Small Business Accounting Relief. TCJA: Business Items. C Corporations. These slides can be found at

Transcription

1 These slides can be found at Chapter 1 C Corporations TCJA: Business Items Tax Update for Businesses and Estates Presented by Gary McBride and Annette Nellen Except 199A covered by Gary in Tax A and B Pg 1-3, 10 Small Business Accounting Relief 2

2 Favorable Methods for Small Businesses - Details increased to $25 million, adj for inflation Also see 447 for farming. 263A new exception for small as defined in (c) new exception for small as defined in (e) for certain construction contracts bumped to $25 million (from $10 million) Individuals still have AMT adjustment. Effective date: Tax years beginning after December 31, Expanded use of cash method 5

3 What about 446(a) General Rule? 3 Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. What if small with GAAP financial statements? Rev. Proc. Rev. Proc , Sec. 2 Section 446(a) and (a)(1) provide that taxable income shall be computed under method of accounting on basis of which taxpayer regularly computes income in keeping books ( 446 book-tax conformity requirement). Section (a)(4) requires each taxpayer to maintain accounting records that will enable the taxpayer to file a correct return and states that accounting records include taxpayer's regular books of account and other records and data as may be necessary to support the entries on the taxpayer's books of account and on the taxpayer's return, as for example, a reconciliation of any differences between such books and his return. Thus, a taxpayer satisfies 446 book-tax conformity requirement if taxpayer reconciles results obtained under the method of accounting used in keeping its records and accounts and method used for federal income tax purposes and maintains sufficient records to support that reconciliation. Small Business Definition Gross receipts test of 448(c) is modified Average annual gross receipts for prior 3 years is $25 million or less. Prior year exception removed (before, if ever crossed $5 million threshold of 448, were forever prohibited from using cash or hybrid). See existing special rules for aggregation, short tax years, etc. --- For taxpayers other than corp or p/s, gross receipts test applied as if each trade or business of such taxpayer were a corporation or partnership.

4 Gross Receipts is Broad 4 Reg T(f)(2)(iv) The term gross receipts means gross receipts of the taxable year in which such receipts are properly recognized under the taxpayer's accounting method used in that taxable year (determined without regard to this section) for federal income tax purposes. For this purpose, gross receipts include total sales (net of returns and allowances) and all amounts received for services. In addition, gross receipts include any income from investments, and from incidental or outside sources. For example, gross receipts include interest (including original issue discount and tax-exempt interest within the meaning of section 103), dividends, rents, royalties, and annuities, regardless of whether such amounts are derived in the ordinary course of the taxpayer's trade of business. Gross receipts are not reduced by cost of goods sold or by the cost of property sold if such property is described in section 1221(1), (3), (4) or (5). With respect to sales of capital assets as defined in section 1221, or sales of property described in 1221(2) (relating to property used in a trade or business), gross receipts shall be reduced by the taxpayer's adjusted basis in such property. Gross receipts do not include the repayment of a loan or similar instrument (e.g., a repayment of the principal amount of a loan held by a commercial lender). Finally, gross receipts do not include amounts received by the taxpayer with respect to sales tax or other similar state and local taxes if, under the applicable state or local law, the tax is legally imposed on the purchaser of the good or service, and the taxpayer merely collects and remits the tax to the taxing authority. If, in contrast, the tax is imposed on the taxpayer under the applicable law, then gross receipts shall include the amounts received that are allocable to the payment of such tax. Aggregation of Gross Receipts 448(c) and T(f)(2)(ii) Aggregate receipts of all persons treated as a single employer under section 52 (a) or (b), or section 414 (m) or (o) (or who would be treated as a single employer under such sections if they had employees) 52(a) controlled group of corporations per 1563(a) except use more than 50% instead of at least 80% and ignore 1563(a)(4) and (e)(3)(c). 52(b) per regs, partnerships, proprietorships, etc. under common control 414(m) affiliated service group 414(o) IRS shall prescribe regs Remove gross receipts for transactions between these related persons. 9

5 Includes businesses under common control Reg (b) Trades or businesses that are under common control. For purposes of this section, the term trades or businesses that under common control means any group of trades or businesses that is either a parent-subsidiary group under common control as defined in paragraph (c) of this section, a brother-sister group under common control as defined in paragraph (d) of this section, or a combined group under common control as defined in paragraph (e) of this section. For purposes of this section and and , the term organization means a sole proprietorship, a partnership, a trust, an estate, or a corporation. An organization may be a member of only one group of trades or businesses under common control. If, without the application of this paragraph, an organization would be a member of more than one such group, that organization shall indicate in its timely filed return the group in which it is being included. If the organization does not so indicate, then the district director with audit jurisdiction of the organization's return will determine the group in which the organization is to be included Application of GR Test to Individuals New 471(c), 263A(i) and 460(e) include: APPLICATION OF GROSS RECEIPTS TEST TO INDIVIDUALS, ETC. In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test of section 448(c) shall be applied in the same manner as if each trade or business of such taxpayer were a corporation or partnership. Meaning? Committee report includes

