the tax cuts and jobs act - dhg

Welcome to DHG’s Tax Reform Briefing!

The Tax Cuts and Jobs ActA Discussion of Key Provisions Impacting You

FEBRUARY 7, 2018

• C Corporations • Accounting Methods• Impact on Financial Statements• Other Changes Impacting Businesses• Impact on Pass-through Entities• Entity Selection Considerations: S Corp vs. C Corp• Impact to Individuals• Charitable Planning and Exempt Organizations

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Tax Reform:Impacts to Corporations

Haley Roberts, Tax Manager – Federal Tax Specialty Services

• Corporate tax rates

• Fiscal year end filers

• Dividends received deduction

• Corporate AMT

• Net operating losses

• Other miscellaneous corporate and business reforms

• Accounting methods

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HISTORICAL REFORM FOR CORPORATIONS

Corporate Tax Rate

Tax Rate If taxable income is:21% $0 and more21% Personal Service Corporation

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Tax Rate If taxable income is:15% $0 - $50,00025% $50,001 - $75,00034% $75,001 - $10,000,00035% $10,000,000+35% Personal Service Corporation

2017 Tax Law Tax Reform Law

Return to Table of Contents

Corporate Tax Rate: Fiscal Year End Filers• Blended rate used for the tax year straddling January 1, 2018

• Calculate two tentative tax liabilities:

- First by applying pre-enactment tax rates to taxable income for the full year

- Second by applying newly enacted tax rates to taxable income for the full year

• Each tentative tax is pro rated based on number of days

• Tax for the full year is the sum of the proportion of each tentative tax

6Return to Table of Contents

Corporate Tax Rate: Fiscal Year End FilersEXAMPLE• Fiscal year ending 4/30/2018• Taxable income for period 5/1/2017 through 4/30/2018 is $1,000,000• Effective date of corporate tax rate change is 1/1/2018

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Tentative Tax One:Taxable Income $1,000,000Pre-enactment Tax Rate 35%Tentative Tax Liability One $350,000

Tentative Tax Two:Taxable Income $1,000,000Post-enactment Tax Rate 21%Tentative Tax Liability Two $210,000

Total Tax Liability for FYE 4/30/2018:2017— 245 / 365 of $350,000 $235,0002018— 120 / 365 of $210,000 69,000Total Tax Liability FYE 4/30/2018 $304,000


Corporate Dividends Received Deduction

Deduction % Ownership %80% 20% or more ownership70% Less than 20% ownership

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Deduction % Ownership %65% 20% or more ownership50% Less than 20% ownership



Corporate AMT

• Corporations subject to a Corporate AMT much like individuals

• AMT calculation could have created credit carryovers

• Corporate AMT repealed beginning after December 31, 2017

• Any remaining AMT credit carryovers may be utilized to the extent of regular tax liability

• For 2018, 2019 and 2020, to the extent they exceed regular tax, 50% of excess carryovers are refundable, with the balance refunded in 2021

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Net Operating Losses

• NOLs applied 100% against current year taxable income (90% for AMT)

• 2 year optional carryback of excess NOL’s

• 20 year carryforward of excess NOL’s

• Limits NOL deduction to 80% of taxable income for NOLs created after 2017

• Repeals the carryback provision

• Indefinite carryforward of NOLs

• New provision applies to losses arising in tax years ending after December 31, 2017

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Example: NOL & AMT Credit CarryforwardsFACTS

• Corporate Taxpayer with calendar year end

• AMT Credit Carryforward at December 31, 2017: $100

• Taxable Income / (Loss) as follows:

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2017 2018 2019 2020 2021($1,500) ($4,000) $1,000 $3,000 $1,500


Example: NOL & AMT Credit Carryforwards

• 2017 NOL of $1,500• Law allows carryback two years or carryforward 20 years• No income to offset in carryback period; Must be carried forward

• 2018 NOL of $4,000• May only be carried forward indefinitely; Usage limited to 80% of pre-

NOL taxable income

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2017 2018 2019 2020 2021($1,500) ($4,000) $1,000 $3,000 $1,500

2017 2018 2019 2020 2021($1,500) ($4,000) $1,000 $3,000 $1,500


Example: NOL & AMT Credit Carryforwards

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2017 2018 2019 2020 2021Taxable Income ($1,500) ($4,000) $1,000 $3,000 $1,500Pre-Reform NOL - - (1,000) (500) -Post-Reform NOL - - - (2,400) (1,200)Net Taxable Income ($1,500) ($4,000) - $100 $300Tax Rate 35% 21% 21% 21% 21%Tax Liability - - - $21 $63AMT Credit C/F - - - (60) (40)Net Tax Liability / (Refund) - - - ($39) $23

AMT Credit Usage 2020

Allowable Credit $21

50% of Excess $39 ($100 - $21 = $79 x 50%)

Total Allowable Credit $60


• Business interest expense• Domestic production activity deduction (DPAD)• Like-kind exchange• Special rule for taxable year of inclusion• Deduction for certain fines, penalties, and other amounts• Local lobbying expense• Business credits• Other miscellaneous business provisions

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MISCELLANEOUS CORPORATE AND BUSINESS PROVISIONS

Business Interest Expense

• Business interest expense is generally deductible, subject to certain limitations

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2017 Tax Law Tax Reform Law• Limits the deduction of business interest

expense in excess of:- Business interest income, plus- 30% of business adjusted taxable

income, plus- Floor plan financing interest

• Any disallowed interest expense is carried forward indefinitely

• Does not apply to floor-plan financing interest

• Defined formula for adjusted taxable income• Defined business interest expense and

business interest incomeReturn to Table of Contents

Domestic Production Activity Deduction (DPAD)

• Certain businesses that have Domestic Production Activity (as defined in section 199) may be able to claim a deduction no greater than:

- 9% of Domestic Production Activity Income

- 9% of W-2 wages

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2017 Tax Law Tax Reform Law• The deduction for domestic

production activities provided under section 199 is repealed

• Note: If a company was taking a 9% DPAD deduction and they now claim the 20% pass-through deduction, the marginal benefit of the pass-through deduction is only 11%



Like-Kind Exchanges

• Section 1031 allows for the “roll-over” exchange of like real property, tangible personal property, and intangible property

• Section 1031 still allowed for like-kind real property

• Section 1031 disallowed for tangible personal property and intangible property

• Transition rules are applied and still need to be defined by the Secretary


Special Rule for Taxable Year of Inclusion

• The “all events” test is satisfied no laterthan when an amount is recognized as revenue in the taxpayer’s applicable financial statements

• Advance payments received must be recognized as taxable revenue no later than the end of the tax year following the year of receipt

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• Under §451, an accrual method taxpayer includes an amount in taxable income when “all events” have occurred which fix the taxpayer’s right to receive the income and the amount can be determined with reasonable accuracy

• “All events” have occurred at the earliest time when one of the following occurs:

- An amount is received;- The taxpayer has the right to bill an

amount; or- The amount is earned

• Possible that all events have not occurred until after an amount is recognized for financial reporting purposes



Special Rule for Taxable Year of Inclusion: Example 1FACTS• XYZ Corporation (an accrual method taxpayer) is awarded a contract worth $2,000,000 to

develop an advanced software program which will allow humans to translate dolphin-speak into common English- The contract is for services and does not meet the definition of a “long-term contract”

• XYZ estimates the program will cost $1,600,000 to complete (a 25% profit margin)• Stipulations of the contract:

- Payment is not due to XYZ until the successful demonstration of the final software program’s capabilities

- XYZ corporation will not be paid for any work done if the program is not completed or fails to perform as specified

- The program must understand all documented species of ocean and river dolphin• On its applicable financial statements, XYZ recognizes revenue equal to 125% of costs as costs

are incurred


Special Rule for Taxable Year of Inclusion: Example 1FACTS (cont.)• The program is still in its nascent stages at the end of Year One and is

non-functional

• By the end of Year Two, the program understands common bottlenose dolphins but not Amazon River dolphins

• The program is completed, successfully tested, and demonstrated to the customer’s satisfaction during Year Three

• XYZ invoices the customer for the full contract price during Year Three but does not receive payment until Year Four


Special Rule for Taxable Year of Inclusion: Example 1

• Same as 2017 tax law with one new addition…

• The “all events test” is met no later than when the amount is recognized as revenue in the taxpayer’s applicable financial statements

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• Income is generally recognized only when the “all events test” is met – which occurs at the earliest of:

(1) when payment is received,

(2) when entitled to invoice for work done, or

(3) when the amount is earned (e.g., when the work is complete)




Year One Year Two Year Three Year Four TotalAmount Received $ - $ - $ - $2,000,000 $2,000,000Right to Bill Amount $ - $ - $2,000,000 $ - $2,000,000Income Earned No No Yes Yes (Year 3)All Events Test Met? No No Yes Yes (Year 3)

Revenue per AFS $800,000 $500,000 $700,000 $ - $2,000,000Taxable Revenue

Pre-Reform Law $ - $ - $2,000,000 $ - $2,000,000Post-Reform Law $800,000 $500,000 $700,000 $ - $2,000,000


Special Rule for Taxable Year of Inclusion: Example 2ADVANCE PAYMENTS UNDER §1.451-5• ABC Co. is an accrual method taxpayer

• In Year 1, ABC receives a customer payment of $5,000 toward the $15,000 purchase price for electric motors to be provided in Year 3

• ABC follows Treasury Regulation §1.451-5, which allows a taxpayer to defer recognition of certain advance payments for goods until the taxable year in which properly accruable under its method of accounting

• ABC does not meet the all events test for this contract until Year 3



Year One Year Two Year Three TotalAmount Received $5,000 $ - $10,000 $15,000All Events Test Met? No No Yes

Revenue per AFS $ - $ - $15,000 $15,000Taxable Revenue

Pre-Reform Law $ - $ - $15,000 $15,000Post-Reform Law $ - $5,000 $10,000 $15,000

ADVANCE PAYMENTS UNDER §1.451-5


Deduction for Fines and Penalties

• Amounts paid to, or at the direction of, a government or governmental entity for violation of a law are non-deductible

• Also applies to amounts paid to investigate any such potential violation

• Does not apply to amounts paid:- As restitution/remediation for

violation of the law- To come into compliance with

violated law; or- As restitution for failure to pay

otherwise deductible taxes25

• Amounts paid to any government or government agency for violations of law are non-deductible



Local Lobbying Expenses

• No deduction will be allowed for lobbying expenses with respect to legislation before local government bodies.

