Tax
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Adam Williams Principal 734.302.4179 [email protected]
Anthony Licavoli Tax Manager 248.463.4598 [email protected]
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What is your impression about the speed at which Congress was able to pass tax legislation? 1. Too slow – been waiting on this for years 2. Just right - seems like they spent enough time but didn’t over analyze 3. Too fast – why didn’t they take some time to think 4. I’m just happy they got something done
POLLING QUESTION #1
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November 16, 2017 House of Representatives passed, H.R. 1, the “Tax Cuts and Jobs Act.” The bill was approved by a vote of 227 to 205.
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December 2, 2017 Senate passed its version of tax legislation (the “Tax Cuts and Jobs Act”) by a vote of 51 to 49.
December 15, 2017 The tax conference committee reached agreement reconciling the two bills.
December 22, 2017 President Trump signed into law.
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Topic
Prior Law
Tax Cuts & Jobs Act
Rates
Seven Brackets: 10% | 15% | 25% | 28% | 33% | 35% | 39.6%
Seven Brackets: 10% | 12% | 22% | 24% | 32% | 35% | 37%
Brackets
Joint
Individual
Joint
Individual
10% $0 - $18,650
10% $0 - $9,325
10% $0 - $19,050
10% $0 - $9,525
15% $18,650 - $75,900
15% $9,325 - $37,950
12% $19,051 - $77,400
12% $9,526 - $38,700
25% $75,900 - $153,100
25% $37,950 - $91,900
22% $77,401 - $165,000
22% $38,701 - $82,500
28% $153,100 - $233,350
28% $91,900 - $191,650
24% $165,001 - $315,000
24% $82,501 - $157,500
33% $233,350 - $416,700
33% $191,650 - $416,700
32% $315,001 - $400,000
32% $157,501 - $200,000
35% $416,700 - $470,700
35% $416,700 - $,418,400
35% $400,001 - $600,000
35% $200,001 - $500,000
39.6% Over $470,700
39.6% Over $418,400
37% Over $600,000
37% Over $500,000
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Topic
Prior Law
Tax Cuts & Jobs Act
Investment Income
• Interest & Short-term Capital Gains: Taxed at ordinary income tax rates plus 3.8% net investment income tax
• Interest & Short-term Capital Gains: Maintain current tax structure plus 3.8% net investment income tax
• Qualified Dividends & Long-term Capital Gains: Taxed at 15%|20% plus 3.8% net investment income tax
• Qualified Dividends & Long-term Capital Gains: Maintain current rates and 3.8% net investment income tax
“Kiddie Tax” on Unearned income taxed at the higher of the Unearned Income parent’s or child’s tax rate
Unearned income taxed at the trusts and estates tax rates
Estates & Trusts
Top tax rate: 37%
Top tax rate: 39.6%
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Topic
Prior Law
Tax Cuts & Jobs Act
Standard Deduction
$6,350 Single $12,700 MFJ
$12,000 Single $24,000 MFJ
Personal Exemption: $4,050
Eliminate Personal Exemptions
Prior Law
Tax Cuts & Jobs Act
Single Individual
Family of Four
Single Individual
Family of Four
Standard Deduction
$6,350
$12,700
$12,000
$24,000
Personal Exemptions
$4,050
$16,200
0
0
Total Deductions
$10,400
$28,900
$12,000
$24,000
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Topic
Prior Law
Tax Cuts & Jobs Act
Child Tax Credit
Child Credit: $1,000 Phaseout: $75K Single/ $110K MFJ
Child Credit: $2,000 ($1,400 refundable) Phaseout: $200K Single/ $400K MFJ
Dependent Care Credit
N/A
Non-child Dependent Credit: $500 nonrefundable
Alimony Payments
Above-the-line deduction for payor and included in income for payee
No longer deductible for payor or included in income of the payee for agreements entered into after 2018
Education Credits
American Opportunity Tax Credit Hope Scholarship Credit Lifetime Learning Credit
No change from Prior Law. Provisions in original House or Senate bills not included in committee agreement
529 Plans
Tax free distributions for qualified higher education expenses such as tuition, books, supplies and room and board
ACA Individual Mandate
Individuals are required to have minimal health care coverage or they are subject to a “tax” known as individual shared responsibility payment
Qualified higher education expanded to include public, private, and religious elementary and secondary schools (up to $10K per year per student) Individual shared responsibility payment reduced to zero effectively removing the individual healthcare mandate
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Topic
Prior Law
Tax Cuts & Jobs Act
Excess Business Loss Limitation
Passive losses generally only deductible against passive income, but nonpassive owners can generally deduct business losses against all other sources of income
