TAX CUTS & JOBS ACT DEVELOPMENTS

Transcription

1 TAX CUTS & JOBS ACT DEVELOPMENTS P L A N N I N G F O R B U S I N E S S E S A N D I N D I V I D U A L S D E C E M B E R 1 2, THE TAX CUTS & JOBS ACT AT A GLANCE BUSINESS PROVISIONS Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions INDIVIDUAL PROVISIONS Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption 1

2 THE TAX CUTS & JOBS ACT AT A GLANCE BUSINESS PROVISIONS Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions CORPORATE INCOME TAX RATE Taxable Income Previous Law $0 $50,000 15% TCJA $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10,000,000 34% 21% $10,000,001 $15,000,000 35% $15,000,001 $18,333,333 38% Over $18,333,333 35% 2

3 CORPORATE ALTERNATIVE MINIMUM TAX Permanent Repeal Effective January 1, 2018 Previous Law TCJA 20% Repealed Remaining AMT credits refundable tax years Reduce regular tax liability by any available AMT credit 50 percent of any excess AMT credit is refundable 2021 tax year Any remaining AMT credit carryforward is refundable THE TAX CUTS & JOBS ACT AT A GLANCE BUSINESS PROVISIONS Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions 3

4 QUALIFIED BUSINESS INCOME DEDUCTION Full phaseout = $207,500 (single) $415,000 (married filing jointly (MFJ)), indexed Threshold = $157,500 (single) $315,000 (MFJ), indexed Click here for PDF & footnotes SPECIFIED SERVICE TRADE OR BUSINESS Health Accounting Financial Services Law Athletics Trading or Dealing Actuarial Science Brokerage Services Investment Management Performing Arts Consulting Principal Asset Reputation/Skill of Employees/Owners 4

5 SPECIFIED SERVICE TRADE OR BUSINESS Health Good (Not an SSTB) Health clubs/spas providing physical exercise/conditioning to their customers Payment processing Research, testing & manufacture/sales of pharmaceutical/medical devices Bad (SSTB) Medical services provided by individuals directly to a patient/service recipient, e.g., physicians, pharmacists, nurses, dentists, veterinarians, physical therapists & psychologists SPECIFIED SERVICE TRADE OR BUSINESS Financial Services Good (Not an SSTB) Bad (SSTB) Banking Managing wealth (wealth planners) Advising clients with respect to finances Developing retirement plans (retirement advisors) Developing wealth transition plans Providing advisory & other similar services regarding valuations, mergers, acquisitions, dispositions, restructurings & raising financial capital by underwriting or acting as a client s agent in the issuance of securities & similar services (investment bankers) 5

6 SPECIFIED SERVICE TRADE OR BUSINESS Consulting Good (Not an SSTB) Performance of services other than advice & counsel Providing training & educational courses Performance of consulting services embedded in/ancillary to the sale of goods/performance of services on behalf of trade/business that s not otherwise an SSTB if there s no separate payment for consulting services Bad (SSTB) Providing professional advice & counsel to clients to assist in achieving goals & solving problems (includes advocacy with intention of influencing decisions made by government or governmental agency) SPECIFIED SERVICE TRADE OR BUSINESS Principal Asset Reputation or Skill of Employees Or Owners Good (Not an SSTB) Bad (SSTB) You re not famous! Receiving income for endorsing products/services Licensing or receiving income for use of individual s image, likeness, name, signature, voice, trademark or any other symbols associated with individual s identity Receiving fees or income for appearing at events or on radio, television or other media formats 6

7 ANTI-AVOIDANCE GUIDANCE Effective for tax years ending after December 22, 2017 Crack & Pack prevented An SSTB includes any T/Bs with 80 percent or more of its property or services to an SSTB if 50 percent or more common ownership of the T/B s Multiple trusts treated as single trust if Substantially same grantors & beneficiaries Principal purpose is to avoid federal income tax Employees can t be converted to independent contractors Considered employees for purposes of deduction if they continue to provide substantially same services (unless they can provide evidence to substantiate nonemployee status) THE TAX CUTS & JOBS ACT AT A GLANCE BUSINESS PROVISIONS Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions 7

8 COST RECOVERY PROVISIONS Enhanced Bonus Depreciation Now available for both new & used assets September 28, 2017 December 31, % % % % % Click here for an overview of bonus depreciation under the TCJA Made changes to Qualified Improvement Property (created unintended need for technical correction) Proposed guidance issued August 3, 2018 COST RECOVERY PROVISIONS Expanded Section 179 Up to $1 million Phaseout beginning at $2.5 million of assets placed in service (adjusted for inflation) Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security systems 8