6 Committee Report Footnotes 6 Footnote 656 on 471(c) change for inventory Footnote 659 on 263A change Footnote 660 on 460(e) change In the case of a sole proprietorship, the $25 million gross receipts test is applied as if the sole proprietorship is a corporation or partnership. Prior 3 tax years Meaning? 12 Entity includes any predecessor of that entity. If one of the years is a short year, must annualize its gross receipts. If fewer than 3 years, use how many there are. 13

7 Small Business Caution 7 448, 263A, 471 and 460(e) small business exemption includes: in the case of any taxpayer (other than a tax shelter prohibited from using the cash method under 448(a)(3) for any tax year) Tax Shelter under 448(d)(3) Refers to 461(i)(3) (A) any enterprise (other than a C corporation) if at any time interests in such enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having the authority to regulate the offering of securities for sale [see more at 448(d)(3)] (B) any syndicate (within the meaning of 1256(e)(3)(B)), See next slide (C) any tax shelter (as defined in 6662(d)(2)(C)(ii)) A partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of Federal income tax. Also see Reg T(b).

8 More on syndicate 8 Definition (since TRA 1986) includes syndicate 1256(e)(3)(B) any partnership or other entity (other than a corporation which is not an S corporation) if more than 35% of losses of such entity during the tax year are allocable to limited partners or limited entrepreneurs (within meaning of 464(e)(2)*). Limited entrepreneur = Person with interest other than as limited partner and does not actively participate in mgmt. Also see explanatory rules at 1256(e)(3)(C) ---- Thus, tax shelter could easily be an LLC with over 35% inactive owners. So can t use favorable methods. *Should have been changed to 461(k)(4) by P.L This was fixed by technical corrections included in P.L (3/23/18). More on syndicate (e)(3)(C) (C) Holdings attributable to active management For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 464(e)(2)) (i) for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity, (ii) for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity, (iii) if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years, (iv) if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or (v) if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax avoidance purposes. For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.

9 Allocation of losses under 1256(e)(3)(B) Little guidance, but see PLR with respect to any taxable year during which M has a taxable loss,, M will nonetheless not be a syndicate within meaning of section 1256(e)(3)(B), as long as not more than 35 percent of such loss is allocable to the last-tier interests held by limited partners after the application of section 1256(e)(3)(C). With respect to profit years, M will not be a syndicate within the meaning of 1256(e)(3)(B) because there will be no losses allocable to partners, whether treated as limited partners or otherwise. Binding guidance? (also see Reg T) What is method if status as tax shelter changes periodically? What if the negative 481(a) adjustment creates a loss for the year of change? Seems that guidance is needed. 9 Tax Shelter per Reg T(b)(1)(iii) Tax shelter within the meaning of 6662(d)(2)(C). Presumed tax avoidance marketed arrangements in which persons carrying on farming activities using the services of a common managerial or administrative service will be presumed to have the principal purpose of tax avoidance if such persons use borrowed funds to prepay a substantial portion of their farming expenses (e.g., payment for farm supplies that will not be used or consumed until a taxable year subsequent to the taxable year of payment). 21

10 An oddity for some tax shelters 10 Pre-P.L , if business was tax shelter under 448 and a retailer with average annual gross receipts of $10 million or less, was excepted from 263A (but had to use accrual method under 448 (but no big deal because also had to use accrual per (c)(2)(i) and 471) With P.L $10 million retailer exception of 263A replaced with $25 million small business rule. So this tax shelter retailer no longer excepted from 263A. 471 as amended So, if don t want to treat as non-incidental supplies, but instead per books and records per taxpayer s accounting procedures, be sure client doesn t have AFS. Pg 1-4 (c) EXEMPTION FOR CERTAIN SMALL BUSINESSES. (1) IN GENERAL. In the case of any taxpayer (other than a tax shelter prohibited from using the cash receipts and disbursements method of accounting under section 448(a)(3)) which meets the gross receipts test of section 448(c) for any taxable year (A) subsection (a) shall not apply with respect to such taxpayer for such taxable year, and (B) the taxpayer s method of accounting for inventory for such taxable year shall not be treated as failing to clearly reflect income if such method either (i) treats inventory as non-incidental materials and supplies, or (ii) conforms to such taxpayer s method of accounting reflected in an applicable financial statement [AFS] of the taxpayer with respect to such taxable year or, if the taxpayer does not have any applicable financial statement with respect to such taxable year, the books and records of the taxpayer prepared in accordance with the taxpayer s accounting procedures. AFS see 451(b)

