Overview. Tax Tips and Tricks: Tax Year End Planning for Tax Reform Changes. Choice of Entity Considerations

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1 Tax Tips and Tricks: Tax Year End Planning for 2018 Chris McFarlain Quinton Autin David Edmond December 6, 2018 assurance - consulting - tax - technology - pncpa.com Postlethwaite & Netterville, A Professional Accounting Corporation Overview Tax Reform Changes Individual Changes Business Changes Pass Through Deduction Choice of Entity Considerations 1

2 Tax Reform Changes Individual Changes Individual Rates - Sunset on 12/31/2025 Rate Taxable Income Single Married Filing Jointly Tax Cut Act 2018 Prior Law Tax Cut Act 2018 Prior Law 10% $0 to $9,525 Same $0 to $19,050 Same 12% $9,525 to $38,700 15%...to $38,700 $19,051 to $77,400 15%...to $77,400 22% $38,701 to $82,500 25%...to $93,700 $77,401 to $165,000 25%...to $156,150 24% $82,501 to $157,500 28%...to $195,450 $165,001 to $315,000 28%...to $237,950 32% $157,501 to $200,000 33%...to $424,950 $315,001 to $400,000 33%...to $424,950 35% $200,001 to $500,000 35%...to $426,700 $400,001 to $600,000 35%...to $480,050 37% $500,001 or more 39.6% > $426,700 $600,001 or more 39.6% > $480,050 Changed the inflation index for the brackets to Chained CPI 2

3 Capital Gain Rates & Medicare/Net Investment Income Tax Taxable Income Single Married Capital Gain/Qualified Dividend $0 $0 0% $38,600 $77,200 $200,000 $250,000 15% $425,800 $479,000 20% Rate Medicare Tax on Earned Income Medicare Tax on Net Investment Income 2.9% 0% 3.8% 3.8% Standard Deduction/Exemption 3

4 Child/Dependent Credit Itemized Deductions 4

5 Itemized Deductions Miscellaneous Itemized Deductions - SALT 5

6 Itemized Deductions - Mortgage Education Incentives Modified Section 529 plan usages to allow for use for K-12 tuition Louisiana opted to create a new K-12 Section 529 plan With the exception of 2018, funds from college 529 plan cannot be transferred or used for K plan. 6

7 Alternative Minimum Tax Individual AMT: NOT repealed but Act increased AMT exemption amounts o Married: $109,400 (up from $78,750) o Single: $70,300 (up from $50,600) o Exemption phaseouts also increased to $1,000,000 (MFJ) and $500,000 (single) Sunsets in tax years after 12/31/2025 Estate Exemption and Annual Gift Exclusion Estate and Gift Tax Exemption for 2018 increased to $11.2 million per person Increased exemption sunsets 12/31/2025 Gift Tax Annual Exclusion for 2018: $15,000 7

8 Example Family of 4 with Qualifying Children Married Current Tax Reform Income $175,000 $175,000 Itemized Deductions* $ 31,125 $ 31,125 Deduction Limitations n/a $(1,125) (limit for cap on SALT deduction) Personal Exemptions $16,200 n/a Taxable Income $ 127,675 $ 145,000 Marginal Tax Rate 25% 24% Child Tax Credit n/a $4,000 Tax $ 23,226 $ 19,379 $6,125 State Tax $5,000 Property Tax $5,000 Charitable Contributions $15,000 Mortgage Interest Tax reduction of $3,847 or 16.6% Example Family of 4 with College Children Married Current Tax Reform Income $175,000 $175,000 Itemized Deductions* $ 31,125 $ 31,125 Deduction Limitations n/a $(1,125) (limit for cap on SALT deduction) Personal Exemptions $16,200 n/a Taxable Income $ 127,675 $ 145,000 Marginal Tax Rate 25% 24% Child Tax Credit n/a n/a Tax $ 23,226 $ 23,379 $6,125 State Tax $5,000 Property Tax $5,000 Charitable Contributions $15,000 Mortgage Interest Tax increase of $153 or 0.65% 8

9 Tax Reform Changes Business Changes Corporate Tax Rates 9

10 Corporate Net Operating Losses Corporate Alternative Minimum Tax Corporate AMT Repealed!! o o No more AMT depreciation calcs at corporate level No more AMT N.O.L. limitations Existing AMT Credits: allowed to the extent of regular tax liability, then 50% of excess is refundable in 2018, 2019 & 2020 o Any remaining credit is 100% refundable in

