2018 Federal Income Tax Update Business

Transcription

1 2018 Federal Income Tax Update Business

2 FTU- Business IRC 199A ISSUES 2

3 Business Tax Changes Under the Tax Cuts and Jobs Act The Tax Cuts and Jobs Act of 2017 (the Act ) contains significant legislation regarding business taxation o The Act made changes to both C Corporation Tax law and Pass-Through Entity Tax law Unlike the individual income tax changes made by the Act, these changes are permanent

4 C Corporation Tax Changes o Flat 21% tax rate o Elimination of lower tax rates o Personal Service Corporations: Flat 21% o Reduced from old rate of 35%

5 Pass-Through Entities Tax rates are the same as for individuals (via the flow-through ) HOWEVER: A 20% deduction from income first applies This is known as a Qualified Business Deduction ( QBI ) This is an attempt to create some parity between C Corporations and flow-through businesses

6 Pass-Through Entities (cont.) Applies to Sole Proprietorships Sole Owners of Rental Real Estate Partnerships S Corporations LLCs that do not elect to be treated like C Corporations Trusts and Estates Phases out for higher income taxpayers

7 20% Deduction General Rule 20% deduction applied to the lesser of: Eligible (qualified) business income; or Taxable income (before application of the pass-through deduction) less any capital gain

8 20% Deduction (cont.) HOWEVER: This phases out for higher income taxpayers (S: $157,500 - $207,500; MFJ - $315,000 - $415,000) Specialized Service Trade or Business ( SSTB ) issue To be discussed shortly

9 Thresholds $157,500 - $207,500 o Single Taxpayers o Estates o Non-Grantor Trusts o Children subject to the Kiddie Tax $315,000 - $415,000 o Married Taxpayers

10 What is an SSTB? Specialized Service Trade or Business ( SSTB ) defined - IRC 1202(e)(3)(A) o Any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners.

11 What is an SSTB? (cont.) Note: Architects and Engineers are excluded from this definition!

12 Non-SSTB Calculation If not an SSTB but over income thresholds, then third calculation for 20% deduction applies The deduction may not exceed the greater of: 50% of the W-2 wages paid by the business; or 25% of the W-2 wages paid by the business plus 2.5% of the unadjusted basis of depreciable property owned by the business

13 Non-SSTB Calculation (cont.) W-2 Wages o Equal to the actual wage expense o Does not include guaranteed payments or payments to independent contractors Qualified Property o Tangible property being depreciated Not land o Depreciable period is the later of the regular depreciation period or ten years

14 Non-SSTB Calculation (cont.) Unadjusted Basis o Equal to basis immediately after acquisition o Not adjusted for depreciation (including bonus depreciation o Not adjusted for IRC 179 o Not adjusted for IRC 734 and 743

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16 Sunset IRC 199 sunsets on December 31, 2025 o Although the business provisions of the Tax Cuts and Jobs Act of 2017 generally do not have sunset provisions, IRC 199A is aligned to the individual provisions of the Act (which do sunset)

17 Accuracy-Related Penalty WARNING: In the case of any Taxpayer who claims the deduction allowed under IRC 199A for the taxable year, a 10% accuracy penalty (instead of a 5% accuracy penalty) applies when erroneously taking the deduction

18 Potential Planning Ideas (cont.) Consider increasing the number of business owners This would increase the threshold (children and trusts) Consider increasing W-2 wages o S Corporation Pay higher wages o LLC Consider checking the box, make the S Corporation election, and pay wages o Replace independent contractors with employees

19 Potential Planning Ideas (cont.) Consider increasing the amount of qualified property o Instead of leasing equipment, consider purchasing equipment

20 Potential Planning Ideas (cont.) Planning for Service Businesses o Establish Qualified Plans or increase contributions to Qualified Plans Defined Benefit Plans Defined Contribution Plans

21 FTU- Business FARM LOSS ISSUES 21

22 Non-C Corp Farm Losses Limited Prior to 2018 Farm losses limited when certain subsidies received to greater of: o $300,000 ($150K MFS), or o Total of prior 5 years net income o Excess carried over o Losses attributable to disease or drought are not subject to the limitation. 22

