Tax Cuts and Jobs Act: The Road Ahead for Federal Taxes and Your Business

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1 Tax Cuts and Jobs Act: The Road Ahead for Federal Taxes and Your Business SPEAKERS Mark Cooter April 24, 2018

2 Agreed Terms of Use The information in this webinar has been provided by Cherry Bekaert LLP for general information purposes. It does not constitute legal, accounting, tax or other professional advice or services and is presented without any representation or warranty as to the accuracy or completeness of the information. While Cherry Bekaert has made every attempt to ensure that the information contained herein has been obtained from reliable sources, Cherry Bekaert is not responsible for any errors or omissions or for the results obtained from the use of this information. In no event will Cherry Bekaert, or Cherry Bekaert s partners, agents or employees, be liable to you or anyone else for any decision made or action taken in reliance on the information contained herein or for any consequential, special or similar damages, even if advised of the possibility of such damages. Thank you for allowing us to serve your accounting, tax, and financial planning needs. We value your business and are committed to protecting your privacy. We hope you view our firm as your most trusted adviser, and we will work to continue earning your trust. Copyright Notice This presentation is protected by U.S. and international copyright laws. Reproduction, distribution, display and use of the presentation without written permission of the speaker is prohibited Cherry Bekaert LLP

3 A 5,000-foot view of 10 provisions in the Tax Cuts and Jobs Act (TCJA) that may impact your business

4 What Did Not Change Capital Gains Definitions for capital assets are retained NIIT 3.8% Net Investment Income Tax is retained

5 New law provisions are generally effective January 1,2018 Many provisions are temporary Expire after December 31, 2025 New law broadens the taxable income base but applies lower tax rates

6 1. Tax Rate Changes New Corporate Tax Rate Flat rate of 21% Individual Tax Rates & Brackets Highest rate of 37% Begins > $500,000 Single > $600,000 MFJ

7 2. Cost Recovery Enhanced Bonus Depreciation Used and New Assets Enhanced 179 Expensing $1 million annually New Definition for Qualified Improvement Property Bonus, 179, 15 year life

8 3. Simplified Accounting Methods $25 million average annual gross receipts Cash Method Simplified Inventory No 263A (UNICAP) Completed Contract Method for Long-term Contracts

9 4. Tax Law Changes for C Corporations New Tax Rate 21% Alternative Minimum Tax Repealed Net Operating Losses limited 199, DPAD Repealed Financial Statement Impacts

10 5. New Limits to Interest Expense Deductions

11 Limitation on Business Interest Expense Deduction Generally limits business interest expense deduction to: 30% of adjusted taxable income Adjusted taxable income ==> EBITDA before 2022, and thereafter EBIT Disallowed interest carries forward indefinitely Pass-through business -- limitation is determined by the entity and disallowed interest impacts partner s basis

12 Limitation on Business Interest Expense Deduction Exceptions & Elections Out Small business with annual gross receipts $25 million Certain regulated public utilities and electric cooperatives Floor plan financing Real property trades or business and farming business that choose to use Alternative Depreciation System (ADS)

13 6. 199A Qualified Business Income Deduction 20% of QBI income from Pass- Through Business Excludes Specified Services Business Limited by W-2 Wages and/or Cost of Tangible Property Taxable Income drives exclusions and limitations

14 New Section 199A Big Picture A non-cash deduction that effectively reduces the top individual income tax rate from 37% to 29.6% on taxable income received from a pass-through business 20% deduction of combined qualified business income (QBI) QBI from each pass-through trade or business is: (a) 20% of QBI limited to the greater of (b) (i) 50% of W-2 wages or (ii) 25% of W-2 wages plus 2.5% cost of tangible depreciable property Overall limit: 20% of Taxable Income before Capital Gains

15 New Section 199A Key Points QBI excludes specified service trade or business Health, law, consulting, athletics, financial services, brokerage services, investing, trading, investment management, or Principal asset is the reputation or skill of one or more of its employees or owners Exception for engineering and architecture services

16 New Section 199A Key Points Taxable income guide to exclude specified services income & apply W-2 wage limit cap $157,500 $207,500 $315,000 $415,000 No limits or exclusions Phase-out range No specified services, W-2 wage limits apply

17 7. 100% Disallowed Entertainment Expense No deduction for: 1) Activities for entertainment, amusement or recreation 2) Membership dues for clubs 3) Facilities for above

18 8. Compensation & Benefits Changes $1 million limit for public company covered employees - expanded New, private company equity income deferral No deduction for employee mass transit, commuting, parking benefits New, Credit for Paid FMLA leave

19 9. One Time, Deemed Repatriation of Deferred Foreign Earnings Income accumulated since 1986 Lower tax rates and 8 year installment election Applies to all 10% owners of CFC S corporation shareholders can elect deferral

20 10. New Tax Regime for International Operations Territorial tax regime GILTI and FDII Foreign tax credit system Base erosion tax Increased reporting penalties Global business structure

21 What s next for the new tax law? Guidance Definitions Examples Permanence

22 TCJA - Far Reaching Implications Consideration to capitalize projects with debt or equity Choice of entity How quickly capital investment in a project may be deducted Ability to deduct losses generated State tax authorities response?

23 Fund Investor Considerations Carried Interests 3 year holding period for recognizing long-term capital gain Otherwise short term capital gain 2% miscellaneous itemized deductions exclude: Unreimbursed employee expenses Investment Property Taxes Limited Charitable contribution deductions: Annual limit increased to 60% of Adjusted Gross Income Syndicated Conservation Easements Listed Transactions Investment management fees

24 Choosing a Federal Tax Entity Management functions How is the entity going to be controlled? Income\loss outlook Is this entity going to generate losses or income? Do the owners have the ability to take the losses? Capital: debt or equity funding Ownership Who are the owners? Different classes of owners? Special allocations? Exit strategy Asset sale v. equity sale Public offering Non-taxed transfers

25 Comments & Questions Thank you! Mark Cooter