tax reform under h.r. 1 (tax cuts and jobs act)
TRANSCRIPT
Microsoft PowerPoint - Tax Reform Webinar - January 2018.pptxTax
Reform under H.R. 1 (Tax Cuts and Jobs Act)
JANUARY 16, 2018
• Participants must answer all three poll questions offered throughout the webinar to qualify.
• Certificates of completion will be emailed to qualifying participants following the webinar.
Richey May & Co, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.
• C Corp and Other Miscellaneous Items
• Conversion from Pass-through to C Corp Thoughts
• Deductions for Pass-through Income (QBI)
• Partnership Technical Termination Update
• State Tax Considerations
(paid after 12/31/17):
1) An activity considered entertainment, amusement, or recreation;
2) Membership dues for any club organized for business, pleasure, recreation, or other social purposes; or
3) A facility or portion of a facility used in connection with any of the above.
Business-related Deductions & Exclusions • Limitation of Deduction by Employers of Certain Fringe Benefits
(paid after 12/31/17): • The new law generally retains the 50% deduction limitation for food and
beverage expenses associated with a trade or business.
• However, the new law applies the 50% limitation to the following meals provided by an employer that are currently 100% deductible: 1) Food and beverages provided to employees as de minimus fringe benefits;
2) Meals provided at an eating facility that meet the requirements for an on-premises dining facility (i.e., in-house cafeteria); and
3) Meals provided on-premises to employees for the convenience of the employer • NOTE: After 2025, NO deduction is allowed for items 1 thru 3 mentioned above.
Business-related Deductions & Exclusions • Limitation of Deduction by Employers of Certain Fringe Benefits
(paid after 12/31/17) (cont.):
• The new law states NO deduction will be allowed for the following employee transportation fringe benefits:
1) Deductions for transportation fringe benefits such as qualified parking expenses and subway or mass transit cards provided by the employer; and
2) Deductions for transportation expenses that are the equivalent of commuting for employees (i.e., between the employee’s home and the workplace), such as van pools, etc.
Business-related Deductions & Exclusions • Limits on Deduction of Business Interest (paid after 12/31/2017):
• All businesses (whether operating as a C corp or flow-thru) will be allowed a deduction for trade or business interest (investment interest not included) incurred during the taxable year only to the extent the total amount of such interest does NOT exceed the sum of: 1) Interest income of the business during that year; PLUS
2) 30% of the business’s earnings before interest, tax, depreciation, and amortization (EBITDA).
• NOTE: For tax years beginning after 2021, the EBITDA measurement will be replaced with earnings before interest and taxes (EBIT), which will further limit this deduction.
• NOTE: Limits on business interest deduction are applied at the entity level AND at the individual level. (Complex calculation and IRS does not want 30% income used twice).
Business-related Deductions & Exclusions • Limits on Deduction of Business Interest (paid after 12/31/2017) (cont.):
• Any interest deduction that is disallowed in a taxable year as a result of the new limitation will be carried forward and can be deducted in a future year, subject to the same limitation in that taxable year.
• NOTE: There is an additional rule applicable only to partnerships & S Corps on the use of the carryforward of disallowed business interest deductions.
• Additional Consideration:
• Partnerships/S Corps – Limit on the amount allowed as a business interest deduction may be increased by a partner’s distributive share of the partnership/S Corp’s excess taxable income.
Depreciation & Other Cost Recovery Items • Bonus Depreciation on Qualifying Business Assets:
• Assets purchased and placed in service during the tax years from 9/27/2017 through 2022 will qualify for a permitted deduction of 100% (full expensing).
• Qualifying assets = equipment, furniture, and other tangible personal property.
• Bonus depreciation deductions now apply to both new and used business assets acquired by purchase.
• NOTE: for used asset purchases to qualify, the assets can’t have been previously used by the purchasing tax payer and/or the assets can’t have been acquired from a related party.
• NOTE: Bonus depreciation will phase down 20% per year starting with the 2023 tax year (i.e., 80% bonus dep. in 2023, 60% bonus dep. in 2024, 40% bonus dep. in 2025, etc.).
Depreciation & Other Cost Recovery Items • Increased IRC Section 179 Expensing:
• Eligible businesses can now fully expense up to $1,000,000 of asset purchases (increased from the previous $500,000 limit).
• The Section 179 deduction will not begin to phase-out until the total asset purchases during the year exceeds $2,500,000 (up from the previous $2,000,000 threshold).
• In addition, the definition of “qualified real property” under section 179 has been expanded to include the following improvements to nonresidential real property:
• Roofs; heating, ventilation, and air-conditioning property (HVAC); fire protection and alarm systems; and security systems.
Depreciation & Other Cost Recovery Items • Other Miscellaneous Cost Recovery Provisions:
• Research and Development (R & D) expenditures:
• Starting in 2022, R & D expenditures will NO longer be fully deductible in the year they are incurred, such R & D expenditures must be amortized over a five-year period.
• NOTE: R & D conducted outside the U.S. is subject to a 15-year amortization period.
• NOTE : Starting in 2022, R & D expenditures for the development of software are now also subject to the new capitalization rules.
• NOTE: In the case of retired, abandoned, or disposed of property to which specified R & D expenditures have been paid or incurred, any remaining basis in that property may not be recovered in the year of retirement, abandonment, or disposal, but instead must continue to be amortized over the remaining 5-year period.
C Corp and Other Miscellaneous Items • Corporate Tax Rate Reduction:
• Under new tax law the graduated tax rates of 15%, 25%, 34% and 35% have been eliminated.
• New corporate tax rate is a flat 21%.
