tax reform
02/20/2018
©2017 RSM US LLP. All Rights Reserved.
TAX REFORM Key Provisions of the Tax Cuts and Jobs Act
©2017 RSM US LLP. All Rights Reserved.
Speakers David T. Hanna Senior Director, Tax Over 15 years of experience, with a focus in the real estate industry
Kelly McNeil Tax Manager Over 4 years of experience, specializing in partnerships and flow-through entities
3 ©2017 RSM US LLP. All Rights Reserved.
1
02/20/2018
Texas Franchise Updates for 2018 • Tax Rates have not changed − 0.375% for taxpayers primarily engaged in retail or wholesale trade − 0.75% for most other taxpayers − 0.331% for taxpayers filing the EZ report
• No Tax Due Threshold – now $1,130,000 • Revenue Threshold for EZ Reports stayed the same at $20 million • Compensation deduction limit - $370,000 4 ©2017 RSM US LLP. All Rights Reserved.
Bonus Depreciation Per PATH Act
Per TCJA
PIS in 2017 – 50% bonus eligible
9/27/17 and prior – 50% bonus eligible After 9/27/17 – 100% bonus eligible*
PIS in 2018 – 40% bonus eligible
PIS 2018 through 2022 – 100% bonus eligible*
PIS in 2019 – 30% bonus eligible
20% per calendar year phase down 2023 - 2026
PIS in 2020 – No bonus
PIS in 2027 – No bonus
Extended 1 year for longer production period property (LPP) and certain noncommercial aircraft (NCA).
Extended 1 year for longer production period property (LPP) and certain noncommercial aircraft (NCA).
Applicable for MACRS Property having a recovery period of 20 years or less.
Applicable for MACRS Property having a recovery period of 20 years or less.
New property only – Original use of property must begin with the taxpayer.
Applicable to new AND used property.
©2017 RSM US LLP. All Rights Reserved.
*100% Bonus eligibility and limitations • Property must be acquired AND placed in service after September 27, 2017. • If property is placed in service 9/28/17 – 12/31/17, but acquired prior to 9/27/17, it is eligible for 50% bonus depreciation, not 100%. • If property is placed in service in 2018, but acquired prior to 9/27/17, it is eligible for 40% bonus depreciation, not 100%. • If property is placed in service in 2019, but acquired prior to 9/27/17, it is eligible for 30% bonus depreciation, not 100%. • If property is placed in service in 2020, but acquired prior to 9/27/17, it is not bonus eligible.
©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
*100% Bonus eligibility and limitations • Acquired date (Section 1.168(k)-1(b)(4)) − For assets purchased directly from a vendor, the acquired date could be the date of a purchase order. The date the asset was physically acquired is not relevant in this definition. − For Real Property (buildings) acquired in a transaction, or constructed by a contractor, the acquisition date is considered to be the date the taxpayer entered into a written binding contract. i.e. date of purchase agreement, date of construction contract. − For self constructed assets, the taxpayer is deemed to have acquired the asset once it begins its manufacture, construction, or production, which is further defined as when “physical work of a significant nature” begins. Under the available safe harbor, “physical work of a significant nature” begins when 10% of the property’s total cost is incurred.
©2017 RSM US LLP. All Rights Reserved.
Overview of U.S. Tax Code
Both the House and Senate proposals are amendments to the Internal Revenue Code of 1986.
©2017 RSM US LLP. All Rights Reserved.
Tax Reform is Here!
9 ©2017 RSM US LLP. All Rights Reserved.
3
02/20/2018
It’s Congress’s Job to Clarify Vagaries in Tax Law • It’s Congress’s responsibility to explain parts of the tax law that are unclear as government officials work to implement the changes, Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) said. • “We will keep the pressure on the administration to do things properly and as Congress intended,” Hatch said Tuesday at an Urban-Brookings Tax Policy Center Event. “I’m going to keep working to ensure that everyone recognizes and respects Congress’s role in the process.” • Hatch’s comments come as officials at the Treasury Department and Internal Revenue Service are being hounded with questions from tax professionals and industry groups about how they intend to interpret the law. Treasury officials say they plan to move quickly to write regulations under the new law and generously use their authority to write regulations to clean up confusion. They have expressed doubt that lawmakers will pass corrections legislation fixing mistakes in the bill. • The law has been criticized because lawmakers quickly pushed it through the legislative process and didn’t hold hearings on the bill. Hatch countered that assessment saying the law is the result of working from Democrats and Republicans over several years. 10 ©2017 RSM US LLP. All Rights Reserved.
Cite: Bloomberg Tax – Daily Tax RealTime®
BUSINESS PROVISIONS All provisions are effective for tax years beginning after December 31, 2017, unless otherwise noted. ©2017 RSM US LLP. All Rights Reserved.
Corporate Tax Rate
Reduced from a top rate of
35%
21%
The new, lower corporate rate provides a large benefit to operating as a C corporation 12 ©2017 RSM US LLP. All Rights Reserved.