23 Non-C Corp Farm Losses Limited The farm loss limitation no longer applies Instead the general business loss limitation applies 23

24 FTU- Business HOBBY LOSS ISSUES 24

25 Hobby Loss Prior to 2018 o Income was reported on 1040 line 21 o Expenses were deducted as tier 2 deductions subject to a specific pecking order o Expenses were limited to income o No SE tax 25

26 Hobby Loss SE Tax Does not apply to: o Sporadic activities o One shot deals o Hobbies 26

27 Hobby Loss Bottom Line through 2025 o Sec 183 unaltered by o Activities not for profit o Income reported on 1040, Sch 1, line 21 o No expenses - can t deduct Tier 2 expenses o No SE tax 27

28 FTU- Business DEPRECIATION ISSUES 28

29 RE Recovery Periods ADS depreciable life o Residential rental property o Placed in service: Prior to 2018 was 40 years After 2017 it is 30 years o What is affected: o o o Election to use ADS life Foreign real estate depreciation Some AMT adjustments 29

30 Bonus Depreciation Two Sets of Rules: o Property acquired before 9/28/2017 and place in service after 9/27/2017 o Property acquired and placed in service after 9/27/

31 Bonus Depreciation Acquired before 9/28/17 In service after 9/27/17 Follows old rules o 2017: 50% o 2018: 40% o 2019: 30% o After 2019: None Example: acquired before 9/28/17 and placed in service in 2018, bonus = 40% 31

32 Bonus Depreciation Acquired after 9/27/17 New rules apply placed in service: o 9/28/17 through 2022: 100% o 2023: 80% o 2024: 60% o 2025: 40% o 2026: 20% o After 2026: None 32

33 Bonus Depreciation Old Rules o First use must begin with taxpayer o Applies to MACRS property 20 years or less Qualified Improvement Property Computer software (not subject to amortization) 33

34 Bonus Depreciation New Rules o New or Used o Applies to All tangible assets except structures Qualified Improvement Property Qualified film productions Qualified TV productions Qualified live theatrical productions Certain fruit and nut trees 34

35 Bonus Depreciation Qualified Improvement Property o Means any improvement to: Interior portion of non-residential real property Made after property originally placed in service But not to enlarge the building Not to elevators or escalators Not to internal structural framework 35

36 Bonus Depreciation Considerations o Will reduce flow through income (QBI) subject to the Sec 199A deduction. o Will also reduce 1040 taxable income allowing some to otherwise qualify for the 199A deduction 36

37 Sec 179 Expensing 37

38 Sec 179 Sports Utility Vehicle o Gross Weight more than 6,000 pounds o Gross Weight 14,000 pounds or less o Sec 179 limit remains at $25,000 BUT WAIT! A luxury vehicle is 6,000 pounds or less o So you can use bonus depreciation on SUVs 38

39 Sec 179 Qualifying property o Tangible personal new or used o Off the shelf software o Portable heating & AC units o Vines & fruit bearing trees (prod. stage) o Qualified Real Property Leasehold improvements Restaurant property Retail improvement property 39

40 Sec 179 Qualifying property o combined the following Leasehold improvements Restaurant property Retail improvement property o Into a single definition of qualified property o 15 year life straight line o 20 year ADS 40

41 Sec 179 AC and heating units o After 2015 Only Portables Window A/C Units Portable heaters However may fall under the definition of qualified improvement property. Discussed next 41

42 Qualified Improvement Property Any interior improvement o Non-residential real property o Placed in service after building in service o Dual character o Qualifies for Sec 179 o Qualifies for bonus depreciation o 15 Year life o Drafting error 39 versus15 year property 42

43 Farm Equipment In service after 2017 o Other than: o o o Grain bin Cotton ginning asset Fence or land improvement o Life shortened from 7 to 5 years o Use 200% declining balance (was 150%) o 150% continues to apply to 15 & 20 Year 43

44 Rental Activities 5-year (1245) property o Appliances o Carpets o Furniture Subjective determination o Example: Kitchen Cabinets 44

45 Rental Activities Purchased as whole o Depreciate as whole, or o Perform a cost segregation study Depreciation recapture 1245 Ordinary income 1250 Capital gains 45