• Dividends-Received Deduction (DRD) Percentages Reduced:
• Lowers the 80% DRD (for dividends from 20% owned corporations) to 65%;
• Lowers the 70% DRD (for dividends from less than 20% owned corporations) to 50%.
C Corp and Other Miscellaneous Items • Corporate Alternative Minimum Tax (AMT) Repealed:
• Effective for tax years beginning after 12/31/2017, the AMT tax is eliminated.
• NOTE: Any AMT credit carryovers to tax years after 12/31/17 may be utilized to the extent of the taxpayer’s regular tax liability.
• NOTE: For tax years beginning in 2018, 2019, and 2020, to the extent that AMT credit carryovers exceed regular tax liability, 50% of the excess AMT credit carryovers are refundable. (Any AMT credits remaining will be fully refundable in 2021).
C Corp and Other Miscellaneous Items • Changes to the Use of Net Operating Loss (NOL) Deductions:
• Three important changes have been made concerning the use of NOL’s by businesses (arising in tax years ending after 12/31/17): 1) The ability to carry back NOL’s for up to two years from the year the NOL’s are generated has been
eliminated (ALL NOL’s must be carried forward).
2) The 20 year limit for NOL carryforwards has also been eliminated (ALL NOL’s can be carried forward indefinitely for use in future tax years).
3) Taxpayers will NO longer be able to use NOL carryforwards to offset all of their taxable income in future years.
• Starting with NOL’s generated in 2018, taxpayers will be permitted to use NOL carryforwards to offset NO more than 80% of their taxable income. (NOL’s generated in the 2017 calendar tax year can still be carried back 2 years and can still offset 100% of 2017 taxable income)
• NOTE: This limitation applies regardless of whether the entity type is an individual or C Corp.
C Corp and Other Miscellaneous Items • Limitation on Use of Excess Business Losses:
• Under the new law, taxpayers will be limited in the use of flow-thru business losses from ALL flow-thru entities each year to offset their non-business income. • The excess loss limit applies when business losses exceed the following amounts:
• $500,000 for married individuals filing jointly
• $250,000 for other individuals.
• Any business loss in excess of the above mentioned limitations will be carried forward as a net operating loss (NOL). • NOTE: The excess business loss amounts treated as NOL’s are subject to the new
80% limitation on deductibility.
C Corp and Other Miscellaneous Items • Limiting When the “Second” Shareholder Level of Tax is Incurred:
• With C Corp structure, a taxpayer may have significant control over when the shareholder level of tax is actually incurred. • Limiting distributions of profits (issuing dividends) to shareholders for a significant period of time can greatly
reduce and in certain cases, almost eliminate, the “second” level of tax.
• Best way to delay shareholder level of tax is by reinvesting profits back into the operation of the business rather than issuing dividends.
• NOTE: The accumulated earnings tax could be applied to retained earnings in excess of reasonable needs of the business.
• State Taxes Paid Deductions for C Corps: • Unlike individual taxpayers who are limited to $10,000 of property tax and/or state taxes
paid, C Corps will still be entitled to deduction treatment for the payment of state taxes paid.
C Corp and Other Miscellaneous Items LIKE-KIND EXCHANGE TREATMENT LIMITED:
Old Law: • No gain or loss was recognized to the extent
that property-which included a wide range of property from real estate to tangible personal property-held for productive use in the taxpayer’s trade or business, or property held for investment purposes, is exchanged for property of a like-kind also held for productive use in a trade or business or for investment.
New Law: • Effective for transfers after 12/31/2017, no
gain or loss will be recognized to the extent that property-which is limited to real property only-NOT held primarily for sale, is exchanged for property of a like-kind that is also real property not held primarily for sale.
C Corp and Other Miscellaneous Items • Changes to Rules for Tax Year of Income Inclusion:
• In general, for an accrual basis taxpayer, an amount is included in income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy (when the “all events” test is met), unless an exception permits deferral or exclusion.
• Under the new law, accrual method taxpayers must recognize income no later than the tax year in which the item is recognized as revenue on an applicable financial statement (i.e., the “all events” test is satisfied no later than the year in which the revenue is recognized for financial accounting purposes).
• NOTE: This change in the law will affect the income deferral treatment of Interest Rate Lock Commitments (IRLC’s) and the corresponding Hedge, as now for tax return purposes this income will have to be picked up in the same year it is included for Financial Statement purposes.
• Limited Exceptions: new book conformity requirement does NOT apply to items of gross income earned in connection with mortgage servicing rights (MSR’s) or for a few select gross income items related to long term contracts (IRC Section 460) or installment agreements (IRC Section 453).
Conversion from S Corp to C Corp • §481(a) adjustments of an eligible terminated S corporation attributable to the
revocation of S status will be taken into account ratably over 6 years (i.e. Cash to accrual method)
• Lenders required to be on accrual method
• Post-transition termination period (PTTP) distributions by an eligible terminated S corporation are treated first as made out of AAA (tax-free to the extent of basis, then capital gain), then out of E&P (dividends). Distributions after the PTTP would be treated as coming out of AAA or accumulated E&P in the same ratio as the amount of the corporation’s AAA bears to the amount of AE&P.
• PTTP is typically 1 year after the last day as an S corporation
New Deduction for Pass-through Income • For tax years beginning after 12/31/17, and before 1/1/26, a new
section §199A is added for “Qualified Business Income.”
• Under this section, a non-corporate taxpayer who has QBI from a partnership, S corporation, or sole proprietorship is allowed to deduct 20% of QBI earned from a trade or business.