9 COST RECOVERY PROVISIONS Planning Considerations Monitor developments Assess interaction with other provisions of the TCJA Evaluate accounting method changes Consider cost segregation studies Review state and local conformity to federal changes THE TAX CUTS & JOBS ACT AT A GLANCE BUSINESS PROVISIONS Reduced Tax Rates Created New 20 Percent Deduction Enhanced Capital Expensing Limited Deductions 9

10 NET OPERATING LOSS (NOL) Deduction limited 80 percent of taxable income Applies to losses arising in tax years beginning after December 31, 2017 No carryback Applies to losses arising in tax years ending after December 31, 2017 (except property/casualty insurance companies & certain farm losses) Carried forward indefinitely Applies to losses arising in tax years ending after December 31, 2017 NET OPERATING LOSS (NOL) 10

11 NET OPERATING LOSS (NOL) CHOICE OF ENTITY AFTER THE TCJA Effective tax rate for corporations & pass-throughs International provisions State & local conformity to federal law Future tax rate changes Individual provisions sunset December 31, 2025 Permanent corporate/qualified dividend tax can be changed Accounting methods expanded Employee benefit & owner compensation options Ownership & succession considerations 11

12 TAX RATES AFTER THE TCJA Corporations Pass-throughs Number of tax brackets One, flat rate Seven brackets for individuals (four for trusts/estates) Top tax rate 21 percent percent on qualified dividends 37 percent percent net investment income tax Alternative minimum tax None 28 percent (exemption $70,300 single/$109,400 MFJ; phaseout $500,000/$1 million MFJ) Other tax Accumulated earnings tax (20 percent) Tax on undistributed personal holding company income (20 percent) Other rate considerations Full/partial gain exclusion on qualified small business stock Self-employment tax (15.3 percent) Built-in gains tax Pass-through business deduction (20 percent) Limitation on SALT deduction Limitation on losses TAX RATES AFTER THE TCJA Previous Tax Law Corporation 50.47% (35% +.65 * 23.8%) Pass-through 43.4% (39.6% + 3.8%) New Tax Law 39.8% (21% * 23.8%) 40.8% (37% + 3.8%) Effective tax rate case study fact pattern S corporation Business income: $1 million State income tax rate: 6 percent (entity & shareholder) State does not conform to IRC Section 199A 12

13 SCENARIO 1: QBI DEDUCTION Previous Tax Law New Tax Law Corp S Corp Corp S Corp Business income $1,000,000 $1,000,000 $1,000,000 $1,000,000 Pass-through business deduction (200,000) State income tax (entity level) (60,000) - - (60,000) - - Taxable income 940,000 1,000, , ,000 State income tax (shareholder level) - - (60,000) - - (60,000) Federal income tax on business income (319,600) (325,623) (197,400) (226,499) Tax on distribution to owner (184,879) - - (221,295) - - Total tax (564,479) (385,623) (478,695) (286,499) Net cash to owner $435,521 $614,377 $521,305 $713,501 Combined effective tax rate 56.45% 38.56% 47.87% 28.65% SCENARIO 2: NO QBI DEDUCTION Previous Tax Law New Tax Law Corp S Corp Corp S Corp Business income $1,000,000 $1,000,000 $1,000,000 $1,000,000 Pass-through business deduction State income tax (entity level) (60,000) - - (60,000) - - Taxable income 940,000 1,000, ,000 1,000,000 State income tax (shareholder level) - - (60,000) - - (60,000) Federal income tax on business income (319,600) (325,623) (197,400) (300,499) Tax on distribution to owner (184,879) - - (221,295) - - Total tax (564,479) (385,623) (478,695) (360,499) Net cash to owner $435,521 $614,377 $521,305 $639,501 Combined effective tax rate 56.45% 38.56% 47.87% 36.05% 13

14 SCENARIO 3: RETAIN 50% OF INCOME Previous Tax Law New Tax Law Corp S Corp Corp S Corp Business income $1,000,000 $1,000,000 $1,000,000 $1,000,000 Pass-through business deduction State income tax (entity level) (60,000) - - (60,000) - - Taxable income 940,000 1,000, ,000 1,000,000 State income tax (shareholder level) - - (60,000) - - (60,000) Federal income tax on business income (319,600) (325,623) (197,400) (300,499) Tax on distribution to owner (92,440) - - (110,647) - - Total tax (472,040) (385,623) (368,047) (360,499) Net cash to owner 217, , , ,501 Net cash retained in business 310, , , ,000 Total net cash after taxes $527,960 $614,377 $631,953 $639,501 Combined effective tax rate 47.20% 38.56% 36.80% 36.05% THE TAX CUTS & JOBS ACT AT A GLANCE INDIVIDUAL PROVISIONS Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption 14

