New Legislation - Business. Chapter 2 pp National Income TAX Workbook

Transcription

1 New Legislation - Business Chapter 2 pp National Income TAX Workbook

2 Corporate Tax Changes p. 24 Tax years beginning after 12/31/2017 Flat 21% tax rate Limit on accumulated earnings credit $250,000 for certain controlled corporations ($150,000 if any member a service corp.)

3 p. 26 Corporate AMT Minimum tax credit 50% of MTC in excess of MTC offsetting regular tax is refundable ( ) 100% of excess refundable in 2021 If short tax year, pro-rate based on # of days Alternative Minimum tax Repealed for tax years beginning after 2017

4 Employer Credit pp Paid Family and Medical Leave Wages paid in tax years > 12/31/17 and < 1/1/20 General business credit = 12.5% wages if wages 50% of employee s wage Plus.25% for each % paid > 50% (max 25%) Max 12 weeks leave per year, per employee Credit cannot exceed hourly rate x hours of leave

5 Employer Credit p. 25 Paid Family and Medical Leave Eligible employer Has written policy Allows FT employees 2 weeks/year (proportionate % for PT ) Require payment of 50% regular pay Must provide protections under the Family and Medical Leave Act of 1993 Leave paid for by state/local or required by state/local law not counted towards pay

6 Employer Credit p. 25 Paid Family and Medical Leave Qualifying Employee Employed 1 year or more and For preceding year comp not > 60% compensation threshold for highly compensated employee (HCE) $120,000 HCE threshold in 2018

7 Employer Credit p. 25 Paid Family and Medical Leave Family and medical leave is leave for: Birth and care of son/daughter Placement of child adoption, foster care Care of spouse, child, parent w/health issue Employee s own serious health condition Qualifying exigency re: active duty of spouse, child, parent Care for covered service member spouse, child, parent or next of kin to employee

8 Employer Credit p. 25 Paid Family and Medical Leave Cannot be payment for vacation, personal or other medical or sick leave (or paid by govt or required under state/local law) Can elect to not get credit Credit is allowed against AMT Wage deduction reduced by credit taken

9 p. 26 Employee Achievement Awards Awards paid after 12/31/2017 Prohibits deduction of non-tangible as employee achievement award Non-tangibles include cash, gift cards, coupons, or gift certificates, vacations, meals, lodging, event tickets, or investments No change to 74(c) for employee exclusion

10 pp Contributions to Capital 118 Contributions made after 12/22/17 Contributions to capital corporate income Contributions to capital does not include: Contribution in aid of construction or any contribution as current/potential customer Contribution by government entity or civic group

11 p. 27 $1M Compensation Limit Additions to covered EE (Years beg > 2017) Principal executive officer or principal financial officer at any time during year 3 highest comp EE s on SEC proxy statement Covered employee tax year beg > 2016, always covered employee Expanded to all domestic publicly traded corps, large private C and S corps Eliminates exceptions for commission & performance based compensation

12 Certain Fines and Penalties p. 28 Paid/Incurred after 12/22/17 No deduction if paid to/at direction of government relative to a violation/potential violation of law If government is complainant/investigator Deductions may be allowed in some instances (to be identified in government reports): Restitution (including remediation costs) To come into compliance with any law Reimbursements for costs to government Restitution for failure to pay tax Amounts paid/incurred as taxes due

13 pp Business Interest Deduction Deduction limited to the sum of: 1. Business interest income 2. 30% of adjusted taxable income (not < 0) 3. Floor plan financing interest for the year N/A to small business ($25M gross receipts test) Ex. 2.1 (e.g. $120,000 business interest expense) $20,000 (business interest income) + $30,000 (30% of adjusted taxable income) $70,000 disallowed carries over indefinitely

14 p. 29 Business Interest Deduction Adjusted Taxable Income = Taxable Income w/out: 1. Items not allocable to trade or business 2. Business interest exp/interest income 3. NOL deduction A deduction (Qualified Bus. Income Ded.) 5. Depreciation, amortization, depletion (tax years < 2022) 6. Other adjustments IRS may specify

15 Business Interest Deduction pp Business Interest: Interest allocable to trade or business debt Business Interest Income : Taxable interest allocable to T or B Investment interest & income not included Floor plan: Debt and interest related to financing inventory of motor vehicles

16 Business Interest Deduction p. 30 Limitation applies after other interest provisions (i.e., deferral, cap., etc.) Disallowed interest carries over indefinitely Small Business Exception $25M gross receipts test (see page 49) Exceptions apply for (see text): T/B of performing services as an employee Electing real property T/B T/B of furnishing or sale of certain utilities by regulated public utilities