• Subject to limits, the deduction is:
1) the lesser of: a) the "combined qualified business income amount" of the taxpayer, or b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
New Deduction, cont’d 2) the lesser of: a) 20% of the aggregate amount of the qualified cooperative dividends of
the taxpayer for the tax year, or b) taxable income (reduced by the net capital gain) of the taxpayer for the tax year.
• The 20% deduction does not impact AGI, but rather is a deduction reducing taxable income. (Although not an itemized deduction)
• QBI is generally ordinary income effectively connected with the conduct of a trade or business within the U.S. and does not include investment-related income, deductions, or losses (e.g. capital gains, dividends, and interest income) or guaranteed payments from partnerships.
New Deduction, cont’d • The QBI deduction is further limited by the greater of:
1) 50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
2) the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” (Note – beneficial to people who own business with large real estate holdings but have few actual employees)
• For a partnership or S corporation, each partner or shareholder is treated as having W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages of the entity for the tax year.
New Deduction, cont’d • Qualified property means tangible, depreciable property which is held by
and available for use in the qualified trade or business at the close of the tax year.
• The deduction does not apply to specified service businesses exceeding certain dollar limits. • Defined from §1202(e)(3)(A) as “any trade or business involving the performance of
services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees;”
• But excluding engineering and architecture; and trades or businesses that involve the performance of services that consist of investment-type activities.
• Mortgage lenders should not fall into this “service” definition.
New Deduction, cont’d • The W-2 wage limit does not apply for taxpayers with taxable income
below the “threshold amount.”
• $315,000 for MFJ, $157,500 for other individuals; indexed for inflation going forward.
• The application of the limit is phased in for individuals with taxable income exceeding the threshold amount.
• Over the next $100,000 of taxable income for MFJ, and $50,000 for other individuals.
General Rules (excluding Specified Service Businesses) Qualified Business Deduction Calculations Single qualified business example (Excluding calculations related to Qualified Cooperative Dividends, Qualified REIT Dividends and Qualified Publicly Traded Partnership Income)
Single Married Filing W2 Wage & Individual Joint Qual Prop. Taxpayer Taxpayer Assumptions
Taxable Income 2,000,000 2,000,000 TI Includes:
Sch E / Sch C QBI 2,000,000 2,000,000 800,000 Wages paid by qualified business Net Capital Gain 150,000 Unadjusted Original Cost of Qualified Property
Phaseout Applicability TI 2,000,000 2,000,000 400,000 50% of Wages Threshold Amount 157,500 315,000 203,750 25% of Wages + 2.5% of Unadjusted Cost Basis of Qualified Property Threshold Amount + Applicable Dollar Amount for Phase Out Rules 207,500 415,000
TI Greater than Threshold Amount? Yes Yes TI Greater than Threshold Amount + Applicable Dollar Amount? Yes Yes
QBI Deduction Calculation: Tentative QBI Deduction = 20% of QBI 400,000 400,000 50% of Employee Wages / 25% Wage + FA Cap 400,000 400,000 400,000 Greater of Wage or Wage+ Capital Limitation
Reduction for Wage Cap Tentative Reduction (Tentative QBI Deduction Excess over Wages) Sec. 199A(b)(2) Tentative Reduction (Phase out rules) Sec. 199A(b)(3) Actual Reduction
Allowable QBI Deduction Lesser of:
Qualified Business Income Amount (Sec. 199A(a)(1)(A)) 400,000 400,000 Taxable Income Limitation (excludes net capital gain) Sec. 199A(a)(1)(B) 400,000 400,000
Allowable QBI Deduction 400,000 400,000
Effective Ded after Caps 20.00% 20.00%
EXAMPLE NOT LIMITED
General Rules (excluding Specified Service Businesses) Qualified Business Deduction Calculations Single qualified business example (Excluding calculations related to Qualified Cooperative Dividends, Qualified REIT Dividends and Qualified Publicly Traded Partnership Income)
Single Married Filing W2 Wage & Individual Joint Qual Prop. Taxpayer Taxpayer Assumptions
Taxable Income 2,000,000 2,000,000 TI Includes:
Sch E / Sch C QBI 2,000,000 2,000,000 600,000 Wages paid by qualified business Net Capital Gain 150,000 Unadjusted Original Cost of Qualified Property
Phaseout Applicability TI 2,000,000 2,000,000 300,000 50% of Wages Threshold Amount 157,500 315,000 153,750 25% of Wages + 2.5% of Unadjusted Cost Basis of Qualified Property Threshold Amount + Applicable Dollar Amount for Phase Out Rules 207,500 415,000
TI Greater than Threshold Amount? Yes Yes TI Greater than Threshold Amount + Applicable Dollar Amount? Yes Yes
QBI Deduction Calculation: Tentative QBI Deduction = 20% of QBI 400,000 400,000 50% of Employee Wages / 25% Wage + FA Cap 300,000 300,000 300,000 Greater of Wage or Wage+ Capital Limitation
Reduction for Wage Cap Tentative Reduction (Tentative QBI Deduction Excess over Wages) Sec. 199A(b)(2) 100,000 100,000 Tentative Reduction (Phase out rules) Sec. 199A(b)(3) Actual Reduction 100,000 100,000
Allowable QBI Deduction Lesser of:
Qualified Business Income Amount (Sec. 199A(a)(1)(A)) 300,000 300,000 Taxable Income Limitation (excludes net capital gain) Sec. 199A(a)(1)(B) 400,000 400,000
Allowable QBI Deduction 300,000 300,000
Effective Ded after Caps 15.00% 15.00%
EXAMPLE LIMITED
New Deduction, cont’d: QBI deduction example (limited)
P-ship Technical Termination – Old Law • A "technical termination" under Code Sec. 708(b)(1)(B), a partnership
is considered as terminated if:
• within any 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.