4
02/20/2018
Corporate Tax Rate-
An example for an individual shareholder
Old income tax rules:
New income tax rules:
• $100 of corporate income
• $100 of corporate income
− Less $35 tax at 35% rate
− Less $21 tax at 21% rate
• $65 of cash on balance sheet
• $79 of cash on balance sheet
$100 - $35 tax = $65
$100 - $21 tax = $79
− Less $13 tax at 20% rate
− Less $15.8 tax at 20% rate
• $49.53 of after tax cash
• $60.20 of after tax cash
$65 - $13 tax = $52
$79 - $15.8 tax = $62.2
− 48% combined income tax rate
− 36.8 % combined income tax rate
− 3.8% tax on $65 (or $2.47)
− 3.8% tax on $79 (or $3)
− All-in 50.47% tax rate
− All-in 36.8% tax rate
13 ©2017 RSM US LLP. All Rights Reserved.
Corporate Tax Rate-
An example for an individual shareholder
New income tax rules: • $100 of corporate income − Less $21 tax at 21% rate
• $79 of cash on balance sheet $100 - $21 tax = $79 − Less $15.8 tax at 20% rate
Planning opportunities • Defer the 20% tax and 3.8% tax by reinvesting cash in the business • Avoid the 20% and 3.8% tax at death − Or with stock gifts to charity that would otherwise be made in cash
• $60.20 of after tax cash $79 - $15.8 tax = $62.2 − 36.8 % combined income tax rate − 3.8% tax on $79 (or $3) − All-in 36.8% tax rate
• Reduce the 20% and 3.8% tax of shares held by lower-rate taxpayers, including from gifts, trusts, etc.
14 ©2017 RSM US LLP. All Rights Reserved.
Details of reduced Corporate Tax Rate • Repeals alternative minimum tax (AMT) • No special 25% rate for personal service corporations • Dividends received deductions (DRD) for corporation-tocorporation dividends adjusted accordingly − To preserve current effective rates: • 80% DRD reduced to 65% • 70% DRD reduced to 50%
15 ©2017 RSM US LLP. All Rights Reserved.
5
02/20/2018
Meals & Entertainment • Directly paid or reimbursed business entertainment expenses = deduction eliminated • Typical business entertainment would be 100% non-deductible • The 50% limitation for business related food and beverage expenses now applies to include food and beverages provided to employees through an eating facility, as well as other employer provided food and beverages • The deduction for expenses associated with providing any qualified transportation fringe benefit, including for commuting between the employee’s residence and place of employment, would be disallowed, except for ensuring the safety of the employee • Fully deductible expenses will include: − Expenses treated as employee compensation; reimbursed expenses; expenses for recreational, social, or similar activities primarily for the benefit of employees; expenses for goods, services and facilities made available by the taxpayer to the general public; expenses for goods and services which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration; expenses includible in income of persons who are not employees 16 ©2017 RSM US LLP. All Rights Reserved.
Lobbyists at Work
• Newman’s Own was facing a 200% tax due to an obscure provision in the new tax law • The new laws were put in place to prevent private foundations from owning for-profit entities to avoid taxes which became a problem when Paul Newman passed • The recent budget deal will exempt groups like Newman’s Own that give 100% of its profits to charity 17 ©2017 RSM US LLP. All Rights Reserved.
Pass-Through Businesses • 20% pass-through deduction only 80% of income, if qualified, is going to be taxed • Does not apply to certain listed professions or financial businesses • Even if you have a conventional business (i.e. manufacturing widgets) there are 2 basic requirements
18 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Pass-Through Businesses- Requirements
Pay W-2 wages equal to 40% of income to get full 20% deduction
OR
Limit deductions to 2.5% of original cost of depreciable, tangible property plus 25% of wages
• However, business type and wage/asset limits do not apply below specified income limits. • Trusts and estates are eligible for the 20 percent deduction. • New restriction limits an owner’s ability to deduct active business losses against non-business income. 19 ©2017 RSM US LLP. All Rights Reserved.
Pass-Through Businesses-
An example for a highincome taxpayer
Situation 1: Investor with $1 million of salary income buys an empty lot for $1 million to use as a parking lot that generates gross parking fees of $200,000 − Paying $200,000 of cash − Borrowing $800,000 at 5% interest
There is $100,000 of net income: − With $200,000 of gross income − But paying $40,000 to an independent contractor to manage the lot − And $20,000 for insurance − And $40,000 of interest
• Does the 20% deduction apply? No − Not enough “wages” and not enough “depreciable property”
20 ©2017 RSM US LLP. All Rights Reserved.
Pass-Through Businesses-
An example for a highincome taxpayer
Situation 2: Investor with $1 million of salary income buys an empty lot for $1 million to use as a parking lot that generates gross parking fees of $200,000 − Paying $200,000 of cash − Borrowing $800,000 at 5% interest
There is $100,000 of net income: − With $200,000 of gross income − But paying $40,000 to an employee to manage the lot − And $20,000 for insurance − And $40,000 of interest
• Does the 20% deduction apply? Yes! − Deduction of $20,000 applies − There are at least $40,000 of wages that were paid 21 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Carried Interests • The act recognizes the concept of different treatment for profits in an “applicable trade or business” defined as− Regular, continuous and substantial activity of − Raising or returning capital and either • Investing in / disposing of specified assets OR • Developing specified assets
• What are “specified assets?” − Include securities, commodities, real estate, cash, options, derivatives, and partner ship interests
1 year
3 year
old holding period
new holding period
22 ©2017 RSM US LLP. All Rights Reserved.
Capital Expensing • The legislation provides for immediate expensing (i.e., 100 percent bonus depreciation) for certain qualified assets acquired and placed in service after Sept. 27, 2017. • The 100 percent bonus depreciation benefit will begin to phase out in 2023. • The Act also increased the expensing allowance under section 179 to $1 million, also subject to a phase-out.