17 Business Interest Limitation (Ch 10) Regs Coming. pp Notice initial guidance Disallowed interest carryover to next year Treated as accrued in succeeding year Expect regs to allow corp to c/o interest disallowed under old law to 1 st yr > 2017 Expect regs to not allow c/o of excess limitation of old law (for corporate)

18 Business Interest Limitation (Ch 10) Regs Coming pp C Corporation only All interest paid/accrued = business int. All interest income = bus. interest inc. Regs to address: Interest exp/income of noncorporate entity w/c corp owner Consolidated group issues (p ) C/o does not affect reduction of E & P

19 Bonus Depreciation pp Property Placed Into Service After 9/27/17 General (also for plants bearing fruits and nuts) After 9/27/17 & Before 1/1/23 100% After 12/31/22 & Before 1/1/24 (2023) 80% After 12/31/23 & Before 1/1/25 (2024) 60% After 12/31/24 & Before 1/1/26 (2025) 40% After 12/31/25 & Before 1/1/27 (2026) 20% Aircraft & long production period property % s decrease one year later, ending with 20% in 2027

20 Bonus Depreciation pp Property Placed Into Service After 9/27/17 Original use w/tp or never used by TP before Allowed only on cash outlay with trade-in N/A if nontaxable exchange, purchased from related ( 267), acquired w/in common control Exclusions: Certain public utility property and certain T/B w/floor plan financing Expanded to film, TV and theater productions 1 st year ending after 9/22/17 can elect 50%

21 Recovery Period Real Property Placed in Service > 2017 p. 36 Qualified improvement property = improvement to nonresidential building interior placed in service after date building first placed in service Exceptions: Enlargement of the building Any elevator or escalator Building s internal structural framework

22 Recovery Period Real Property p. 36 Qualified improvement property Committee Reports: 15 year, bonus dep. O.K. TCJA language: 39 year, no bonus Technical correction expected 179: Qualified improvement property replaces qualified leasehold, restaurant, and retail

23 Recovery Period Real Property pp Real property T/B electing out of business interest limitation must use ADS for real property and qualified improvement property ADS recovery period residential rental: shortened from 40 to 30 years

24 Section 179 Expensing p. 38 Property Placed in Service > 2017 $1M limit $2.5M phaseout threshold SUVs: $25,000/vehicle limit tax years beginning after 2018 (to be indexed for inflation) Add: certain depreciable tangible personal property used to furnish lodging Changes definition of qualified real property eligible for expensing

25 Section 179 Expensing pp Property Placed in Service > 2017 Qualified real property eligible for 179: improvements to nonresidential real placed in service after bldg. placed in service Roofs HVAC property Fire protection and alarm systems Security systems (4 of the 8 bldg. systems in capitalization regs)

26 Listed Property p. 51 Vehicle into service > 12/31/17, tax yrs ending > 2017 Auto with no bonus depreciation Year 1: $10,000 Year 2: $16,000 Year 3: $ 9,600 Year 4 +: $ 5,760/year W/bonus dep: $18,000 for Year 1 Computer/peripherals no longer listed prop.

27 Modification of NOL p. 37 NOLs Arising in Years Beg g > 12/31/2017 NOL deduction limited to the lesser of: Aggregate of NOL c/o s & c/b s to year or 80% of taxable income (w/o NOL deduction) Ex. 2.4 $95,000 NOL in 2018 carried to 2019 $100,000 Tax Inc in 2019 NOL deduction limited to $80,000

28 Modification of NOL p year carryback repealed Replaced with indefinite carryforward Farm loss may be carried back 2 years Lesser of loss with farming items only or NOL May elect to forego carryback Property & casualty insurance companies not subject to 80% limit and may carryback 2 years Note: 3 year c/b for hurricane disaster NOL remains

29 Research & Experimental Expenditures Amounts Paid/Incurred > 2021 p. 38 Capitalize & amortize ratably over 5 years Research outside US, 15 year amortization Begins at midpoint of year paid/incurred Specified research or experimental exp Includes software development Does not include land or property but does include depreciation & depletion allowances on this property Does not include exploration expenses

30 Research & Experimental Expenditures Amounts Paid/Incurred > 2021 p. 38 Abandon, retire or dispose of property used? continue amortization Application of new rules = change in accounting method Treated as initiated by taxpayer with the consent of the IRS Cut-off method (tax years beginning after 12/31/21) and ther is no 481(a) adjustment for expenses paid/incurred in yrs beg < 1/1/22

31 p. 39 Domestic Production Activities Deduction Repealed All TPs for years beginning after 2017