• A technical termination gives rise to a deemed contribution of all the partnership's assets and liabilities to a new partnership in exchange for an interest in the new partnership, followed by a deemed distribution of interests in the new partnership to the purchasing partners and the other remaining partners.
Repeal of Technical Termination • For partnership tax years beginning after 12/31/17, the Code Sec.
708(b)(1)(B) rule providing for the technical termination of a partnership is repealed.
• The repeal doesn't change the pre-Act law rule of Code Sec. 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.
Individual Tax Updates • Tax rate changes
• H.R. 1 carries temporary tax rates of 10, 12, 22, 24, 32, 35, and 37 percent after 2017. (Expire after 2025) • Under prior law, individual income tax rates have been 10, 15, 25, 28, 33, 35, and
39.6 percent.
Individual Tax Updates, cont’d • Standard Deduction Increase
• This deduction nearly doubles as it increases the standard deduction to $24,000 for MFJ, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation (using chained CPI) for tax years beginning after 2018.
• All increases end after 12/31/2025.
• Mortgage Interest Deduction Limits • The deduction for tax years beginning after 12/31/17 and before 1/1/2026, is limited
to interest on $750,000 of acquisition indebtedness ($375,000 in the case of MFS). (Grandfather rules can apply)
• Note that no interest deduction will be allowed for interest on home equity indebtedness.
Individual Tax Updates, cont’d • State and local taxes
• For tax years beginning after 12/31/17 and before 1/1/2026, state and local tax deductions, including property taxes are limited to $10,000 ($5,000 for MFS).
• Sales taxes may be included as an alternative to claiming state and local income taxes.
• Miscellaneous Itemized Deductions
• For tax years beginning after 12/31/17 and before 1/1/2026, the deduction for miscellaneous itemized deductions that are subject to the two-percent floor is suspended. (e.g. Unreimbursed employee business expenses)
Individual Tax Updates, cont’d • Alternative Minimum Tax (AMT)
• AMT is retained for individuals with modifications.
• It temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). The new law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.
• Affordable Care Act (ACA)
• ACA individual shared responsibility requirement is repealed, making the payment amount $0. This change is effective for penalties assessed after 2018, and the repeal is permanent.
Individual Tax Updates, cont’d • Carried Interest
• Under the new law, the holding period for long-term capital gains is increased to three years with respect to certain partnership interests transferred in connection with the performance of services. (Prior law holding period more than one year)
• Note this includes passthrough items from partnerships.
• Itemized Deduction Limitation
• For tax years beginning after 12/31/17 and before 1/1/2026, the "Pease limitation" on itemized deductions is suspended.
Comparison of H.R. 1 & Prior Law
State Tax Considerations • States may be slow to finalize conformity and/or decoupling rules.
• Especially amid the Federal government still needing a technical corrections bill completed.
• Roughly half of the states imposing an income tax conform to the Internal Revenue Code as of a specific date (e.g., as of 12/31/16) that the state legislature updates annually or periodically, while the other half conform to the current code on a rolling basis without need for legislative action.
§409A Reminders • Continued stress on written plans, if applicable.
• Continue to watch for employee discretion on payments.
• This can cause constructive receipt issues.
• Strict penalties for plan failure.
• The amount of income tax to the employee is increased by the sum of an amount equal to 20% of the compensation which is required to be included in income plus interest at the statutory underpayment rate plus 1%.
Partnership Audit Rules • Tax Equity and Fiscal Responsibility Act (TEFRA) partnership
audit procedures were repealed with the 2015 Bipartisan Budget Act (BBA).
• These new rules are effective for returns filed for tax years beginning after 2017.
• Result of repeal causes adjustments to a partnership's items of income, gain, loss, deductions, and credits will be made at the partnership level rather than the partner level.
P-ship Audit Rules, cont’d • The new audit rules do not provide for a tax matters partner (TMP).
Instead, partnerships will designate a partnership representative (PR) .
• Congress has given the PR sweeping authority to act on the partnership's behalf, and to bind the partnership and the partners without their direct knowledge or involvement. The PR has sole authority to act on behalf of the partnership in all federal tax assessment matters.
• A PR is designated on the partnership's tax return. Partnerships must designate a PR separately for each tax year.
• Note that there are complex guidelines in PR designation changes.
• Stress importance of having procedures in place to address PR’s is partnership agreements.
P-ship Audit Rules, cont’d • Small partnerships are eligible to opt-out of the new audit
rules.
• Eligible partnerships with 100 or fewer eligible partners can elect out of the new audit rules for any tax year. If the election out is made, the partnership and its partners will be audited under the general rules for individual taxpayers.
• Eligible partners include individuals, C or S corporations, foreign entities (treated as C corporations if domestic), and estates and deceased partners.
P-ship Audit Rules, cont’d • Manner of election
• The election out must be made with a timely filed return (including extensions) for the tax year for which the election applies.
• It must include the name and taxpayer identification number (TIN) of each partner.
• The partnership must also notify each partner of the election out in a manner to be prescribed by the IRS.
• Recommend Partnership Agreement amendments to formalize the PR, as well as other applicable criteria. (No later than 3/15/19)
Questions? Jake Lawrence [email protected] 303.253.7967
Gina West [email protected] 303.253.7952
JANUARY 16, 2018
• Participants must answer all three poll questions offered throughout the webinar to qualify.
• Certificates of completion will be emailed to qualifying participants following the webinar.