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• Exception to general rule disallowing a deduction for lobbying expenses for lobbying on legislation before local government bodies



Business Credits

• Orphan Drug Credit – credit available equal to 50% of qualified clinical testing expenses related to drugs for rare diseases or conditions.

• Rehabilitation Credit (Historical Structures) – 10% credit of qualified rehabilitation expenditures with respect to any qualified rehabilitated building; Increased to 20% for expenditures related to certified historic buildings.

• Orphan Drug Credit – the amount of credit is reduced to 25% of qualified clinical testing expenses

• Rehabilitation Credit –

- 10% credit for qualified rehabilitated buildings is eliminated

- 20% credit remains on certified historic buildings

- Credit must be claimed ratably over five years

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Business Credits (cont.)

• Employer credit for paid family and medical leave – no credit existed in 2017

• Tax credit bonds – Taxpayers holding certain bonds would receive tax credits in lieu of interest payments from bond issuers.

• Employer credit for paid family and medical leave –

- Eligible employers my claim a credit equal to 12.5% of paid leave paid to qualifying employees.

- Credit is increased by 0.25% for each percentage point that wages paid during qualifying leave exceeds 50% of the wages normally paid to the employee.

- Maximum credit of 25%• Tax credit bonds –

- Repealed; No new issuances after 12/31/2017

- Current holders of bonds issued prior to 12/31/2017 will continue to receive credits



Accounting Methods: Small Business Reforms• Expands availability of cash method of accounting to certain

taxpayers

• Expands exemption from requirement to account for inventories and to apply UNICAP for certain taxpayers

• Expands exemption from requirement to use the percentage-of-completion method for small contractors

• Modification of rules under §179


Small Business: Overall Cash Method of Accounting

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• Corporations and partnerships with corporate partners are prohibited from using the cash method of accounting unless their average gross receipts for the prior three taxable years is less than $5 million

- This test must be satisfied for each of the taxpayer's tax years beginning after December 31, 1985

• Farming corporations are generally prohibited from using the cash method of accounting if annual gross receipts exceed $1 million

• Closely-held and family-owned farming businesses are permitted to use the cash method if average gross receipts do not exceed $25 million

• Qualified personal service corporations are generally permitted to use the cash method regardless of gross receipts.

2017 Tax Law


Tax Reform Law

Small Business: Overall Cash Method of Accounting (cont.)

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• All taxpayers (other than tax shelters) with 3-year average gross receipts less than $25 million (indexed for inflation) are permitted to use the cash method of accounting

• Application of this provision constitutes a change in method of accounting


Small Business: Overall Cash Method of Accounting (cont.)• Factors to consider when evaluating overall cash method:

- May be beneficial when Accounts Receivable are higher than Accounts Payable (allows taxpayer to defer income)

- More flexibility with regard to timing of taxable income recognition (taxpayer can write checks at end of the year or bill clients soon after the close of the year to control expenses and income)

- Reduced administrative burden - assuming the taxpayer does not have GAAP accrual-basis financial statements

- Gives a better indication of cash on hand


2017 Tax Law

Small Business: Inventories

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• Any business in which the production, purchase, or sale of merchandise is a material income-producing factor must generally account for inventories at the beginning and ending of each year

• Affected businesses must also use the accrual method of accounting for purchases and sales of inventory

• Taxpayers in qualifying trades or businesses may account for inventory as materials and supplies that are not incidental if average gross receipts for the prior three taxable years does not exceed $10 million

- Must not otherwise be prohibited from using the cash method as overall method of accounting under §448


Tax Reform Law

Small Business: Inventories (cont.)

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• All taxpayers (other than tax shelters) with 3-year average gross receipts less than $25 million (indexed for inflation) are exempt from the requirement to account for inventories

• Eligible taxpayers may either treat inventories as materials and supplies that are not incidental or conform to the taxpayer’s financial accounting treatment

- Non-incidental materials and supplies are deducted as consumed or utilized in the taxpayer’s operations



Small Business: Inventories ExampleFACTS• Corporate Taxpayer producing wooden canoes• Average annual gross receipts: $20M• Annual purchases are fully consumed during the year of purchase – but

20% remains on-hand in the form of canoes in process• Annual wood purchases as follows:

Year 1 Year 2 Year 3$7,000,000 $9,000,000 $8,000,000


Small Business: Inventories Example• Accounting for inventory under accrual method:

• Accounting for inventory as non-incidental materials and supplies

Year 1 Year 2 Year 3(A) Beginning Inventory $ - $1,400,000 $1,800,000(B) Purchases 7,000,000 9,000,000 8,000,000(C) Ending Inventory (20% of Purchases) 1,400,000 1,800,000 1,600,000Cost of Goods Sold (A) + (B) – (C) $5,600,000 $8,600,000 $8,200,000

Year 1 Year 2 Year 3Purchases $7,000,000 $9,000,000 $8,000,000Consumed (100% of Purchases) 7,000,000 9,000,000 8,000,000Cost of Goods Sold = Amount Consumed $7,000,000 $9,000,000 $8,000,000

Difference in Taxable Income(Compared to accrual method) ($1,400,000) ($400,000) $200,000


Small Business: UNICAP

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• Taxpayers must capitalize certain direct and indirect costs related to real or tangible property, whether produced or acquired for resale

• Qualifying resellers whose average annual gross receipts do not exceed $10,000,000 are generally exempt from these requirement with respect to personal property acquired for resale

• Other taxpayers may be exempt from the requirements of IRC 263A based on certain industry classification or other limited exceptions

2017 Tax Law


Tax Reform Law

Small Business: UNICAP (cont.)

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• All taxpayers (other than tax shelters) with 3-year average gross receipts less than $25 million (indexed for inflation) are exempt from the capitalization rules of IRC 263A



Small Business: Long-Term Contract Accounting (IRC 460)

• Gross receipts threshold amount is increased to $25 million for all taxpayers (other than tax shelters)


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• Taxpayers with average gross receipts of less than $10 million for the three prior taxable years are exempt from the requirement to use the percentage-of-completion method of accounting for long-term construction contracts which are expected to be completed within two years of the date when related costs are first incurred



Other Accounting Methods Opportunities

• Even though many of these provisions are not effective until 2018, taxpayers should explore opportunities to accelerate deductions into to 2017 and defer income into 2018

• Not just timing! Will result in permanent tax savings due to lowering of income tax rate


Creating Value Through DeferralEXAMPLETaxpayer recognizes revenue ratably as work is performed. Taxpayer changes its method to recognize revenue when earned (e.g., when work is complete or product is delivered). Taxpayer projects steady business activity and revenue going forward.

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Year 1 Year 2 Year 3 Years 4-10 Total Final YearCurrent Method 1,000 1,000 1,000 7,000 10,000 -

New Method 750 750 750 5,250 7,500 -Recognize PY Deferral - 250 250 1,750 2,250 250 Total 750 1,000 1,000 7,000 9,750 250

Difference (250) - - - (250) 250 Tax Savings @ 35% (88) - - - (88) 88

Note: Example does not take into account IRR on cash tax savings. The opportunity to generate significant benefit is greater than illustrated here! Return to Table of Contents

Creating Value Through DeferralEXAMPLESame facts, but assume tax rate is 35% in Year 1 and is reduced to 21% in Year 2 and beyond.

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Year 1 Year 2 Year 3 Years 4-10 Total Final YearCurrent Method 1,000 1,000 1,000 7,000 10,000 -

35% 21% 21% 21% 21%350 210 210 1,470 2,240 -

New Method 750 750 750 5,250 7,500 -Recognize PY Deferral 0 250 250 1,750 2,250 250 Total 750 1,000 1,000 7,000 9,750 250

35% 21% 21% 21% 21%263 210 210 1,470 2,153 53

Annual Tax Savings 88 - - - 88 (53)Permanent Tax Savings 35

Note: Example does not take into account IRR on cash tax savings. The opportunity to generate significant benefit is greater than illustrated here!Return to Table of Contents

Other Accounting Methods Opportunities• Automatic method changes may be made effective for 2017 through the

date the 2017 tax return is filed (including extensions)

- Overall accrual to cash

- Prepaid maintenance, service or insurance contracts

- Cost segregation studies

- Accrued expenses – fixed and determinable

• We are still awaiting guidance on the procedures for adopting new accounting methods provided in the tax reform legislation


Tax Reform: Impact onFinancial Statements

Jeremy Betsill, Assurance Partner

Tax Reform Headlines


• Enacted date vs. effective date

• Re-measurement of deferred taxes

• International tax considerations

FINANCIAL STATEMENT CONSIDERATIONS


Enacted Date vs Effective DateDEFINITIONS

• Enacted- The date the legislation is signed into law

• Effective- The date the legislation (law) takes effect


Enacted Date vs Effective Date

“The President signed the bill into law on December 22, 2017. The new rates apply to tax years beginning on or after January 1, 2018.”

• Enacted Date: December 22, 2017• Effective Date: January 1, 2018


ASC 740: Enacted Date vs. Effective Date• “The effect of a change in tax laws or rates shall be recognized at the

date of enactment.”

• Implications:

- Current taxes will remain under OLD tax regulations for 2017 since new law not effective until January 1, 2018.

- However, deferred tax assets and liabilities shall be adjusted for the effect of a change in tax laws or rates in the period enacted (i.e. 2017).


Current vs Deferred Taxes

• Current Taxes –tax effects that are taxable or deductible in the current reporting period.

• Deferred Taxes - tax effects that will lead to taxable income or tax deductions in future periods.- GAAP requires deferred tax liability or asset to be recognized

for the estimated future tax effects attributable to temporary differences and carryforwards.