11 Applicable Financial Statement Per 451(b)(3) 11 A. GAAP certified and is: i. 10-K, annual statement filed with SEC ii. iii. Audited FS used for credit purposes, reporting to owners or any other substantial nontax purpose, but only if no (i) statement Filed with any other Federal agency for other than tax purposes, but only if not (i) or (ii) statement. B. FS on int l financial reporting standards and filed with agency of a foreign gov t equivalent to U.S. SEC with reporting stds no less stringent that those of SEC, but only if no (A) statement, or C. FS filed with any other regulatory or gov t body specified by IRS but only if no (A) or (B) statement. 24 Treating inventory as non-incidental supplies Per Rev. Proc : Under section , materials and supplies that are not incidental are deductible only in the year in which they are actually consumed and used in the taxpayer's business. For purposes of this revenue procedure, inventoriable items that are treated as materials and supplies that are not incidental are consumed and used in the year in which the taxpayer sells the merchandise or finished goods. Thus, under the cash method, the cost of such inventoriable items are deductible only in that year [year sold to customer], or in the year in which the taxpayer actually pays for the inventoriable items, whichever is later. Producers may use any reasonable method of estimating the amount of raw materials in their year-end work-inprocess and finished goods inventory to determine the amount of raw materials that were used to produce finished goods that are sold during the tax year, provided that method is used consistently. Query: Will IRS provide guidance now that Rev. Proc has obsoleted Rev. Proc ?

12 Method changes for small 12 Generally, method change treated for purposes of 481 as initiated by taxpayer and made with the consent of the IRS. 460(e) change must use cut-off (no 481 adjustment) Such change shall be effected on a cut-off basis for all similarly classified contracts entered into on or after the year of change. Effective for contracts entered into after December 31, 2017, in tax years ending after such date. Example method change ABC Corporation is retailer using accrual method, and cost and FIFO for inventory; was not using 263A (because gross receipts of $10 million or less). 12/31/17 A/R $560,000 A/P $430,000 Ending Inventory $780,000 In 2018 will change to cash and treat inventory as non-incidental supplies.

13 ABC s 481(a) adjustment 13 A/R $560,000 As accrual method t/p, already reported as income. If had always been using cash method would not have reported as income since not yet received. So, need to remove from income. Negative 481(a) adjustment. Will get picked up into cash method income when collected. A/P $430,000 As accrual method t/p, already deducted these items. If had always been using cash method, no deduction because not yet paid. So, need to add back to income because as cash method, will deduct when ABC pays these liabilities. Positive 481(a) adjustment. Ending Inventory $780,000 As accrual method t/p using inventory method, this was never deducted. If had always treated inventory as non-incidental supplies, would not be written off until used (sold). So no 481(a) adjustment. Assume that ABC has paid for this inventory already. 481(a) adjustment = negative $130,000 Pick up all in the year of change (in 2018). What if ABC will change to treat inventory as expensed when acquired? If ABC had always done this, it would have expensed the BI already ($780,000) (assuming ABC already paid for the inventory). So, have negative 481(a) adjustment of $780,000. In 2018 and later when sell this inventory, no tax effect. The total negative 481(a) adjustment for 2018 = $910,000. Treat as two separate adjustments.

14 TCJA Small Business Method Changes Pg Rev. Proc (8/3/18) Modifies Rev. Proc (list of automatic method changes) Obsoletes RP and for tyba 12/31/17 Designated accounting method change numbers (DCN): *Accrual to cash = 233 *Unicap = 234 *Inventory = 235 Certain construction contracts = 236 *Ok to combine on one 3115 But must separately show each change Limited lines to complete on Form 3115 (see RP ) Pick up 481(a) adjustments separately 30 Change for small business Addition to RP (text of addition is in RP ) Comments Changing to overall cash method Exception from requirement to capitalize costs under 263A New See special rules on next 2 slides New Inapplicable to small business that chooses to no longer capitalize under 263A for home construction contracts; see of RP Exception for requirement to account for inventories under 471 Exceptions from req to account for certain LT contracts under 460 or to capitalize costs under 263A for certain home construction contracts New New See cautions on later slide that automatic change doesn t mean inventory method is permissible. Change made using cut-off basis (so, no 481(a) adj) 31

