2017 Tax Reform What you need to Know

Transcription

1 Oil & Natural Gas Accounting & Tax Tax Reform What you need to Know November 8, 2018 J. Marlin Witt, CPA, CFP, CGMA What Makes Us Different, Makes You Better

2 Overview of Reform Product of budget reconciliation process Work around Senate rules majority vs 60% Deficit limits Impact on future technical corrections Passed Congress December 20,

3 Overview of Reform All items included here are preliminary reflections only rely on future authoritative guidance Most items are temporary attempted to indicate those provisions that are permanent 3

4 Overview of Reform Initial thoughts Changed more than simplified - postcard? For most taxpayers modest actual effect Higher income and non-service business owners seem to benefit more Gives with one hand and takes with other Most provisions sunset within 10 years 4

5 Provisions that didn t make the bill Not included in the bill FIFO method required for basis on sales Repeal of student loan interest deduction Repeal of itemized deduction for medical expenses 5

6 Estate and Gift tax provisions Estate, Gift, and GST exemption increases from $5 million to $10 million (indexed for inflation so roughly $11.2 million) 6

7 Corporate tax provisions 21% maximum tax rate Repeal corporate AMT Current AMT credits can use 50% of credits each year until 2020 and the remaining in 2021 Dividends received deductions Deduction lowered from 70% to 50% 20% owned corps lowered from 80% to 65% 7

8 Expensing provisions 100% Expensing Bonus Depreciation increased 50% to 100% Effective September 27, 2017 New or Used Can elect to use 50% for first year after Sept 27,

9 Expensing provisions Depreciation provisions Luxury Auto Limits increased Computer and peripheral equipment not listed property Prospective for property placed in service after 12/31/2017 9

10 Expensing provisions Section 179 expanded $500k to $1 million for qualified property Phase-out begins $2.5 million Qualified property includes roofs, heating, and property protection 10

11 Expensing provisions Interest Limitations Trade or business interest limited 30% of adjusted taxable income First four years ATI adds back Depreciation, Amortization, and Depletion. Afterwards no addbacks Excluded from limitations Small business - $25 million gross receipts Performing services as employee Real property trade or business 11

12 Expensing provisions Net Operating Losses NOL deduction limited to 80% of taxable income NO carryback Carryforward indefinitely Farming trade or business and Property and Casualty companies retain 2 year CB 12

13 Expensing provisions Like Kind Exchange Not available except for real property Transition - If property is disposed of or received in 2017 can still be completed in 2018 as LKE Research and Development Amortized over a five year period R&D outside the US over 15 years Specifically includes software development 13

14 Expensing provisions Section 199 Domestic Production Activity Deduction Repealed for 2018 forward Real property cost recovery Retains lives: 39 years 27.5 years 15 years Nonresidential Residential Qualified Improvement property 14

15 Expensing provisions Eliminates employer deductions for: Entertainment activities and membership dues Transportation or commuting expenses of employees Meals and beverages would continue to be deductible at 50% Meals and beverages offered for convenience of the employer would be limited to 50% through

16 Expensing provisions 16

17 Credit provisions Deduction for unused business credits will be retained FMLA Credit Employers that pay wages to employees on FML General business credit equal to 12.5 of these wages. Must allow at least 2 weeks Must provide to full time and part time Work Opportunity Tax Credit retained 17

18 International provisions Many provisions relate to international Look for further guidance down the road 18

19 Pass-through income 20% deduction on certain pass-through income Qualified Business Income From Partnership, S corporation, or sole proprietorship Can reduce effective rate of tax from 37% to 29.5% Allowed as adjustment before Taxable income Not adjustment from Gross Income 19

20 Pass-through income QBI does not include: reasonable compensation from an S Corp amounts allocated to partners acting other than capacity of partner as a partner for services or guaranteed payments Losses from QB are carried forward to be treated as loss from QB in following year 20

21 Pass-through income Limitations based on wages and capital No limits for taxable income < $315k/157.5k 50% of wages (employer paid, not received by taxpayer) Or 25% of wages of unadjusted basis of all qualified property (depreciable tangible property) 21

22 Pass-through income Special limitations for service businesses Deduction not available to specified service businesses Uses modified IRC 1202 definition Fields of health, law, accounting, actuarial sciences, performing arts, consulting, athletics, financial services, brokerage services, investment management, trading, dealing in securities, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its owners or employees. 22