Richey May & Co, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org.
• C Corp and Other Miscellaneous Items
• Conversion from Pass-through to C Corp Thoughts
• Deductions for Pass-through Income (QBI)
• Partnership Technical Termination Update
• State Tax Considerations
(paid after 12/31/17):
1) An activity considered entertainment, amusement, or recreation;
2) Membership dues for any club organized for business, pleasure, recreation, or other social purposes; or
3) A facility or portion of a facility used in connection with any of the above.
Business-related Deductions & Exclusions • Limitation of Deduction by Employers of Certain Fringe Benefits
(paid after 12/31/17): • The new law generally retains the 50% deduction limitation for food and
beverage expenses associated with a trade or business.
• However, the new law applies the 50% limitation to the following meals provided by an employer that are currently 100% deductible: 1) Food and beverages provided to employees as de minimus fringe benefits;
2) Meals provided at an eating facility that meet the requirements for an on-premises dining facility (i.e., in-house cafeteria); and
3) Meals provided on-premises to employees for the convenience of the employer • NOTE: After 2025, NO deduction is allowed for items 1 thru 3 mentioned above.
Business-related Deductions & Exclusions • Limitation of Deduction by Employers of Certain Fringe Benefits
(paid after 12/31/17) (cont.):
• The new law states NO deduction will be allowed for the following employee transportation fringe benefits:
1) Deductions for transportation fringe benefits such as qualified parking expenses and subway or mass transit cards provided by the employer; and
2) Deductions for transportation expenses that are the equivalent of commuting for employees (i.e., between the employee’s home and the workplace), such as van pools, etc.
Business-related Deductions & Exclusions • Limits on Deduction of Business Interest (paid after 12/31/2017):
• All businesses (whether operating as a C corp or flow-thru) will be allowed a deduction for trade or business interest (investment interest not included) incurred during the taxable year only to the extent the total amount of such interest does NOT exceed the sum of: 1) Interest income of the business during that year; PLUS
2) 30% of the business’s earnings before interest, tax, depreciation, and amortization (EBITDA).
• NOTE: For tax years beginning after 2021, the EBITDA measurement will be replaced with earnings before interest and taxes (EBIT), which will further limit this deduction.
• NOTE: Limits on business interest deduction are applied at the entity level AND at the individual level. (Complex calculation and IRS does not want 30% income used twice).
Business-related Deductions & Exclusions • Limits on Deduction of Business Interest (paid after 12/31/2017) (cont.):
• Any interest deduction that is disallowed in a taxable year as a result of the new limitation will be carried forward and can be deducted in a future year, subject to the same limitation in that taxable year.
• NOTE: There is an additional rule applicable only to partnerships & S Corps on the use of the carryforward of disallowed business interest deductions.
• Additional Consideration:
• Partnerships/S Corps – Limit on the amount allowed as a business interest deduction may be increased by a partner’s distributive share of the partnership/S Corp’s excess taxable income.
Depreciation & Other Cost Recovery Items • Bonus Depreciation on Qualifying Business Assets:
• Assets purchased and placed in service during the tax years from 9/27/2017 through 2022 will qualify for a permitted deduction of 100% (full expensing).
• Qualifying assets = equipment, furniture, and other tangible personal property.
• Bonus depreciation deductions now apply to both new and used business assets acquired by purchase.
• NOTE: for used asset purchases to qualify, the assets can’t have been previously used by the purchasing tax payer and/or the assets can’t have been acquired from a related party.
• NOTE: Bonus depreciation will phase down 20% per year starting with the 2023 tax year (i.e., 80% bonus dep. in 2023, 60% bonus dep. in 2024, 40% bonus dep. in 2025, etc.).
Depreciation & Other Cost Recovery Items • Increased IRC Section 179 Expensing:
• Eligible businesses can now fully expense up to $1,000,000 of asset purchases (increased from the previous $500,000 limit).
• The Section 179 deduction will not begin to phase-out until the total asset purchases during the year exceeds $2,500,000 (up from the previous $2,000,000 threshold).
• In addition, the definition of “qualified real property” under section 179 has been expanded to include the following improvements to nonresidential real property:
• Roofs; heating, ventilation, and air-conditioning property (HVAC); fire protection and alarm systems; and security systems.
Depreciation & Other Cost Recovery Items • Other Miscellaneous Cost Recovery Provisions:
• Research and Development (R & D) expenditures:
• Starting in 2022, R & D expenditures will NO longer be fully deductible in the year they are incurred, such R & D expenditures must be amortized over a five-year period.
• NOTE: R & D conducted outside the U.S. is subject to a 15-year amortization period.
• NOTE : Starting in 2022, R & D expenditures for the development of software are now also subject to the new capitalization rules.
• NOTE: In the case of retired, abandoned, or disposed of property to which specified R & D expenditures have been paid or incurred, any remaining basis in that property may not be recovered in the year of retirement, abandonment, or disposal, but instead must continue to be amortized over the remaining 5-year period.
C Corp and Other Miscellaneous Items • Corporate Tax Rate Reduction:
• Under new tax law the graduated tax rates of 15%, 25%, 34% and 35% have been eliminated.
• New corporate tax rate is a flat 21%.
• Dividends-Received Deduction (DRD) Percentages Reduced:
• Lowers the 80% DRD (for dividends from 20% owned corporations) to 65%;
• Lowers the 70% DRD (for dividends from less than 20% owned corporations) to 50%.
C Corp and Other Miscellaneous Items • Corporate Alternative Minimum Tax (AMT) Repealed:
• Effective for tax years beginning after 12/31/2017, the AMT tax is eliminated.
