Tax Team Topics. goo.gl/3pt2mk (case sensitive) December 12, 2018 Doubletree by Hilton Columbia, South Carolina

Transcription

1 Tax Team Topics Tax Cuts and Jobs Act of A Deduction S-Corp. vs. C-Corp. Wealth Transfer Update Latest Federal Income Tax Developments in Cases and Rulings Panel Discussion December 12, 2018 Doubletree by Hilton Columbia, South Carolina

2 Tax Reform for Pass-Through Entities Qualified Business Income Deduction ( 199A) Centralized Partnership Audit Regime S Corp. vs. C Corp. (vs. partnership) Miscellaneous Questions?

3 Not Covered Many tax reform items generally applicable to all businesses First year bonus depreciation 179 Expensing Limitation on business interest deduction

4 QUALIFIED BUSINESS INCOME ( 199A)

5 Category 1 Category 2 Category 3 Taxable Income < $157,500 $157,500 - $207,500 > $207,500 < $315,000 $315,000 - $415,000 > $415,000 Wage Limitation DOES NOT APPLY PHASE-IN APPLIES Specified Service Trade or Business Discrimination DOES NOT APPLY PHASE-IN

6 Who gets it? (Pass-through owners) - Sole Proprietors - S Corporation Shareholders - Partners - Members of a Limited Liability Company not taxed as a C Corporation - Estate and Trust Beneficiaries - Members of Qualified Cooperatives - REIT / Publicly-Traded Partnership ( PTP ) Owners

7 Lesser of: Basic Deduction = Basic Deduction = 20% of Combined Qualified Business Income ( CQBI ) -OR- 20% x (taxable income net capital gain)

8 Example #1 Basic Deduction Samantha owns and operates S Corp, with $200,000 in revenue after expenses (other than Sam s salary) S Corp pays Samantha a reasonable salary of $100,000 Samantha s taxable income (after deductions) is $150,000 Samantha s QBI deduction is 20% of $100,000 ($20,000) and she will pay income tax on $130,000

9 Coverage What income qualifies? - Qualified Business Income ( QBI ) - Combined QBI - Qualified REIT Dividends / Publicly Traded Partnership ( PTP ) Income What businesses qualify? - Qualified Trade or Business ( QTB ) - Business of Being an Employee

10 Coverage Aggregation - when is a business separate? Businesses operated through another pass-through entity ( PTE ) Limitations: - Income thresholds - Specified Service Trade or Business ( SSTB ) limitation - Wage limitation - Unadjusted Basis Immediately After Acquisition ( UBIA )

11 Coverage Tax Penalties and Administrative - QBI must be effectively connected with the U.S. - Sunset (d) exception

12 Qualified Business Income ( QBI ) QBI = net amount of qualified items of income, gain, deduction, and loss with respect to each Qualified Trade or Business ( QTB ) of the taxpayer QBI is determined separately for each QTB Tax items taken into account only to extent included or allowed in the determination of taxable income

13 Qualified Business Income ( QBI ) Includes: - REIT dividends - Publicly-traded partnership ( PTP ) income - Qualified cooperative dividends Deduction treated below-the-line Deduction is allowed in full for AMT purposes

14 What is not QBI? Reasonable compensation paid to taxpayer Guaranteed payments ( 707(c)) paid to a partner for services rendered 707(a) payments to a partner for services rendered

15 What is not QBI? Investment income (dividends, interest, capital gains, etc.) QBI deduction does not: - Reduce net earnings from self-employment - Reduce the 3.8% net investment tax

16 Sum of QBI for each QTB Combined QBI + 20% of taxpayer s: (1)Qualified dividends from real estate investment trusts, and (2)Qualified income from publicly traded partnerships ( PTPs )

17 Example #2 Combined QBI QTB #1 QTB #2 Aggregated QTBs: Income $200,000 $100,000 $300,000 Wages (50,000) (120,000) (170,000) QBI 150,000 (20,000) 130,000 x 20% x 20% x 20% a20% of QBI 30,000 (4,000) 26,000 bwage Limit (50%) 25,000 60,000 85,000 Lesser of a or b 25,000 (4,000) 26,000 Combined QBI $21,000 $26,000

18 Qualified Trade or Business ( QTB ) Any trade or business other than: Specified service trade or business ( SSTB )* The trade or business of being an employee * Unless the taxpayer s income is under the threshold

19 Trade or Business - Not defined by the Code or Proposed Regulations - Prop. Treas. Reg A-1(b)(13) - a Section 162 trade or business other than the trade or business of performing services as an employee - Must look to common law for definition

20 Groetzinger v. Commissioner, 480 U.S. 23 (1987) Two things: - Continuous and regular involvement - Primary purpose for income or profit But...resolution of this issue requires an examination of the facts in each case. (quoting Higgins v. Commissioner, 312 U.S. 212 (1941)).