15 Small business changing to overall cash method Rev. Proc If not otherwise prohibited from using overall cash method or required to use a method other than cash. Examples in Rev Proc: 475 and Query: Are there other examples? Inapplicability of new 15.18: Banks see 15.12(2)(a) of Rev. Proc Farmers see of Rev. Proc Small business changing to overall cash method Rev. Proc Open accounts receivable* cash method t/p includes amounts attributable to open A/R in income as amounts are actually or constructively received. * any receivable that is due in full in 120 days or less and that is not subject to 475. This was also in Rev. Proc Limited lines needed to complete on Form See example that follows; similar to other RP changes (see details in RP ) 33

16 16 Form 3115 Example Change from accrual to cash. Inventory Change from 471(a) to treat as nonincidental supplies (taxpayer wasn t using 263A so no change). 34 Complete all of these lines 35

17 Complete these parts

18 Part II continued - answer these questions Part II continued - answer these questions, BUT skip #16 39

19 Answer these questions, BUT skip Part III Part IV - answer these questions, BUT skip #25 ($130,000) 41

20 20 42 Cautions on inventory changes for small business Rev. Proc Automatic change consent is not a determination that proposed inventory method of accounting is permissible, and does not create any presumption that proposed method is a permissible method of accounting under the Code. The director will ascertain whether the proposed method is permissible under the Code. IRS seeking comments on how books and records of the taxpayer prepared in accordance with the taxpayer s accounting procedures should be interpreted in 471(c)(1)(B). 44

21 Rev. Proc more If already taking a 481(a) adj into account form prior related change: Account for it separate from new adjustment, OR Combine or net remaining portion of the adj with new adj Note combination choice in statement required on Line 26 of 3115 IRS expect to publish future guidance to implement the legislative changes to 263A, 447, 448, 460, and 471. AICPA comments on TCJA methods for small businesses (7/23/18) aicpa-small-tp-accounting-methods.pdf More on methods for small businesses If currently on accrual and Rev. Proc , need to also stop using Rev. Proc (calculate 481(a) adjustment). Seems to be part of accrual to cash change. If currently on 263A, lower-of-cost-or-market or LIFO or other special inventory method, calculate another 481(a) adjustment for this change and follow RP Interest capitalization not clear; guidance needed. If currently under $1 million of gross receipts and using cash and non-incidental supplies treatment for inventory, can stay on that even if gross receipts go above $1 million. If want to stop using non-incidental supplies and use something more favorable and don t have AFS, likely need method change. See Rev. Proc and Rev. Proc Take your time computing 481(a) adjustment AND have someone double-check your calculations

22 22 Taxpayers who can adopt favorable methods after TCJA include 48 C corps and p/s with C corp partner with gross Small receipts taxpayers over $5 million but under $25 million. Can change from accrual to cash Small taxpayers using unicap. Small taxpayers accounting for inventory and using accrual. Taxpayers using cash and treating inventory as nonincidental supplies per Rev. Proc Stay on cash. No longer have to treat inventory as non-incidental supplies assuming have no applicable financial statement. Small contractors with over $10 million but with $25 million or less of GR ( 460(e)). If not a tax shelter. 49

23 Polling Question 23 What is the gross receipts threshold for small business for 2019? A. $25 million B. $25.5 million C. $26 million D. We don t know yet. 50 Inflation adjusted amounts for tax years beginning in 2019 Rev. Proc Supp Gross receipts threshold of 448(c) $25 million $26 million 51

24 Pg Accrual Method Changes (TCJA and other) Income Timing for Accrual Method Taxpayers TCJA SEC CERTAIN SPECIAL RULES FOR TAXABLE YEAR OF INCLUSION Adds: 451(b) Inclusion not later than for financial accounting purposes - all events test with respect to any item of gross income (or portion thereof) shall not be treated as met any later than when such item (or portion thereof) is taken into account as revenue in (i) an applicable financial statement, or (ii) such other financial statement as Secretary may specify. 451(c), Treatment of advance payments - codifies Rev. Proc and related changes Special rule for income from a debt instrument having OID. Watch for guidance from IRS on the method changes and how and when to make them. Track changes for 451 see 53

25 451(b) method changes Rev. Proc (11/29/18) Supplement 25 Automatic method change 54 Applicable Financial Statement Per 451(b)(3) A. GAAP certified and is: i. 10-K, annual statement filed with SEC ii. iii. Audited FS used for credit purposes, reporting to owners or any other substantial nontax purpose, but only if no (i) statement Filed with any other Federal agency for other than tax purposes, but only if not (i) or (ii) statement. B. FS on int l financial reporting standards and filed with agency of a foreign gov t equivalent to U.S. SEC with reporting stds no less stringent that those of SEC, but only if no (A) statement, or C. FS filed with any other regulatory or gov t body specified by IRS but only if no (A) or (B) statement. 55