• NOTE: Any AMT credit carryovers to tax years after 12/31/17 may be utilized to the extent of the taxpayer’s regular tax liability.
• NOTE: For tax years beginning in 2018, 2019, and 2020, to the extent that AMT credit carryovers exceed regular tax liability, 50% of the excess AMT credit carryovers are refundable. (Any AMT credits remaining will be fully refundable in 2021).
C Corp and Other Miscellaneous Items • Changes to the Use of Net Operating Loss (NOL) Deductions:
• Three important changes have been made concerning the use of NOL’s by businesses (arising in tax years ending after 12/31/17): 1) The ability to carry back NOL’s for up to two years from the year the NOL’s are generated has been
eliminated (ALL NOL’s must be carried forward).
2) The 20 year limit for NOL carryforwards has also been eliminated (ALL NOL’s can be carried forward indefinitely for use in future tax years).
3) Taxpayers will NO longer be able to use NOL carryforwards to offset all of their taxable income in future years.
• Starting with NOL’s generated in 2018, taxpayers will be permitted to use NOL carryforwards to offset NO more than 80% of their taxable income. (NOL’s generated in the 2017 calendar tax year can still be carried back 2 years and can still offset 100% of 2017 taxable income)
• NOTE: This limitation applies regardless of whether the entity type is an individual or C Corp.
C Corp and Other Miscellaneous Items • Limitation on Use of Excess Business Losses:
• Under the new law, taxpayers will be limited in the use of flow-thru business losses from ALL flow-thru entities each year to offset their non-business income. • The excess loss limit applies when business losses exceed the following amounts:
• $500,000 for married individuals filing jointly
• $250,000 for other individuals.
• Any business loss in excess of the above mentioned limitations will be carried forward as a net operating loss (NOL). • NOTE: The excess business loss amounts treated as NOL’s are subject to the new
80% limitation on deductibility.
C Corp and Other Miscellaneous Items • Limiting When the “Second” Shareholder Level of Tax is Incurred:
• With C Corp structure, a taxpayer may have significant control over when the shareholder level of tax is actually incurred. • Limiting distributions of profits (issuing dividends) to shareholders for a significant period of time can greatly
reduce and in certain cases, almost eliminate, the “second” level of tax.
• Best way to delay shareholder level of tax is by reinvesting profits back into the operation of the business rather than issuing dividends.
• NOTE: The accumulated earnings tax could be applied to retained earnings in excess of reasonable needs of the business.
• State Taxes Paid Deductions for C Corps: • Unlike individual taxpayers who are limited to $10,000 of property tax and/or state taxes
paid, C Corps will still be entitled to deduction treatment for the payment of state taxes paid.
C Corp and Other Miscellaneous Items LIKE-KIND EXCHANGE TREATMENT LIMITED:
Old Law: • No gain or loss was recognized to the extent
that property-which included a wide range of property from real estate to tangible personal property-held for productive use in the taxpayer’s trade or business, or property held for investment purposes, is exchanged for property of a like-kind also held for productive use in a trade or business or for investment.
New Law: • Effective for transfers after 12/31/2017, no
gain or loss will be recognized to the extent that property-which is limited to real property only-NOT held primarily for sale, is exchanged for property of a like-kind that is also real property not held primarily for sale.
C Corp and Other Miscellaneous Items • Changes to Rules for Tax Year of Income Inclusion:
• In general, for an accrual basis taxpayer, an amount is included in income when all the events have occurred that fix the right to receive such income and the amount thereof can be determined with reasonable accuracy (when the “all events” test is met), unless an exception permits deferral or exclusion.
• Under the new law, accrual method taxpayers must recognize income no later than the tax year in which the item is recognized as revenue on an applicable financial statement (i.e., the “all events” test is satisfied no later than the year in which the revenue is recognized for financial accounting purposes).
• NOTE: This change in the law will affect the income deferral treatment of Interest Rate Lock Commitments (IRLC’s) and the corresponding Hedge, as now for tax return purposes this income will have to be picked up in the same year it is included for Financial Statement purposes.
• Limited Exceptions: new book conformity requirement does NOT apply to items of gross income earned in connection with mortgage servicing rights (MSR’s) or for a few select gross income items related to long term contracts (IRC Section 460) or installment agreements (IRC Section 453).
Conversion from S Corp to C Corp • §481(a) adjustments of an eligible terminated S corporation attributable to the
revocation of S status will be taken into account ratably over 6 years (i.e. Cash to accrual method)
• Lenders required to be on accrual method
• Post-transition termination period (PTTP) distributions by an eligible terminated S corporation are treated first as made out of AAA (tax-free to the extent of basis, then capital gain), then out of E&P (dividends). Distributions after the PTTP would be treated as coming out of AAA or accumulated E&P in the same ratio as the amount of the corporation’s AAA bears to the amount of AE&P.
• PTTP is typically 1 year after the last day as an S corporation
New Deduction for Pass-through Income • For tax years beginning after 12/31/17, and before 1/1/26, a new
section §199A is added for “Qualified Business Income.”
• Under this section, a non-corporate taxpayer who has QBI from a partnership, S corporation, or sole proprietorship is allowed to deduct 20% of QBI earned from a trade or business.
• Subject to limits, the deduction is:
1) the lesser of: a) the "combined qualified business income amount" of the taxpayer, or b) 20% of the excess, if any, of the taxable income of the taxpayer for the tax year over the sum of net capital gain and the aggregate amount of the qualified cooperative dividends of the taxpayer for the tax year; plus
New Deduction, cont’d 2) the lesser of: a) 20% of the aggregate amount of the qualified cooperative dividends of
the taxpayer for the tax year, or b) taxable income (reduced by the net capital gain) of the taxpayer for the tax year.