11 Business Expensing/Bonus Depreciation 179 Business Expensing 11

12 Interest Expense Interest Expense 12

13 Interest Expense Excess Business Loss (Individuals) 13

14 Meals and Entertainment Deduction Treatment Under Old Law Employee-Related Expenses Treatment Under New Law Expenses for meals during employee travel 50% 50% Expenses for food and beverages for employees furnished on the 50% 100% business premises Expenses for recreational, social, or similar activities for the benefit 100% 100% of employees Expenses directly related to business meetings of his employees, stockholders, agents, or directors Facility: 100% F&B: 50% Facility: 100% F&B: 50% Client Lunches/Dinners Business Lunches (i.e., business lunch meetings with clients during 50%; retain detailed itemized 50% the workday) billing Networking events/cocktail parties with clients/referrals 50%; retain detailed itemized 50% billing Entertainment Expenses Expenses for entertainment without any food/beverage 50% 0% component Entertainment: 0% Entertainment: 50% Expenses for entertainment with food and beverage component F&B: 50%; retain detailed itemized F&B: 50% billing Expenses related to tickets for any sports event which is organized 100% 0% for the primary purpose of benefiting certain charities Other Expenses Expenses for goods, services, and facilities made available to the general public 100% 100% Meals and Entertainment Examples 14

15 Like-Kind Exchanges Pass-through Business Income 15

16 Pass-through Income - Expires 12/31/25 199A Deduction Calculation STEP 1 Calculate the Deduction Amount STEP 2 Apply W-2 Wage/Property Limitation to calculate the Tentative Deduction STEP 3 Total each Tentative Deduction to get Potential QBI STEP 4 Apply overall limitation. 16

17 What is QBI: Trade or Business Requirements Requirements Must have profit motive Must be engaged in regularly and continually What is QBI? Statute says 17

18 What is QBI: Trade or Business Requirements Pass-through Income Limitations 18

19 Specified Service Trade or Businesses If your taxable income is less than $315,000 (MFJ)/ $157,500 (All Others) SSTB income QBI. If your taxable income is more than $415,000 (MFJ)/ $207,500 (All Others) If your taxable income is between SSTB income QBI. A portion of SSTB income QBI. Specified Service Trade or Businesses 19

20 Specified Service Trade or Businesses - Required Aggregation 50% Common Ownership Non SSTB 80% property or services SSTB Required aggregation A non-sstb that provides 80% or more of its property or services to a SSTB is deemed to be an SSTB (and therefore aggregated with the SSTB) when there is 50% or more common ownership with the SSTB. Specified Service Trade or Businesses - Required Aggregation 50% Common Ownership Non SSTB Less than 5% gross Shares expenses SSTB Required aggregation 20

21 Specified Service Trade or Businesses - Required Aggregation SSTB Gross receipts $25 million and SSTB activity <10% of gross receipts SSTB Gross receipts > $25 million and SSTB activity < 5% of gross receipts Pass-through Income Limitations 21

22 Wages/Property Limitation If your taxable income is less than $315,000 (MFJ)/ $157,500 (All Others) If your taxable income is more than $415,000 (MFJ)/ $207,500 (All Others) No limitation Limitation applies If your taxable income is between Partial Limitation Aggregation of Multiple Trades or Businesses 22

23 Aggregation of Multiple Trades or Businesses Permissive Aggregation 50%+ same person/group ownership All items attributable to each aggregated trade or business are reported during the same taxable year No SSTBs The trade or business meet two of the following Provide products/ services that are the same/ offered together Share facilities/ significant centralized business elements Operated in coordination with one+ of the businesses in the aggregated group Pass-through Income Overall Limitation 23