23 Pass-through income Special limitations for service businesses Deduction not available to specified service businesses Available to taxpayers below $207,500/$415,000 TI Phased out between $157,500/$315,000 23

24 Pass-through income Taxable Income Single MFJ Limits Apply No service trade or business 50% of W-2 Wages or 25% Wages + 2.5% of qualified property 415,000 Phased out limits No Service T or B limit 315, ,500 Phased out limits No Service T or B limit 157,500 No W-2/Qualified Property limits No Service T or B limit 0 24

25 Pass-through income Repeal of partnership technical termination caused by sale or exchange of 50% or more interest in capital and profits of a partnership 25

26 Pass-through income Loss limitation rules applicable to individuals Excess business losses from other than C corporation would not be allowed but would be carried forward Excess business losses aggregate losses from businesses over $250k/$500k Applied at the partner level 26

27 Pass-through income Mandatory basis adjustment for sales of partnership interest Retains provision for $250k built in loss trigger Adds $250k trigger of allocated loss upon a hypothetical taxable disposition Partner loss limitation to include charitable contributions and foreign taxes 27

28 Pass-through income State and local taxes deduction retained for entity level taxes Carried Interest Holding period on expanded from 1 to 3 years for LTCG treatment 28

29 Insurance provisions Seek Additional Resources for Coverage of Provisions Related to: Financial Services Life Insurance Businesses Property Casualty Insurance Businesses 29

30 Retirement planning Repeal of Roth recharacterization Not available after 12/31/2017 Extended rollover period for plan loan offsets From 60 days Now due date of return including extensions for the year the offset occurred. 30

31 Energy Oil and Gas tax incentives 199 repealed Following retained 45I credit Intangible drilling costs deduction Percentage depletion 31

32 Exempt organizations UBIT computed separately by line of business Does not apply to losses carried forward before 12/31/2017 Excise tax on executive comp on income over $1 million Clarifications and tax increase to 21% Elimination of deduction for college event seating rights Charitable deduction AGI limit increased to 60% 32

33 Accounting Methods Requirement for accrual basis taxpayers to recognize income subject to the all events test no later than taxable year in which the income is taken into account of the taxpayers financial statements. Not intended to accelerate the realization, only recognition (not income from securities marked to market on financial statements) 33

34 Accounting Methods Would apply this rule in lieu of the OID rules and overturns Capital One case on items such as latepayment fees. Also doesn t override special methods of accounting such as: Installment Sales Long term contracts Codifies Rev Proc to allow deferral of income from certain advance payments 34

35 Accounting Methods Cash Basis Expanded to allow for businesses with $25 million of Gross Receipts up from $5 million No requirement to meet limits in all prior years Available even if maintain inventories Exempt from 263A UNICAP rules 35

36 Individual Provisions State and local taxes repealed Except $10,000 of State sales or income taxes and real estate property taxes allowed ACA shared responsibility payment repealed beginning in

37 Individual Provisions Rates reduced slightly Old rates 0,15,25,28,33,35,39.6% New rates 0,10,15,22,25,32,35,37% Capital gains and dividends rates remain same 0, 15, 20% 37

38 Individual Provisions Standard Deductions of $12k/$24k Personal Exemptions repealed Pease limitation (3% haircut) repealed Indexing method changed to produce slower growth in deductions 38

39 Individual Provisions AMT retained Exemption increased $84,500 to $109,400 Joint $54,300 to $70,300 Single Phase outs higher at $1 million and $500k 39

40 Estate and Gift tax provisions Estate, Gift, and GST exemption increases from $5 million to $10 million (indexed for inflation so roughly $11.2 million 40

41 Child Tax Credit Increased Child Tax Credit from $1,000 to $2,000 Phase outs increased to 200k/400k Certain self created property (patents, inventions, model or design) would no longer be capital and will generate ordinary income 41

42 Itemized Deductions Home mortgage deduction limited to $750k of indebtedness Second home still qualifies No deduction relate to home equity lines of credit State and local taxes - $10k limit Charitable deductions 60% AGI limit 42

43 Itemized Deductions All itemized deductions subject to 2% floor are eliminated Tax prep, investment management, home office deductions, license and regulatory fees, professional dues Moving expense deduction eliminated Medical expenses deductible above 7.5% AGI 43

44 Other provisions Exclusion for sale of home Limited to once every 5 years 44

45 QUESTIONS? J. Marlin Witt, CPA, CFP, CGMA Partner voice: What Makes Us Different, Makes You Better 45