32 Other TCJA Changes p. 48 DRD reduced tax year beg after % 50%, 80% 65%, To offset reduction in tax rate

33 p. 49 Small Business Accounting Method Expands eligibility for cash method Average gross receipts for prior 3-yr-period $25M C corps & farms w/c partner qualify if $25M Eases requirements for maintaining inventory $25M gross receipts test applied Treat as non-incidental materials & supplies or treat consistent with financial accounting treatment of inventories

34 Business Expense Changes p. 50 Paid/Incurred After 12/31/2017 Entertainment no deduction for 1. Entertainment, amusement, recreation 2. Membership dues to club organized for business, pleasure, recreation, social 3. Facility or portion thereof used in connection with #1 or #2

35 Business Expense Changes p. 50 Paid/Incurred After 12/31/2017 Deduction remains To extent amount taxed to employee Substantiated expense in connection with services for another (reimbursed) Recreational, social or similar primarily for employee benefit If related to shareholder, employee, Director meetings

36 Business Expense Changes Food and Beverage pp (k) Can deduct 50% of food/beverage in T/B (such as employee travel) Not lavish or extravagant and Taxpayer or employee of taxpayer is present 12/31/17-12/31/2025: 50% cut-back to apply to cost of de minimis fringe eating facility & cost of meals for convenience of employer After 12/31/2025: No deduction for de minimis fringe facility/convenience meals

37 Transportation Fringe Benefits (Ch 10) pp Excludable from EE wages (up to $260/mo): 1. To/from work in commuter highway vehicle 2. Transit passes 3. Qualified parking Deduction by ER: Tax years > 2017, no deduction (except as necessary to ensure safety of employees)

38 Transportation Fringe Benefits (Ch 10) Bicycle Commuting Expenses p. 352 Exclusion suspended for Employer may deduct for Exclusion when applies limited to $20/mo. Purchase, improvements, repairs, storage if bike used regularly for commuting No exclusion if another excludable fringe received during the same month

39 Year of Income Inclusion pp Accrual basis Taxpayer With AFS (applicable financial statement), recognize income no later than tax year in which recognized in the AFS Without AFS, continue to apply all events test unless deferral or exclusion allowed AFS includes financial statements prepared using GAAP or IFRS, or if filed with governmental or regulatory body specified by IRS

40 Year of Income Inclusion p. 52 Codifies deferral method in Rev Proc Accrual TP can elect deferral of advanced payments to end of tax year following year of receipt if also deferred in financial statement If advance payment for mixed items, may allocate as done for financial statement If taxpayer ceases to exist, balance taxable Application of these rules = change in acctg Initiated by IRS, consent [OID: 6-yr spread for 481(a) adjustment]

41 Limit on Losses pp Tax Years 2018 to 2025 Excess business loss disallowed for taxpayers other than C Corporations Excess business loss = Total all business deductions over sum: 1. Gross income/gain of all T or Bs 2. $250,000 ($500,000 MFJ) Passive activity limits applied first Excess is NOL c/o to subsequent year Limit applied at PN or SH level

42 EBL Example NIB A single taxpayer has gross income of $200,000 and deductions of $500,000 or a $300,000 loss on his Schedule C. Taxpayer has an excess business loss of $50,000. Therefore, in addition to offsetting all of the $200,000 in gross business income, the maximum business loss Joel can claim on his 2018 return is $250,000. His $(50)K EBL carryover will go onto 2019 return. $200K -500K $(300)K $500 $200 +$ $ (50)

43 EBL Example NIB Now let s say the taxpayer is married. He has gross income of $200,000 and deductions of $500,000 or a $(300,000) loss on his Schedule C and his wife has no business income. Their actual loss on the return will be $300K $500 $ $

44 EBL Example NIB Same married TP w/sch C numbers: His wife has W-2 income of $150,000 and investment income of $50,000. Same potential business loss allowed as before: How much is their allowed business loss this year? The entire business loss of $300,000 is allowed on their joint return, and the wife s income can be offset as well. $200K -500K $(300)K $500 $-700 $

45 EBL Example NIB MFJ: Taxpayer Sch C has gross income of $200,000 and deductions of $500,000, or a $300,000 loss. Spouse has a Sch C with gross income of $250,000 and deductions of $600,000, or a $350,000 loss. $1,100 ( ) $450 (income reported on Sch Cs) $ EBL treated as a 2019 NOL $ $300 $ $350

46 Unrelated Business Income pp Tax Years Beg g After 2017 UBTI must be calculated for each unelated trade or business separately Deduction from one T or B may not be used to offset income from another NOL deduction allowed only against income of T or B for which loss arose UBTI increased by disallowed fringe benefit expenses