24 Treatment of Losses ($100) QBI $200 QBI $200 QBI Treatment of Losses ($300) QBI $200 QBI 24

25 Pass-through Income Examples Income Below Threshold Amounts Business Other than Specified Service Business Specified Service Business Partner s Share of Qualified Business Income $200,000 $200,000 Partner s Share of W-2 Wages $10,000 $10,000 Partner s Share of Unadjusted Basis of Qualified Property $10,000 $10,000 20% of Partner s Share of Qualified Business Income $40,000 $40,000 Deduction $40,000 $40,000 Pass-through Income Examples Income Above Threshold Amounts Wage-Intensive Business Business Other than Specified Service Business Specified Service Business Partner s Share of Qualified Business $1,000,000 $1,000,000 Income Partner s Share of W-2 Wages $200,000 $200,000 Partner s Share of Unadjusted Basis of Qualified Property 20% of Partner s Share of Qualified Business Income Deduction (Apply 50% of W-2 wage limit) $10,000 $10,000 $200,000 $200,000 $100,000 $0 25

26 Pass-through Income Examples Income Above Threshold Amounts Capital-Intensive Business Partner s Share of Qualified Business Income Business Other than Specified Service Business Specified Service Business $1,000,000 $1,000,000 Partner s Share of W-2 Wages $50,000 $50,000 Partner s Share of Unadjusted Basis of Qualified Property 20% of Partner s Share of Qualified Business Income Deduction (Apply 25% of W-2/2.5% unadjusted basis limit) $1,000,000 $1,000,000 $200,000 $200,000 $37,500 $0 Planning for 199A Deduction 26

27 Planning for 199A Deduction Choice of Entity Considerations 27

28 What does all this mean to the classification of my entity? When to use a C corp? 28

29 Rate Differences Active pass-through Passive pass-through Tax rate on undistributed income C corporation with 20% deduction Without 20% deduction With 20% deduction Without 20% deduction 21% 29.6% 37% 33.4% 40.8% All-in rate 39.8% 29.6% 37% 33.4% 40.8% C corp v. Pass-through C corp/personal Service Pass-through Corp Income from Trade or $300,000 $300,000 Business Entity Level Tax $63,000 $0 After Tax Cash Available for $237,000 $300,000 Distribution Individual Income Tax $23,970 $48,463* Net Investment Tax $0 $0 Self-Employment Tax $0 $25,071 Total Tax $86,970 $73,534 *assumes taxpayer receives full 20% deduction tax rate of 19.2% 29

30 C corp v. Pass-through (assume non-service business) C corporation Pass-through Income from Trade or $600,000 $600,000 Business Entity Level Tax $126,000 $0 After Tax Cash Available for $474,000 $600,000 Distribution Individual Income Tax $59,520 $129,103* Net Investment Tax $8,512 $0 Self-Employment Tax $0 $36,471 Total Tax $194,032 $165,574 *assumes taxpayer receives full 20% deduction and active marginal tax rate of 29.6% C corp v. Pass-through (assume service business) C corp/personal Service Passthrough Corp Income from Trade or $600,000 $600,000 Business Entity Level Tax $126,000 $0 After Tax Cash Available for $474,000 $600,000 Distribution Individual Income Tax $59,520 $148,543* Net Investment Tax $8,512 $0 Self-Employment Tax $0 $36,471 Total Tax $194,032 $185,014 *assumes no 20% deduction since over the threshold and service business 30

31 When to use a S corporation vs. Partnership/LLC? Entity Choice Below Threshold Schedule C/Sole Proprietorship S Corp Owned 100% Partnership 99%/1% Qualified Business Income 200, , ,000 Guaranteed Payment from LLC 0 80,000 Share of W-2 Wages N/A 80,000 Qualified Property 100, , ,000 Taxable income on , , ,000 Initial Deduction 40,000 24,000 24,000 50% Wages N/A N/A N/A 25% Wages/2.5% Property N/A N/A N/A Tentative Deduction 40,000 24,000 24,000 31

32 Entity Choice Above Threshold Schedule C/Sole Proprietorship S Corp Owned 100% Partnership 99%/1% Qualified Business Income 500, , ,000 Guaranteed Payment from LLC 0 125,000 Share of W-2 Wages N/A 125,000 Qualified Property 100, , ,000 Taxable income on , , ,000 Initial Deduction 100,000 75,000 75,000 50% Wages N/A 62, % Wages/2.5% Property 2,500 33,750 2,500 Tentative Deduction 2,500 62,500 2,500 Conclusions 32

33 Contact Us Chris McFarlain, CPA Associate Tax Director (337) Quinton Autin, CPA Tax Manager (337) David Edmond, CPA Tax Director (800) A Professional Accounting Corporation 33