tax planning

R*c

((1-tp) / ((1*cg)*(1-tc)) * Rp

annual rate of appreciation to get a desired after tax return (for non div c corp) [rc*]

(1+rp)^n = (1*x)^n (1 - tcg) + (tcg)

Investment = 1

rc* for div stock

(1+rp)^n = (1+x-div yield)^n (1-tcg) + tcg + div yield * (1-tax on div)

then subtract the div yield to find the appreciation rate

shareholder effective tax rate

1 - (rp / rc*)

SPDA - no penalty

Investment (1 + R)^n (1-t) + (investment * tax)

SPDA - penalty

Investment (1+R)^n (1-tax-penalty) + (investment * (tax + penalty)

Marginal tax rate w/full NOL deduct

tax rate in payoff year / (1+ discount rate)^years needed to payoff

Marginal tax rate 80% NOL deduct

Years to payoff = (total NOL / (future income * 80%))

(tax rate in payoff year * (1-80%)) + ((tax rate * 80%) / (1+discount)^payoff years)

Deferred Compensation - employeer

payment * (1+rcn)^n * ((1-tc0) / (1-tcn))

• r is after tax return of the employer in n years

Deferred Compensation (D*) - employee

(payment (1-tp0) * (1+rp)^n) / (1-tpn)

• r is of the after tax return employee in N years

Contribution to pension plan indifferent equation

((D* (1-tp0) / (1+ return of pension)^n) / (1-tpn)

After tax PV of immediate bonus

bonus * (1 - tax rate)

After tax pv of D*

PV of Dstar * (1-tcn)

PV of pension

pension amount * (1-tc0)

ATA using section 83(b)

Future stock price - ((future stock price - current stock price) tcg) - (current stock price tp * (1+ borrowing rate)^ vest years)

ATA when borrowing

F.S.P (1-tp) + tp F.S.P - tp (F.S.P - S.P.N) tcg - S.P.N tp (1+ borrowing rate)^ vest years

level of stock appreciation would you be indifferent between doing nothing and taking the 83 (b) election

step 1: Find the stock price that make the ATA of both equal

Pn (1-tp) = Pn - ((Pn - Po) tcg) - (po tp (1+borrowing rate)^ vesting years)

Step 2: After solving for Pn

(Pn/Po)^(1/vest years) - 1

level of stock appreciation would you be indifferent between doing nothing and taking the 83 (b) election, if rate changes

step 1: Find the stock price that make the ATA of both equal

Pn (1-tp) = Pn - ((Pn - Po) tcg) - (po tp(new rate) (1+borrowing rate)^ vesting years)

Step 2: After solving for Pn

(Pn/Po)^(1/vest years) - 1

What types of gains do you record during a NQO, and when?

1. Record during exercise year

Ordinary income. Amount is (price on exercise date - exercise price) * shares

2. Record when you sell stock

Capital gain. Amount is (Price on sell date - price on exercise date) * shares

What types of gains do you record during a ISO, and when?

1. Only record a gain during the sale of stock

Capital gain. Amount is (Sale price - exercise price) * number of shares

How much can a corporation deduct for a NQO

(price on exercise date - exercise price) * shares

How much does a corporation report as compensation expense in each period for a NQO

(FV at the grant date * # of options) / vesting period

How much can a corporation deduct for a ISO

Nothing

Tax on exercise when ISO

Shares * (Price at sale - exercise price) * tcg

reminder, corporation does not deduct anything

Tax on exercise of NQO

Shares (price at sale - exercise price) * personal tax rate

Present Value of Corporation deduction for NQO

(stock price - exercise price) * shares * tc

Present Value of Corporation deduction for ISO

None

why the appreciation of the stock after the exercise of the option is not relevant to the ISO/NQO choice

The stock appreciation is not needed after the exercise date because gains after exercise are taxed the same for ISO and NQO

After tax amount of NSO with immediate vesting

Step 1: Find the stock price at date of sale

• current price * (1+appreciation rate)^ years held

Step 2: Put price in present value

Step 3: subtract exercise price

Step 4: Subtract exercise tax

• (current price - exercise price) * tp

Step 5: subtract present value of tax on sale

• find nondiscount tax (price from step 1 - current price) * tcg

• The discount into the present value

then: take step 2 and subtract sum of steps 3-5

last step: multiple by # of shares

After tax amount of NSO with vesting on maturity

Step 1: Find the stock price at the date of sale

• current price * (1+appreciation rate)^ years held

Step 2: Subtract exercise price

Step 3: Subtract exercise tax

• (price from step 1 - exercise price) * tp

Step 4: take step 1 and subtract steps 2 and 3

Step 5: Discount step 4 into the present

Step 6: Multiply step 5 by # of shares

Are there benefits from exercising on vesting date or exercising on maturity date when ISO

There would be no tax difference between the options. You pay the tax when the shares are sold in either scenario

Equation to determine if an employee should exercise NQO when tax rates are expected to increase.