Fiscal Year Ends (non-calendar) • If a law is enacted subsequent to the balance sheet date but

prior to issuance of the financial statements, it is considered a non-recognized subsequent event

• Example: - Legislation enacted December 22, 2017 would be a non-

recognized subsequent event for a corporation with a November 30th fiscal year end


Re-measurement of Deferred Taxes• Applies to C-corporations, pass-through entities (S-corps, LLC, etc.) are

generally not subject to tax at the entity level

• Corporate rate of 21% for deferred tax assets and liabilities expected to reverse after 12/31/2017

• Blended statutory tax rate for fiscal year taxpayers- Portion of year at 35%, portion at 21%

• Reduced federal benefit on state effective tax rates

• For U.S. GAAP purposes, all re-measurement effects of deferred tax balances should be recorded to income from continuing operations as of the enactment date


Re-measurement of Deferred Taxes (cont.)MECHANICS OF RE-MEASUREMENT AT DATE OF ENACTMENT

• Obtain U.S. deferred tax balances as of enactment date- In practice, one may expect to use 12/31/2017 balances as

that may be the best information available• Schedule the reversal of the deferred tax balances in the future• Re-measure effect of temporary differences and carryforwards at

new corporate tax rate of 21%.


Re-measurement of Deferred Taxes (cont.)• Rate change may result in disproportionate tax effects being

lodged in OCI- Could apply to various other items that are accounted for

through OCI, such as unrealized gains or losses derived from pensions, currency translation, available-for-sale securities, etc.

• FASB recently issued a proposed ASU that allows a reclass from AOCI to retained earnings for the "lodged" tax effect that will reside in AOCI.


Re-measurement of Deferred Taxes – Example

Reduction of DTA = $140,000 charged to earnings through deferred tax expense

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OLD Rate Tax Reform

NOL carryforward $1,000,000 $1,000,000

Tax rate 35% 21%

Deferred tax asset $350,000 $210,000


Net Operating Loss DTA Considerations• Applicable for NOLs generated after 1/1/2018

• NOL utilization limited to 80% of taxable income

• NOL carrybacks eliminated

• NOL carryforward period is indefinite

• Note: NOL changes to be considered in ability to utilize NOL carryforwards and need for valuation allowance


Multinational Considerations • New law creates one-time transition tax on undistributed foreign earnings

(since 1986)

• “Unremitted Foreign Earnings” is a GAAP concept, based on book earnings

• “Earnings and Profits” (E&P) is a tax concept, based on U.S. tax rules

• Caution:- In practice, the two above measures often vary by only an immaterial

amount and differences between the two are often disregarded for ease of computation


One-Time Transition Tax – Deemed Repatriation • One-time transition tax on accumulated foreign earnings (E&P)

• Cash and Cash Equivalents taxed at 15.5%

• Operating Assets taxed at 8%

• Tax recorded in graduated installments over 8 years

- Record tax payable balance as of 12/31/2017

- Consider classification as current vs. non-current payable due to 8-year payment period.


SEC Implementation Guidance• SEC guidance provides a “measurement period” for issuers to

evaluate the impacts of tax reform on their financial statements• Measurement period not to extend beyond one year from the

enactment date• During the measurement period, the SEC Staff expect that

entities will be acting in good faith to complete the accounting under ASC Topic 740

• Applies to publicly traded companies, may be used as guideline for privately-held companies


Other Changes Impacting Businesses

• Cost Recovery

• Limitation on Deduction of Interest

• Meals and Entertainment Expenses

• State Tax Conformity

• International Implications

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OTHER CHANGES IMPACTING BUSINESSES

Other Changes Impacting Businesses:Cost Recovery

Rachel Nightengale, Tax Manager

• Increased expensing- Bonus depreciation- Section 179 expensing

• Changes to recovery periods for real property• Modifications to depreciation limitations on luxury automobiles and

personal use property• Research and experimental expenses• Planning considerations

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COST RECOVERY

Bonus Depreciation

• Allows a 50% bonus depreciation deduction for first year placed in service• Applies to new property only• Not limited to taxable income of the entity• Qualified property includes property with a MACRS life of 20 years or less• Qualified property includes:

- Property with a MACRS life of 20 years or less- Qualified leasehold improvement property- Certain qualified restaurant property- Certain qualified retail improvement property- Limitations apply to self rental or owner occupied property

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2017 Tax Law


Bonus Depreciation (cont.)

• Allows a 100% bonus depreciation deduction for first year placed in service

• Applies to new and used property

• Not limited to taxable income of the entity

• Qualified property - Technical issues discussed later

• Applies to property acquired and placed in service after September 27, 2017, subject to binding contract rules

• Phased down by 20% each year beginning in 2023 until completely phased on in 2027

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Tax Reform Law


Bonus Depreciation – Binding Contracts• Eligible property must be both acquired and placed in service after 9/27/2017• Eligible property is considered acquired after 9/27/2017 only if there was not a written binding

contract prior to the acquisition date• Requirements of a binding contract:

- Enforceable under state law- Does not limit damages to a specified amount- Any conditions are not within control of either party- Any changes to conditions are insubstantial- Supply agreements must include the amount and design specifications of the purchase to

be binding- Purchasing a component or components of a larger asset is not considered a binding

agreement to purchase the larger asset• Note: An option to buy property is not considered a binding contract


Bonus Depreciation – Effective Dates and Allowances

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Date Applicable Percentage

Acquired before Sept. 27, 2017 50%

Acquired and placed in service after Sept. 27, 2017, and before January 1, 2023 100%

Acquired and placed in service after Sept. 27, 2017, and before Dec. 31, 2022 with an election made to use 50% rather than 100% 50%

Acquired after December 31, 2022, and PIS in before January 1, 2024 80%

Acquired after December 31, 2023, and PIS in before January 1, 2025 60%

Acquired after December 31, 2024, and PIS before January 1, 2026 40%

Acquired after December 31, 2025, and PIS before January 1, 2027 20%

PIS on or after January 1, 2027 0%


Applicable Recovery Period for Qualified Improvement Property

• Eliminates the 15 year recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property – effective 1/1/2018

• Eliminates qualified improvement property from the definition of eligible bonus depreciation property – effective 1/1/2018

• Congress intended to – but DID NOT – provide a single 15-year recovery period for qualified improvement property

• Qualified Improvement Property - certain interior improvements to nonresidential real property placed in service after the initial placed-in-service date of the property

• Starting in 2018, qualified improvement property is depreciated over 39 (MACRS) and 40 (ADS) years, generally not eligible for 100% expensing

• ADS recovery period for residential rental property is reduced from 40 to 30 years

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Tax Reform Law


Section 179 Expensing Election

• Maximum amount that may be deducted is $500,000 (indexed for inflation – 2017 deduction is $510,000)

• Partial phase-out of deduction if more than $2,000,000 of section 179 eligible property is acquired during the tax year (indexed for inflation – 2017 limitation is $2,030,000)

• Deduction fully phased out if purchases of section 179 eligible property exceeds $2,500,000 ($2,540,000 for 2017)

• Deduction limited to taxable income• Amount of deduction disallowed due to taxable income limitation may carried forward

indefinitely• Deduction for Sport Utility Vehicles capped at $25,000• Expense election limited to 1245 property• Available for new or used property

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2017 Tax Law


Section 179 Expensing Election (cont.)

• Maximum amount that may be deducted is $1,000,000 (indexed for inflation after 2018)

• Partial phase-out of deduction if more than $2,500,000 of section 179 eligible property is acquired during the tax year (indexed for inflation after 2018)

• Deduction fully phased out if purchases of section 179 eligible property exceeds $3,500,000

• Deduction limited to taxable income• Amount of deduction disallowed due to taxable income limitation may

carried forward indefinitely

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Tax Reform Law


Section 179 Expensing Election (cont.)

• Deduction for Sport Utility Vehicles remained capped at $25,000 but will be indexed for inflation after 2018

• Expands expensing election to:- Furnishing lodging property – hospitality and apartment buildings- Roofs, HVAC property, fire protection, alarm and security systems

(only applies to nonresidential real property under expansion or improvement, placed into service after the building was placed into service

• Applies to assets placed in service after December 31, 2017

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Tax Reform Law (cont.)


Cost Recovery Life Comparison

Life Classification27.5 Years Residential (MACRS)

40 Years Residential (ADS)

39 Years Nonresidential (MACRS)

40 Years Nonresidential (ADS)

15 years Qualified Leasehold Improvement (MACRS)

15 Years Qualified Restaurant Property (MACRS)

15 Years Qualified Retail Improvement (MACRS)

39 Years Qualified Leasehold Improvement (ADS)

39 Years Qualified Restaurant Property (ADS)

39 Years Qualified Retail Improvement (ADS)

Life Classification27.5 Years Residential (MACRS)

30 Years Residential (ADS)

39 Years Nonresidential (MACRS)

40 Years Nonresidential (ADS)

39 Years Qualified Improvement Property (MACRS)

40 years Qualified Improvement Property (ADS)

Sec. 179 Roof, HVAC, Fire Protection, Security and Alarm Systems – Not original UOP

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2017 Tax Law 2018 Tax Law


Depreciation Limitations: Luxury Automobiles and Personal Use Property • Increases to annual depreciation limitations placed on passenger automobiles• New limitations will be indexed for inflation

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Year Limitation1 $3,1602 $5,1003 $3,050

4+ $1,875

2017 Tax Law 2018 Tax LawYear Limitation

1 $10,0002 $16,0003 $9,600

4+ $5,760


Research and Experimental Expenditures

• R&E and software costs maybe expensed or elect to capitalize and amortize over 60 months –section 174

• Can elect to recover over 10 years, subject to AMT – 59(e)

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2017 Tax Law Tax Reform Law• Capitalized and amortized over

60 months starting with tax years beginning after December 31, 2021

• Research conducted outside the United States capitalized and amortized over 15 years

• Current AMT considerations remain the same for individuals


Cost Recovery: Planning Considerations• 100% bonus depreciation and impact on qualified business

income deduction

• 100% bonus depreciation in a year that creates or increases a net operating loss

• M&A considerations – benefits created for both buyers and sellers in deals structured as asset sales and deemed asset sales


Other Changes Impacting Businesses:Limitation on Deduction of Interest

Tracey Erbe, Tax Manager

Business Interest Expense

• Business interest expense is generally deductible, subject to certain limitations