$250K Single/$500K MFJ loss limitation on aggregate trade or business passthrough income/loss items Excess losses would be added to NOL carry-forward Partnerships/S-corps: determined on the partner or shareholder level
Example
Prior Law
Tax Cuts & Jobs Act
Facts
Income: $800,000 Loss: $600,000 Taxable Income: $200,000
Income: $800,000 Limited Loss: $500,000 Taxable Income: $300,000
• Married taxpayer • Wages: $800,000 • Active Partnership Loss: $600,000 • Sufficient basis to take entire loss
Loss Carryforward: $100,000
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Topic
Itemized Deductions
State and Local Taxes
Retained with $10,000 combined deduction limitation for income, sales and property taxes
Mortgage Interest
Retained with additional limitations: • Acquisition indebtedness limitation reduced to $750K on debt incurred after 12/15/2017 • Applies to principal and second homes • Existing or new home equity indebtedness interest no longer deductible unless debt proceeds used to substantially improve qualified residence
Medical Expense
Retained with temporary reduction in AGI floor to 7.5%
Charitable Contributions
Retained
Personal Casualty Loss
Retained for losses incurred in federally-declared disaster areas only
Miscellaneous Deductions – 2% floor
Eliminated
Itemized Deduction Limitation (Pease Limitation)
Eliminated
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Married filing Joint
Prior Law
Tax Cuts & Jobs Act
Income
$75,000
$75,000
Itemized Deductions
n/a
n/a
Standard Deduction
$12,700
$24,000
Personal Exemptions
$16,200
n/a
Taxable Income
$46,100
$51,000
Marginal Tax Rate
15%
12%
Child Tax Credit
$2,000
$4,000
Tax
$3,962
$1,739
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Married filing Joint
Prior Law
Tax Cuts & Jobs Act
Income
$175,000
$175,000
Itemized Deductions*
$31,135
$30,000
Standard Deduction
n/a
n/a
Personal Exemptions
$16,200
n/a
Taxable Income
$127,675
$145,000
Marginal Tax Rate
25%
22%
Child Tax Credit/Dependent Credit
n/a
$4,000
Tax
$23,226
$19,779
*Itemized Deductions Summary: $6,125 State Tax $5,000 Property Tax $5,000 Charitable Contributions $15,000 Mortgage Interest
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Pass-Through Deduction Formula
1.
The Lessor of: A. the “combined qualified business income (deduction)” of the taxpayer, the Lessor of (for each separate trade or business): I. 20% of the taxpayer’s “qualified business income” or II. The Greater of: a. b.
B. 2.
50% of the W-2 wages with respect to the business, or 25% of the W-2 wages with respect to the business plus 2.5% of the unadjusted basis of all qualified property
Or 20% of the excess of taxable income over the sum of any net capital gain
Plus the Lessor of: A. 20% of qualified REIT dividends, cooperative dividends, or PTP income B. Or taxable income less net capital gain
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Topic
Pass-Through Income Deduction
Passthrough Deduction
• 20% of qualified business income (QBI) plus 20% of qualified REIT dividends and publicly traded partnership income for the tax year • Applies to non-corporate taxpayers, including trust and estates, who have QBI from partnerships, S-corps and sole proprietorships • Deduction is a reduction to taxable income not AGI
Qualified Business Income
• Includes income, gain, deduction and loss items effectively connected with a US trade or business • Trade or business not defined: Is a triple net lease a trade or business? • Does not include investment type income, reasonable compensation paid to the taxpayer and guaranteed payments made to a partner for services to the business • Wage & asset limitations: - 50% of allocable share of businesses W-2 wages - 25% of allocable share of businesses W-2 wages plus 2.5% of unadjusted basis of all tangible depreciable property used in the business • Deduction does not apply to service businesses except engineering and architecture • Taxpayers whose taxable income does not exceed $157K Single/$315K MFJ (phased-out) are not subject to either the W-2 or the service business limitation
Limitations
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Pass-Through Income Deduction: Specified Service Businesses •
Entities not eligible for deduction: Includes law firms, accounting firms, medical practices, and any other firms involved in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, or dealing in securities partnership interests, or commodities.
Architecture and engineering firms were specifically carved out and are still eligible for the deduction (maybe) •
Also defined as “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” How broad will the IRS interpret this?