23 ©2017 RSM US LLP. All Rights Reserved.
Business Interest • The deduction for net business interest of corporations and many pass-through businesses is limited under a formula. − Generally speaking, deductions cannot exceed 30 percent of EBITDA (earnings before interest, taxes, depreciation and amortization) for the next four years. − After that period, interest deductions may not exceed 30 percent of EBIT (earnings before interest and taxes).
• Disallowed interest deductions can generally be carried forward indefinitely, but may be subject to certain limitations applicable to partnerships. • Certain taxpayers are exempted from these rules, including taxpayers with average gross receipts of $25 million or less for the three years immediately preceding the effective date of this provision, as well as taxpayers involved in certain real estate activities. 24 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Business Interest-
Interest limitation using EBITDA
Situation: • Company worth $3 million • Debt of $2 million @ 5% • Equity of $1 million Earnings before interest and depreciation =
$500,000
Depreciation =
($200,000)
Interest =
($100,000)
Taxable income before limitation =
$200,000
Base for limitation = $500,000 30% of base = $150,000 • Does the limitation apply? No − Carryforward allowed indefinitely 25 ©2017 RSM US LLP. All Rights Reserved.
Business Interest-
Interest limitation using EBIT
Situation: • Company worth $3 million • Debt of $2 million @ 5% • Equity of $1 million Earnings before interest and depreciation =
$500,000
Depreciation =
($200,000)
Interest =
($100,000)
Taxable income before limitation =
$200,000
Base for limitation = $300,000 30% of base = $90,000 • Does the limitation apply? $10,000 interest is “limited” − Carryforward allowed indefinitely 26 ©2017 RSM US LLP. All Rights Reserved.
Net Operating Losses (NOLs) • The Act limits the NOL deduction to 80% of taxable income • Carrybacks are generally eliminated • But unused losses can be carried forward indefinitely
27 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Research Credits and Expenses • The legislation retains the research and development credit • Requires capitalization and amortization of research and experimental expenses over a five-year period. • The capitalization provisions apply to amounts paid or incurred in tax years beginning after Dec. 31, 2021
28 ©2017 RSM US LLP. All Rights Reserved.
Overall Methods of Accounting The Act increases the gross receipts threshold above which C corporations and partnerships with C corporation partners must generally use the accrual method of accounting from:
$5 million
$25 million
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Like-Kind Exchanges • Those under Section 1031 are limited to real property that is not held primarily for sale. • So, for example: personal property no longer qualifies for tax-deferred treatment
30 ©2017 RSM US LLP. All Rights Reserved.
10
02/20/2018
Lobbyists at Work • Tax breaks for racetracks and horse owners continue • Race Horses will continue to be depreciated over 3 years • Racetracks will be depreciated over 7 years • These items remain in place for 2017 31 ©2017 RSM US LLP. All Rights Reserved.
What has been repealed? • Domestic manufacturing deduction – The section 199 domestic production deduction is repealed.
• Corporate alternative minimum tax – The corporate AMT is repealed.
• Technical Terminations – a change in the partnership’s capital and profits within a 12-month period no longer causes a technical termination
32 ©2017 RSM US LLP. All Rights Reserved.
Sale of Partnership Interest by Foreign Taxpayer • Under the New Act, a foreign partner would generally be subject to U.S. tax on gain from sale of an interest in a partnership to the extent the gain is attributable to U.S. trade or business assets of the partnership. • The New Act also requires the person or entity receiving a partnership interest in a sale of exchange to withhold 10 percent of the amount realized on the disposition unless the transferor certifies that it isn’t a nonresident alien or foreign corporation • Overturns Grecian Magnesite Decision • In that Tax Court case, the judge ruled the Grecian Magnesite Mining, Industrial & Shipping Co. SA – a Greek mining company – didn’t have to pay tax on the gain it realized on the redemption of its partnership interest in a Pennsylvania-based company because the gain wasn’t U.S.-source income. 33 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Tax Evasion
“We pay all the taxes we owe, every single dollar,” Apple CEO Tim Cook claimed at a hearing on May 2013 organized by the United States Senate investigative subcommittee…“We don’t depend on tax gimmicks … We don’t stash money on some Caribbean island.” Apple instead was using an obscure island in the English Channel, Jersey, as its tax haven during a time when the tech giant received criticism for using Ireland for the same purpose, according to an analysis of The Paradise Papers released last Sunday.
©2017 RSM US LLP. All Rights Reserved.
OVERVIEW OF THE INDIVIDUAL AND WEALTH TRANSFER PROVISIONS
©2017 RSM US LLP. All Rights Reserved.
Summary of provisions
Area Brackets and rates
Summary Seven tax brackets—10, 12, 22, 24, 32, 35, and 37 percent. The top individual rate of 37 percent will apply at incomes of $500,000/$600,000 .
Brackets and rates for estates and trusts
Condenses the number of tax brackets from seven to four, including 10, 24, 35 and 37 percent brackets
Alternative minimum tax
Retained with higher exemptions ($70,300/ $109,400); phase-out of exemption increased to $500,000/$1,000,000
36
©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Example of Change to Tax Rates • Under the 2017 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 25% tax bracket and would have a tax liability of $5,739. • Under the 2018 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 22% tax bracket and would have a tax liability of $4,740.
©2017 RSM US LLP. All Rights Reserved.