26 More on 451(b) change for accrual method taxpayers (b)(2) new rule n/a to gross income from special method of accounting provided under any other provision of this chapter (with limited exceptions) So should still be allowed to use installment method of 453 and long-term contract methods of 460. What else? Wait for IRS guidance. Committee Report Footnote 872 Related to New 451(b) The provision does not revise the rules associated with when an item is realized for Federal income tax purposes and, accordingly, does not require the recognition of income in situations where the Federal income tax realization event has not yet occurred. Meaning? If use fair value accounting, that might include income not yet realized. Commission on 5 year renewable insurance contract? Estimate might be included in financial statements when entered into. Will 451(b) also require reporting in tax return of similar amount? Or is there no realization event until the renewals are signed? Or is that a condition precedent to now be ignored under 451(b)? 57

27 New 451(c) Treatment of Advance Payments Advance Payments and Transition Pg 1-10 Notice (4/12/18) Ok to continue to rely on Rev. Proc until guidance issued under 451(c). During this time, the Service will not challenge a taxpayer s use of Rev. Proc to satisfy requirements of 451, although the Service will continue to verify on examination that taxpayers are properly applying Rev. Proc Requests comments to specific questions by 5/14/18 No reference to advance payment for goods rule of Reg

28 RP versus new 451(c) Differences include: Slight differences in defining AFS 28 Rev. Proc applies even if no AFS look at what was earned in the year advance payment rec d. But 451(b) gives IRS authority to specify other FS Rev. Proc allows another year of deferral if year after receipt is a short tax year of 92 days or less 451(c) elect to use vs. Rev Proc adopt automatically in first year taxpayer has advance payments 60 IRS Summary of 451(c) Rev Proc Section 451(c)(4)(A) defines an advance payment as any payment: (1) the full inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting, (2) any portion of which is included in revenue by the taxpayer in an applicable financial statement, or such other financial statement as the Secretary may specify, for a subsequent taxable year, and (3) which is for goods, services, or such other items as may be identified by the Secretary. Section 451(c) generally contains rules similar to Rev. Proc See H.R. Rep. No , at 429 (2017) (Conf. Rep.). 61

29 United Airlines Comments on Notice Frequent flyer miles should be added to the list of advance payments for which deferral under 451(c) is allowed. Similar to the items the IRS already lists in Rev. Proc Committee Report Footnote 880 Related to New 451(c) Thus, the provision is intended to override any deferral method provided by Treasury Regulation section for advance payments received for goods. Reg allows longer deferral than does RP So, Congress wants no more than subsequent year to receiving the advance payment But could adopt Rev Proc for advance payments which is now part of 451. Watch for method change guidance from IRS. 63

30 Proposed Repeal of Reg TCJA addition of advance payment rule for accrual t/p at 451(c) suggested Reg on advance payments for sale of goods is no longer needed. REG (10/15/18) proposes to repeal Reg IRS - Removing also will ensure that the new deferral rules of section 451(c) apply uniformly and consistently to all taxpayers as well as simplify tax administration. 64 Other Methods Updates 65

31 Methods and 965 Transition Tax TCJA Chart 31 Notice (4/2/18) Any method change for tax year of specified foreign corporation ending in 2017 or 2018 is disregarded for the 965 tax liability of US shareholder if favorable (a negative adjustment that would reduce the tax). n/a if method change filed before 11/2/17 Doesn t matter if automatic change or improper to proper change Updated Rev. Proc. on Automatic Method Changes Pg 1-9 Rev. Proc (5/9/18) Mostly replaces Rev. Proc Does not address TCJA method changes But later addressed in Rev. Proc (covered earlier) 67

32 Method Changes and ASC 606 Pg Rev. Proc (5/10/18) Basically for early adopters of ASC 606, Revenue from Contracts with Customers Automatic change (#231) Cut-off or automatic Doesn t mean IRS finds your method permissible Rev. Proc does not provide guidance relating to amendments to 451 made by section of the TCJA. Additional guidance will be issued on such changes. Modified by Rev. Proc (9/19/18) 68 Contingencies, 451 and the Giant Eagle Case Pg 1-13 LAFA F (12/8/17) T, accrual method offered customers X if they did Y and attended first 2 weeks of next academic term Original return did not deduct cost of X Amended return based on Giant Eagle holding of 3 rd Cir., arguing all events test met IRS denied Not same as Giant Eagle At y/e T s event not fixed as goes into next year Note: IRS NA to Giant Eagle. 69

33 Pg C Corporations 70 Drop in Corporate Rate (the main reason for tax reform) Flat rate of 21% For QPSCs too Effective for tyba 12/31/17 IRC 15 blended rate (straddle) approach applicable to fiscal year C corps. Means effective date is January 1, If that is not first day of a C corp s year, then must calculate tax using