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Exception to the exception: Taxpayers whose total taxable income does not exceed $157K Single/$315K MFJ are not subject to the specified services business limitation
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Which of the provisions do you anticipate will have the greatest impact for you personally? 1. 2. 3. 4.
Lower individual tax rates Pass-through deduction State and local tax itemized deduction limitation Excess business loss limitation
POLLING QUESTION #2
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Topic
Prior Law
Tax Cuts & Jobs Act
Estate and Gift: Unified Base Unified Credit: $5,000,000 Credit Indexed for Inflation – 2017 $5,490,000
Base Unified Credit: $10,000,000 Indexed for Inflation - 2018 $11,200,000
Estate and Gift: Estate/GST
Top Rate: 40% Stepped-Up Basis
Top Rate: 40% Stepped-Up Basis
Estate and Gift: Gift
Top Rate: 40% $14,000 Annual Gift Exclusion
Top Rate: 40% $14,000 Annual Gift Exclusion
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Topic
Prior Law
Tax Cuts & Jobs Act
Individual AMT
Enacted
Enacted
Exemption Amounts: $54,300 Single/$84,500 MFJ Exemption Phase-out Threshold: $120,700 Single/$160,900 MFJ
Exemption Amounts: $70,300 Single/$109,400 MFJ Exemption Phase-out Threshold: $500,000 Single/$1,000,000 MFJ
Enacted
Repealed
Corporate AMT
Prior year minimum credit available for future years on a phased-in basis
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Topic
Prior Law
Tax Cuts & Jobs Act
Corporate Rates
Top Rate: 35% Personal Service Corporations: 35%
Flat Rate: 21% effective 2018 Personal Service Corporations: 21% effective 2018
C Corporation Example
Double Taxation Earned income – 35% Dividend Top Rate – 23.8% Combined Rate – 50.47% (35% + (65% * 23.8%)
Double Taxation Earned income – 21% Dividend Top Rate – 23.8% Combined Rate – 39.8% (21% + (79% * 23.8%)
S Corporation Partnership Sole Proprietor Example
Single Level of Tax Individual Top Rate - 39.6%
Single Level of Tax Individual Top Rate – 37% After Pass Through Deduction – 29.6% (37% - 20% Deduction = 29.6%)
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Topic
Prior Law
Tax Cuts & Jobs Act
Bonus • 50% phased • 100% through 2022 phased Depreciation down to 0% by down 20% per year for through 2020 2026 • Original use of • Expanded to taxpayer’s first use property of property required (used required property) Effective for property acquired and placed in service after Sept 27, 2017 • Property purchased before Sept 28, 2017 and placed at a later date is subject to current bonus rules
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Bonus Depreciation Rate Schedule Placed-in Service Year
Depreciation Deduction % Prior Law
New law
2017 (Pre September 27)
50%
50%
2017 (Post September 27)
50%
100%
2018
40%
100%
2019
30%
100%
2020-2022
0%
100%
2023
0%
80%
2024
0%
60%
2025
0%
40%
2026
0%
20%
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Topic
Prior Law
Tax Cuts & Jobs Act
Section 179 Expensing
• $500K Limitation • $2M Phase-out for property placed in-service
• $1M Limitation • $2.5M Phase-out for property placed inservice • Qualified Improvements now qualify • Roofs • HVAC Systems • Fire/Alarm/Security Systems • Inflation-Adjusted after 2018 • Permanent increase
Amortization of • Specified R&D and software Research and development expenditures: Election Development to expense as incurred
• Specified R&D and software development expenditures: Required to be capitalized and amortized over a 5 years (15 years if attributable to research conducted outside of the United States) • Effective for amounts incurred after 2021
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Topic Interest Expense Deduction
Prior Law •
Generally 100% deductible in year paid or accrued unless paid to a related party who paid no US tax
Tax Cuts & Jobs Act •
Deduction limited for net interest expense in excess of 30% of “adjusted business income”
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Deduction limited for net interest expense in excess of 30% of “adjusted business income”
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Adjusted taxable income: Taxable income without regard to business interest expense, business interest income, net operating losses, and depreciation, amortization, and depletion (After 2021 would no longer back out depreciation, amortization, and depletion)
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Limitation determined on the filer level (partnership not the partner)
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Disallowed interest is carried forward indefinitely
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Small Business Exception: The business interest limitation does not apply to taxpayer’s that average less than $25,000,000 in gross receipts over a three year period
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Topic
Prior Law
Tax Cuts & Jobs Act
Meals General
• 50% limitation
• 50% limitation
Meals – Convenience of Employer
• Generally 100% deductible
• 50% limitation • After 2025 non-deductible
Entertainment • Generally 50% of entertainment expenses Expenses with a valid business purpose are nondeductible.