46 Rental Activities Other considerations o 199A deduction 1245 property shorter lives increase depreciation, thus reduce QBI and TI But 1245 property is qualified property for a shorter period of time o Sec 1031 exchanges 1245 property no longer qualifies 46

47 Computers After 2017 o No longer listed property and no longer: Subject to special substantiation Special depreciation rules As if you have been following the listed property rules all along anyway 47

48 FTU- Business INDEPENDENT CONTRACTOR ISSUES 48

49 Independent Contractor A big Issue going forward o o Worker perspective Pro Loss of employee business expenses Pro Advent of the Sec 199A deduction Neg Loss of employer provided benefits Employer perspective cost of Payroll taxes Insurance and fringe benefits Paid time off Not a choice Facts & Circumstances 49

50 Independent Contractor Federal Criteria o The 20-factor test summarized: Behavioral control how, when and where Financial control expenses, compensation and liability Type of relationship employee benefits, permanency of relationship, services a key aspect of business 50

51 Independent Contractor Court s Simplistic Examples o Plumber hired to repair a leak - IC o Electrician to install a line IC o Home working seamstress making clothing from cloths and patterns supplied by employer - Employee 51

52 Independent Contractor What about these situations: o Hair salon rents a chair to a hair dresser o Dental hygienist works for multiple dentists o Home hospice caregiver 52

53 Independent Contractor IRS 20-Factor Test 1. Instructions 2. Training 3. Integration 4. Service provided personally 5. Hiring assistants 6. Continuing relationship 7. Set hours of work 53

54 Independent Contractor IRS 20-Factor Test (continued) 8. Full-time work 9. Work done on premises 10. Order of work sequence 11. Reports 12. Payments 13. Payment of expenses 14. Tools and materials 54

55 Independent Contractor IRS 20-Factor Test (continued) 15. Significant Investment 16. Profit or loss 17. Working for more than one business 18. Offers service to general public 19. Right to fire 20. Right to quit 55

56 FTU- Business BUSINESS DEDUCTION ISSUES 56

57 Meals & Entertainment Say goodbye to: Golf outings Fishing trips Spa visits Sporting events Concerts And the like 57

58 Meals & Entertainment Business Meals Still allowed at 50% if: 1. Ordinary & necessary 2. Not lavish or extravagant 3. Taxpayer or employee present 4. Provided to potential business client, consultant or similar business contact 58

59 Meals & Entertainment Business Meals 5. If meals and beverage provided with entertainment, then they are deductible if separately paid for or separately stated Notice example: Take customer to ball game Cost of tickets is non-deductible entertainment However the cost of hot dogs and beer, if paid for separately, would be a deductible meal expense. 59

60 Meals & Entertainment Employer Provided Meals In-house cafeteria meals Still allowed 2018 through 2025 Limited to a 50% deduction (was 100%) After 2025, meals for the convenience of the employer and cafeteria meals sunset 60

61 Meals & Entertainment Away From Home Meals Reimbursement still deductible by employer o o Accountable plan not income to employee Otherwise included in W-2 income, and not deductible by employee Still limited to 50% Includes self-employed individuals 61

62 Luxury Autos 62

63 Luxury Autos Luxury Auto Limits (GVW 6,000 pounds or less) Automobiles Year 1 st 1 st (bonus) 2 nd 3 rd Thereafter ,160 11,160 5,100 3,050 1, ,000 18,000* 16,000 9,600 5,760 Qualified Trucks and Vans ,560 11,560 5,700 3,450 2, ,000 18,000 16,000 9,600 5,760 * Can elect 50% bonus 1 st year - $14,000. If acquired 1/1/17-9/27/17 but not placed in service until 2018, 1 st year limit with bonus = $16,400. Note: Autos and trucks are the same for 2018 could vary in future due to inflation adj. 63

64 Luxury Autos Hind Sight Retroactive Law Used Vehicles placed in service before 9/28/17 do not qualify for bonus depreciation. (Prior to 9/28/17 bonus only applied to new property.) After 9/27/17 bonus applies to both new and used property 64