15 INDIVIDUAL INCOME TAX RATE Click here for printable version of all individual brackets Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000) Expires after December 31, 2025 INDIVIDUAL ALTERNATIVE MINIMUM TAX Previous Law New Law Top rate 28 percent 28 percent Exemption Phaseout of exemption $55,400 single ($86,200 MFJ) $123,100 single ($164,100 MFJ) $70,300 single ($109,400 MFJ) $500,000 single ($1 million MFJ) 15

16 THE TAX CUTS & JOBS ACT AT A GLANCE INDIVIDUAL PROVISIONS Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption INCREASED STANDARD DEDUCTION Previous Law New Law Standard deduction $6,500 single $9,550 HOH $13,000 MFJ $12,000 single $18,000 HOH $24,000 MFJ Personal exemption $4,150 Repealed Child tax credit $1,000; phaseout at $75,000 single ($110,000 MFJ) $2,000 ($1,400 refundable); phaseout at $200,000 single ($400,000 MFJ) Family tax credit Not addressed $500 nonrefundable credit for dependents other than qualifying children; phaseout at $200,000 single ($400,000 MFJ) 16

17 THE TAX CUTS & JOBS ACT AT A GLANCE INDIVIDUAL PROVISIONS Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption ITEMIZED DEDUCTIONS AFTER TCJA 17

18 ITEMIZED DEDUCTIONS Medical & Dental Expense Deduction for qualified out-of-pocket medical expenses paid or incurred during year to extent exceed 7.5 percent of AGI for 2017 & percent of AGI beginning in 2019 State & Local Income/Sales, Real Estate & Personal Property Tax Expense Combined deduction for amounts not paid or accrued in a trade or business capped at $10,000 Amounts paid in 2017 for income taxes imposed for 2018 or later treated as paid in 2018 ITEMIZED DEDUCTIONS AFTER TCJA 18

19 ITEMIZED DEDUCTIONS Home Mortgage Interest Expense Deduction for mortgage interest paid or incurred up to $750,000 of acquisition indebtedness after December 15, 2017 Deduction for interest paid on home equity loans eliminated Gifts to Charity Deduction for cash contributions to 50-percent-organizations limited to 60 percent of contribution base CHARITABLE DEDUCTION LIMITATIONS* 100% Overall 50% 60% 50% Regular 30% Special 30% 20% *An individual s charitable contribution deduction for a tax year is limited to a specified percentage of their contribution base or adjusted gross income (AGI) computed without regard to any net operating loss carryback 19

20 CHARITABLE DEDUCTION LIMITATIONS* Cash Topic Public charity / Donor advised fund (DAF) 60% until 2025; 50% thereafter Private foundation (PF) 30% Capital gain property** Fair market value 30% 20% Tax basis of property*** 50% 20% *An individual s charitable contribution deduction for a tax year are limited to specified percentage of their contribution base or adjusted gross income (AGI) computed without regard to any net operating loss carryback **Assets where sale results in long-term capital gain (includes Section 1231 trade or business assets) ***Fair market value if smaller ITEMIZED DEDUCTIONS AFTER TCJA 20

21 THE TAX CUTS & JOBS ACT AT A GLANCE INDIVIDUAL PROVISIONS Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption QUALIFIED OPPORTUNITY ZONES Qualified opportunity (QO) Zones: Low-income census tracts identified by states Fund: Corporation or partnership that invests in QO zone property Not limited to real estate Businesses with substantially all of tangible property owned or leased in QO zone Cannot be golf course, country club, gaming, etc. 21

22 QUALIFIED OPPORTUNITY ZONES Temporary Deferral of Gain 180-day reinvestment of gain directly in fund Deferral ends on earlier of date of next sale, or 2026 Percentage of deferred gain recognized depends on holding period < 5 years: 100 percent > 5 but < 7 years: 90 percent > 7 years: 85 percent Permanent exclusion of gain on sale of QO fund Appreciation in the investment 10-year hold requirement QUALIFIED OPPORTUNITY ZONES & FUND 22

23 THE TAX CUTS & JOBS ACT AT A GLANCE INDIVIDUAL PROVISIONS Reduced Tax Rates Increased Standard Deduction Limited Itemized Deductions Created Qualified Opportunity Zones Doubled lifetime exemption DOUBLED LIFETIME EXEMPTION Previous Law New Law Estate tax 40 percent rate with $5.6 million basic exclusion amount per taxpayer Gift tax 40 percent rate with $5.6 million basic exclusion amount per taxpayer; $15,000 annual exclusion Generation-skilling transfer tax 40 percent rate with $5.6 million basic exclusion amount per taxpayer 40 percent rate with $11.18 million basic exclusion amount per taxpayer 40 percent rate with $11.18 million basic exclusion amount per taxpayer; $15,000 annual exclusion 40 percent rate with $11.18 million basic exclusion amount per taxpayer 23

24 QUESTIONS THANK YOU! Ernie Skyrme, CPA 24

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