• All entertainment expenses are nondeductible regardless of business purpose
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Topic
Prior Law
Tax Cuts & Jobs Act
Entertaining Clients
• Meals: 50% deductible • Entertainment: 50% deductible
• Meals: 50% deductible • Entertainment: Non-deductible
Employee Travel Meals
• 50% deductible
• 50% limitation
Meals Provided for Convenience of Employer
• Generally 100% deductible
• 2018- 2025: 50% limitation • 2025: Non-deductible
Office Holiday Parties
• 100% deductible
• 100% deductible
Based on these changes, we suggest a minimum of the following general ledger accounts: 1. 100% nondeductible entertainment 2. 50% deductible meals 3. 100% deductible meals for office holiday parties, etc.
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Which of the provisions do you anticipate will have the greatest impact on your business? 1. 2. 3. 4.
Corporate rate reductions to 21% 100% expensing Interest expense limitation N/A
POLLING QUESTION #3
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Topic
Prior Law
Tax Cuts & Jobs Act
NOL Deductions
• Carryforward: 20 years • Carryback: 2 years • Up to 100% of taxable income (unless in AMT) • Deduction up to 9% of qualified production activities income
• Carryforward: Indefinitely • Carryback: Disallowed • Up to 80% of taxable income
• 1-year holding period requirement for certain interests received for services to be taxed as a long-term capital gain. If not met, treated as short-term capital gain.
• 3-year holding period requirement for certain interests received for services to be taxed as a long-term capital gain. If not met, treated as short-term capital gain.
• Over 80% Ownership: 100% deduction • Over 20% Ownership: 80% deduction • 20% Ownership: 70% deduction
• Over 80% Ownership: 100% deduction • Over 20% Ownership: 65% deduction • 20% Ownership: 50% deduction
Domestic Producers Activity Deduction Carried Interest
Corporate Dividends Received Deduction Like-Kind Exchanges
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Real property and tangible personal property eligible
• Repealed
• Only real property eligible
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Topic
Small Business Accounting Methods
Cash Method of Accounting
Under the Act, the $5 million threshold would be increased to $25 million
Accounting for Inventories
Under the Act, businesses with average gross receipts of $25 million or less would be permitted to use the cash method of accounting even if the business has inventories
UNICAP
Under the Act, businesses with average gross receipts of $25 million or less would be fully exempt from the uniform capitalization (UNICAP) rules
Accounting for Long-term Contracts
Under the Act, the $10 million average gross receipts exception to the percentage-of-completion method would be increased to $25 million for eligible contracts entered in after 2017
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Topic
Business Credits
Employer-Paid Family and Medical Leave
Enacted
Research and Development Credit
Retained
Work Opportunity Tax Credit
Retained
Employer-Provided Child Care Credit
Retained
Low Income Housing Credit
Retained
New Markets Credit
Retained
Energy Investment Tax Credit
Retained
Enhanced Oil Recovery Credit
Retained
Marginal Well Production Credit
Retained
Rehabilitation Credit
Modified
Employer Social Security Tax Credit on Tips
Modified
Production Tax Credit
Modified
Orphan Drug Credit
Modified
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Topic
Prior Law
Tax Cuts & Jobs Act
Territorial System
• Worldwide tax system with deferral on income kept overseas for corporations
• Territorial (sort of) tax system with 100% deduction for foreign-source dividends paid to 10% US corporate shareholders
• Foreign tax credit or deduction allowed to mitigate double-taxation of foreign earnings
• No credit or deduction allowed for taxes paid or accrued on exempt foreign dividends
N/A
• Deemed Repatriation of accumulated foreign profits (deferred foreign income) • Cash or cash equivalents: 15.5% rate • Other assets: 8% rate
Transition Tax
• Election to pay tax over 8 years • Election for S-corporations shareholders to defer tax until “triggering event”
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Topic
Prior Law
Tax Cuts & Jobs Act
Global Intangible Low-taxed Income (GILTI)
N/A
• US shareholders of controlled foreign corporations subject to taxation on share of “global intangible lowtaxed income” • “GILTI” = the excess (if any) of “net CFC tested income” over the shareholder’s “net deemed tangible income return.” • 50% offsetting deduction available for corporations
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Adam Williams Principal 734.302.4179 [email protected]
Anthony Licavoli Tax Manager 248.463.4598 [email protected]
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What is your impression about the speed at which Congress was able to pass tax legislation? 1. Too slow – been waiting on this for years 2. Just right - seems like they spent enough time but didn’t over analyze 3. Too fast – why didn’t they take some time to think 4. I’m just happy they got something done
POLLING QUESTION #1
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November 16, 2017 House of Representatives passed, H.R. 1, the “Tax Cuts and Jobs Act.” The bill was approved by a vote of 227 to 205.
