelf software qualifies • WIS (and many other states) have not adopted.

7. Business provisionIncreased bonus depreciation • 30% first year bonus depreciation of 2001 Act • Increased to 50% • Effective for property placed in service after 5/5/03 • Expires 12/31/04 • Applies to new property only

8. Planning pointsBonus depreciation • Perform a “Cost Classification Study” for new buildings • No adjustment for AMT • Bonus Depreciation and remaining depreciation

9. Individual and business provisionReduced rate on dividends and capital gains • 15% (5% lowest bracket individuals) • Dividends effective 1/1/03 • Long Term Capital Gains effective 5/6/03 • Expiration • Both after 2008 • 0% rate for lowest bracket taxpayers in 2008 • Consider gifting appreciated capital gain property to children > 14

10. Individual provisionAccelerates individual rate reductions of 2001 Act • New rates 10%, 25%, 28%, 33% and 35% • Retroactive to 1/1/03 • Means • Paychecks over withheld first half of year • Withholding tables adjusted • Estimated payments may be too high • More likely to be in AMT • Top individual bracket now same as corporate • Makes S corps and LLCs more attractive

11. ObservationComparison of top individual rates

12. S Corps and LLC's • 35% individual rate vs 34% rate for most corporations • Contrast to almost 6% differential in recent past 39.6% vs 34%

13. S Corps and LLC's • Capital gain preferences • 20% rate differential for individuals, not for C corps • Careful on depreciation recapture of old ACRS buildings • Still "double tax" on corporations – just less

14. S Corporation opportunity • Economic decline past several years • Assets values may be depressed • Helpful in minimizing BIG tax exposure • BIG tax based on appreciation on date of selection • Built-in gains still taxed @ 35%

15. Planning pointsS corporation opportunity • S corporation with E&P from C corporation period • Consider deemed E&P distribution 1368(e)(3) • Take advantage of 15% rate • Avoid excess passive investment income issues • 1375 "sting" tax • 1362(d)(3) termination S status

16. Individual provisionAMT relief for individuals • Increases exemption • $4,500 to $40,250 single/$9,000 to $58,000 joint • Merely a "band aid"

17. ObservationAMT Relief Not Adequate • Not sufficient • Only for 2003 and 2004 –back to phase in for 2005 • 2005 Taxpayers liable for AMT jumps from 3 mil to 13 mil • 2010 expect 33 mil taxpayers in AMT • 25 times more than in 2001 • 37% taxpayers with incomes $50k-$75K – avg AMT $1,075 • 73% taxpayers $75k to $100k – avg AMT $1,671 • 97% if family has two or more children • AMT expected to take back 1/3 of the benefit of tax rate cut • AMT expected to generate $1 trillion next 10 years

18. Additional Observations • If dividends and long term capital gains are a disproportionate amount of total income, then taxpayer will likely be in AMT • Preferred stock more competitive with bonds

19. Strategy – Reduced Dividend Rate • Rethink Mix of Salaries versus Dividends • Shareholder pays less tax on dividend income • Payment of dividends avoids payroll taxes • Salaries are deductible by Corp; dividends are not • Careful, may establish new compensation history • Shareholder Loans • Pay off via dividend • Example: Loan of $100,000, interest of $5,000 distribute note as dividend – tax of $15,000

20. StrategyReduced Dividend Rate • May encourage shareholders to be more aggressive in personal expenses via company • Constructive dividends don't look so bad • Effect of denying a deduction and inclusion of dividend income

21. Strategy Reduced Dividend Rate • Stock redemptions • Prior law: • If relatives owned shares of company • To obtain capital gain treatment had to agree not to work for or retain interest in company for 10 years after redemption • Now: • Can obtain 15% rate and remain active in business

22. Whats still on the table? • Trade Bill • Replace a US subsidy on exports • Close loophole for SUV's • Slash maximum expensing to $25,000 for vehicles with GVW < 14,000 lbs. • Election Year issue: • Rolling back tax rate cuts for the 33% and 35% brackets

23. Other Developments • Split Dollar life insurance • Pre 1/2/02 arrangement • Can permanently exempt existing policy equity from tax provided action taken by 12/31/03 • Post 9/17/03 arrangement • Employer owned policy – economic benefit regime • Employee owned policy - loan

24. Other Developments • IRS takes liberal stance on bonus depreciation rules • Treatment of reconditioned property • Up to 20% of property can be used reconditioned parts – still treat as new • Like-kind exchange property • Applies both to cash paid + carryover basis of old property

25. Other Developments • LIFO IPIC Method • Automatic Consent available for first two years ending on/after 12/31/01 • Incorrect computations – minimize prior year exposure • Controlling costs better than industry • IBNR – Self Insured Medical Claims • IRS softening of General Dynamics decision • IRS will grant method changes • 3rd party submission of payment

26. Other Developments • Change in Recovery Method • Tax Court reaffirmed in two cases is not a change in accounting method • Taxpayer used 3 & 5 year life when it should have used 10 • Court held the year is closed for adjustment • Cite Green Forest Manufacturing and BrookshireBrothers if faced with 481(a) adjustment in IRS audit • Can still rely on Rev Proc 2002-9 for retroactive taxpayer friendly cost segs

27. Other Developments • ISO's • Grant and Exercisement – generally no regular tax consequences • Careful with AMT on exercisement – bargain element in income • Employer Health plan and FSA reimbursements • Expanded definition – over-the-counter drugs tax-free

28. Other Developments • Stock Redemptions • Covenants not to compete in connection with redemption subject to Sec. 197 15yr amortization period • Group of Rental and S Corp activities for passive loss rules • Loss from leasing activity can be treated as nonpassive

29. Annual Limits/Etc. Mileage Rate 37.5 cents/mile Social Security wage base - $87,900 – ($87,000) 401(K), 403(b), 457 elective deferrals - $13,000 – ($12,000) Catch-up contribution - $3,000 – ($2,000) SIMPLE elective deferral - $9,000 – ($8,000) Defined contribution plan maximum annual benefit - $165,000 – ($160,000) Annual compensation limit - $205,000 – ($200,000) Highly compensated employee - $90,000 – (unchanged)

30. ADDITIONAL QUESTIONS?