34 Application of 15 to Fiscal Year C Corps Pg Notice (4/16/18) Applies to rate reduction Applies to termination of AMT 72 Example C Corp with June 30 year end For year ending 6/30/18, taxable income is $1,000,000. Old rate structure: Tax = $340,000 New rate structure: Tax = $210,000 Tax for 6/30/18 = $340,000 x 184/365 = $171,397 [July 2017 Dec. 2017] $210,000 x 181/365 = $104,137 [Jan June 2018] TOTAL $275,534

35 Related Change to Drop in Corporate Rate 35 Dividends Received Deduction Changes (a)(1) 70% changed to 50% 243(c)(1) 80% changed to 65% and 70% changed to 50% And more (see 243, 245, 246 and 246A changes) + international changes Rationale reduction in corporate tax rate 74 Repeal of AMT, Use of MTC Effective for tax years beginning after 12/31/17. Minimum Tax Credit - New 53(e) AND Use MTC against regular tax (TMT treated as zero) 2018 through 2021, can get refundable credit equal to 50% of excess of MTC for the year over the MTC allowable against regular tax (beginning in 2021, changes to 100%). So, full MTC will be all used in tax years beginning before Could be earlier for many C corps; depends on amount of regular tax and MTC.

36 Repeal of AMT & Application of Example from Notice C corp with June 30 year end AMTI in excess of AMT exemption $2,000,000 TMT (20%) $ 400,000 Multiply tax by 184/365 $ 201,643 Don t compute for 2018 because repealed. Regular tax of $275,534 > TMT so don t owe AMT 76 Modification to 118 Pg 1-17 Modification to 118 for certain contributions by governmental entities (Act Sec ) Conf Rpt: provides that the term contributions to capital does not include (1) any contribution in aid of construction or any other contribution as a customer or potential customer, and (2) any contribution by any governmental entity or civic group (other than a contribution made by a shareholder as such). The conferees intend that section 118, as modified, continue to apply only to corporations.

37 Other Business Deductions and Credits Pg A few deduction changes Pg Repeal deduction for local lobbying expenses, effective for amounts paid or incurred after enactment date (12/22/17). [ 162(e)] (f) change to deny deduction for amounts paid to or at direction of a gov t or specified nongovernmental entity for law violation or investigation into potential law violation; exception for restitution or remediation; reporting by gov t agencies to IRS of amounts paid of $600 or more ( 6050X). Notice No deduction for settlement, payout, or attorney fees related to sexual harassment or abuse if payments subject to nondisclosure agreement; effective for amounts paid or incurred after enactment date. [ 162(q)] 79

38 Tax Reform and R&D TCJA Chart 38 Research tax credit retained. Delayed change - Amortize 174 R&E over 5 years for amounts paid or incurred in tyba 12/31/21 Half-year convention Includes software development Continue to amortize even when dispose of during amortizable life 15 years for foreign research Change via cut-off basis (no 481(a) adj) Entertainment, meals and more No deduction allowed for entertainment, club dues or facility used for entertainment, amusement or recreation. So, no deduction for taking clients or employees to baseball game through 2025, 50% meals limit applies to de minimis fringe meals and for convenience of employer. After 2025, no deduction. But still get 50% of meals for business operations, such as incurred by employee on work travel. Must satisfy 162 to avoid income to employee (also see 132(d) working condition fringe). Generally effective for amounts paid or incurred after 12/31/17. Pg 1-18 See track changes of modified Section 274: 82

39 39 Excerpt of changes to 274 Exceptions for directly related or associated with are removed (e) still has 9 exceptions to 274(a)

40 So, still deductible, includes 40 Company picnic and holiday party Coffee and food in the breakroom 100% deductible 274(e)(4) and 274(n)(2)(A) recreational, socializing Company meeting for staff food and beverages 50% deductible 274(e)(5) and 274(n)(2)(A) 85 Effective date for 274 changes Note not changed for tax year of taxpayer, but for amounts incurred or paid after 12/31/17.

41 Client Meals Survive TCJA! Notice (10/3/18) 50% deductible Not considered entertainment 5 requirements must be met: 1) ordinary and necessary under 162 2) Not lavish or extravagant 3) taxpayer or employee is present 4) provided to current or potential customer; and 5) if provided during or at entertainment activity, must be purchased separately or separately stated on the invoice; can t inflate the cost of the food/drink to try to deduct entertainment Pg What is deductible? Polling Question 1. Employee takes potential client to opera and they have dinner at restaurant beforehand? 2. Sole proprietor takes client to baseball game and buys BBQ for them both 3. Sole proprietor takes client to football game and they have tix in a suite that includes food and drink that is all included in the tix price. 4. Sole proprietor takes client to wine tasting event. 5. More than one of the above. 88

42 New 274(a)(4) No deduction shall be allowed under this chapter for the expense of any qualified transportation fringe (as defined in section 132(f)) provided to an employee of the taxpayer. Pg Why? House Republican Blueprint June 2016 businesses will deduct compensation paid to their employees and workers. Generally, the tax system should use the same definition for taxable compensation of employees as it does for compensation employers may deduct.