• The 20% deduction does not impact AGI, but rather is a deduction reducing taxable income. (Although not an itemized deduction)
• QBI is generally ordinary income effectively connected with the conduct of a trade or business within the U.S. and does not include investment-related income, deductions, or losses (e.g. capital gains, dividends, and interest income) or guaranteed payments from partnerships.
New Deduction, cont’d • The QBI deduction is further limited by the greater of:
1) 50% of the W-2 wages with respect to the qualified trade or business (“W-2 wage limit”), or
2) the sum of 25% of the W-2 wages paid with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all “qualified property.” (Note – beneficial to people who own business with large real estate holdings but have few actual employees)
• For a partnership or S corporation, each partner or shareholder is treated as having W-2 wages for the tax year in an amount equal to his or her allocable share of the W-2 wages of the entity for the tax year.
New Deduction, cont’d • Qualified property means tangible, depreciable property which is held by
and available for use in the qualified trade or business at the close of the tax year.
• The deduction does not apply to specified service businesses exceeding certain dollar limits. • Defined from §1202(e)(3)(A) as “any trade or business involving the performance of
services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees;”
• But excluding engineering and architecture; and trades or businesses that involve the performance of services that consist of investment-type activities.
• Mortgage lenders should not fall into this “service” definition.
New Deduction, cont’d • The W-2 wage limit does not apply for taxpayers with taxable income
below the “threshold amount.”
• $315,000 for MFJ, $157,500 for other individuals; indexed for inflation going forward.
• The application of the limit is phased in for individuals with taxable income exceeding the threshold amount.
• Over the next $100,000 of taxable income for MFJ, and $50,000 for other individuals.
General Rules (excluding Specified Service Businesses) Qualified Business Deduction Calculations Single qualified business example (Excluding calculations related to Qualified Cooperative Dividends, Qualified REIT Dividends and Qualified Publicly Traded Partnership Income)
Single Married Filing W2 Wage & Individual Joint Qual Prop. Taxpayer Taxpayer Assumptions
Taxable Income 2,000,000 2,000,000 TI Includes:
Sch E / Sch C QBI 2,000,000 2,000,000 800,000 Wages paid by qualified business Net Capital Gain 150,000 Unadjusted Original Cost of Qualified Property
Phaseout Applicability TI 2,000,000 2,000,000 400,000 50% of Wages Threshold Amount 157,500 315,000 203,750 25% of Wages + 2.5% of Unadjusted Cost Basis of Qualified Property Threshold Amount + Applicable Dollar Amount for Phase Out Rules 207,500 415,000
TI Greater than Threshold Amount? Yes Yes TI Greater than Threshold Amount + Applicable Dollar Amount? Yes Yes
QBI Deduction Calculation: Tentative QBI Deduction = 20% of QBI 400,000 400,000 50% of Employee Wages / 25% Wage + FA Cap 400,000 400,000 400,000 Greater of Wage or Wage+ Capital Limitation
Reduction for Wage Cap Tentative Reduction (Tentative QBI Deduction Excess over Wages) Sec. 199A(b)(2) Tentative Reduction (Phase out rules) Sec. 199A(b)(3) Actual Reduction
Allowable QBI Deduction Lesser of:
Qualified Business Income Amount (Sec. 199A(a)(1)(A)) 400,000 400,000 Taxable Income Limitation (excludes net capital gain) Sec. 199A(a)(1)(B) 400,000 400,000
Allowable QBI Deduction 400,000 400,000
Effective Ded after Caps 20.00% 20.00%
EXAMPLE NOT LIMITED
General Rules (excluding Specified Service Businesses) Qualified Business Deduction Calculations Single qualified business example (Excluding calculations related to Qualified Cooperative Dividends, Qualified REIT Dividends and Qualified Publicly Traded Partnership Income)
Single Married Filing W2 Wage & Individual Joint Qual Prop. Taxpayer Taxpayer Assumptions
Taxable Income 2,000,000 2,000,000 TI Includes:
Sch E / Sch C QBI 2,000,000 2,000,000 600,000 Wages paid by qualified business Net Capital Gain 150,000 Unadjusted Original Cost of Qualified Property
Phaseout Applicability TI 2,000,000 2,000,000 300,000 50% of Wages Threshold Amount 157,500 315,000 153,750 25% of Wages + 2.5% of Unadjusted Cost Basis of Qualified Property Threshold Amount + Applicable Dollar Amount for Phase Out Rules 207,500 415,000
TI Greater than Threshold Amount? Yes Yes TI Greater than Threshold Amount + Applicable Dollar Amount? Yes Yes
QBI Deduction Calculation: Tentative QBI Deduction = 20% of QBI 400,000 400,000 50% of Employee Wages / 25% Wage + FA Cap 300,000 300,000 300,000 Greater of Wage or Wage+ Capital Limitation
Reduction for Wage Cap Tentative Reduction (Tentative QBI Deduction Excess over Wages) Sec. 199A(b)(2) 100,000 100,000 Tentative Reduction (Phase out rules) Sec. 199A(b)(3) Actual Reduction 100,000 100,000
Allowable QBI Deduction Lesser of:
Qualified Business Income Amount (Sec. 199A(a)(1)(A)) 300,000 300,000 Taxable Income Limitation (excludes net capital gain) Sec. 199A(a)(1)(B) 400,000 400,000
Allowable QBI Deduction 300,000 300,000
Effective Ded after Caps 15.00% 15.00%
EXAMPLE LIMITED
New Deduction, cont’d: QBI deduction example (limited)
P-ship Technical Termination – Old Law • A "technical termination" under Code Sec. 708(b)(1)(B), a partnership
is considered as terminated if:
• within any 12-month period, there is a sale or exchange of 50% or more of the total interest in partnership capital and profits.