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2017 Tax Law Tax Reform Law• Limits the deduction of business interest

expense in excess of:- Business interest income, plus- 30% of business adjusted taxable

income, plus- Floor plan financing interest

• Any disallowed interest expense is carried forward indefinitely

• Does not apply to floor-plan financing interest

• Defined formula for adjusted taxable income• Defined business interest expense and

business interest incomeReturn to Table of Contents

Business Interest Expense: Adjusted Taxable IncomeStart with Taxable income of taxpayerLess: Wages earned as an employee (applies to individual taxpayers only)

Less: Any item of interest income or gain that is not allocable to trade or business (investment income)

Less: Business interest income

Less: Income from electing out real property trades or businesses

Less: All items of income or gain of partnership or S corporation

Plus: Any item of deduction or loss that is not allocable to trade or business (investment losses)

Plus: Business interest expense

Plus: Net Operating Loss deduction

Plus: Depreciation, amortization and depletion before January 1, 2022 *

Plus: Losses from electing out real property trades or businesses

Plus: All items of deduction or loss of partnership or S corporation

Plus: Partner’s share of partnership excess taxable income

End with Adjusted taxable income (May not be less than zero)

*Addback for Depreciation, amortization and depletion not permitted after 2021

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Secretary to provide other adjustments to the computation of adjusted taxable income


Business InterestDEFINITION OF BUSINESS INTEREST • Business Interest Income

- The amount of interest includible in the taxpayer's gross income and allocable to a trade or business

• Business Interest Expense

- Any interest paid or accrued on indebtedness properly allocable to a trade or business

- Does not include investment interest

- “Floor plan financing interest” is excluded from limitation

Defined as interest associated with indebtedness to finance self-propelled vehicle, boat, or farm machinery or equipment held for sale or lease


Business Interest ExpenseBUSINESS INTEREST EXPENSE LIMITATION DOES NOT APPLY TO:• Small businesses with 3-year average annual gross receipts less than $25,000,000• Real property trades or businesses may elect out, but are required to use alternative

depreciation system (ADS) to depreciate:- Nonresidential real property- Residential real property- Qualified improvement property

• Farming businesses may elect out, but are required to use ADS to depreciate any property with a recovery period of 10 years or more

• Certain regulated public utilities• Floor plan financing interest


Business Interest Expense: Does not apply to…REAL PROPERTY TRADES OR BUSINESSES

• Includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trades or businesses (IRC §469(c)(7)(C))

• Election out of interest limitation is irrevocable

• Requirement to use ADS system could include switch for existing property in addition to any new and future acquisitions


Business Interest Expense: Treatment by Pass-throughs• Interest deduction applies first at the entity level

- Any deduction is taken into account in determining the non-separately stated taxable income or loss of pass-through entity

• Business interest not deducted can be carried forward indefinitely- Special rules apply to partnerships

• Adjusted taxable income of each partner or shareholder is determined without regard to partner’s or shareholder’s distributive share of income or deductions of the entity- This rule prevents double counting of same dollars used in computing the

adjusted taxable income of entity from generating additional interest deductions from income passed through to the partners or shareholders


Business Interest Expense: Treatment by Pass-throughs• “Excess taxable income” of a pass-through is passed through to partners or

shareholders- If an entity has excess taxable income for purposes of deduction limit, such excess

is passed through to partners of shareholders- Adjusted taxable income of each partner or shareholder is increased by its share of

the entity’s taxable income• Excess taxable income from a pass-through increases the partner’s adjusted taxable

income, which can increase the interest deduction at the partner level- It cannot be used to deduct disallowed interest from other pass-through entities

• Disallowed partnership interest is passed through to the partners and is carried forward to the next year. It may only be deducted to the extent of 30% of excess taxable income from that same partnership activity


Business Interest Expense: Treatment by Pass-throughs• Excess taxable income is a percentage of the entity’s adjusted taxable income.

Percentage is:- The excess of: 30% of the entity’s adjusted taxable income, over The amount (if any) by which the entity’s business interest expense,

reduced by floor plan financing interest, exceeds the entity’s business interest income

- Divided by 30% of the entity’s adjusted taxable income• This excess taxable income is added to a partner’s or shareholder’s adjusted

taxable income which allows the taxpayer to deduct more interest to the extent the entity could have deducted more interest


Business Interest Expense: Treatment by Pass-throughsEXAMPLE 1• Roy is a 50% partner in ABC Partnership• ABC Partnership has adjusted taxable income of $100,000 and business

interest expense of $20,000• ABC Partnership deducts $20,000 of business interest because the amount

does not exceed its business interest expense limitation of $30,000 ($100,000 x 30%)

• Since ABC Partnership could have deducted an additional $10,000, Roy is allocated $16,667 of excess taxable income [($10,000 / $30,000) x $100,000 x 50%]. This allows Roy to deduct an additional $5,000 of interest ($16,667 x 30%)


Business Interest Expense: Treatment by Pass-throughsEXCESS BUSINESS INTERSET EXPENSE• For S corporations, carryforward stays at corporate level• For partnerships, excess is allocated to each partner as non-separately

stated taxable income or loss


Business Interest Expense: Treatment by Pass-throughsEXCESS BUSINESS INTEREST EXPENSE FROM PARTNERSHIPS (NOT APPLICABLE TO S CORPS)

• Partners treat excess business interest as business interest in succeeding taxable year

• Allocated excess interest carried forward to a succeeding year by a partner is treated as paid or incurred by such partner in succeeding year only to extent the partner is allocated “excess taxable income” from such partnership in succeeding year

• If partner does have enough excess taxable income from the entity to offset excess business interest carried forward to that year, excess becomes interest not deemed “paid” by partner in that year. Therefore, excess business interest carried forward to succeeding tax years.

• Adjusted basis of partner’s interest in partnership is reduced in the year excess business interest is allocated to partner (but not below zero)

• Excess business income does not carryforward

• Upon disposition of applicable partnership interest, remaining excess business interest is added to partnership interest tax basis


Business Interest Expense: Treatment by Pass-throughsEXAMPLE 2

• Partnership P is owned 50/50 by XYZ Corporation and an individual

• P’s adjusted taxable income (before interest expense): $200

• P’s business interest expense: $60

• XYZ Corp has adjusted taxable income of zero (excludes interest expense)

• XYZ Corp’s business interest expense is $25



Step One: Calculate limitation and income at Partnership level

• P’s interest deduction limit is $200 x 30% = $60

• P’s taxable income is $200 - $60 = $140

• XYZ Corp and the individual each receive $70 of taxable business income


Business Interest Expense: Treatment by Pass-throughsEXAMPLE 2Step Two: Calculate limitation and income at XYZ Corp level

• Maximum interest deduction deducted at P level- No interest deductions limited- No excess business income - P’s income is disregarded for XYZ adjusted taxable income calculation

• XYZ’s interest deduction limit: $0 x 30%• XYZ’s $25 of business interest expense is limited• XYZ has a $25 interest expense carryover (carryover is indefinite)



• Partnership P is owned 50/50 by XYZ Corporation and an individual

• P’s adjusted taxable (before interest income): $200

• P’s business interest expense: $40

• XYZ Corp has net taxable income of zero (Excludes interest expense)

• XYZ Corp’s business interest expense: $25


Business Interest Expense: Treatment by Pass-throughsEXAMPLE 3Step One: Calculate limitation and income at Partnership level• P’s interest deduction limit: $200 x 30% = $60• P’s taxable income $200 - $40 = $160• Full income limit isn’t used Calculate excess taxable income allocated to XYZ

corporation:

x Adjusted taxable income

(60 - 40 + 0 - 0) / 60 x 200 = $66.67• XYZ Corporation and individual each receive an allocation of $80 of taxable income

and $33.33 of excess taxable income

(Int. deduction limit – Int. expense + Floor Plan Int. – Bus. Int. Income)Int. deduction limit


Business Interest Expense: Treatment by Pass-throughsEXAMPLE 3Step Two: Calculate limitation at XYZ Corp level• Distributive share of excess taxable income from P is added to the adjusted taxable

income of XYZ• XYZ’s deduction for business interest is limited to 30% of the sum of:

- Adjusted taxable income- Allocation of excess taxable income from P

• XYZ’s interest deduction limit: 30% x ($0 + $33.33) = $10 • XYZ Corporation’s $25 of interest expense is limited to $10• XYZ Corp has a $15 interest expense carryover (carryover is indefinite)


Other Changes Impacting Businesses:Meals & Entertainment Expenses

Rudy Thomas, Tax Partner

Meals & Entertainment Changes

Old Law New Law ImportantConsiderations

Planning Item

• 50% deduction for eligible meals & entertainment expenses

• 100% deduction for meals provided at employer-operated eating facility and meals provided for the convenience of employer

• No deductionallowed for activities considered to be entertainment, amusement, recreation

• Meal expenses limited to 50% for meals provided on employer premises

• No deduction allowed for operation of employer-operated eating facilities after 12/31/2025

• No deduction allowed for employee meals provided for the convenience of the employer after 12/31/2025

• Create separate general ledger account for non-deductible entertainment expenses


Deduction of Entertainment and Fringe Benefits: ExamplesExamples of items which are no longer deductible in any part:• Entertainment (i.e., tickets to sporting events)• Dues to any club formed for the principle purpose of entertainment –

may include pleasure, business, recreation, or social clubs• Transportation fringe benefits• Expenses incurred to provide transportation for employees’ commuting

purposes


Deduction of Entertainment: Dues• Dues are deductible if the taxpayer is engaged in a trade or business, the dues are

incurred in carrying on that trade or business, and the payment is an ordinary and necessary expense.

• Payments to the following organizations are deductible (unless the organization’s principal purpose is providing entertainment to members):

- Business leagues- Trade associations- Chambers of commerce- Boards of trade- Real estate boards- Profession organizations (e.g., bar and medical associations)- Civic or public service organizations (e.g., Kiwanis, Lions, Rotary and Civitan)


Other Changes Impacting Businesses:State ConformityRudy Thomas, Tax Partner

State Conformity: Types of ConformityFor most states, the IRC is the starting part for calculating state taxable income. For these states, IRC conformity can be broken into 3 categories:

• Fixed- The states conform to the IRC as of a certain date- Conformity for these states is generally NOT automatic- The state Legislature must affirmatively conform to any IRC changes subsequent to that

date• Rolling

- The states conform to the IRC as applicable for Federal tax purposes- Conformity for these states is generally automatic- The state Legislature must then affirmatively decouple from any IRC changes

• Selective- The states either conform or decouple from various code sections and/or public laws

that are passed- Conformity in these states can depend on whether an existing section of the IRC is

being amended or if a new section is being introduced.100Return to Table of Contents

State Conformity: Types of Conformity


State Conformity: Items to be Addressed by StatesSome of the items that will need to be addressed by states include:

• Bonus DepreciationWill states continue to decouple from bonus depreciation and will more consider doing so?