43 132(f) Qualified Transportation Fringe 43 Qualified Transportation Fringe = (A) Transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee's residence and place of employment. (B) Any transit pass (C) Qualified parking (D) Any qualified bicycle commuting reimbursement^^ See specific definitions at 132(f) and limits on exclusion ($175/month; $20/month for biking (+ inflation adj)) Fringes and Pub 15-B (2018) 94

44 Notice (12/10/18) Calculating disallowed parking QTF Supp & TCJA Chart 44 Interim guidance for 2018 on reasonable methods to measure parking. If pay 3 rd party for employee parking that is your cost. Until further guidance is issued, if a taxpayer owns or leases all or a portion of one or more parking facilities where its employees park, the 274(a)(4) disallowance may be calculated using any reasonable method. The methodology described in Steps 1-4 of this section B is deemed to be a reasonable method. Several examples are provided. 95 Total Parking Expenses Include Supp & TCJA Chart repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning landscape costs (if on or in the parking location) parking lot attendant expenses, security, rent or lease payments or a portion of a rent or lease payment (if not broken out separately). Depreciation is not considered a parking expense. 96

45 Cost, not Value Although the value of a QTF is relevant in determining exclusion under 132(f) and whether the 274(e)(2) exception applies, the deduction disallowed under 274(a)(4) relates to the expense of providing a QTF, not its value. 45 Using value as 274(a)(4) measure is not a reasonable method. 97 Notice Reasonable method offered Supp & TCJA Chart Parking area owned or leased by taxpayer: 1st determine % of spaces reserved for employees. Expenses attributed to this % of parking costs is not deductible by employer. For the balance of spaces, employer determines primary purpose (over 50% usage) customers or employees. If over 50% for customers, then no other disallowed parking expenses. If primary purpose is employee parking, employer next allocates a portion of the costs of these spaces to any that are reserved for customer use or for partners, sole proprietors, and 2% S corp shareholder use (this amount is deductible). Any reasonable method is used to allocate expenses of remainder of spaces between deductible customer use and non-deductible employee use based on normal business hours. Employers have until 3/31/19 to change number of spaces reserved for employees, if desired, with such change treated as made 1/1/18. 98

46 Notice More 46 Also for exempt orgs who have to treat parking QTF as UBTI Similar approach as for employers figuring out how much is not deductible by for profit employer. Several examples provided. For more on parking, on-premises athletic facility, and UBTI calculation (including when QTF is provided by an unrelated T or B) see Notice Comments sought by 2/22/ Notice (12/10/18) For parking QTF for exempt orgs estimated tax payment penalty relief if underpay estimated income tax due to changes to tax treatment of certain QTF. Put Notice at top of Form 990- T to get relief

47 QTF Benefit Reminder 47 If benefit to employee is greater than monthly amount allowed under 132(f), excess is taxable wages for employee and deductible compensation for employer = $260/month 2019 = $265/month 101 And new 274(l), Transportation and commuting benefits (1) No deduction shall be allowed under this chapter for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer in connection with travel between the employee's residence and place of employment, except as necessary for ensuring the safety of the employee.

48 Change to 274(j) Employee Achievement Award 48 Restricts definition of tangible property Conference Rpt: No inference is intended that this is a change from present law and guidance. Add l Fringe Benefit Changes Change to length of service award programs for bona fide public safety volunteers ( 457(e)) Effective tyba 12/31/17; permanent Repeal exclusion for employer-provided qualified moving expense reimbursements ( 132(g)) + repeal moving deduction ( 217) Other than for members of the Armed Forces (per 217(g)) 2018 through 2025 Remove any computer or peripheral equipment from listed property definition at 280F(d)(4)(A). Conference Report: Such property is therefore not subject to the heightened substantiation requirements that apply to listed property at 274(d). Effective for property placed in service after 12/31/17, in tax years ending after such date.