21 Trade or Business - Includes the rental or licensing of tangible or intangible property that does not rise to the level of a trade or business where the property is rented/licensed to a commonly controlled entity (Prop. Treas. Reg A-1(b)(13))

22 Rental Real Property - Facts and circumstances - Tax law regarding trade or business - Case law

23 Rental Real Property - Yes Facts Trade or Bus? Venue/comments Murtaugh v. Comm r. 2 timeshares; mgt. co.; had subst. activity Yes Tax Ct: mgrs. activity counts (post- Groetzinger case) LaGreide v. Comm r. Inherited, singlefamily residence Yes Tax Ct. - single prop. rental = business Hazard v. Comm r. Single-family, taxpayer lived in different city Yes Tax Ct. single prop. rental = business Reiner v. U.S. Single-family; mgt. co. Yes 7 th Cir./cited LaGreide

24 Rental Real Property - No Facts Trade or Bus? Venue/comments Grier v. U.S. Single-family; only one tenant; made repairs Balsamo v. Comm r. Inherited (sold after 3 mos.); no repairs Union Bank of Troy Triple net lease; tenant maintained building No No No 2 nd Cir. - has least favorable position Tax Ct. - used 2 nd Cir. law, bound by Golsen U.S. Dist. Ct. (N.Y.) PLR Triple net lease; tenant maintained building No Admin. guidance only - no precedential value

25 Business of Being an Employee Excluded from QBI Prop. Treas. Reg A-5(d) former employee now treated as other than an employee with regard to substantially the same services will be presumed to still be an employee Presumption may be rebutted upon a showing that the individual is performing services in a capacity other than as an employee Presumption applies even if individual forms an S corp or other entity through which individual performs services

26 Business of Being an Employee Example: - Law firm associates leave Law Firm 1 to form Law Firm 2 - Law Firm 2 performs substantially all its legal services for Law Firm 1 - Law firm associate income will be treated as income from the business of being an employee and excluded from QBI (deduction unavailable on the income)

27 Business of Being an Employee Example: - Engineering Firm is a partnership - Firm has structure in place to promote senior engineers to partner after 10 years if certain milestones are met - Engineer meets milestones and is admitted as a partner - Engineer is able to rebut presumption by showing partnership rules and Engineer s sharing of partnership net profits.

28 Taxpayer s with Multiple QTBs QBI items must be allocated among QTBs using a reasonable method based on all the facts and circumstances Method must: - Be applied consistently from one tax year to the next - Clearly reflect the income and expenses of each trade/business Overall combination of methods among QTBs must be reasonable

29 Aggregation Proposed Regulations allow aggregation of separate businesses into one (combines QBI, W-2 wages and qualified property Aggregation is at option of taxpayer (each business owner may chose whether to aggregate) Consistency once you aggregate you must continue unless: - Adding newly created/acquired business to group - Facts have changed such that you no longer qualify

30 Aggregation 5 Requirements 1. Same person/group owns 50% or more of each business (directly or indirectly); 2. Ownership exists for majority of tax year; 3. All items attributable to each business are reported on returns having same taxable year; 4. None of the businesses are SSTBs; and 5. Businesses satisfy at least 2 aggregation factors.