• Interest LimitationsWill the states follow the Federal interest limitations, even if the state decouples from bonus depreciation?

• NOL LimitationsFor states which require tracking state specific NOLs, will the new NOL limitations be applied?


State Conformity: When Will We Know• It will take time for the state impact of tax reform to become clear

- For the states with fixed and selective conformity, the Legislatures must meet and determine whether or not to conform

- For states with rolling conformity, the Legislatures still must meet and decide to decouple from specific provisions

• The current conformity for states will be unique for each particular state


Tax Reform:International Implications

Stani Fowler, Tax Senior Manager

U.S. in a Global Tax Context


Tax Competitiveness Rankings 2017Country Overall RankEstonia 1New Zealand 2Switzerland 3… …United Kingdom 14… …Germany 23… …Mexico 25… …Greece 29United States 30… …France 35


Worldwide Tax System Trends


International provisions

Main purpose is to introduce a territorial system of taxation• Includes introduction of participation exemption• Transition rules for deferred income• Strengthening of base erosion rules


• Participation exemption for dividends (“DRD”)

• Deemed repatriation of Post 1986 Earnings and Profits

• Base Erosion Anti-Abuse Tax (“BEAT”)

• Global Intangible Low Taxed Income (“GILTI”)

• Deduction for Foreign Derived Intangible Income (“FDII”)

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INTERNATIONAL TAX

• New IRC §245A • 100% DRD for foreign-source dividends received from 10% owned

foreign corporations• No credit for foreign withholding taxes on incoming dividends• DRD does not apply to individual shareholders or S-corporations

International: Participation Exemption System

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Tax Reform Law


• Tax is assessed on accumulated earnings and profits (E&P) at rates of:- 15.5% of E&P attributable to liquid assets (i.e., cash and cash equivalents)- 8% of E&P attributable to illiquid assets (i.e., all other assets)

• Tax can be paid over 8 years• Tax applies to “Specified Foreign Corporations” - CFC or foreign corporation

that has at least one domestic shareholder that is a US corporation.• Foreign tax credits can be applied, subject to a “haircut” for the reduction in

US tax rate

International: Deemed Repatriation

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Tax Reform Law


Tax Reform Law• Base erosion and anti-abuse tax (BEAT) – new IRC §59A

“An attempt to level the playing field between US-headquartered parent companies and foreign-headquartered parent companies.” -Unified Framework

• Acts as a minimum tax for corporations imposed on certain cross-border related-party payments made by large multi-nationals

• Applies to US corporations:- With average annual gross receipts > 500 million, and- Which have a “base erosion percentage” 3% or higher

• Base Erosion % equals Base Erosion Payments divided by Total Deductions

International: Base Erosion and Anti-Abuse Tax


International: Base Erosion and Anti-Abuse TaxDEFINITIONS• Base Erosion Payment is any payment to a foreign related

person after 2017 for which a deduction is allowable- Excludes amounts paid for costs of goods sold and eligible

services• Total Deductions for purposes of calculating the BEAT

percentage means total deductions allowable for the year, excluding NOLs, the participation exemption, the deduction allowed under new IRC §250 for foreign intangible income, and any amounts paid for costs of goods sold and eligible services


International: Base Erosion and Anti-Abuse TaxDEFINITIONS• Related person for purposes of applying the BEAT rules means

- Any foreign shareholder with direct, indirect, or constructive ownership of at least 25% (vote or value)

- Any person related to the corporation or 25% owner under IRC §§ 267(b) or 707(b)(1)

- Any person related for purposes of transfer pricing rules under IRC §482


International: Base Erosion and Anti-Abuse TaxCOMPUTATION• BEAT minimum tax amount is equal to excess of (a) over (b)

(a)10% x Modified Taxable Income(b)Pre-credit regular income tax liability reduced by: R&D credits 80% of applicable IRC §38 credits

• No FTCs or deductions

• In tax years beginning after 2025- The percentage applied to modified taxable income in (a) above is increased from 10% to

12.5%- R&D credits and applicable IRC §38 credits may no longer reduce the pre-credit regular

income tax liability in (b) above


Tax Reform Law• Global intangible low-tax income (GILTI) provisions under new IRC §951A require US

shareholders of a CFC to include currently in income its GILTI. Similar to current Subpart F regime

• GILTI generally means the excess (if any) of a US shareholder’s “net CFC tested income” over the shareholder’s “net deemed tangible income return” with respect to the CFC’s tangible assets for the year

• Net deemed tangible return equal to excess of 10% of qualified business asset investment over interest expense deducted in determining “tested income”

• GILTI is determined on an aggregate basis by taking into account the income and losses of each CFC with respect to which the shareholder is a US shareholder.

• IRC §951A requires US shareholders of CFCs to include their pro rata share of GILTI in current income, similar to other Subpart F inclusions

International: Global Intangible Low-Taxed Income (GILTI)


International: Global Intangible Low-Taxed Income (GILTI)• US shareholders that are C Corporations are allowed a

deduction of up to 50% of the GILTI inclusion amount – resulting in an ETR of 10.5%

• Non-corporate shareholders pay tax on GILTI at ordinary income rates with no deduction

• A foreign tax credit is available to corporate shareholders, limited to 80% of foreign taxes paid.


International: Global Intangible Low-Taxed Income (GILTI)EXAMPLE• A CFC that is a qualified foreign corporation earns $1,000,000 of

non-Subpart F income and pays $150,000 of foreign tax. The CFC has $500,000 of adjusted basis in its tangible personal property.

• The GILTI inclusion for the US shareholder is $800,000 ($850,000 of net CFC tested income less $50,000 of net deemed tangible income return).


International: Global Intangible Low-Taxed Income (GILTI)EXAMPLE

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GILTI Inclusion (plus §78 gross up) $800,000Less: 50% Deduction for GILTI (400,000

)Equals: US Taxable Income Inclusion $400,000US Tax on GILIT Inclusion at 20% $84,000Less: Credit for Foreign Taxes (84,000)Net US Tax Due $0

Implications for Corporate Shareholder


International: Global Intangible Low-Taxed Income (GILTI)EXAMPLE

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Implications for Individual ShareholderGILTI Inclusion (plus §78 gross up) $800,000No Deduction for GILTI (0)Equals: US Taxable Income Inclusion $800,000US Tax on GILIT Inclusion at 37% $296,000Less: Credit for Foreign Taxes (0)Net US Tax Due $296,000


Tax Reform Law• Foreign Derived Intangible Income (FDII) provisions under new IRC §250

imposes a tax on excess returns earned directly by a US corporation from foreign sales or services

• Provides for a deduction of up to 37.5% of a domestic corporations FDII for the year (resulting in an effective rate on FDII of 13.125%)

• The deduction decreases to 21.875% for years beginning after December 31, 2025 (resulting in an effective rate of 16.406%)

• FDII is only available to C corporations other than RICs or REITs• FDII will benefit corporations with low fixed asset values, such as

companies in services or technology sectors

International: Foreign-Derived Intangible Income (FDII) Deduction


International: Foreign-Derived Intangible Income (FDII) DeductionINCOME ELIGIBLE FOR FDII DEDUCTION• Income derived from

- Property sold, including licenses and leases, to any non-US person which is for foreign use, or

- Services provided to foreign persons or with respect to property located outside the US

• “Foreign use” means any use, consumption or disposition which is not in the US


International: Foreign-Derived Intangible Income (FDII) DeductionCOMPUTING THE DEDUCTION FOR FDII• FDII is NOT deductible, rather it is used to determine the ratio of FDII to

Gross income. This ratio is then applied to deemed intangible income• Deemed intangible income is equal to net income less the deemed

tangible income return• Deemed tangible income return is equal to 10% of qualified business

asset investments


International: Foreign-Derived Intangible Income (FDII) DeductionEXAMPLE 3

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US MANUFACTURING COMPANY US SERVICE COMPANYNet Income from Domestic Sales $700 Net Income from Domestic Sales $700Net Income from Foreign Sales 300 Net Income from Foreign Sales 300Total Net Income $1,000 Total Net Income $1,000

Tangible Property $5,000 Tangible Property -0-

Deemed Intangible Income $500 Deemed Intangible Income $1,000Equal to: $1,000 – ($5,000 x 10%) Equal to: $1,000 – ($0 x 10%)

Foreign Derived Intangible Income $150 Foreign Derived Intangible Income $300Equal to: $500 x ($300 / $1,000) Equal to: $1,000 x ($300 / $1,000)

FII Deduction $56 FII Deduction $113Equal to: $150 x 37.5% Equal to: $300 x 37.5%


Tax Reform: Impact on Pass-Through Entities

Robert Bradham, Tax Partner Blair Clawson, Tax Manager

Pass-through: Qualified Business Income Deduction

• For tax years beginning after December 31, 2017, allows an individual taxpayer (and a trust or estate) a deduction up to 20% based on an individual’s domestic qualified business income from a partnership, S Corporation, or sole proprietorship

• Assuming in highest 37% bracket with full deduction allowed, it produces an effective 29.6% Federal rate

• Set to expire at the end of 2025. Under the new legislation, the deduction is not available for tax years beginning on or after January 1, 2026.

• Increased reporting for pass-through entities to partners and shareholders

• This is the opposite of tax simplification…it can be a complex calculation & has areas of uncertainty



Items of consideration:

• What are “qualifying business activities”?

• What is “qualified business income” or “QBI”?

