The Tax Cuts and Jobs Act Impact on C Corps, S Corps and Individuals

Transcription

1 The Tax Cuts and Jobs Act Impact on C Corps, S Corps and Individuals Charles J. Garrison, CPA Joseph M. Press, CPA Community Bankers Association of Oklahoma 2018 Annual Convention September 13, 2018

2 Corporation and S-Corporation Tax Changes Tax Rates Deductions and Pay-Fors Miscellaneous Qualified Business Income (QBI) Deduction

3 Tax Rates % Taxable Income <$10MM 21% 35% Taxable Income >$10MM 21% Also applies to Deferred Tax Assets and Liabilities Tax rates for other than 12/31 year end 3

4 Deductions the good news Depreciation $2.0MM Qualified assets placed in service $2.5MM $500M Allowable 179 depreciation $1.0MM Allowable 179 depreciation expense is reduced by the amount of assets purchased over the limit of $2.5MM. Expensing of real property also has been expanded. 100 bonus depreciation now available for qualified property placed in service after September 27, 2017 and before

5 Deductions the good news Vehicle (Luxury Auto) Depreciation $1,475 First year expensing $5,760 $2,560 First year total depreciation $10,000 $4,100 Second year total depreciation $16,000 Pickups and large SUVs are still not subject to the luxury auto limits as long as the GVW exceeds 6,000 lbs. 5

6 Deductions the good news Cash Basis of Accounting 2017 Average Gross 2018 $5.0MM Receipts Limitation $25.0MM Allows for indefinite deferral of income tax on excess of receivables over payables. Gross receipts still not limited for S Corporations. IRS to provide automatic consent. 6

7 Deductions the good news Cash Basis of Accounting Interest Receivable $800,000 Prepaid Expenses 255,000 Interest Payable (125,000) Accrued Expense excluding taxes (165,000) Net deferral of expense $765,000 7

8 Deductions the bad news Meals & Entertainment, Employee Expenses Changes % Tickets to events - 50% Business entertainment (Golf) - 80% Contributions to colleges (seating) - 100% Employee transportation/parking - 100% Employee moving expenses - 100% Employer provided meals 50% 8

9 Deductions the bad news Meals & Entertainment, Employee Expenses No Change Employee travel meals 50% Other travel expenses 50% Business meals 50% Meals during entertainment 50% Employee entertainment (Christmas party) 100% Employee service awards 100% Business gifts 100% Association dues 100%* * Subject to lobbying exclusion 9

10 Deductions the bad news Dividend Received Deduction % Dividend Received Deduction >20% owned 65% 70% Dividend Received Deduction <20% owned 50% 10

11 Deductions the bad news Net Operating Losses (NOL) % Offset of current year 80% income with NOL 2 yrs. Carryback to NOL to None 20 yrs. prior years income Carryforward to subsequent years income Indefinitely 11

12 Miscellaneous Items Alternative Minimum Tax repealed under the TCJA AMT credit carryforwards can still be used AMT for other than corporations NOT repealed State and Local Tax (SALT) deduction not limited for other than individuals 12

13 Qualified Business Income (QBI) Deduction Effort to equalize rates between C corporations and pass-through entities Provides the potential to deduct up to 20 percent of QBI from S corporations and trusts as well as other entities Possibly the most complex part of the legislation at both the pass-through and individual level 13

14 Pass-Through Business Deduction 14

15 Pass-Through Business Deduction Explanations Non-corporate Taxpayer: S Corp, Partnership, Trust, Sole Prop., etc. Domestic Income: Earned in the U.S. or Puerto Rico QBI: Income from qualified trade or business except excluded items Taxable income threshold: $157,000 single, $315,000 MFJ Specified Service Trade or Business: not QBI Taxable income full phase-out: $207,000 single, $415,000 MFJ Reduced Deduction: Wage limitation and non-qbi income will determine the amount of the deduction, if any Deduction limited to 20% of QBI 15

16 Specified Service Trade or Business (SSTB) Accounting, Law, Consulting, Actuarial Science Health Care, Performing Arts, Athletics Investment Management, Brokerage, Securities Dealer Financial Services DOES NOT INCLUDE BANKING Investment Management The performance of services that consist of investing and investment management would include a trade or business that receives either a commission, a flat fee, or an investment management fee calculated as a percentage of assets under management. 16