Summary of provisions (cont.)
Area Personal exemptions Standard deduction
Mortgage interest
Summary Repeals Doubles to $12,000/$24,000; retains additional deduction for blind and elderly
Limits to interest on $750,000 of indebtedness on newly purchased principal and second residences incurred after Dec. 15, 2017; not allowed for home equity loans.
38
©2017 RSM US LLP. All Rights Reserved.
Summary of provisions(cont.)
Area
Summary
State and local tax deductions
Deduction of up to $10,000 for state and local property, income or sales taxes allowed Prepayments of 2018 state and local income taxes made during 2017 are not deductible for 2017, and prepayments of 2018 property taxes need to be analyzed on a case-by-case basis to determine deductibility.
Charitable contributions
Preserves deduction and increases the AGI limitation for cash contributions to public charities and certain private foundations from 50 percent to 60 percent
529 plans
Up to $10,000 of 529 plans can be used per student for public, private and religious elementary and secondary schools
39
©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Summary of provisions (cont.) Area
Summary
Other deductions
Deductions for casualty and theft losses limited to those incurred in a disaster area Alimony paid for divorce after Dec. 31, 2018, not deductible/includible after 2018 .
Miscellaneous deductions
Eliminates miscellaneous deductions over 2 percent of AGI
40
©2017 RSM US LLP. All Rights Reserved.
Summary of provisions (cont.)
Area
Summary
Medical expenses
Overall limitation on itemized deductions (Pease limitation) IRAs
Medical expenses exceeding 7.5 percent of AGI deductible for 2017 and 2018; eliminates AMT preference for medical expense deductions for 2017 and 2018.
Suspends 3 percent of AGI limit on deductions
Conversion of traditional IRA to a Roth IRA cannot be recharacterized; can still convert traditional IRA into a Roth IRA.
41
©2017 RSM US LLP. All Rights Reserved.
Summary of provisions (cont.)
Area
Summary
Estate, gift and GST tax
Exemptions are doubled to approximately $11 million, effective January 2018. The estate, gift and GST tax rates remain the same as prior law. Estate and GST tax not repealed Provisions sunset after 2025
42
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02/20/2018
Lobbyists at Work
• Americans Against Double Taxation was formed specifically during tax reform discussions to prevent the state and local tax deduction from being eliminated • $46,000 was spent to lobby for the deduction, but Republicans needed to free up hundreds of millions of dollars • The $10,000 limit on deductions for state and local taxes was placed • It will hit California, Connecticut, Massachusetts, New Jersey, and New York the hardest 43 ©2017 RSM US LLP. All Rights Reserved.
Examples • Savings: $4,470
Example One Single Renter living in Texas. Salary $150,000
Current LawNew Law Income
150,000
150,000
Standard Deduction
6,350
12,000
Personal Exemption
4,050
Adj. Income
Tax Due Effective Rate Marginal Rate
139,600
138,000
32,070 22.97% 28.00%
27,600 20.00% 24.00%
44 ©2017 RSM US LLP. All Rights Reserved.
Examples • Tax Increase: $168
Example Two Single Home Owner living in NJ. Salary $150,000 Current Law New Law Income
150,000
150,000
Standard Deduction Personal Exemption
4,050
State Taxes Property Taxes
11,000 6,629
10,000
Home Mortgage Int.
25,000
25,000
103,321
115,000
Adj. Income
Tax Due Effective Rate Marginal Rate
21,912 21.21% 28.00%
22,080 19.20% 24.00%
45 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Key provisions of prior law left undisturbed • Income tax
− The 3.8 percent tax on investment income under section 1411 and the .9 percent Medicare tax on compensation − Tax rates on capital gains and qualified dividends − Exclusion of gain on sale of a residence − Ability to identify the securities that an investor is deemed to sell, i.e., the Senate’s proposal for a ‘first-in, first out’ method not included − Pre-tax contribution limits (including catch-ups) for 401(k) plans − Ability for beneficiaries to ‘stretch’ IRA withdrawals out over their lifetimes − Student loan interest deductions, adoption assistance programs, dependent care accounts, tuition waivers, employer paid tuition, teacher supplies deduction and Archer medical savings accounts 46
©2017 RSM US LLP. All Rights Reserved.
Observations on impact on estate planning • Doubling of the exemptions (and indexing thereafter) effectively repeals the estate tax for many individuals − But sunsetting makes the planning more problematic • The doubling of the estate tax exemption is reason enough to review your current estate plan, e.g., the funding of a so-called ‘credit shelter’ trust • Key inquiries will be: − Whether the current or projected estate will be taxable in the first place, and − Whether there is a need (or, just as important, a desire) to reduce the taxable estate • Perhaps just use the increased exemption to fix problems with existing planning • Plans for estate tax liquidity also should be revisited 47 − For increased exemptions, sunsetting, etc.
©2017 RSM US LLP. All Rights Reserved.
48 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
49 ©2017 RSM US LLP. All Rights Reserved.
50 ©2017 RSM US LLP. All Rights Reserved.
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This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. RSM® and the RSM logo are registered trademarks of RSM International Association. The power of being understood® is a registered trademark of RSM US LLP. © 2017 RSM US LLP. All Rights Reserved.
©2017 RSM US LLP. All Rights Reserved.
17
©2017 RSM US LLP. All Rights Reserved.