Exercise early if…

(Current stock price - exercise price) * (1- tc period 1) > B.S value * (1-tc period 2)

How much taxable income do you report on US tax return

US pretax income + any foreign branch pretax income

Total US taxes paid on a foreign branch

Step 1: Find Branch Income

Step 2: Calculate US tax on that income

• Branch Income * US corporate tax rate

Step 3: Calculate Foreign tax on that income

• Branch income * foreign corporate tax rate

Step 4: Subtract Foreign tax credit

• Limited to lesser of US tax or foreign tax

Step 5: Calculate foreign tax carryforward (if needed)

• if foreign tax is greater than us tax, then carryforward the difference between the two

Step 6: Calculate US taxes paid

• Step 2 - Step 4

Effective Tax rate - 1 branch

(Taxes paid on US income + foreign taxes paid) / total pretax income (both countries)

Foreign Tax credit limit

Total foreign tax * US corporate tax rate

After tax return of subsidiary assets invested into foreign projects

R * (1 - foreign tax rate)

After tax return of subsidiary assets invested into financial portfolio

R * (1- foreign tax rate - us residual tax rate)

• residual tax rate is US tax - foreign tax

Are foreign subsidiary business projects taxable in US

No, we don’t pay a tax on these projects. Only pay US tax on other projects like the financial portfolio

Net US tax liability for foreign portfolio

Step 1: Calculate income

• Asset base x pretax return x weight of assets in portfolio

Step 2: Calculate US taxes paid

• Income from step 1 * US tax rate

Step 3: Calculate foreign taxes paid

• income from step 1 * foreign tax rate

Step 4: Calculate tax credit limit

• income from step 1 * US tax rate (will be different from step 2 if there are multiple asset/investments)

Step 5: Calculate foreign tax credit

• Lesser of step 2 or 3

Step 6: Calculate US net tax liability

• Step 2 - Step 5

Minimum annual before-tax return in foreign country for firm to invest in foreign country

Step 1: Calculate US after tax return

• US before tax return * (1 - US corp tax rate)

Step 2: Calculate required return

• Number found in step 1 / (1 - foreign corp tax rate)

Before tax implicit tax

(US pretax return - required before tax return of foreign investment) / US pretax return

How much do the shareholders receive when target assets are bought and target is liquidated

Step 1: Calculate Targets ATA

• Asset price - ((Asset price - Corp’s Basis in assets) * tc)

Step 2: calculate shareholders ATA

• Amount found in step 1 - ((Amount found in step 1 - Shareholders basis) * tcg)

Present value of step up of asset basis

Step 1: Find annual incremental depreciation

• (asset price - basis in assets) / years of amort/dep

Step 2: Calculate tax savings from this annual depreciation

• Number found in step 1 * corp tax rate

Step 3: Use present value function

• rate= discount rate, years= amort years, pmt = number found in step 2

Should a company take a section 338 election

Compare the additional corp taxes paid from the election and the money saved from the step up in basis.

• Corp taxes paid: (ADSP - asset basis) * corporate tax rate

• Present value of step up (different flashcard)

ADSP

Price + Liabilities + corp tax rate * (ADSP - Basis - NOL carryforward)

How do NOLs impact taxable income during section 338

NOLs affect the ADSP price, and directly decrease the taxable income

Shareholder ATA in taxable asset acquisition

Step 1: Find recognized gain

• Sale price - asset basis - any NOL

Step 2: Calculate corporate taxes paid

• recognized gain * tc

Step 3: Find after tax distribution

• Recognized gain - corp taxes paid

Step 4: Find the shareholder gain

• After tax distribution - shareholder basis

Step 5: Find the shareholder taxes paid

• shareholder gain * tcg

Step 6: Find shareholder ATA

• After tax distribution (step 3) - shareholder taxes paid

Indifference price for shareholders between asset sale and stock sale with no section 338

(shareholder ATA in asset sale - (shareholder basis * tcg)) / (1-tcg)

NPV for purchaser of taxable asset sale

FMV of assets with step up - sales price paid

NPV for purchaser of stock sale with no section 338

FMV of assets with no step up - sales price paid

Shareholder ATA of taxable stock acquisition without section338

Step 1: calculated capital gains

• stock price - shareholder basis

Step 2: calculated capital gains tax

• capital gain * tcg

Step 3: Find ATA

• sales price - capital gains tax

Shareholder ATA of taxable stock acquisition with section338

Step 1: Find taxable income

• stock price - shareholder basis

Step 2: Find ordinary income

• Amount of accumulated depreciation

Step 3: find tax on ordinary income

• ordinary income * tp

Step 4: Find capital gain

• taxable income - ordinary income

Step 5: Find tax on capital gain

• capital gain * tcg

Step 6: Find ATA

• Price Paid - ordinary income taxes paid - capital gain taxes paid

Shareholder indifferent price between stock sale with section 338 and no 338

price with 338 election = price no election + (shareholders basis tcg - historical cost of assets X tcg + accumulated depreciation X toi) X (1-tcg)

Maximum price acquirers will pay for stock purchase with section 338 election

Acquire price with 338 election = (acquire price with no 338 election - tc X annuity factor X net tax basis of target assets) / (1-tc-annuity factor)

maximum price acquirer will pay in taxable asset sale given it will pay X in taxable stock acquistion

Asset Price - value of step up = taxable stock price

this turns into this equation

• P - (((P - net basis of assets) / depreciation years (n)) X tc) X PV annuity factor = taxable stock price

  • Annuity factor should be greater than 1 (factor for recieving x amount for x years). Not the present value of a dollar

then solve for P

Minimum price shareholders will accept under a taxable asset sale given they will get paid X in taxable stock sale

Price of asset sale = (price of stock sale - net asset basis X tc) / (1-tc)

Should the acquirer make the 338 election (formula to find net gain/loss of making the election