31 Aggregation 3 Factors A. Businesses provide products/services that are the same or customarily offered together B. Businesses share facilities or significant centralized business elements C. Businesses are operated in coordination with or reliance upon one or more businesses in the aggregated group

32 What about tiered entities? Deduction available for income allocated through another passthrough entity, trust or estate (Relevant Passthrough Entity ( RPE )) Prop. Treas. Reg A-6

33 Relevant Passthrough Entity Rules Four Rules: 1. Determine if 1 or more QTBs and whether any are SSTBs 2. Determine QBI for each QTB 3. Determine wage and UBIA limitations 4. Determine qualified REIT dividends and PTP income

34 Relevant Passthrough Entity Rules RPEs must report to owners on Schedule K-1 or attachment: - Owner s share of QBI, wages, UBIA and SSTB info - QBI, wages, UBIA and SSTB info from other RPEs (tiered entity structures) - Owner s share of qual. REIT dividends / PTP income

35 Trusts and Estates (Prop. Treas. Reg A-6(d)) QBI, wages, UBIA, qual. REIT dividends and PTP income to be allocated by distributable net income ( DNI ) Treated as an RPE to the extent it allocated items to beneficiaries Treated as an individual to extent items are not allocated Grantor trusts will be treated like a sole proprietorship

36 Analyzing the Deduction 1. Overall Limitation 2. Wage limitation (or modified wage limit for capital intensive businesses Unadjusted Basis Immediately After Acquisition ( UBIA )) 3. SSTB discrimination 4. Lower income taxpayer (threshold) 5. Phase-in range

37 Overall Limitation Lesser of 20% of: Combined Qualified Business Income ( QBI ) Deduction = Taxable Income Net Capital Gain Qual. Cooperative Dividends PLUS -OR- Lesser of: 20% of Qual. Cooperative Dividends -OR- Taxable Income Net Capital Gain

38 Specified Service Trade or Business - Health - Law - Accounting - Actuarial science - Performing arts - Consulting - Athletics - Financial services - Brokerage services

39 SSTB Accounting (Prop. Treas. Reg A-5(b)(2)(iv) Provision of services by accountants, enrolled agents, return preparers, financial auditors, and similar professionals in their capacity as such. Not limited to services requiring CPA license Aim of proposed regulation is to capture common understanding of accounting including tax return and bookkeeping services Does not include payment processing / billing analysis

40 Specified Service Trade or Business Principal asset is the reputation or skill of one or more employees Involves services of investing and investment management, trading, or dealing in securities, partnership interests, or commodities

41 Category 1 Category 2 Category 3 Taxable Income < $157,500 $157,500 - $207,500 > $207,500 < $315,000 $315,000 - $415,000 > $415,000 Wage Limitation DOES NOT APPLY PHASE-IN APPLIES Specified Service Trade or Business Discrimination DOES NOT APPLY PHASE-IN

42 Category 1 Category 2 Category 3 Taxable Income < $157,500 $157,500 - $207,500 > $207,500 < $315,000 $315,000 - $415,000 > $415,000 Wage Limitation DOES NOT APPLY PHASE-IN APPLIES Specified Service Trade or Business Discrimination DOES NOT APPLY PHASE-IN

43 Taxable Income Category 1 Category 2 Category 3 < $157,500 $157,500 - $207,500 > $207,500 < $315,000 $315,000 - $415,000 > $415,000 Wage Limitation DOES NOT APPLY PHASE-IN APPLIES Specified Service Trade or Business Discrimination DOES NOT APPLY PHASE-IN

44 Category 3 & SSTB Taxable Income > Upper Thresholds = No Deduction ($207,500 / $415,000)

45 Wage Limitation Otherwise available QBI deduction limited to greater of: - 50% of W-2 wages with respect to the qualified trade or business -OR- - 25% of W-2 wages + 2.5% of the unadjusted basis of all qualified property immediately after acquisition

46 Example 2a Wage Limit QBI $2,000,000 x 20% Potential QBI Deduction $400,000 Taxpayer's Wages $200,000 x 50% Wage Limited Deduction $100,000 x 37% Savings from Deduction $37,000

47 Example 2b Increase Wages QBI $2,000,000 x 20% Potential QBI Deduction $400,000 Taxpayer's Wages $500,000 x 50% Wage Limited Deduction $250,000 x 37% Savings from Deduction $92,500 Less: Addit'l Empl. Tax (2.9%) ($8,700) Net Savings $83,800

48 Qualified Property Tangible, depreciable property: 1. Held by and available for use in the qualified trade or business at the close of the tax year, 2. Used at any point during the tax year in the production of QBI, and 3. Depreciable period for property has not ended before the close of the tax year