TAX REFORM Key Provisions of the Tax Cuts and Jobs Act
©2017 RSM US LLP. All Rights Reserved.
Speakers David T. Hanna Senior Director, Tax Over 15 years of experience, with a focus in the real estate industry
Kelly McNeil Tax Manager Over 4 years of experience, specializing in partnerships and flow-through entities
3 ©2017 RSM US LLP. All Rights Reserved.
1
02/20/2018
Texas Franchise Updates for 2018 • Tax Rates have not changed − 0.375% for taxpayers primarily engaged in retail or wholesale trade − 0.75% for most other taxpayers − 0.331% for taxpayers filing the EZ report
• No Tax Due Threshold – now $1,130,000 • Revenue Threshold for EZ Reports stayed the same at $20 million • Compensation deduction limit - $370,000 4 ©2017 RSM US LLP. All Rights Reserved.
Bonus Depreciation Per PATH Act
Per TCJA
PIS in 2017 – 50% bonus eligible
9/27/17 and prior – 50% bonus eligible After 9/27/17 – 100% bonus eligible*
PIS in 2018 – 40% bonus eligible
PIS 2018 through 2022 – 100% bonus eligible*
PIS in 2019 – 30% bonus eligible
20% per calendar year phase down 2023 - 2026
PIS in 2020 – No bonus
PIS in 2027 – No bonus
Extended 1 year for longer production period property (LPP) and certain noncommercial aircraft (NCA).
Extended 1 year for longer production period property (LPP) and certain noncommercial aircraft (NCA).
Applicable for MACRS Property having a recovery period of 20 years or less.
Applicable for MACRS Property having a recovery period of 20 years or less.
New property only – Original use of property must begin with the taxpayer.
Applicable to new AND used property.
©2017 RSM US LLP. All Rights Reserved.
*100% Bonus eligibility and limitations • Property must be acquired AND placed in service after September 27, 2017. • If property is placed in service 9/28/17 – 12/31/17, but acquired prior to 9/27/17, it is eligible for 50% bonus depreciation, not 100%. • If property is placed in service in 2018, but acquired prior to 9/27/17, it is eligible for 40% bonus depreciation, not 100%. • If property is placed in service in 2019, but acquired prior to 9/27/17, it is eligible for 30% bonus depreciation, not 100%. • If property is placed in service in 2020, but acquired prior to 9/27/17, it is not bonus eligible.
©2017 RSM US LLP. All Rights Reserved.
2
02/20/2018
*100% Bonus eligibility and limitations • Acquired date (Section 1.168(k)-1(b)(4)) − For assets purchased directly from a vendor, the acquired date could be the date of a purchase order. The date the asset was physically acquired is not relevant in this definition. − For Real Property (buildings) acquired in a transaction, or constructed by a contractor, the acquisition date is considered to be the date the taxpayer entered into a written binding contract. i.e. date of purchase agreement, date of construction contract. − For self constructed assets, the taxpayer is deemed to have acquired the asset once it begins its manufacture, construction, or production, which is further defined as when “physical work of a significant nature” begins. Under the available safe harbor, “physical work of a significant nature” begins when 10% of the property’s total cost is incurred.
©2017 RSM US LLP. All Rights Reserved.
Overview of U.S. Tax Code
Both the House and Senate proposals are amendments to the Internal Revenue Code of 1986.
©2017 RSM US LLP. All Rights Reserved.
Tax Reform is Here!
9 ©2017 RSM US LLP. All Rights Reserved.
3
02/20/2018
It’s Congress’s Job to Clarify Vagaries in Tax Law • It’s Congress’s responsibility to explain parts of the tax law that are unclear as government officials work to implement the changes, Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) said. • “We will keep the pressure on the administration to do things properly and as Congress intended,” Hatch said Tuesday at an Urban-Brookings Tax Policy Center Event. “I’m going to keep working to ensure that everyone recognizes and respects Congress’s role in the process.” • Hatch’s comments come as officials at the Treasury Department and Internal Revenue Service are being hounded with questions from tax professionals and industry groups about how they intend to interpret the law. Treasury officials say they plan to move quickly to write regulations under the new law and generously use their authority to write regulations to clean up confusion. They have expressed doubt that lawmakers will pass corrections legislation fixing mistakes in the bill. • The law has been criticized because lawmakers quickly pushed it through the legislative process and didn’t hold hearings on the bill. Hatch countered that assessment saying the law is the result of working from Democrats and Republicans over several years. 10 ©2017 RSM US LLP. All Rights Reserved.
Cite: Bloomberg Tax – Daily Tax RealTime®
BUSINESS PROVISIONS All provisions are effective for tax years beginning after December 31, 2017, unless otherwise noted. ©2017 RSM US LLP. All Rights Reserved.
Corporate Tax Rate
Reduced from a top rate of
35%
21%
The new, lower corporate rate provides a large benefit to operating as a C corporation 12 ©2017 RSM US LLP. All Rights Reserved.
4
02/20/2018
Corporate Tax Rate-
An example for an individual shareholder
Old income tax rules:
New income tax rules:
• $100 of corporate income
• $100 of corporate income
− Less $35 tax at 35% rate
− Less $21 tax at 21% rate
• $65 of cash on balance sheet
• $79 of cash on balance sheet
$100 - $35 tax = $65
$100 - $21 tax = $79
− Less $13 tax at 20% rate
− Less $15.8 tax at 20% rate
• $49.53 of after tax cash
• $60.20 of after tax cash
$65 - $13 tax = $52
$79 - $15.8 tax = $62.2
− 48% combined income tax rate
− 36.8 % combined income tax rate
− 3.8% tax on $65 (or $2.47)
− 3.8% tax on $79 (or $3)
− All-in 50.47% tax rate
− All-in 36.8% tax rate
13 ©2017 RSM US LLP. All Rights Reserved.