• A technical termination gives rise to a deemed contribution of all the partnership's assets and liabilities to a new partnership in exchange for an interest in the new partnership, followed by a deemed distribution of interests in the new partnership to the purchasing partners and the other remaining partners.
Repeal of Technical Termination • For partnership tax years beginning after 12/31/17, the Code Sec.
708(b)(1)(B) rule providing for the technical termination of a partnership is repealed.
• The repeal doesn't change the pre-Act law rule of Code Sec. 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.
Individual Tax Updates • Tax rate changes
• H.R. 1 carries temporary tax rates of 10, 12, 22, 24, 32, 35, and 37 percent after 2017. (Expire after 2025) • Under prior law, individual income tax rates have been 10, 15, 25, 28, 33, 35, and
39.6 percent.
Individual Tax Updates, cont’d • Standard Deduction Increase
• This deduction nearly doubles as it increases the standard deduction to $24,000 for MFJ, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation (using chained CPI) for tax years beginning after 2018.
• All increases end after 12/31/2025.
• Mortgage Interest Deduction Limits • The deduction for tax years beginning after 12/31/17 and before 1/1/2026, is limited
to interest on $750,000 of acquisition indebtedness ($375,000 in the case of MFS). (Grandfather rules can apply)
• Note that no interest deduction will be allowed for interest on home equity indebtedness.
Individual Tax Updates, cont’d • State and local taxes
• For tax years beginning after 12/31/17 and before 1/1/2026, state and local tax deductions, including property taxes are limited to $10,000 ($5,000 for MFS).
• Sales taxes may be included as an alternative to claiming state and local income taxes.
• Miscellaneous Itemized Deductions
• For tax years beginning after 12/31/17 and before 1/1/2026, the deduction for miscellaneous itemized deductions that are subject to the two-percent floor is suspended. (e.g. Unreimbursed employee business expenses)
Individual Tax Updates, cont’d • Alternative Minimum Tax (AMT)
• AMT is retained for individuals with modifications.
• It temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). The new law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.
• Affordable Care Act (ACA)
• ACA individual shared responsibility requirement is repealed, making the payment amount $0. This change is effective for penalties assessed after 2018, and the repeal is permanent.
Individual Tax Updates, cont’d • Carried Interest
• Under the new law, the holding period for long-term capital gains is increased to three years with respect to certain partnership interests transferred in connection with the performance of services. (Prior law holding period more than one year)
• Note this includes passthrough items from partnerships.
• Itemized Deduction Limitation
• For tax years beginning after 12/31/17 and before 1/1/2026, the "Pease limitation" on itemized deductions is suspended.
Comparison of H.R. 1 & Prior Law
State Tax Considerations • States may be slow to finalize conformity and/or decoupling rules.
• Especially amid the Federal government still needing a technical corrections bill completed.
• Roughly half of the states imposing an income tax conform to the Internal Revenue Code as of a specific date (e.g., as of 12/31/16) that the state legislature updates annually or periodically, while the other half conform to the current code on a rolling basis without need for legislative action.
§409A Reminders • Continued stress on written plans, if applicable.
• Continue to watch for employee discretion on payments.
• This can cause constructive receipt issues.
• Strict penalties for plan failure.
• The amount of income tax to the employee is increased by the sum of an amount equal to 20% of the compensation which is required to be included in income plus interest at the statutory underpayment rate plus 1%.
Partnership Audit Rules • Tax Equity and Fiscal Responsibility Act (TEFRA) partnership
audit procedures were repealed with the 2015 Bipartisan Budget Act (BBA).
• These new rules are effective for returns filed for tax years beginning after 2017.
• Result of repeal causes adjustments to a partnership's items of income, gain, loss, deductions, and credits will be made at the partnership level rather than the partner level.
P-ship Audit Rules, cont’d • The new audit rules do not provide for a tax matters partner (TMP).
Instead, partnerships will designate a partnership representative (PR) .
• Congress has given the PR sweeping authority to act on the partnership's behalf, and to bind the partnership and the partners without their direct knowledge or involvement. The PR has sole authority to act on behalf of the partnership in all federal tax assessment matters.
• A PR is designated on the partnership's tax return. Partnerships must designate a PR separately for each tax year.
• Note that there are complex guidelines in PR designation changes.
• Stress importance of having procedures in place to address PR’s is partnership agreements.
P-ship Audit Rules, cont’d • Small partnerships are eligible to opt-out of the new audit
rules.
• Eligible partnerships with 100 or fewer eligible partners can elect out of the new audit rules for any tax year. If the election out is made, the partnership and its partners will be audited under the general rules for individual taxpayers.
• Eligible partners include individuals, C or S corporations, foreign entities (treated as C corporations if domestic), and estates and deceased partners.
P-ship Audit Rules, cont’d • Manner of election
• The election out must be made with a timely filed return (including extensions) for the tax year for which the election applies.
• It must include the name and taxpayer identification number (TIN) of each partner.
• The partnership must also notify each partner of the election out in a manner to be prescribed by the IRS.
• Recommend Partnership Agreement amendments to formalize the PR, as well as other applicable criteria. (No later than 3/15/19)
Questions? Jake Lawrence [email protected] 303.253.7967
Gina West [email protected] 303.253.7952