65 Luxury Autos Vehicles in Excess of 6,000# GVW Not bound by the luxury auto rules If placed in service after 9/27/17, qualify for 100% bonus depreciation. May not need or want 100%, can elect to step down to 50% bonus. 65

66 Unreimbursed Employee Travel Expenses 2018 through 2025 Employee business expenses suspended Thus no deduction Employees should negotiate accountable plans Still deductible for certain states including California 66

67 Home Office 2018 through 2025 Employee business expenses suspended Thus no deduction Still available for self-employed 67

68 FTU- Business BUSINESS LOSS ISSUES 68

69 NOL Farming Carryback Exception Repeal does not apply to farming losses. Farming NOL is the lesser of: o The portion of the NOL attributable to farming, or o The NOL for the year 69

70 NOL Pre-2018 Carryovers Unaffected by Not subject to the 80% rule But only carry forward for 20 years Potential technical correction o Applies to years ending after 12/31/2017 Congress s intent was: o Applies to years beginning after 12/31/

71 NOL Excess Business Losses New provisions Discussed later If there are excess losses they are added to the post-2017 NOL carryover Two Types of Carryovers Pre-2018, the 80% limit does not apply Post-2017, the 80% limit does apply 71

72 Excess Business Loss Non-Corporate Taxpayers: o Excess business loss equals: o Aggregate deductions in excess of business income plus $250K ($500K MFJ) The excess business loss is not allowed in the current year and is carried forward as part of the NOL.

73 Excess Business Losses Included in business income o Wages o Sch C, E, F profit or loss o 1041, 1065, 1120-S K-1s profit or loss o 4797 gain or loss o Unemployment income o At-risk and passive loss limits apply before business loss limitations are applied

74 Excess Business Losses Computation (new) Form 461 o Step 1 Add up Wages Schedule C, E and F profit or loss 1041, 1065, 1120-S profit or loss (K-1s) CG or loss 4797 gain or loss Unemployment comp

75 Excess Business Losses Computation Form 461 o Step 2 o Determine the amounts in step 1 that are not business related

76 Excess Business Losses Computation Form 461 o Step 3 1. Adjust amount from step 1 by step If the result is negative add $250K ($500 if MFJ) to the amount of line If the result is still negative a. Treat amount from 3 as income on line 21 b. Also add the amount to NOL carryover

77 Excess Business Losses Notes: o Income from activities is adjusted by passive losses before this computation o After 2017, NOLs only carry forward and can only offset 80% of income

78 Limited Business Interest Disallowance of Business Interest o Applies to all business forms o Interest is limited to 30% of the business s adjusted taxable income (ATI). o ATI is figured without depreciation, amortization or depletion

79 Limited Business Interest Exceptions o Small Business (Aver. gross receipts prior 3 o o o years $25M or less) RE Property Trades or Businesses using ADS depreciation Farming using ADS for property with useful life of 10 years or more Inventory interest for auto, boat, and machinery dealers

80 Cannabis Business Issues IRC Sec 280E No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business

81 FTU- Business SHORT-TERM RENTAL ISSUES 81

82 Short-Term Rentals Four Rules To Deal With Rented less than 15 days during the year. Average tenant use is 7 days or less. Average tenant use is 30 days or less and significant services are provided. Unlimited rental days when extraordinary personal services are provided.

83 Short-Term Rentals Rented Less Than 15 Days During The Year Falls under the vacation home rental rules. Income is not taxable. Expenses are not deductible. Home mortgage interest and taxes deductible on Schedule A as normal.

84 Short-Term Rentals Average Rental Less Than 7 Days Not a rental activity. Reported on Schedule C. Subject to SE Tax. Prorated and direct expenses including home mortgage interest and taxes deducted on Schedule C.

85 Short-Term Rentals Average Rental 30 Days Or Less With Significant Services Provided Not a rental activity. Reported on Schedule C. Subject to SE Tax. Prorated and direct expenses including home mortgage interest and taxes deducted on Schedule C.

86 Short-Term Rentals Significant Services Includes: Regular cleaning, changing linen, maid service. Does not include: Heat or light, trash collection, cleaning of public areas. Exception 30 day rule Cost is less than 10% of the rental fee.