49 Example 2c Capital Intensive QBI $2,000,000 x 20% Potential QBI Deduction $400,000 Wages Qual. Property Total Taxpayer's Wages $200,000 $2,500,000 x 25% x 2.5% Wage Limited Deduction $50,000 $62,500 $112,500 x 37% Tax Savings $41,625

50 Wage Limitation Must be reported timely to the Social Security Administration - If > 60 days late the wages won t count Guaranteed payments from partnerships are not wages - Not included in QBI (so not deduction permitted for such amounts) - Also not included in wages (so the wage limit will be lower)

51 Category 2 Category 1 Category 3 Taxable Income < $157,500 $157,500 - $207,500 > $207,500 < $315,000 $315,000 - $415,000 > $415,000 Wage Limitation DOES NOT APPLY PHASE-IN APPLIES Specified Service Trade or Business Discrimination DOES NOT APPLY PHASE-IN

52 Non-SSTB SSTB Wage Limitation (1b) > Un-Limited Deduction (1a) Phase-In Inapplicable Simple Phase-In Un-Limited Deduction (1a) > Wage Limitation (1b) Complicated Phase-In

53 Phase-In Step #1 1a. Calculate (un-limited) QBI deduction 1b. Calculate wage limitation

54 Phase-In Step #2 2a. Compare 1a and 1b 2b. If 1b > 1a and business is not a specified service T/B analysis stops (wage limit is too low and the phase-in won t apply)

55 Example 3a (Phase-In) 1b > 1a & Not SSTB 1a. QBI $182,500 x 20% Un-Limited QBI Deduction $36,500 1b. Taxpayer's Wages $80,000 x 50% Wage Limitation $40,000 1b > 1a: Deduction = 1a

56 Non-SSTB SSTB Wage Limitation (1b) > Un-Limited Deduction (1a) Phase-In Inapplicable (Example 3a) Simple Phase-In Un-Limited Deduction (1a) > Wage Limitation (1b) Complicated Phase-In

57 Phase-In Step #2 2c. If 1b > 1a and business is a specified service T/B: Applicable % = 100% minus ratio of taxable income in excess of $157,500 / $315,000 divided by $50,000 / $100,000 Phase-in limitation = 1a x Applicable %

58 Example 3b (Phase-In) 1a > 1b & SSTB 1a. QBI $182,500 x 20% Un-Limited QBI Deduction $36,500 1b. Taxpayer's Wages $80,000 x 50% Wage Limitation $40,000 2c. Taxable Income ($182,500) > $157,500 $25,000 $50, % 50% -50% Applicable % 50% Un-Limited QBI Deduction $36,500 Applicable % x 50% Phase-In Limitation $18,250

59 Non-SSTB SSTB Wage Limitation (1b) > Un-Limited Deduction (1a) Phase-In Inapplicable (Example 3a) Simple Phase-In (Example 3b) Un-Limited Deduction (1a) > Wage Limitation (1b) Complicated Phase-In

60 Phase-In Step #2 2d. If 1a > 1b: Excess amount = 1a 1b Reduction = Excess amount x ratio of taxable income in excess of $157,500 / $315,000 divided by $50,000 / $100,000 Phase-in limitation = 1a - reduction

61 Example 3c Phase-In & 1b > 1a 1a. QBI $182,500 2d. Un-Limited QBI Deduction $36,500 x 20% Less: Wage Limitation ($15,000) Un-Limited QBI Deduction $36,500 Excess Amount $21,500 1b. Taxpayer's Wages $30,000 Taxable Income $182,500 x 50% ($157,500) Wage Limitation $15,000 $25,000 $50,000 50% Excess Amount x $21,500 Reduction $10,750 1a. Un-Limited QBI Deduction $36,500 Less: Reduction ($10,750) Phase-In Deduction $25,750

62 Non-SSTB SSTB Wage Limitation (1b) > Un-Limited Deduction (1a) Phase-In Inapplicable (Example 3a) Simple Phase-In (Example 3b) Un-Limited Deduction (1a) > Wage Limitation (1b) Complicated Phase-In (Example 3c)

63 6662(d)(1)(C) Penalty Threshold for substantial understatement of tax reduced from 10% to 5% Applies to taxpayers claiming a 199A deduction 5% reduction threshold applies to all items (so a 6% understatement unrelated to the QBI deduction will cause application of the penalty)

