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

Transcription

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

2 QBI Stuff Allowable Years Property shall be treated as If such property has a class life in years of Years property may be used for QBI 3-year property 4 or less 10 5-year property More than 4 but less than year property 10 or more but less than year property 16 or more but less than year property 20 or more but less than year property 25 or more 20

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

4 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refundable ( ) 100% of excess refundable in 2021 If short tax year, pro-rate based on # of days Alternative Minimum tax Repealed for tax years beg g after 2017

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

6 Employer Credit p. 25 Paid Family and Medical Leave Eligible employer Has written policy Allows FT EEs 2 weeks/year (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 included

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

8 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 EE s 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 EE

9 Employer Credit p. 25 Paid Family and Medical Leave Cannot be payment for vacation, personal or other medical or sick leave Can elect to not get credit Wage deduction reduced by credit taken

10 p. 26 Employee Achievement Awards Awards paid after 12/31/2017 Prohibits deduction of non-tangible as employee achievement award No change to 74(c) for EE exclusion

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

12 p. 27 $1M Compensation Limit Additions to covered EE (Yrs beg g > 2017) Principal executive officer or principal financial officer at any time during year 3 highest comp d EE s on SEC proxy stmt Covered EE > 2016, always covered EE Expanded to all domestic publicly traded Eliminates exceptions for commission & performance based comp

13 Certain Fines and Penalties p. 28 Paid/Incurred after 12/22/17 No deduction if at direction of government If government is complainant/investigator Exceptions (will be identified in govt reporting): Restitution To come into compliance w/any law Reimbursements for costs Restitution for failure to pay tax Amounts paid/incurred as taxes due

14 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 $20,000 (business interest income) + $30,000 (30% of adjusted taxable income) $70,000 disallowed carries over indefinitely

15 p. 29 Business Interest Deduction Adjusted Taxable Income = Taxable Income w/out: 1. Items not allocable to T or B 2. Business interest exp/interest income 3. NOL deduction A deduction 5. Depreciation, amortization, depletion (< 2022) 6. Other adjustments IRS may specify

16 Bonus Depreciation pp Property Placed Into Service After 9/27/17 Merrill covers this in Chapter 13! 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

17 pp Certain Farm Property Barry will cover this in Agriculture Section Placed in service > 2017 & yrs ending > 2017 Recovery period 7 5 years if used in farm g [ 263A(e)(4)] if original use began with TP Except grain bin, cotton ginning, fence or other land improvement Repeals required use of 150% DB unless: 15 or 20-year property TP elects 150% DB

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

19 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

20 Recovery Period Real Property pp Real property T or B elect out of bus int limitation ADS for real property and qualified improvement property Farms elect out of bus int limitation ADS on any property with recovery period of 10 years (years beg g > 2017) ADS recovery period residential rental: 40 to 30 years

21 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

22 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 hurr. disaster NOL remains

23 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 Does not include exploration expenses

24 Research & Experimental Expenditures Amounts Paid/Incurred > 2021 p. 38 Abandon, retire or dispose of property used? continue amortization Application of new rules = change in acctg. Treated as initiated by IRS Cut-off method, no 481(a) adjustment

25 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) Add: certain depreciable tangible personal property used to furnish lodging Add: qualified real property as eligible

26 Section 179 Expensing pp Property Placed in Service > 2017 Qualified real property eligible for 179: improvemts 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)

27 BASIS REPORTING REQUIRED FOR 2018 Handout

28 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).

29 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

30 Do you have basis for ALL yours? Handout

31 PRACTICE UNITS Handout

32 PRACTICE UNITS Handout

33 Summary Soft Letter Draft Instructions Section L of Schedule K-1 (1065)

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

35 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)

36 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

37 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

38 199A Qualified Business Income Ded. Qualified Business Income (QBI) pp Does not include amounts paid to TP by a qualified T or B: Guaranteed or 707(a) paymts from PS Wages from S corp Partnerships are not required to make Guaranteed Payments

39 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 c/o qualified bus. loss

40 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 EE 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

41 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

42 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

43 199A Qualified Business Income Ded. p. 45 Partnerships and S Corporations Deduction at the PN and SH 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)

44 199A Qualified Business Income Ded. p. 47 Accuracy-related penalty applies to the 199A deduction TP can claim deduction for 20% of aggregate $ of qualified REIT dividends Without capital gain div. or qualified div. TP can claim deduction for 20% of qualified publicly traded PS income Allocated $ + ordinary gain (sale of PTP int.)

45 Other TCJA Changes p. 48 DRD reduced tax year beg g after % 50%, 80% 65%, To offset reduction in tax rate Expenses of Costs of Replanting Citrus Costs paid/incurred after 12/22/17 Modifies rule re: deduction by other than TP Wine, Beer, Spirits Production Period Covered in Business Exclude aging period for UNICAP Issues Section purpose

46 p. 49 Small Business Accounting Method Expands eligibility for cash method Average GR for prior 3-yr-period $25M This Section is Co C corps & farms vered w/c by PN Merrill qualify if $25M Eases requirements for maintain g inventory $25M gross receipts test applied Treat as non-incidental materials & supplies or treat as in TP s books

47 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

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

49 Business Expense Changes p. 50 Paid/Incurred After 12/31/2017 Transportation Expenses No deduction for costs of any qualified transportation fringe benefit to EEs Except as necessary to ensure safety, no deduction for costs to provide or reimbursement for commuting

50 Business Expense Changes Food and Beverage pp Can deduct 50% of food/beverage in Trade or Business (such as when EEs traveling) 12/31/17-12/31/2025: 50% to apply to cost of de minimus fringe eating facility & cost of meals for convenience of ER After 12/31/2025: No deduction for de minimus fringe facility/convenience meals

51 Allowable Reimbursing Plan p. 50 certain substantiated expenses paid or incurred by the taxpayer in connection with the performance of services for another person under a reimbursement or other expense allowance arrangement;

52 Listed Property p. 51 Vehicle into service > 2017, yr ended > 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.

53 Year of Inclusion pp Accrual basis TP 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 definition p. 52

54 Year of 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 TP ceases to exist, balance taxable Application of these rules = change in acctg Initiated by IRS, consent (OID: 6-yr spread)

55 Limit on Losses pp Tax Years 2018 to 2025 Excess business loss disallowed 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

56 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)

57 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 $700 $-700 $

58 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 $700 $-700 $

59 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. $950 ( ) $500 hus sch C wife sch C -1,100 $ EBL treated as a 2019 NOL $ $300 $ $350

60 S Corp Conversion to C Corp p. 53 Effective 12/22/17 Eligible terminated S corp is C corp that 1. Is an S corp before 12/22/2017, Covered in Business 2. Revokes S status during 2-yr period Entity Issues Section beginning 12/22/2017, and 3. SHs on date of revocation same as on 12/22/2017 with same allocable share Any 481(a) required spread over 6 years Distributions after PTTP allocated between AAA and accumulated earnings (not AE first)

61 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

62 PS Provisions pp Tax Years Beg g After 2017 PN basis limitation applies to 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

63 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

64 PS Substantial Built-in Loss p. 55 Transfer of PS Interests After 2017 Ex 2.14 ABC Partnership, No 754 election Asset X $1M BIG Asset Y $900,000 BIL PS agreemt: X gain to A, all else shared equally PS: Net BIG $100,000 C sells interest to D for $33,333 If assets sold, C allocated ($300,000) As loss is substantial basis of PS assets adjusted as to D

65 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

66 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

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

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

69 Questions? 69