47 Parntership Provisions pp Tax Years Beg g After 2017 Partnership basis limitation applies includes foreign taxes and charitable contributions If FMV of contribution > asset basis, excess not subject to basis limitation PS technical termination rule repealed (rule re: 50% ownership change in 12 mos.) Termination on cessation of business or reduction to only one owner remains

48 PS Substantial Built-in Loss p. 55 Transfer of PS Interests After 2017 Substantial BIL exists if seller would be allocated a net loss > $250,000 if all PS assets sold immediately after transfer A substantial BIL requires asset basis adjustment even w/o a 754 election New law requires adjustment to buyer s basis in PS assets for the BIL see example in book

49 p Other TCJA Changes Like-Kind Exchanges after 12/31/2017 Nonrecognition only for real property not held primarily for sale PS profits interest for performance of investment services Yrs beg g > 2017 CG passed to fund managers not LTCG unless held for 3 years by PS (ordinary) Rule applies regardless of 83 election

50 Self-Created Property p. 57 Dispositions after 2017 Additional exclusions from capital assets under 1221(a)(3): A patent, inventory, model, or design (whether or not patented) A secret formula/process held either by TP who created it or TP with substantial transferred basis from creator of asset Sale of such assets not capital gain/loss

51 Other TCJA Changes p. 57 Electing Small Business Trust: A nonresident alien can be beneficiary

52 Excise Tax pp Exempt Org Executive Compensation Tax years beginning after 12/31/ % excise tax on remuneration to covered employee in excess of $1M plus excess parachute payment Applicable tax-exempt: 501(a) Covered employee: One of highest 5 paid or covered employee for any year after 2016

53 BASIS REPORTING REQUIRED FOR 2018 Handout

54 new note line in Part II: Handout Note: If you report a loss, receive a distribution, dispose of stock, or receive a loan repayment from an S corporation, you must check the box in column (e) on line 28 and attach the required basis computation. If you report a loss from an at-risk activity for which any amount is not at risk, you must check the box in column (f) on line 28 and attach Form 6198 (see instructions).

55 At the Individual 1040 Level Handout IF ANY MUST BE ATTACHED Reported a loss from Schedule K-1 Received a distribution Disposed of S Corp stock or interest in the Partnership Received a loan repayment from the S Corp

56 199A Qualified Business Income Ded p. 39 Deduction = 20% QBI limited by: 20% of taxable income w/out net capital gain W-2 wage limit/qualified Property Specified Service Trade or Business limit (SSTB)

57 199A Qualified Business Income Ded. W-2 Wage Limit pp Applies if taxable income > threshold $ $157,500 ($315,000 if MFJ) Limit phase-in threshold plus $50,000 ($100,000 MFJ) Wage Limit = Greater of: 50% x W-2 wages from QB or 25% x W-2 wages from QB + 2.5% x unadjusted basis of all qualified property

58 199A Qualified Business Income Ded. Qualified Business Income (QBI) p. 42 Qualified items of income, gain, deduction & loss effectively connected to bus in US Does not include: (remember Entity Level) Capital gain/loss, dividend income Interest income (unless allocable to T or B) Certain items under 954(c) Annuity not received in connection with Tor B Deduction or loss relating to any of above

59 199A Qualified Business Income Ded. Qualified Business Income (QBI) pp Does not include amounts paid to taxpayer by a qualified T or B: Guaranteed or 707(a) payments from partnership Wages from S corporation Partnerships are not required to make Guaranteed Payments

60 199A Qualified Business Income Ded. Qualified Business Income (QBI) p. 43 Net QBI loss carries to next year Deduction allowed in subsequent year reduced by 20% of carryover qualified business loss

61 199A Qualified Business Income Ded. Qualified Trade or Business p. 43 Qualified Tor B = any Tor B other than SSTB or T or B as an employee SSTB = Tor B in 1202(e)(3)(A) other than engineering & architecture Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, if principal asset = EE skill

62 199A Qualified Business Income Ded. Specified Service Business p. 44 If taxable income < threshold SSTB = qualified If taxable income in phasein range: Use % x QBI & wages from SSTB % = 100% less ratio of TI > threshold divided by phasein (50,000 or 100,000) Range: 157, ,500 MFJ 315, ,000 If taxable income > 207,500 (415,000): QBI does not include SSTB

63 199A Qualified Business Income Ded. p. 44 Deduction does not reduce AGI Deduction only for income tax purposes Does NOT reduce SE tax For AMT, computed without AMT adjustments

64 199A Qualified Business Income Ded. p. 45 Partnerships and S Corporations Deduction at the partner and shareholder level Use allocable share of income/loss, wages, unadjusted basis of property Trusts and Estates Eligible for QBI deduction Rules to allocate wages & QP similar to those of 199(d)(1)(B)(i) (DPAD rules)

65 Questions? 65