• Claiming the deduction (netting, overall TI, more limitations)

• Income limitation exception (AGI thresholds)

• Computations and complications


Pass-through: Qualified Business Income DeductionQUALIFYING BUSINESS ACTIVITIES• Qualified trades or businesses that meets the following criteria:

- Generally must be U.S. domestic trade or business

- Based on qualified business income (includes both passive and non-passive)

- Excludes trade or businesses of performing services as an employee

- Excludes specified service trade or businesses:

Fields of health, accounting, law, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services (excludes engineers and architecture)

Where the principal asset is the reputation or skill of the owners or employees

That involves the performance of services of investing and investment managing trading or dealing in securities, partnership interests, or commodities


Pass-through: Qualified Business Income DeductionQUALIFYING INCOME

• Qualified business income

• Qualified cooperative dividends

• Qualified REIT dividends (excludes REIT capital gains)

• Qualified publicly traded partnership income


Pass-through: Qualified Business Income DeductionCLAIMING THE DEDUCTION• Individuals, estates and trusts are eligible for the qualified business income deduction

• The deduction is calculated at the taxpayer level with information supplied by the qualified trade or business

• The deduction is claimed on the taxpayer’s tax return

• For individuals, deduction claimed after taxable income is computed

- Below the line, not a deduction for AGI; not an itemized deduction

• Deduction available to taxpayers that itemize deductions, as well as those that do not

• Deduction does not reduce self-employment income

• Same for AMT and Regular Tax


Pass-through: Qualified Business Income DeductionINCOME LIMITATION EXCEPTION FOR SPECIFIED SERVICE TRADES OR BUSINESSES

• Taxpayers with income from a specified service trade or business may qualify for 20% deduction if taxable income is less than $315,000 (MFJ) or $157,500 (all other filers)

• The 20% deduction is phased out as taxpayers’ taxable income increases from $315,000 to $415,000 (MFJ) and $157,500 to $207,500 (all other filers)


Pass-through: Qualified Business Income DeductionINCOME LIMITATION EXCEPTION

• If taxable income is less than $315,000 (MFJ) or $157,500 (all other taxpayers), the limitation related to W-2 wages / capital does not apply

• If taxable income is between $315,000 and $415,000 (MFJ) or $157,500 and $207,500 (all other taxpayers), the limitation related to W-2 wages / capital phases in


Pass-through: Qualified Business Income DeductionCALCULATING THE DEDUCTION

Equal to the lesser of (1) or (2):(1) Combined Qualified Business Income = (a) + (b) + (c)

(a) The lesser of (i) or (ii)(i) 20% of the business income of the qualified trade or business, or(ii) The W-2 Wage / Capital Limitation, which is the greater of (A) or (B):

(A) 50% of W-2 wages paid with respect to the qualified trade or business, or(B) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property

(b) 20% of the aggregate REIT dividends and qualified publicly traded partnership income(c) Lesser of (i) or (ii)

(i) 20% of qualified cooperative dividends, or(ii) Taxable income reduced by net capital gain

(2) 20% of taxable income less net capital gain


Pass-through: Qualified Business Income DeductionMULTIPLE QUALIFIED BUSINESSES

• Compute the 20% Deduction for each qualified trade or business (Step 1) and add

them together

• Then apply the overall limitation (Step 2)

- The sum of the deductions cannot exceed 20% of the excess of taxable income

over net capital gains


Pass-through: Qualified Business Income DeductionDEFINITIONS• W-2 wages are generally wages and deferred compensation reported to the Social

Security Administration• Taxpayers’ wages derived from the Qualified Trade or Business are not added back to

determine Qualified Business Income• For fiscal year partnerships and S corporations, W-2 wages are the calendar year

wages paid by the business during the calendar year ending during the taxable year- Example: A partnership with a 5/31/2018 fiscal year end would use W-2 wages paid

for the calendar year ending 12/31/2017 for purposes of applying the wage limitation


Pass-through: Qualified Business Income DeductionDEFINITION OF QUALIFIED PROPERTY• The acquisition cost (unadjusted basis) of tangible and real property (excluding land) • Held for use by the qualified trade or business at the close of the tax year• Used at any point during the tax year • Depreciable period for which has not ended before the close of the taxable year

- Depreciable period is the period beginning on date the property was first placed in service and ending on the later of: 10 years after such date, or The last day of the last full year in the applicable recovery period under section 168

(GDS recovery period) - Example: A calendar year partnership acquires equipment with a 5 year GDS recovery

period on 7/1/2015. The equipment is considered qualified property through the 2025 tax year


Pass-through: Qualified Business Income DeductionREAL ESTATE• Owners of real estate-related businesses may qualify for the new 20%

pass-through deduction• Will need additional guidance from IRS/Department of Treasury

EXAMPLE• Oscar owns an office building constructed in 2012 and pays no wages • Original cost basis and depreciable lives are as follows

Land $200,000Building $1,000,000/ 39 YearsFF&E $400,000/ 5 Years


Pass-through: Qualified Business Income DeductionEXAMPLE CONTINUED

• In 2018, his pass-through deduction is limited to 2.5% * $1,400,000 = $35,000

- Both the cost of the building and the equipment qualifies, because each asset was

owned for the longer of its depreciable life or 10 years as of 2018

• Now assume the building was constructed in 2005

- Only the building qualifies for the calculation because as of 2018, the FF&E is all

older than 10 years or it’s depreciable life has expired

- Deduction is limited to 2.5% * $1,000,000 = $25,000


Pass-through: Qualified Business Income DeductionRECAP: WHAT DO WE KNOW? • Taxable Income under $315K

- 20% Deduction not subject to wage or property limitations

- Applies to SSTB and Qualified Business Activities

• Taxable Income between $315K and $415K

- Wage and property limitations are phased-in*

- Applies to SSTB and Qualified Business Activities

• Taxable Income over $415K – Qualifying Business Activities

- Wage and property limitations fully phased-in*

• Taxable Income over $415K – SSTB

- No Deduction

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*Wage and property limitations may not apply in cases where calculations yield an amount exceeding 20% of your QBI*Deduction is always limited to 20% of Taxable Income less Net Capital Gain


Pass-through: Qualified Business Income DeductionWHAT DON’T WE KNOW?• Congress instructed the Secretary to issue regulations• Awaiting guidance on:

- Application of provision to tiered entities- Application of the rules in short tax years and in years of acquisition or disposition

of a major portion of a trade or business

- Anti-abuse rules for W-2s

- Determining unadjusted basis for like kind exchange or involuntary conversion property

- Examples and instruction regarding activities “where the principal asset is the reputation or skill of the owners or employees”


Qualified Business Income Deduction: Example 1FACTS• Taxpayer, Robert, owns an S corp that sells golf clubs and earns

$100,000 in wages and $150,000 in qualified business income • Spouse, Claire, works as an accountant and earns a salary • Robert and Claire’s joint taxable income is $300,000 and they file MFJ• Net Capital Gains equal $15,000 (with $0 REIT/cooperative dividends or

PTP income)


Qualified Business Income Deduction: Example 1DEDUCTION• Business income is not from an SSTB • Taxable income before the deduction falls below $315,000 threshold, so there

are no wage or capital limitations • Deduction is the lessor of:

1) 20% of Qualified Business Income 20% * $150,000 = $30,000

or 2) 20% of Taxable Income over Net Capital Gains

20% * (300,000-15,000) = 57,000

Total Deduction is $30,000143Return to Table of Contents

Qualified Business Income Deduction: Example 2FACTS• Taxpayer, Dog, owns a pass-through veterinary practice and earns

$200,000 in wages and $100,000 in business income• Spouse, Kat, sells pet clothing on Etsy; Kat’s qualified business income

totals $220,000• Kat’s share of allocable wages from her qualified business is $70,000 and

her share of the unadjusted basis of qualified property is $500,000• Dog and Kat’s joint taxable income is $520,000 and they file MFJ (with $0

capital gain/REIT/cooperative dividends/PTP income)


Qualified Business Income Deduction: Example 2DEDUCTION• Taxable income before the deduction exceeds $415,000 threshold; the

wage and capital limitation is fully phased in • Dog’s business income does not qualify since he operates a Specified

Service Trade or Business


Qualified Business Income Deduction: Example 2DEDUCTION CONTINUEDDeduction is the lesser of:

1) The lesser of (i) or (ii)

(i) 20% of qualified business income

20% * 220,000 = 44,000(ii) The W-2 Wage / Capital Limitation, which is the greater of (A) or (B):

(A) 50% of W-2 wages paid with respect to the qualified trade or business, or

50% * 70,000 = 35,000(B) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property

25% * 70,000 + 2.5% * 500,000 = 30,000

2) 20% of Taxable Income over Net Capital Gains

20% * (520,000-0) = 104,000

Total Deduction is $35,000


Qualified Business Income Deduction: Example 3

No Wages - Holds

Property With Wages With Wages

and Property Qualified Business Income 500,000 500,000 500,000Share of W-2 Wages 0 80,000 80,000Qualified Property 1,000,000 0 1,000,000Taxable Income on 1040 500,000 500,000 500,000Initial Deduction 100,000 100,000 100,00050% Wage Limitation 0 40,000 40,00025% Wage + 2.5% Property Limitation 25,000 20,000 45,000

Tentative Deduction 25,000 40,000 45,000

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PROPERTY AND WAGE LIMITATION COMPARISON


Qualified Business Income Deduction: Example 4

$315k $345K $415KQualified Business Income 300,000 300,000 300,000Share of W-2 Wages 80,000 80,000 80,000Qualified Property 1,000,000 1,000,000 1,000,000Initial Deduction 60,000 60,000 60,00050% Wage Limitation 40,000 40,000 40,00025% Wage + 2.5% Property Limitation 45,000 45,000 45,000Reduction in Initial Deduction 0 15,000 0Phase-In of Reduction (30%) 0 4,500 0

Tentative Deduction 60,000 55,500 45,000

PROPERTY AND WAGE LIMITATION: VARYING INCOME LEVELS


Pass-through: Qualified Business Income DeductionLOSSES & CARRYOVERS• If the total of all qualified trade or business amounts results in an net negative

amount for the tax year, the negative amount is carried forward and offsets the 20% deduction amount calculated in the following year

EXAMPLE• Dwight and Angela file MFJ and both have qualifying business activities

• Taxable income is less than $315,000 and they have zero capital gains

• In 2018, they have qualified business income/(loss) totaling ($50,000)

• In 2019, Dwight has qualifying business income from beet sales of $150,000 and Angela has a qualified business loss from her cat daycare of ($40,000)