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December 2, 2017 Senate passed its version of tax legislation (the “Tax Cuts and Jobs Act”) by a vote of 51 to 49.
December 15, 2017 The tax conference committee reached agreement reconciling the two bills.
December 22, 2017 President Trump signed into law.
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Topic
Prior Law
Tax Cuts & Jobs Act
Rates
Seven Brackets: 10% | 15% | 25% | 28% | 33% | 35% | 39.6%
Seven Brackets: 10% | 12% | 22% | 24% | 32% | 35% | 37%
Brackets
Joint
Individual
Joint
Individual
10% $0 - $18,650
10% $0 - $9,325
10% $0 - $19,050
10% $0 - $9,525
15% $18,650 - $75,900
15% $9,325 - $37,950
12% $19,051 - $77,400
12% $9,526 - $38,700
25% $75,900 - $153,100
25% $37,950 - $91,900
22% $77,401 - $165,000
22% $38,701 - $82,500
28% $153,100 - $233,350
28% $91,900 - $191,650
24% $165,001 - $315,000
24% $82,501 - $157,500
33% $233,350 - $416,700
33% $191,650 - $416,700
32% $315,001 - $400,000
32% $157,501 - $200,000
35% $416,700 - $470,700
35% $416,700 - $,418,400
35% $400,001 - $600,000
35% $200,001 - $500,000
39.6% Over $470,700
39.6% Over $418,400
37% Over $600,000
37% Over $500,000
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Topic
Prior Law
Tax Cuts & Jobs Act
Investment Income
• Interest & Short-term Capital Gains: Taxed at ordinary income tax rates plus 3.8% net investment income tax
• Interest & Short-term Capital Gains: Maintain current tax structure plus 3.8% net investment income tax
• Qualified Dividends & Long-term Capital Gains: Taxed at 15%|20% plus 3.8% net investment income tax
• Qualified Dividends & Long-term Capital Gains: Maintain current rates and 3.8% net investment income tax
“Kiddie Tax” on Unearned income taxed at the higher of the Unearned Income parent’s or child’s tax rate
Unearned income taxed at the trusts and estates tax rates
Estates & Trusts
Top tax rate: 37%
Top tax rate: 39.6%
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Topic
Prior Law
Tax Cuts & Jobs Act
Standard Deduction
$6,350 Single $12,700 MFJ
$12,000 Single $24,000 MFJ
Personal Exemption: $4,050
Eliminate Personal Exemptions
Prior Law
Tax Cuts & Jobs Act
Single Individual
Family of Four
Single Individual
Family of Four
Standard Deduction
$6,350
$12,700
$12,000
$24,000
Personal Exemptions
$4,050
$16,200
0
0
Total Deductions
$10,400
$28,900
$12,000
$24,000
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Topic
Prior Law
Tax Cuts & Jobs Act
Child Tax Credit
Child Credit: $1,000 Phaseout: $75K Single/ $110K MFJ
Child Credit: $2,000 ($1,400 refundable) Phaseout: $200K Single/ $400K MFJ
Dependent Care Credit
N/A
Non-child Dependent Credit: $500 nonrefundable
Alimony Payments
Above-the-line deduction for payor and included in income for payee
No longer deductible for payor or included in income of the payee for agreements entered into after 2018
Education Credits
American Opportunity Tax Credit Hope Scholarship Credit Lifetime Learning Credit
No change from Prior Law. Provisions in original House or Senate bills not included in committee agreement
529 Plans
Tax free distributions for qualified higher education expenses such as tuition, books, supplies and room and board
ACA Individual Mandate
Individuals are required to have minimal health care coverage or they are subject to a “tax” known as individual shared responsibility payment
Qualified higher education expanded to include public, private, and religious elementary and secondary schools (up to $10K per year per student) Individual shared responsibility payment reduced to zero effectively removing the individual healthcare mandate
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Topic
Prior Law
Tax Cuts & Jobs Act
Excess Business Loss Limitation
Passive losses generally only deductible against passive income, but nonpassive owners can generally deduct business losses against all other sources of income
$250K Single/$500K MFJ loss limitation on aggregate trade or business passthrough income/loss items Excess losses would be added to NOL carry-forward Partnerships/S-corps: determined on the partner or shareholder level
Example
Prior Law
Tax Cuts & Jobs Act
Facts
Income: $800,000 Loss: $600,000 Taxable Income: $200,000
Income: $800,000 Limited Loss: $500,000 Taxable Income: $300,000
