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30 Cards in this Set

  • Front
  • Back
What are the 3 Tax Planning Strategies
1. Timing
2. Income Shifting
3. Conversion
What are the three parties that every transaction includes?
The taxpayer
the other transacting party
the government
Astute Tax Planning
Understanding the consequences of all transaction and understand tax rates.
Timing Strategy
WHEN income is taxed or expense is deducted affects the associated real tax cost or saving.

It might be an additional tax cost in one part of the transaction but it can reduce your overall tax.
The timing strategy involves the time value of money concept.
A dollar today is worth than a dollar tommorow. A discounted Cash flow model.
Cash inflows ______ present values are preferred
Cash outflows ______ present values are preferred
Present Value Formula
= Future Value/(1+r)^n
Future Value Formula
= Present Value x (1+r)^n
Two types of Annuities
1. Ordinary Annuity
2. Annuity Due.
Tax Deductions Strategy When Rates are consistent.
Accelerate Tax deductions into earlier years because it Maximizes the present value of tax savings from deductions.
Taxable Income Strategy When Rates are consistent.
Defer taxable income into later years in order to minimize the present value of taxes paid.
Timing Strategy when tax rates are increasing
Calculate the optimal tax strategies. You have to take it into a case by case basis.
When Tax Rates Decrease
Taxable income should be deffered into later years
Tax deductions should be in earlier years.
Limitations to the timing strategy
1. You have to continue your investment to defer income recognition for taxpayers
2. Deferal May not be optimal.
What are 3 reasons why Deferal Is not optimal regarding the timing strategy
1. The Taxpayer has sever cash flow needs
2. Continuing the invsement souwl general a low rate of return compared to other investments.
3. the current investment would subject the taxpayer to unnessesary risk.
Constructive Receipt Doctrine
Restricts income defferal for cash method taxpayers. You have to recognize the income when it come through.
Income shifting Strategies
Tax Rates can also vary across Taxpayers or Jurisdictions.
Examples of Income shifting strategies
you can shift income to another person who has a different tax rate.

You can shift income to another state with a different rate.
Related parties
Family members or business partners
Operating in multiple locations
Whats the difference between an arms length transaction and related party transaction
in an arms length transaction two parties are negotiating for their own benefit. In a related party transaction the two are colluding against the irs.
What could offset the tax advantages of moving money across borders?
Demand for labor services and property would all cost more money to take across the border.

You may inflict negative publicity for movign operations across borders.
Conversion Strategies
Recasting your income and expenses for faborable tax treatment. You must be aware of the differences in tax treatment.
Business purposes Doctrine
Allows IRS to challenge and disallow business expenses without business motivation
Step Transaction Doctrine
Allows IRS to collapse related transactions into one transaction to see what they did to save on taxes.
Substance over form Doctrine
Allows IRS to reclassify a transaction regardless of form and reclassify it.
Economic substances doctrine
1. Taxpayer must have a meaningful impact on the persons economic position
2. Taxpayer must ahave a substantial purpose (other than tax avoidance)
Smell test
If it smells bad than use a doctrine
Difference between tax avoidance and tax evasion
Tax avoidance is ok and actually encouraged.
Tax evasion is attempting to defraud the government.