49 Compensation Changes (m) Limitation on excessive employee compensation of publicly-held corporations Effective for tyba 12/31/17 Binding Contract Exception - remuneration provided pursuant to written binding contract in effect on 11/2/17, and not modified in any material respect on or after such date. Top 5 now must include principal financial officer (such as CFO) + if covered employee after 2016 remain as a covered employee. Applies to both domestic and foreign publicly-held corporations Eliminates exceptions for commissions and performance-based compensation So, makes more comp subject to disallowance but eases work of structuring to take advantage of the exceptions. Act Sec Increase in excise tax rate for stock compensation of insiders in expatriated (inverted) corps (IRC 4985 and PL Sec ) Polling Question The new credit for paid family and medical leave is. A. A permanent provision B. Temporary for 2018 through 2025 C. Temporary for 2018 and 2019 D. There is no such credit! 106

50 A new credit! New 45S Employer credit for paid family and medical leave 38 credit Also allowed against AMT. Reduce wage deduction by amount of credit ( 280C(a)). applicable percentage of wages paid to qualifying employees during family and medical leave 12.5% but can be increased up to 25% Can t exceed normal hourly pay x hours of leave Calculation limited to 12 weeks of leave Numerous special rules! Eligible employer Needs written policy meeting 45S requirements Policy provides for qualifying employee who is not part-time, not less than 2 weeks of annual paid family and medical leave Pg 1-25 Effective for wages paid in tyba 12/31/17, BUT terminates for wages paid in tyba 12/31/19 (so only available for 2018 and 2019) TCJA Paid Family and Medical Leave Credit 45S Notice (9/24/18) Effective for 2018 and Q&As Eligible employers must create or amend qualifying paid family leave programs by 12/13/18, to claim credit, retroactive to start of employer s 2018 tax year, for qualifying leave already provided. Q&As in the notice. Nature of written plan, transition rule for 2018 plans, definitions such as wages, how to calculate the applicable credit percentage, calculation examples, limitations and more. Form 8994, Employer Credit for Paid Family and Medical Leave + Form 3800, General Business Credit

51 45S is a bit complicated example Q&A 16 on # of weeks employer must provide Other business credit changes Pg C - Clinical testing expenses for certain drugs for rare diseases or conditions [orphan drug credit] Rate dropped to 25% from 50% Can elect to take a reduced credit rather than make 280C(b) expense reduction Effective for amounts paid or incurred in tax years beginning after 12/31/17 Act Sec Rehabilitation credit Repeals 10% credit for pre-1936 buildings Modification for 20% credit ratably over 5 years Generally effective for amounts in tyba 12/31/17, with transition rule. Act Sec

52 Property Changes TCJA Chart (a)(3) modified a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by Similar change to 1231 Effective for dispositions after 12/31/17 Proposal to repeal 1235, Sale or exchange of patents, not enacted. Repeal 1044, Rollover of publicly traded securities gain into specialized small business investment companies Effective sales after 12/31/ TCJA Chart Changes for Tax- Exempt Entities 112

53 Tax-Exempt Entities TCJA Chart 53 Unrelated business taxable income includes any expenses paid or incurred by tax-exempt entity for qualified transportation fringe benefits ( 132(f)), a parking facility used in connection with qualified parking ( 132(f)(5)(C)), or any on-premises athletic facility ( 132(j)(4)(B)), if such amounts are not deductible under 274, and not directly connected with an unrelated T or B regularly carried on by the entity. So, they create UBTI! Effective for amounts paid or incurred after 12/31/17. IRS to issue regs including to allocate depr of parking or athletic facilities. Likely rationale: Equalize the treatment with for profit employers. New 512(a)(7); Act Sec Parking Notice and Change in computation of UBTI if more than one unrelated trade or business [new 512(a)(6); Act Sec ] For tyba 12/31/17 21% rate 113 UBTI Siloing Notice (8/21/18) Offers transition guidance Seeks comments for future regs by 12/3/18 Prior to regs, reasonable, good-faith interpretations of , considering all facts and circumstances; also reasonable to use 6-digit NAICS code to determine if have unrelated businesses Investment activities - Interim may aggregate UBTI from interest in single partnership with multiple trades or businesses if meet de minimis test or control test. any amount included in UBTI under 512(a)(7) is not subject to 512(a)(6). TCJA Chart 114

54 Tax-Exempt Entities New comp limit via excise tax 21% excise tax on compensation over $1 million for 5 highest paid employees of applicable tax-exempt organization (IRC 4960) Query - Application to all football coaches? Probably not text likely does not cover public universities. But extra compensation to a football coach or university president at a public university, likely paid from a 501(c)(3) entity (which is an applicable tax-exempt organization ) Interim Guidance Notice (12/31/18) 92 pages long! TCJA Chart Tax-Exempt Entities - more TCJA Chart % excise tax on net investment income of private colleges and universities (new 4968) Had at least 500 tuition-paying students in prior year. 2. No deduction for donations related to right to purchase tickets for seating at athletic event at university stadium (effect to both donors and donees) ( 170(l) modification). 3. Repeal (D) of 170(f)(8) (so no possibility of regs to allow charities to report details of donations of $250 to IRS) Donors still need CWA for donations of $250 or more! 116