64 199A Final Thoughts If net QBI loss from all qualified T/B, the loss is carried forward to the next tax year Carryforward will apply to reduce any QBI deduction in a subsequent year Sunset - 199A is inapplicable for tax years beginning after 12/31/2025

65 CENTRALIZED PARTNERSHIP AUDIT REGIME

66 Prior Law Tax Equity and Fiscal Responsibility Act of 1982 ( TEFRA ) Tax Matters Partner LLCs Publicly traded partnerships

67 Centralized Partnership Audit Regime Section 1101 of the Bipartisan Budget Act of 2015 ( BBA ) enacted November 2, 2015 Mandatory January 1, 2018 String of proposed or temporary regulations Final regulations issued August 2018

68 What Changed? TEFRA audit rules repealed Audit rules for electing large partnerships repealed No existing coordinated audit rules for partnerships excepted from application of the BBA

69 What Changed? Partnership Representative replaces Tax Matters Partner Entity-level liability Election to push liability out to partners Election out of regime

70 Primary Takeaways

71 Scope Default rule BBA audit rules cover partnerships required to file a U.S. partnership tax return Election Out: Maximum number of K-1s 100 No pass-through partners (but corp partners permitted)

72 May Elect Out Unavailable

73 Election Out - Procedure Must elect out each year on partnership tax return Must notify partners of election out within 30 days of making the election Partnership required to disclose key information to IRS regarding each partner annually (see Treas. Reg (b)-1(c)(2) for full list)

74 What is covered? 6221 adjustment[s] to items of income, gain, loss, deduction, or credit of a partnership (and any partner s distributive share thereof) Prop. Treas. Reg partnership-related items ( PRIs ): Any item or amount with respect to the partnership which is relevant in determining the tax liability of any person under chapter 1 and any partner's distributive share of any such item or amount.

75 Partnership-Related Items Items on partnership return or in books and records Items in Imputed Underpayment Partner-partnership transactions Guaranteed payments Partnership liabilities

76 Partnership-Related Items Character, timing, source and amount of: Income, gain, loss, deductions, etc. Partnership contributions / distributions Basis, value and character of assets Consequences of partnership termination Partnership allocations

77 Consistent Reporting Partners are required to file consistently with the partnership regarding any PRI Inconsistencies will be processed as math errors Partner may submit notice of inconsistent treatment K-1 Errors 60 day reporting requirement

78 Partnership Representative ( PR ) Replaces Tax Matters Partner ( TMP ) Enlarged authority: TMP was limited to managing the audit PR has statutory authority to bind the partnership to audit items including elections contained in the BBA and settlements of the examination

79 Partnership Representative ( PR ) May be an entity if so: Annual appointment of Designated Individual ( DI ) Specific individual with clear authority to bind partnership PR / DI does not have to be a partner if not: Partner must still sign partnership tax return

80 Partnership Representative ( PR ) IRS will not be bound by partnership or contractual limitations on the PR / DI IRS will not look at PR / DI provisions in the Partnership Agreement

81 Partnership Representative ( PR ) Separate, annual 1 year appointments on the partnership tax return for both the PR and DI If the PR designation is terminated, so is the DI Either can resign by written notice to the IRS (IRS to send written confirmation to the partnership within 30 days)

82 PR / DI Resignation and Revocation Either can resign by written notice to the IRS (IRS to send written confirmation to the partnership within 30 days) Partnership may revoke, but must also appoint a new PR / DI simultaneously Only available after IRS issues a notice of administrative proceeding

83 Failure to Designate IRS will pick a PR / DI if none appointed IRS-selected PR / DI may only be revoked with the permission of the IRS (not to be unreasonably withheld) IRS designation effective upon mailing of notice

84 Failure to Designate - Factors Whether there is a partner eligible to serve Views of majority of partners Knowledge of appointee in tax matters and operation of the partnership Access to books and records Profits interest of appointee

85 Audit Procedures IRS issues Notice of Proposed Partnership Adjustments Computation of the Imputed Underpayment complicated jumble of groupings and subgroupings Imputed Underpayment = total net adjustment by highest marginal tax rate for the reviewed year

86 Audit Procedures PR requests modification within 270 days of date of mailing of the Notice of Proposed Partnership Adjustments After modifications IRS issues Notice of Final Partnership Adjustments