Corporate Tax Rate-
An example for an individual shareholder
New income tax rules: • $100 of corporate income − Less $21 tax at 21% rate
• $79 of cash on balance sheet $100 - $21 tax = $79 − Less $15.8 tax at 20% rate
Planning opportunities • Defer the 20% tax and 3.8% tax by reinvesting cash in the business • Avoid the 20% and 3.8% tax at death − Or with stock gifts to charity that would otherwise be made in cash
• $60.20 of after tax cash $79 - $15.8 tax = $62.2 − 36.8 % combined income tax rate − 3.8% tax on $79 (or $3) − All-in 36.8% tax rate
• Reduce the 20% and 3.8% tax of shares held by lower-rate taxpayers, including from gifts, trusts, etc.
14 ©2017 RSM US LLP. All Rights Reserved.
Details of reduced Corporate Tax Rate • Repeals alternative minimum tax (AMT) • No special 25% rate for personal service corporations • Dividends received deductions (DRD) for corporation-tocorporation dividends adjusted accordingly − To preserve current effective rates: • 80% DRD reduced to 65% • 70% DRD reduced to 50%
15 ©2017 RSM US LLP. All Rights Reserved.
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02/20/2018
Meals & Entertainment • Directly paid or reimbursed business entertainment expenses = deduction eliminated • Typical business entertainment would be 100% non-deductible • The 50% limitation for business related food and beverage expenses now applies to include food and beverages provided to employees through an eating facility, as well as other employer provided food and beverages • The deduction for expenses associated with providing any qualified transportation fringe benefit, including for commuting between the employee’s residence and place of employment, would be disallowed, except for ensuring the safety of the employee • Fully deductible expenses will include: − Expenses treated as employee compensation; reimbursed expenses; expenses for recreational, social, or similar activities primarily for the benefit of employees; expenses for goods, services and facilities made available by the taxpayer to the general public; expenses for goods and services which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration; expenses includible in income of persons who are not employees 16 ©2017 RSM US LLP. All Rights Reserved.
Lobbyists at Work
• Newman’s Own was facing a 200% tax due to an obscure provision in the new tax law • The new laws were put in place to prevent private foundations from owning for-profit entities to avoid taxes which became a problem when Paul Newman passed • The recent budget deal will exempt groups like Newman’s Own that give 100% of its profits to charity 17 ©2017 RSM US LLP. All Rights Reserved.
Pass-Through Businesses • 20% pass-through deduction only 80% of income, if qualified, is going to be taxed • Does not apply to certain listed professions or financial businesses • Even if you have a conventional business (i.e. manufacturing widgets) there are 2 basic requirements
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Pass-Through Businesses- Requirements
Pay W-2 wages equal to 40% of income to get full 20% deduction
OR
Limit deductions to 2.5% of original cost of depreciable, tangible property plus 25% of wages
• However, business type and wage/asset limits do not apply below specified income limits. • Trusts and estates are eligible for the 20 percent deduction. • New restriction limits an owner’s ability to deduct active business losses against non-business income. 19 ©2017 RSM US LLP. All Rights Reserved.
Pass-Through Businesses-
An example for a highincome taxpayer
Situation 1: Investor with $1 million of salary income buys an empty lot for $1 million to use as a parking lot that generates gross parking fees of $200,000 − Paying $200,000 of cash − Borrowing $800,000 at 5% interest
There is $100,000 of net income: − With $200,000 of gross income − But paying $40,000 to an independent contractor to manage the lot − And $20,000 for insurance − And $40,000 of interest
• Does the 20% deduction apply? No − Not enough “wages” and not enough “depreciable property”
20 ©2017 RSM US LLP. All Rights Reserved.
Pass-Through Businesses-
An example for a highincome taxpayer
Situation 2: Investor with $1 million of salary income buys an empty lot for $1 million to use as a parking lot that generates gross parking fees of $200,000 − Paying $200,000 of cash − Borrowing $800,000 at 5% interest
There is $100,000 of net income: − With $200,000 of gross income − But paying $40,000 to an employee to manage the lot − And $20,000 for insurance − And $40,000 of interest
• Does the 20% deduction apply? Yes! − Deduction of $20,000 applies − There are at least $40,000 of wages that were paid 21 ©2017 RSM US LLP. All Rights Reserved.
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Carried Interests • The act recognizes the concept of different treatment for profits in an “applicable trade or business” defined as− Regular, continuous and substantial activity of − Raising or returning capital and either • Investing in / disposing of specified assets OR • Developing specified assets
• What are “specified assets?” − Include securities, commodities, real estate, cash, options, derivatives, and partner ship interests
1 year
3 year
old holding period
new holding period
22 ©2017 RSM US LLP. All Rights Reserved.
Capital Expensing • The legislation provides for immediate expensing (i.e., 100 percent bonus depreciation) for certain qualified assets acquired and placed in service after Sept. 27, 2017. • The 100 percent bonus depreciation benefit will begin to phase out in 2023. • The Act also increased the expensing allowance under section 179 to $1 million, also subject to a phase-out.