• Married taxpayer • Wages: $800,000 • Active Partnership Loss: $600,000 • Sufficient basis to take entire loss
Loss Carryforward: $100,000
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Topic
Itemized Deductions
State and Local Taxes
Retained with $10,000 combined deduction limitation for income, sales and property taxes
Mortgage Interest
Retained with additional limitations: • Acquisition indebtedness limitation reduced to $750K on debt incurred after 12/15/2017 • Applies to principal and second homes • Existing or new home equity indebtedness interest no longer deductible unless debt proceeds used to substantially improve qualified residence
Medical Expense
Retained with temporary reduction in AGI floor to 7.5%
Charitable Contributions
Retained
Personal Casualty Loss
Retained for losses incurred in federally-declared disaster areas only
Miscellaneous Deductions – 2% floor
Eliminated
Itemized Deduction Limitation (Pease Limitation)
Eliminated
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Married filing Joint
Prior Law
Tax Cuts & Jobs Act
Income
$75,000
$75,000
Itemized Deductions
n/a
n/a
Standard Deduction
$12,700
$24,000
Personal Exemptions
$16,200
n/a
Taxable Income
$46,100
$51,000
Marginal Tax Rate
15%
12%
Child Tax Credit
$2,000
$4,000
Tax
$3,962
$1,739
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Married filing Joint
Prior Law
Tax Cuts & Jobs Act
Income
$175,000
$175,000
Itemized Deductions*
$31,135
$30,000
Standard Deduction
n/a
n/a
Personal Exemptions
$16,200
n/a
Taxable Income
$127,675
$145,000
Marginal Tax Rate
25%
22%
Child Tax Credit/Dependent Credit
n/a
$4,000
Tax
$23,226
$19,779
*Itemized Deductions Summary: $6,125 State Tax $5,000 Property Tax $5,000 Charitable Contributions $15,000 Mortgage Interest
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Pass-Through Deduction Formula
1.
The Lessor of: A. the “combined qualified business income (deduction)” of the taxpayer, the Lessor of (for each separate trade or business): I. 20% of the taxpayer’s “qualified business income” or II. The Greater of: a. b.
B. 2.
50% of the W-2 wages with respect to the business, or 25% of the W-2 wages with respect to the business plus 2.5% of the unadjusted basis of all qualified property
Or 20% of the excess of taxable income over the sum of any net capital gain
Plus the Lessor of: A. 20% of qualified REIT dividends, cooperative dividends, or PTP income B. Or taxable income less net capital gain
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Topic
Pass-Through Income Deduction
Passthrough Deduction
• 20% of qualified business income (QBI) plus 20% of qualified REIT dividends and publicly traded partnership income for the tax year • Applies to non-corporate taxpayers, including trust and estates, who have QBI from partnerships, S-corps and sole proprietorships • Deduction is a reduction to taxable income not AGI
Qualified Business Income
• Includes income, gain, deduction and loss items effectively connected with a US trade or business • Trade or business not defined: Is a triple net lease a trade or business? • Does not include investment type income, reasonable compensation paid to the taxpayer and guaranteed payments made to a partner for services to the business • Wage & asset limitations: - 50% of allocable share of businesses W-2 wages - 25% of allocable share of businesses W-2 wages plus 2.5% of unadjusted basis of all tangible depreciable property used in the business • Deduction does not apply to service businesses except engineering and architecture • Taxpayers whose taxable income does not exceed $157K Single/$315K MFJ (phased-out) are not subject to either the W-2 or the service business limitation
Limitations
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Pass-Through Income Deduction: Specified Service Businesses •
Entities not eligible for deduction: Includes law firms, accounting firms, medical practices, and any other firms involved in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, or dealing in securities partnership interests, or commodities.
Architecture and engineering firms were specifically carved out and are still eligible for the deduction (maybe) •
Also defined as “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.” How broad will the IRS interpret this?