17 De Minimis Rule If gross receipts are <$25MM and SSBT income is <10% of gross receipts If gross receipts are >$25MM and SSBT income is <5% of gross receipts 17

18 Reporting While the Company must report necessary items to the shareholder/partner, the calculation is made on the individual level Items that will likely need to be reported: Interest, dividends, short and long-term capital gain/loss Investment income W-2 wages Qualified property Will require substantial revision to the Form K-1 18

19 Individual Tax Impact Tax Rates Standard Deduction and Exemptions State and Local Tax (SALT) Deduction Mortgage Interest Deduction Itemized Deductions Alternative Minimum Tax 19

20 Then- 20

21 Now The difference between death and taxes is death doesn t get worse every time Congress meets. Will Rogers 21

22 Most Provisions Impacting Individuals are Temporary E Effective for years after December 31, 2017 Expiring for tax years beginning after December 31,

23 Tax Rates 23

24 Tax Rates 24

25 Standard Deduction and Exemptions The Tax Policy Center estimates the increase in the standard deduction coupled with the elimination of the personal exemption deduction will shrink the number of households itemizing their deductions from about 37 million in 2017 to about 16 million in This one change simplifies tax filing for millions. 25

26 Simplified Form

27 State and Local Taxes (SALT) Aggregate deduction now limited to $10,000 per year. Includes income/sales taxes, and real and personal property taxes. Does not include taxes incurred in a taxpayer s trade or business. 27

28 State and Local Taxes (SALT) States with high taxes are pushing back: High 4 states have sued IRS/US Treasury Some states allowed collection of 2018 property and income taxes in 2017 States are legislating schemes to convert taxes into deductible charitable contributions. 28

29 Prospects on Workarounds: 29

30 Mortgage Interest Deduction Prior Law Prior Law-Qualified residence interest is deductible. Qualified residence interest is acquisition indebtedness with respect to any qualified residence or home equity indebtedness. Qualified residence is the principal residence of the taxpayer and one other residence. Aggregate limit for married couples of $1,000,000 plus $100,000 of home equity indebtedness. 30

31 Mortgage Interest Deduction Prior Law Continued Home equity indebtedness is any indebtedness (other than acquisition indebtedness) secured by a qualified residence. Acquisition indebtedness means it was incurred in acquiring, constructing or substantially improving a qualified residence Acquisition indebtedness can include refinanced debt up to the debt prior to refinancing. 31

32 Mortgage Interest Deduction New Law New limit of $750,000 of acquisition indebtedness. No deduction if not acquisition indebtedness. Acquisition indebtedness incurred before December 15, 2017 continues to enjoy the old $1,000,000 limit. 32

33 Other Comments on Itemized Deductions Medical and Dental Expenses No change - 7.5% AGI threshold through 2018, then 10%. Contributions New, higher limitation on aggregate deductible donations, now 60% AGI vs old 50% AGI. Eliminate charitable deduction for payments made in exchange for college athletic event seating rights. Personal Casualty and Theft Losses Now only deductible if the loss is attributable to a disaster declared by the President. 33

34 Other Comments on Itemized Deductions All Miscellaneous Itemized Deductions Subject to the Two-Percent AGI Floor are repealed. Non-exhaustive list includes: Investment fees Union Dues Tax Preparation Fees Job Education Dues to Professional Societies Home office expense 34

35 Alternative Minimum Tax Alternative Minimum Tax (AMT) first passed in 1969 in response to study that showed 155 uber-wealthy taxpayers filed returns that showed a $0 tax liability. Because the AMT calculation was not indexed for inflation and because of changes in the tax code since then (mainly lower regular tax rates), now millions of taxpayers are paying AMT. 35

36 Alternative Minimum Tax Bradford Tax Institute 36

37 Alternative Minimum Tax 37

38 Alternative Minimum Tax In 2017, 28,000 Oklahoma taxpayers paid $137,000,000 in AMT. Nationally, 4,464,000 taxpayers paid $31,014,000,000 in AMT. 38

39 Alternative Minimum Tax The Tax Cuts and Jobs Act dramatically increased the AMT Exemption and Exemption Phaseout Thresholds. The Tax Policy Center estimates these changes will decrease the number of taxpayers paying AMT by 96% in Like so many other of the Act s tax provisions for individuals, this will sunset after

40 Thank You CBAO! Questions? 40

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