87 Short-Term Rentals Schedule C Profit & Losses Profits subject to SE tax. Loss still treated as passive under Sec 469 unless TP meets material participation test. Special $25K passive loss allowance that s available to rental activities does not apply.

88 FTU- Business COMPENSATION ISSUES 88

89 Reasonable Compensation Issues: S corporation working stockholders Must take wages for services performed Flow-through not subject to SE tax and is QBI Compared to a o All pass-through (except rentals) SE income o Limited partners don t pay SE tax o Guaranteed payment not included in QBI

90 Reasonable Compensation Who is an employee? Generally an officer is an employee Exception for officers who: o o Provide no services, or Minor services What is reasonable compensation? No bright line definition Depends on a number of factors

91 Reasonable Compensation IRS Pub 536 factors Duties performed by the employee. Volume of business handled. Character and amount of responsibility. Complexities of the business. Amount of time required. Cost of living in the locality. Ability and achievements of employee. Pay compared with the gross and net income of the business. Pay compared with distributions to shareholders. Company policy regarding pay for all employees. History of pay for each employee.

92 Reasonable Compensation S Corp Wages & 199A Deduction Larger the wages. o Smaller the QBI. o Greater the wage limitation. Smaller the wages. o Greater the QBI o Lower the wage limitation Under the threshold o Wage limitation does not matter

93 Reasonable Compensation Initial version of included a safe harbor: o 70% compensation o 30% flow-through income o Or justify a different allocation Rock and hard place careful A determinable number, Not one to be adjusted to maximize 199A Reasonable compensation firms

94 FTU- Business IRA, QUALIFIED PLAN, AND EDUCATION ISSUES 94

95 4.05 IRA Contributions Contribution limit increased o Effective for 2019 o First time since 2013 o Under age 50: $6,000 o Age 50 and over: $7,000

96 4.06 IRA Recharacterizations Recharacterizations are repealed o Can t undo a traditional to Roth conversion once made o Effective for years after 2017 o Applies to conversions from: Traditional IRA, SEP or SIMPLE

97 IRA Recharacterizations Some recharacterizations still ok o Traditional or Roth contributions o Character can be switched o If done so by the unextended due date of the return

98 Qualified Tuition Plans Modified to pay tuition only annual max. $10,000 per student for: o Kindergarten through o High school At: o Public o Private, and o Religious schools

99 Qualified Tuition Plans Tends to benefit the wealthy Most beneficial if plan is established at child s birth. Needs big upfront contributions to gain any benefit in the short term

100 ABLE Accounts Savings plan for the disabled Disabled before turning age 26 Maximum annual contribution o Before 2018: $14,000 o After 2017: $15,000 plus the lesser of the Disabled s taxable compensation or Single person s poverty level for the year

101 ABLE Accounts One person poverty level for 2018 is $12,060 Thus the max could be $27,060 Don t overlook that direct payment for medical and education is exempt from gift tax

102 529 to ABLE Rollovers 2018 through Plan distributions of the beneficiary or family members (see text) Within 60 days Up to $15,000 (reduced by other contributions)

103 Paid Family & Med Leave For 2 years only 2018 and 2019 General business credit Leave pay must be at least 50% of normal pay Basic credit is 12.5% x leave pay Increase by.25% for each add l 1% of pay above the 50% Maximum credit percentage 25%

104 Paid Family & Med Leave Example o Leave pay equals 70% of regular wage o 70% is 20 points above the 50% threshold o Credit Increase is 5% (.25 x 20%) o Base Credit (12.5%) plus extra (5%) = 17.5% o Leave pay = $15,000 o Credit will be $2,625 (17.5% of $15,000)

105 Other Issues o o o o Paid Family & Med Leave Not allowed where required by state Employer must have a written policy* All FT employees at least 2 weeks All PT employees a prorated amount Employee qualifications Employed for one year Prior year compensation < 60% of highly compensated employee amount ($72,000) Deduction or credit for employer *IRS Notice allows retroactive policy if in place by 12/31/18

106 Contact Information Werner-Rocca Seminars, Ltd. (215) Art Werner Anthony Rocca Follow us on