•
Exception to the exception: Taxpayers whose total taxable income does not exceed $157K Single/$315K MFJ are not subject to the specified services business limitation
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Which of the provisions do you anticipate will have the greatest impact for you personally? 1. 2. 3. 4.
Lower individual tax rates Pass-through deduction State and local tax itemized deduction limitation Excess business loss limitation
POLLING QUESTION #2
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Topic
Prior Law
Tax Cuts & Jobs Act
Estate and Gift: Unified Base Unified Credit: $5,000,000 Credit Indexed for Inflation – 2017 $5,490,000
Base Unified Credit: $10,000,000 Indexed for Inflation - 2018 $11,200,000
Estate and Gift: Estate/GST
Top Rate: 40% Stepped-Up Basis
Top Rate: 40% Stepped-Up Basis
Estate and Gift: Gift
Top Rate: 40% $14,000 Annual Gift Exclusion
Top Rate: 40% $14,000 Annual Gift Exclusion
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22
Topic
Prior Law
Tax Cuts & Jobs Act
Individual AMT
Enacted
Enacted
Exemption Amounts: $54,300 Single/$84,500 MFJ Exemption Phase-out Threshold: $120,700 Single/$160,900 MFJ
Exemption Amounts: $70,300 Single/$109,400 MFJ Exemption Phase-out Threshold: $500,000 Single/$1,000,000 MFJ
Enacted
Repealed
Corporate AMT
Prior year minimum credit available for future years on a phased-in basis
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Topic
Prior Law
Tax Cuts & Jobs Act
Corporate Rates
Top Rate: 35% Personal Service Corporations: 35%
Flat Rate: 21% effective 2018 Personal Service Corporations: 21% effective 2018
C Corporation Example
Double Taxation Earned income – 35% Dividend Top Rate – 23.8% Combined Rate – 50.47% (35% + (65% * 23.8%)
Double Taxation Earned income – 21% Dividend Top Rate – 23.8% Combined Rate – 39.8% (21% + (79% * 23.8%)
S Corporation Partnership Sole Proprietor Example
Single Level of Tax Individual Top Rate - 39.6%
Single Level of Tax Individual Top Rate – 37% After Pass Through Deduction – 29.6% (37% - 20% Deduction = 29.6%)
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Topic
Prior Law
Tax Cuts & Jobs Act
Bonus • 50% phased • 100% through 2022 phased Depreciation down to 0% by down 20% per year for through 2020 2026 • Original use of • Expanded to taxpayer’s first use property of property required (used required property) Effective for property acquired and placed in service after Sept 27, 2017 • Property purchased before Sept 28, 2017 and placed at a later date is subject to current bonus rules
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Bonus Depreciation Rate Schedule Placed-in Service Year
Depreciation Deduction % Prior Law
New law
2017 (Pre September 27)
50%
50%
2017 (Post September 27)
50%
100%
2018
40%
100%
2019
30%
100%
2020-2022
0%
100%
2023
0%
80%
2024
0%
60%
2025
0%
40%
2026
0%
20%
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Topic
Prior Law
Tax Cuts & Jobs Act
Section 179 Expensing
• $500K Limitation • $2M Phase-out for property placed in-service
• $1M Limitation • $2.5M Phase-out for property placed inservice • Qualified Improvements now qualify • Roofs • HVAC Systems • Fire/Alarm/Security Systems • Inflation-Adjusted after 2018 • Permanent increase
Amortization of • Specified R&D and software Research and development expenditures: Election Development to expense as incurred
• Specified R&D and software development expenditures: Required to be capitalized and amortized over a 5 years (15 years if attributable to research conducted outside of the United States) • Effective for amounts incurred after 2021
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Topic Interest Expense Deduction
Prior Law •
Generally 100% deductible in year paid or accrued unless paid to a related party who paid no US tax
Tax Cuts & Jobs Act •
Deduction limited for net interest expense in excess of 30% of “adjusted business income”
•
Deduction limited for net interest expense in excess of 30% of “adjusted business income”
•
Adjusted taxable income: Taxable income without regard to business interest expense, business interest income, net operating losses, and depreciation, amortization, and depletion (After 2021 would no longer back out depreciation, amortization, and depletion)
•
Limitation determined on the filer level (partnership not the partner)
•
Disallowed interest is carried forward indefinitely
•
Small Business Exception: The business interest limitation does not apply to taxpayer’s that average less than $25,000,000 in gross receipts over a three year period
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Topic
Prior Law
Tax Cuts & Jobs Act
Meals General
• 50% limitation
• 50% limitation
Meals – Convenience of Employer
• Generally 100% deductible
• 50% limitation • After 2025 non-deductible
Entertainment • Generally 50% of entertainment expenses Expenses with a valid business purpose are nondeductible.