Pass-through: Qualified Business Income DeductionDEDUCTION • No deduction is allowed in 2018• 2019 deduction is calculated as follows:

150

2019 Qualified Business Income 150,000 x 20% = 30,0002019 Qualified Business Loss (40,000) x 20% = (8,000)2018 QBI Loss Carryover (50,000) x 20% = (10,000)Total 2019 Deduction 12,000


Pass-through: Modified Loss Limitation Rules

• Excess Business Loss of a non-passive activity cannot be deducted and shall be carried forward as a net operating loss

• Note NOLs carryovers generated after December 31, 2017 cannot offset more than 80% of taxable income

• Excess Business Loss for the tax year is defined as the excess of (a) the taxpayer’s aggregate deduction attributable to trades or businesses, over (b) the sum of aggregate gross income or gain attributable to trades or businesses, plus (c) $500,000 for MFJ or $250,000 for other filers (indexed for inflation)

• For partnerships and S corporations, the “excess business loss limitation” applies at the partner/shareholder level

• This provision is applied after first applying the section 469 passive activity rules

• Bottom line – individual taxpayers cannot apply more than $500,000 of business losses against non-business income in a given year ($250,000 for single filers)



PLANNING OPPORTUNITIES

• Examine choice of entity

• Tax planning to fall below $315,000 if subject to limitations

• Revisit reasonable compensation

• Examine business systems as a whole for reallocation opportunities

• Potential grouping planning

• Consider filing separate

• Capitalization planning



• Taxable income < $315,000deduction MAY just be the lesser of 20% of QBI or 20% of taxable income less net capital gains

• Taxable income $315,000 – $415,000wage and capital limitations phased in

• Taxable income > $415,000no deduction for SSTBswage and capital limitation fully phased in for non-SSTBs

• Stay tuned! More guidance to come!

153

CONCLUSION


Entity Selection Considerations: S Corp vs. C Corp

Sarah Windham, Tax Partner

Entity Selection

• Tax reform brings significant individual and business tax modifications that may prompt taxpayers to reconsider entity structure

• There are many competing factors that should be carefully considered before making a hasty change to the choice of business entity from a tax perspective


Entity Selection: Overview

• Reduced corporate tax rate from a maximum of 35% to 21%

• Double taxation regime- Earnings taxed when earned at the

corporation level - Dividends taxed when distributed to

shareholders• Shareholders potentially subject to

additional 3.8% net investment income tax on distributions

• Certain deductions are available to corporations that are not available to individual taxpayers

- State and local tax deduction

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C Corporations Pass-Through Entities• Income taxed at individual tax rates which

vary based on individual income levels- Highest individual tax rate of 37%

• New qualified business income deduction available for certain qualifying businesses allowing a reduction of up to 20% of qualified business income

• Reduced individual tax rates and qualified business income deduction are both set to expire for tax years beginning after December 31, 2025


Eligible Terminated S Corporations

157

• Distributions from a terminated S-Corporation are treated as paid out from its AAA

• Any adjustments arising from changes in methods of accounting necessitated by the conversion are taken into account over a 4-year period

• During the post-termination period, distributions are paid from AAA, and from E&P in the post termination period

• During the post-termination period, distributions are paid from AAA

• Distributions from a terminated S-Corporation after the post-termination period are treated as paid from AAA and E&P on a ratable basis

• Any adjustments arising from changes in methods of accounting necessitated by the conversion are taken into account over a 6-year period



Entity Selection ConsiderationsEFFECTIVE TAX RATE: ASSUME HIGHEST INDIVIDUAL TAX BRACKET

158

C Corporations

Earnings 100

Corporate Tax Expense 21

Net Earnings Available for Distribution 79

Individual Tax Expense on Dividend 15.8

Net Investment Income Tax 3

Total Tax Expense 39.8

Pre-tax Earnings 100

Effective Tax Rate 39.8%

Pass-through Entities

Earnings 100

Entity-level Tax Expense 0

Net Earnings to Individual 100

Qualified Business Income Deduction (20)

Net Taxable Earnings 80

Individual Tax Expense on Earnings 29.6

Total Tax Expense 29.6

Pre-tax Earnings 100

Effective Tax Rate 29.6%


Example 1

• Current S-corporation• Estimated profit of $1million in 2018 with 5% growth• W-2 wages of $2.5 million with 8% growth • No distributions other than to pay taxes as a S-corp• Not a service business• Estimated value of company:

$10 million if stock sale$12 million as asset sale


Example 1


Example 2

• Current S-corporation• Estimated profit of $1million in 2018 with 5% growth• W-2 wages of $2.5 million with 8% growth • Distributions of 80% of profit annually• Service business• Estimated value of company:

$10 million if stock sale$12 million as asset sale


Example 2


Entity Selection: Other Key Considerations• Limitations on qualified business income deduction

• Certain business activities are ineligible for 20% deduction (specified service trades or businesses)

• Wage and capital limitations may reduce amount of deduction allowable

• Income levels and preferential tax rates on dividends

• Liquidity Needs- Accumulated earnings tax assessed on C corporations at 20% of retained

earnings deemed to exceed the corporation’s ordinary business needs


Entity Selection: Other Key Considerations• Exit strategy

- Buyers are incentivized to seek out asset sales

- Double taxation on sale of assets at entity level and shareholder level

- Need to leave enough cash in C corporation to pay tax upon eventual sale of assets

• Reduced individual and qualified business income deduction set to expire for tax years beginning after December 31, 2025• Reduction to C corporation tax rate is permanent


Tax Reform: Impact to IndividualsCristen Jones, Tax Manager Scott Russell, Tax Manager

INDIVIDUAL TAX REFORM CONSEQUENCES

• Individual tax rates• Tax rate on capital gains and dividends• Alternative minimum tax (AMT)• Affordable Care Act• Standard deduction• Personal exemptions• Child Tax credit and qualifying expenses• Itemized deductions• Other provisions

174

Individual Tax Rates• Decrease of the top rate from 39.6% to 37%

• Tax brackets indexed for inflation to minimize “bracket creep”

- New method of indexing for inflation – based on chained CPI

• Tax rates are based upon taxable income

• Significant changes to taxable income computation

• Simplification of “kiddie tax” calculation


Individual Tax Rates: Married Filing Joint

Tax Rate If taxable income is:10% $0 - $18,65015% $18,651 - $75,90025% $75,901 - $153,10028% $153,101 - $233,35033% $233,351 - $416,70035% $416,701 - $470,700

39.6% $470,701 or more

Tax Rate

If taxable income is:

10% $0 - $19,05012% $19,051 - $77,40022% $77,401 - $165,00024% $165,001 - $315,00032% $315,001 - $400,00035% $400,001 - $600,00037% $600,001 or more

176

2017 Tax Rates Tax Reform Rates


Individual Tax Rates: Single

Tax Rate If taxable income is:10% $0 - $9,32515% $9,326 - $37,95025% $37,951 - $91,90028% $91,901 - $191,65033% $191,651 - $416,70035% $416,701 - $418,400

39.6% $418,401 or more

Tax Rate

If taxable income is:

10% $0 - $9,52512% $9,526 - $38,70022% $38,701 - $82,50024% $82,501 - $157,50032% $157,501 - $200,00035% $200,001 - $500,00037% $500,001 or more

177

2017 Tax Rates Tax Reform Rates


Tax Rate on Capital Gains and Dividends• Current tax law and rates remain in place

• Net capital gains taxed at a maximum of 20%

• Qualified dividends taxed at a maximum of 20%

• Gains from collectibles and unrecaptured depreciation subject to higher rates


Alternative Minimum Tax (AMT)

• AMT exemption amount for MFJ taxpayers is $84,500

• Phase out threshold begins at $160,900

• AMT exemption amount for MFJ taxpayers is $109,400 ($70,300 for single)

• Phase out threshold begins at $1,000,000 ($500,000 for single)

Note: certain items disallowed or limited under the 2017 Tax Act negatively impacted AMT prior to 2018 such as SALT, miscellaneous deductions, etc.

179



Affordable Care Act• 3.8% net investment income tax remains in place

• 0.9% additional Medicare tax on earned income above $250,000 for MFJ taxpayer’s remains in place

• Excise tax imposed on individuals who do not obtain minimum essential coverage will be reduced to zero starting in 2019- Note: No other ACA provisions are addressed in the new law. AS such,

excise tax on corporations that do not provide minimum essential coverage was not reduced to zero.


Standard Deduction

Filing Status AmountSingle $6,350

Married filing separate $6,350Head of household $9,350Married filing jointly $12,700

Filing Status AmountSingle $12,000

Married filing separate $12,000Head of household $18,000Married filing jointly $24,000

181

• The increased standard deduction for taxpayers that are blind or 65 or older is retained

• Taxpayers that are blind or 65 or older are eligible for an increased standard deduction. The amount of the increase is dependent on the taxpayers’ filing status and age of both spouses if married



Personal Exemptions

• Personal exemption for 2017 is $4,050 for single, spouse and each dependent, subject to phase-out

• Tax reform law suspends personal exemptions for single, spouse and each dependent starting in 2018

• Increase in standard deduction intended to compensate for repealing many itemized deductions and the personal exemption

182



Child Tax and Qualifying Dependent Credit

• $1,000 tax credit per qualifying child

• Credit phase-out at $110,000 of AGI for MFJ

• $2,000 tax credit per qualifying child

• Credit phase-out at $400,000 of AGI for MFJ

• $500 non-refundable credit for qualifying dependents other than qualifying child

• $1,400 of the credit is refundable, subject to phase-outs

183



Itemized Deductions: Medical Expenses

• Medical deduction limited to qualified medical expenses in excess of 10% of adjusted gross income

• Medical deduction limited to excess of 7.5% of AGI for tax years 2017 and 2018.