23 ©2017 RSM US LLP. All Rights Reserved.
Business Interest • The deduction for net business interest of corporations and many pass-through businesses is limited under a formula. − Generally speaking, deductions cannot exceed 30 percent of EBITDA (earnings before interest, taxes, depreciation and amortization) for the next four years. − After that period, interest deductions may not exceed 30 percent of EBIT (earnings before interest and taxes).
• Disallowed interest deductions can generally be carried forward indefinitely, but may be subject to certain limitations applicable to partnerships. • Certain taxpayers are exempted from these rules, including taxpayers with average gross receipts of $25 million or less for the three years immediately preceding the effective date of this provision, as well as taxpayers involved in certain real estate activities. 24 ©2017 RSM US LLP. All Rights Reserved.
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Business Interest-
Interest limitation using EBITDA
Situation: • Company worth $3 million • Debt of $2 million @ 5% • Equity of $1 million Earnings before interest and depreciation =
$500,000
Depreciation =
($200,000)
Interest =
($100,000)
Taxable income before limitation =
$200,000
Base for limitation = $500,000 30% of base = $150,000 • Does the limitation apply? No − Carryforward allowed indefinitely 25 ©2017 RSM US LLP. All Rights Reserved.
Business Interest-
Interest limitation using EBIT
Situation: • Company worth $3 million • Debt of $2 million @ 5% • Equity of $1 million Earnings before interest and depreciation =
$500,000
Depreciation =
($200,000)
Interest =
($100,000)
Taxable income before limitation =
$200,000
Base for limitation = $300,000 30% of base = $90,000 • Does the limitation apply? $10,000 interest is “limited” − Carryforward allowed indefinitely 26 ©2017 RSM US LLP. All Rights Reserved.
Net Operating Losses (NOLs) • The Act limits the NOL deduction to 80% of taxable income • Carrybacks are generally eliminated • But unused losses can be carried forward indefinitely
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Research Credits and Expenses • The legislation retains the research and development credit • Requires capitalization and amortization of research and experimental expenses over a five-year period. • The capitalization provisions apply to amounts paid or incurred in tax years beginning after Dec. 31, 2021
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Overall Methods of Accounting The Act increases the gross receipts threshold above which C corporations and partnerships with C corporation partners must generally use the accrual method of accounting from:
$5 million
$25 million
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Like-Kind Exchanges • Those under Section 1031 are limited to real property that is not held primarily for sale. • So, for example: personal property no longer qualifies for tax-deferred treatment
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Lobbyists at Work • Tax breaks for racetracks and horse owners continue • Race Horses will continue to be depreciated over 3 years • Racetracks will be depreciated over 7 years • These items remain in place for 2017 31 ©2017 RSM US LLP. All Rights Reserved.
What has been repealed? • Domestic manufacturing deduction – The section 199 domestic production deduction is repealed.
• Corporate alternative minimum tax – The corporate AMT is repealed.
• Technical Terminations – a change in the partnership’s capital and profits within a 12-month period no longer causes a technical termination
32 ©2017 RSM US LLP. All Rights Reserved.
Sale of Partnership Interest by Foreign Taxpayer • Under the New Act, a foreign partner would generally be subject to U.S. tax on gain from sale of an interest in a partnership to the extent the gain is attributable to U.S. trade or business assets of the partnership. • The New Act also requires the person or entity receiving a partnership interest in a sale of exchange to withhold 10 percent of the amount realized on the disposition unless the transferor certifies that it isn’t a nonresident alien or foreign corporation • Overturns Grecian Magnesite Decision • In that Tax Court case, the judge ruled the Grecian Magnesite Mining, Industrial & Shipping Co. SA – a Greek mining company – didn’t have to pay tax on the gain it realized on the redemption of its partnership interest in a Pennsylvania-based company because the gain wasn’t U.S.-source income. 33 ©2017 RSM US LLP. All Rights Reserved.
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Tax Evasion
“We pay all the taxes we owe, every single dollar,” Apple CEO Tim Cook claimed at a hearing on May 2013 organized by the United States Senate investigative subcommittee…“We don’t depend on tax gimmicks … We don’t stash money on some Caribbean island.” Apple instead was using an obscure island in the English Channel, Jersey, as its tax haven during a time when the tech giant received criticism for using Ireland for the same purpose, according to an analysis of The Paradise Papers released last Sunday.
©2017 RSM US LLP. All Rights Reserved.
OVERVIEW OF THE INDIVIDUAL AND WEALTH TRANSFER PROVISIONS
©2017 RSM US LLP. All Rights Reserved.
Summary of provisions
Area Brackets and rates
Summary Seven tax brackets—10, 12, 22, 24, 32, 35, and 37 percent. The top individual rate of 37 percent will apply at incomes of $500,000/$600,000 .
Brackets and rates for estates and trusts
Condenses the number of tax brackets from seven to four, including 10, 24, 35 and 37 percent brackets
Alternative minimum tax
Retained with higher exemptions ($70,300/ $109,400); phase-out of exemption increased to $500,000/$1,000,000
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Example of Change to Tax Rates • Under the 2017 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 25% tax bracket and would have a tax liability of $5,739. • Under the 2018 tax brackets and rates, a single taxpayer with $40,000 of taxable income would be in the 22% tax bracket and would have a tax liability of $4,740.