• All entertainment expenses are nondeductible regardless of business purpose
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Topic
Prior Law
Tax Cuts & Jobs Act
Entertaining Clients
• Meals: 50% deductible • Entertainment: 50% deductible
• Meals: 50% deductible • Entertainment: Non-deductible
Employee Travel Meals
• 50% deductible
• 50% limitation
Meals Provided for Convenience of Employer
• Generally 100% deductible
• 2018- 2025: 50% limitation • 2025: Non-deductible
Office Holiday Parties
• 100% deductible
• 100% deductible
Based on these changes, we suggest a minimum of the following general ledger accounts: 1. 100% nondeductible entertainment 2. 50% deductible meals 3. 100% deductible meals for office holiday parties, etc.
31
Which of the provisions do you anticipate will have the greatest impact on your business? 1. 2. 3. 4.
Corporate rate reductions to 21% 100% expensing Interest expense limitation N/A
POLLING QUESTION #3
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Topic
Prior Law
Tax Cuts & Jobs Act
NOL Deductions
• Carryforward: 20 years • Carryback: 2 years • Up to 100% of taxable income (unless in AMT) • Deduction up to 9% of qualified production activities income
• Carryforward: Indefinitely • Carryback: Disallowed • Up to 80% of taxable income
• 1-year holding period requirement for certain interests received for services to be taxed as a long-term capital gain. If not met, treated as short-term capital gain.
• 3-year holding period requirement for certain interests received for services to be taxed as a long-term capital gain. If not met, treated as short-term capital gain.
• Over 80% Ownership: 100% deduction • Over 20% Ownership: 80% deduction • 20% Ownership: 70% deduction
• Over 80% Ownership: 100% deduction • Over 20% Ownership: 65% deduction • 20% Ownership: 50% deduction
Domestic Producers Activity Deduction Carried Interest
Corporate Dividends Received Deduction Like-Kind Exchanges
•
Real property and tangible personal property eligible
• Repealed
• Only real property eligible
33
Topic
Small Business Accounting Methods
Cash Method of Accounting
Under the Act, the $5 million threshold would be increased to $25 million
Accounting for Inventories
Under the Act, businesses with average gross receipts of $25 million or less would be permitted to use the cash method of accounting even if the business has inventories
UNICAP
Under the Act, businesses with average gross receipts of $25 million or less would be fully exempt from the uniform capitalization (UNICAP) rules
Accounting for Long-term Contracts
Under the Act, the $10 million average gross receipts exception to the percentage-of-completion method would be increased to $25 million for eligible contracts entered in after 2017
34
Topic
Business Credits
Employer-Paid Family and Medical Leave
Enacted
Research and Development Credit
Retained
Work Opportunity Tax Credit
Retained
Employer-Provided Child Care Credit
Retained
Low Income Housing Credit
Retained
New Markets Credit
Retained
Energy Investment Tax Credit
Retained
Enhanced Oil Recovery Credit
Retained
Marginal Well Production Credit
Retained
Rehabilitation Credit
Modified
Employer Social Security Tax Credit on Tips
Modified
Production Tax Credit
Modified
Orphan Drug Credit
Modified
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Topic
Prior Law
Tax Cuts & Jobs Act
Territorial System
• Worldwide tax system with deferral on income kept overseas for corporations
• Territorial (sort of) tax system with 100% deduction for foreign-source dividends paid to 10% US corporate shareholders
• Foreign tax credit or deduction allowed to mitigate double-taxation of foreign earnings
• No credit or deduction allowed for taxes paid or accrued on exempt foreign dividends
N/A
• Deemed Repatriation of accumulated foreign profits (deferred foreign income) • Cash or cash equivalents: 15.5% rate • Other assets: 8% rate
Transition Tax
• Election to pay tax over 8 years • Election for S-corporations shareholders to defer tax until “triggering event”
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Topic
Prior Law
Tax Cuts & Jobs Act
Global Intangible Low-taxed Income (GILTI)
N/A
• US shareholders of controlled foreign corporations subject to taxation on share of “global intangible lowtaxed income” • “GILTI” = the excess (if any) of “net CFC tested income” over the shareholder’s “net deemed tangible income return.” • 50% offsetting deduction available for corporations