• Medical deduction limited to excess of 10% of AGI for tax years after 2018

• Deductions are the same for regular tax and AMT

184



Itemized Deductions: State and Local Tax (SALT)

• Deduction for state income taxes

• Deduction for real estate taxes

• Deduction for personal property tax

• Deduction for other qualified taxes

• AMT preference

• Same taxes allowed for deduction

• Deduction not to exceed $10,000

• Could be significant change for some and insignificant for others

• AMT preference

185



Itemized Deductions: Home Mortgage Interest

• Qualified residential interest

• Qualified mortgage indebtedness = “acquisition indebtedness”

• Can deduct on 1st and 2nd

qualifying home

• Qualified mortgage indebtedness not to exceed $1 million

• First three bullets apply

• Qualified mortgage indebtedness not to exceed $750,000

• Debt incurred before December 16, 2017 grandfathered

• Grandfathered debt cannot exceed $1 million

• Grandfathered debt can be refinanced, but cannot exceed amount of debt refinanced

186



Itemized Deductions: Home Equity Debt

• Home equity loan interest deductible

• Qualified home equity indebtedness not to exceed $100,000

• No tracing rules on proceeds of loan

• Home equity loan interest is not deductible

• No grandfather provision

187



Itemized Deductions: Charitable Contributions

• Cash and non-cash contributions of non-appreciated property limited to 50% of AGI

• Appreciated property limited to 30% of AGI

• Contributions can be made to public charities and certain private foundations

• Cash contributions are subject to 60% of adjusted gross income

• Non-cash contributions remain limited to 50% AGI

• Contributions to colleges in exchange for seating rights to athletic events are not deductible

188



Itemized Deductions: Personal Casualty and Theft Losses

• Deduction may be claimed for any loss sustained during the tax year

• Losses must exceed amounts compensated by insurance

• Subject to certain limitations• 2017 losses incurred in a

federally declared disaster zone maybe taken on the 2016 return (allows earlier tax proceeds)

• Limits losses to only those incurred in a federally declared disaster zone

189



Itemized Deductions: Miscellaneous Itemized Deductions

• Individuals may claim itemized deductions for certain miscellaneous deductions subject to 2% of adjusted gross income

• Investment fees, safe deposit box rentals, tax preparation fees, etc.

• Unreimbursed employee business expenses

• Suspends all miscellaneous deductions that are subject to the 2% floor

190



Itemized Deductions: The “Pease” Limitation

• Total amount of itemized deductions is reduced by 3% when adjusted gross income exceeds certain thresholds

- Does not include medical expenses

- Investment interest expense

- Casualty theft- Gambling losses

• Suspends the overall limitation on itemized deductions

191



Individual Tax Impact – ExampleFACTS• Married filing joint taxpayer• 3 dependent children • AGI: $400,000• State income tax paid: $25,000• Personal property tax paid: $5,000• Mortgage interest paid: $20,000• Outstanding mortgage debt on primary home: $1,000,000

(assume not a grandfathered mortgage)


Individual Tax Impact – Example

193

Pre-Tax Reform Post Tax Reform Notes

AGI $400,000 $400,000

Personal Exemptions @ $4,050 each (2 adults; 3 children) (20,250) - Repealed by H.R. 1

State Income Taxes Paid (25,000) (10,000) Limited to $10,000 total for all state and local income and property taxes

Personal Property Tax Paid (5,000) - See above

Mortgage Interest Paid (20,000) (15,000)Deductible up to $750,000 of indebtedness ($750,000 / $1,000,000 = 75% x $20,000 interest paid)

Taxable Income $329,750 $375,000

Tax Liability 84,034 83,379Child Tax Credit ($1,000 per pre-reform; $2,000 per post-reform) - (6,000) Fully phased-out @: $130,000 MAGI pre-reform;

$420,000 MAGI post-reform

Net Tax Liability $84,034 $77,379

Effective Tax Rate 21.0% 19.3%


Qualified Moving Expense Reimbursement

• Qualified moving expense reimbursements are excludable from an employee’s gross income and from the employee’s wages for employment tax purposes

• Reimbursement amounts include expenses that would have been deductible as moving expenses if directly paid or incurred by the employee

194

2017 Tax Law Tax Reform Law• Suspends the exclusion from

gross income and wages for qualified moving expense reimbursements

• Exclusion is preserved for member of the U.S. Armed Forces and their family


Qualified Moving Expense

• Individuals can claim an above the line deduction for allowable moving expenses paid or incurred

• Criteria included starting a new job at a new principal place of business

• Specified distance and employment status requirements met

195

2017 Tax Law Tax Reform Law• Suspends the deduction for

moving expenses• Certain provisions are

preserved for member of the U.S. Armed Forces and their family


Alimony Payments

• Alimony and separate maintenance payments are deductible by the payor and includible in income by the payee

196

2017 Tax Law Tax Reform Law• Alimony and separate

maintenance payments are not deductible by the payor and are not includible in income by the payee

• Effective date of this provision is for any agreement executed after December 31, 2018

• Also applies to agreements executed before December 31, 2018 and modified after that date as a result of the new law


Individual Provisions Set to Expire

197

Key Provision Sunset Date

Changes to individual income tax rates December 31, 2025

Changes to capital gain and qualified dividends tax rates December 31, 2025

Increased standard deduction December 31, 2025

Suspension of personal exemptions December 31, 2025

Increased child tax credit December 31, 2025

Suspension of “Pease” limitation on overall itemized deductions December 31, 2025

Suspension of 2% miscellaneous itemized deductions December 31, 2025

Limitation on home mortgage interest for indebtedness incurred after December 15, 2017 December 31, 2025

Itemized deduction limitation on state and local taxes December 31, 2025

Increased limitation for cash contributions December 31, 2025

Decrease in medical expense deduction December 31, 2018

Increase to AMT exemption and exemption phase-out amounts December 31, 2025


Tax Reform: Charitable Planningand Exempt Organizations

Donor Related Provisions• The adjusted gross income limitation for cash charitable contributions has been

increased from 50% to 60% for cash contributions to public charities

• Planning Points:

- Donors should be conscious that the increased standard deductions may impact whether they will itemize on the 1040 and therefore affect the impact that charitable giving has on their tax liability

- Donors who are on the “edge” of being able to itemize may want to consider “bunching” their contributions from multiple years and make the actual distribution in the year that it is helpful to their tax situation

- Donors who are able to itemize should determine which type of giving vehicle offers the best tax impact based on AGI limitations.


Donor Related ProvisionsTHE GIVING VEHICLE


Exempt Organization ProvisionsCOLLEGE ATHLETIC EVENT SEATING RIGHTS• Effective for tax years beginning after 12/31/2017 a charitable deduction

is no longer allowed for contributions made to a college to obtain the right to purchase tickets to an athletic event.


Donor Related ProvisionsThe modifications in rules relating to charitable contributions to impact exempt organizations• With the increase in the standard deductions, fewer individuals

will be able to itemize on their tax returns leaving less financial incentive to make contributions

• Exempt Organizations likely to feel a direct impact in resources available to accomplish charitable activities


ABLE Accounts

• Overall limit on contributions is $14,000

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2017 Tax Law Tax Reform Law• Same overall limit on contributions of

$14,000 (indexed $15,000 for 2018)• Once limit is reached designated

beneficiary may contribute an additional amount limited to the lesser of:-The Federal poverty level line for a one-person household ($12,060 for 2018), or

-The individual’s compensation for the year

• Permitted to roll-over beneficiary 529 plan into ABLE account or 529 plan of a family member (limitations still apply)


529 Plans

• Earnings from 529 plans are not taxable for federal purposes

• Distributions not taxable if used for qualified higher education expenses such as tuition, room and board, fees, books, supplies and equipment required for enrollment

204

2017 Tax Law Tax Reform Law• Qualified higher education

expense is expanded to include certain expenses and tuition at an elementary or secondary public, private or religious school

• Tax-free distribution for tuition, at an elementary or secondary public private or religious school is limited to $10,000 per year per student


Estate, Gift and Generation-Skipping Tax

• Taxes are imposed on certain gifts, certain transfers at death, and generation-skipping transfers.

• Gifts / Transfers at Death- Basic lifetime exclusion amount of

$5,000,000 per individual (indexed for inflation after base year 2010; scheduled to be $5,600,000 in 2018)

- Gift transfers and transfers at death are combined for purposes of applying the basic exclusion

• Generation-Skipping Transfers- Exemption amount is equal to gift tax

exclusion amount

• Basic lifetime exclusion amount increased to $10,000,000 per individual (indexed for inflation after base year 2016; expected to be around $11,200,000 in 2018)

- Increase applies to Generation-Skipping Transfers exemption amount

• Applies to estates of decedents dying and gifts made after December 31, 2017 and before January 1, 2026.

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Exempt Organization ProvisionsEXCISE TAX ON EXECUTIVE COMPENSATION• For tax years beginning after 12/31/2017 a TE Organization is

subject to a 21% excess tax on the excess compensation paid over 1 million on the top 5 highest paid employees (there is an exclusion for compensation paid in remuneration for medical services by a licensed medical professionals).


Exempt Organization ProvisionsEXCISE TAX ON COLLEGES & UNIVERSITIES• For tax years beginning after 12/31/2017 there will be a 1.4%

excise tax on the net investment income of certain colleges and universities. This applies to colleges / universities with at least 500 students (50% of which are located in the US) and with assets (other than those used directly in carrying out the institutions exempt purpose) that exceed $500,000 per student. The number of students is based on the daily average number of full-time equivalent students.


Taxable Income Provisions• UBI Separately Computed for Each Trade or Business: For

tax years beginning after 12/31/2017, organizations must be calculate UBI tax liability for each trade or business separately. Losses from one trade or business cannot be used to offset income from another trade or business.

• Net Operating Losses (NOLs): NOLs generated in tax periods beginning after 12/31/2017 must be tracked separately. NOLs cannot be carried back but can be carried forward indefinitely.

• NOL Deduction limited to 80% of taxable income• International provision related to transition tax


Tax Reform Assessment and Implementation Services

Kip Hooker, Tax Partner

Assessment Tool Deliverable


Save the Date! Nov. 29th

DHG’s 6th Annual Charleston Executive Briefing

Legal Disclaimer:The information in this presentation is based upon the internal revenue code and other relevant legalauthority as of a specific point in time. These authorities are subject to change or modification retroactivelyand/or prospectively and such changes may affect the validity or correctness of this information.Additionally, the information contained within the presentation may be tailored to a specific audience andtherefore may not be applicable to all taxpayers or all situations. This presentation does not constitute taxadvice by DHG.

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