©2017 RSM US LLP. All Rights Reserved.
Summary of provisions (cont.)
Area Personal exemptions Standard deduction
Mortgage interest
Summary Repeals Doubles to $12,000/$24,000; retains additional deduction for blind and elderly
Limits to interest on $750,000 of indebtedness on newly purchased principal and second residences incurred after Dec. 15, 2017; not allowed for home equity loans.
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©2017 RSM US LLP. All Rights Reserved.
Summary of provisions(cont.)
Area
Summary
State and local tax deductions
Deduction of up to $10,000 for state and local property, income or sales taxes allowed Prepayments of 2018 state and local income taxes made during 2017 are not deductible for 2017, and prepayments of 2018 property taxes need to be analyzed on a case-by-case basis to determine deductibility.
Charitable contributions
Preserves deduction and increases the AGI limitation for cash contributions to public charities and certain private foundations from 50 percent to 60 percent
529 plans
Up to $10,000 of 529 plans can be used per student for public, private and religious elementary and secondary schools
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Summary of provisions (cont.) Area
Summary
Other deductions
Deductions for casualty and theft losses limited to those incurred in a disaster area Alimony paid for divorce after Dec. 31, 2018, not deductible/includible after 2018 .
Miscellaneous deductions
Eliminates miscellaneous deductions over 2 percent of AGI
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©2017 RSM US LLP. All Rights Reserved.
Summary of provisions (cont.)
Area
Summary
Medical expenses
Overall limitation on itemized deductions (Pease limitation) IRAs
Medical expenses exceeding 7.5 percent of AGI deductible for 2017 and 2018; eliminates AMT preference for medical expense deductions for 2017 and 2018.
Suspends 3 percent of AGI limit on deductions
Conversion of traditional IRA to a Roth IRA cannot be recharacterized; can still convert traditional IRA into a Roth IRA.
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©2017 RSM US LLP. All Rights Reserved.
Summary of provisions (cont.)
Area
Summary
Estate, gift and GST tax
Exemptions are doubled to approximately $11 million, effective January 2018. The estate, gift and GST tax rates remain the same as prior law. Estate and GST tax not repealed Provisions sunset after 2025
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Lobbyists at Work
• Americans Against Double Taxation was formed specifically during tax reform discussions to prevent the state and local tax deduction from being eliminated • $46,000 was spent to lobby for the deduction, but Republicans needed to free up hundreds of millions of dollars • The $10,000 limit on deductions for state and local taxes was placed • It will hit California, Connecticut, Massachusetts, New Jersey, and New York the hardest 43 ©2017 RSM US LLP. All Rights Reserved.
Examples • Savings: $4,470
Example One Single Renter living in Texas. Salary $150,000
Current LawNew Law Income
150,000
150,000
Standard Deduction
6,350
12,000
Personal Exemption
4,050
Adj. Income
Tax Due Effective Rate Marginal Rate
139,600
138,000
32,070 22.97% 28.00%
27,600 20.00% 24.00%
44 ©2017 RSM US LLP. All Rights Reserved.
Examples • Tax Increase: $168
Example Two Single Home Owner living in NJ. Salary $150,000 Current Law New Law Income
150,000
150,000
Standard Deduction Personal Exemption
4,050
State Taxes Property Taxes
11,000 6,629
10,000
Home Mortgage Int.
25,000
25,000
103,321
115,000
Adj. Income
Tax Due Effective Rate Marginal Rate
21,912 21.21% 28.00%
22,080 19.20% 24.00%
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Key provisions of prior law left undisturbed • Income tax
− The 3.8 percent tax on investment income under section 1411 and the .9 percent Medicare tax on compensation − Tax rates on capital gains and qualified dividends − Exclusion of gain on sale of a residence − Ability to identify the securities that an investor is deemed to sell, i.e., the Senate’s proposal for a ‘first-in, first out’ method not included − Pre-tax contribution limits (including catch-ups) for 401(k) plans − Ability for beneficiaries to ‘stretch’ IRA withdrawals out over their lifetimes − Student loan interest deductions, adoption assistance programs, dependent care accounts, tuition waivers, employer paid tuition, teacher supplies deduction and Archer medical savings accounts 46
©2017 RSM US LLP. All Rights Reserved.
Observations on impact on estate planning • Doubling of the exemptions (and indexing thereafter) effectively repeals the estate tax for many individuals − But sunsetting makes the planning more problematic • The doubling of the estate tax exemption is reason enough to review your current estate plan, e.g., the funding of a so-called ‘credit shelter’ trust • Key inquiries will be: − Whether the current or projected estate will be taxable in the first place, and − Whether there is a need (or, just as important, a desire) to reduce the taxable estate • Perhaps just use the increased exemption to fix problems with existing planning • Plans for estate tax liquidity also should be revisited 47 − For increased exemptions, sunsetting, etc.
©2017 RSM US LLP. All Rights Reserved.
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RSM US LLP Address City Phone +1 800 274 3978 www.rsmus.com
This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute audit, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. RSM US LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person. Internal Revenue Service rules require us to inform you that this communication may be deemed a solicitation to provide tax services. This communication is being sent to individuals who have subscribed to receive it or who we believe would have an interest in the topics discussed. RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. RSM® and the RSM logo are registered trademarks of RSM International Association. The power of being understood® is a registered trademark of RSM US LLP. © 2017 RSM US LLP. All Rights Reserved.
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