87 Imputed Underpayment Adjustments Reviewed year partner files amended return and pays resulting tax, penalties and interest Tax rate modifications due to C corp partner with lower marginal rate Tax rate modification due to individual partner with lower capital gain or qualified dividends rate Tax exempt partners

88 Modification Substantiation PR must submit detailed information regarding the requested modification, including: Partnership Agreement Partnership structure Allocations among partners Ownership changes

89 Push Out Election Partnership may elect to push out the obligation to pay the imputed underpayment to the reviewed year partners Requires review year partners to pay the tax, interest and penalties (or to pay a safe harbor amount)

90 Making the Push Out Election PR must file the election within 45 days of the Notice of Final Partnership Adjustments PR must send push out statement to reviewed year partners within 60 days of earlier of: Expiration of time to file court petition, or Date of a final court decision

91 Push Out Election Statement Reviewed year partner s share of original items Changes to the items Changes affecting intervening years Partner s share of penalties Partner s safe harbor amount

92 Making the Push Out Election IRS will notify partnership and PR within 30 days of a determination that a push out election is invalid Passthrough partner must make additional push out election or pay the tax itself Interest rate on pushed-out IU is 2% higher than interest rate on partnership-paid IU

93 Administrative Adjustments Request ( AARs ) Now the sole method for voluntary amendments to a partnership return Deadline 3 years from later of: Date original return filed, or Due date of original return including extensions

94 Administrative Adjustments Request ( AARs ) May not be filed if IRS has mailed a Notice of Administrative Proceeding (audit notice) regarding the tax year Must be filed by the PR Adjustments bind the partners and are subject to the consistency rules

95 Administrative Adjustments Request ( AARs ) Partnership must either (a) pay the imputer underpayment, or (b) make an election similar to the push out election forcing the reviewed year partners to file amended returns If the AAR results in a refund for a partner, the partner must file an amended return to claim the refund

96 Terminated Partnerships Former partners must take adjustments into account as though push out election was made However, adjustment year partners will receive the allocations (not the reviewed year partners) IRS may determine termination if partnership terminates under 708(b)(1) or does not have ability to pay tax due from IU

97

98 Partnership Agreement Amendments Designation, resignation and removal of PR / DI Define the authority, restrictions, duties and standard of care owed by the PR / DI to the partnership and the partners Indemnification provisions if PR / DI breaches standard

99 Partnership Agreement Amendments Define the obligations and responsibilities owed to the PR / DI by the partnership and the partners PR / DI s authority to incur audit and litigation expenses on behalf of the partnership Push out election

100 Partnership Agreement Amendments Election out? Ineligible partners Former partners Authority over elections PR / DI autonomy vs. partnership approval of elections

101 Partnership Agreement Amendments Economic distortion provisions Reviewed year partners Adjustment year partners not involved in audited year PR / DI authority to make capital calls for partners shares of IU Compensation for PR / DI

102 Together we will focus on the following. Opportunity Knocks...

103 S Corp vs. C Corp Rate differences factoring in: Participation in business Earnings distributed vs. reinvested Eligibility for 20% QBI deduction End game - sell the business?

104 Choosing the Optimal Structure Single-member LLCs (disregarded entity, S corp or C corp) Multi-member LLCs (partnership, S corp or C corp) Partnerships S Corporations

105 What Does Your Client Have (do they know)?

106 Tax Reform Changes for C Corps Old Law Prior maximum tax rate 35% Personal service corporations (PSCs) were taxed at flat 35% Corporate AMT - 20% New Law Flat tax rate 21% No separate rate for PSCs No Corporate AMT

107 Tax Rate Differences in S Tax Corp Reform Changes for S Corps Old Law Top Individual Rate 39.6% No 199A deduction New Law Top Individual Rate 37% 20% 199A deduction possible

108 Considerations for Switch Section 481(a) adjustment will be spread over 6 years Two tax returns required if S election revoked mid-year After revocation, AAA cash distributions can be made tax free during the post-termination transition period (PTTP) Suspended losses can be used on the last day of the PTTP assuming the shareholder has basis in the S Corp stock

109

110 Comparison of 2017 and 2018 Tax Rates Entity Change S Corp (active; no 199A) 39.6% 37.0% -2.6% S Corp (passive; no 199A) 43.4% 40.8% -2.6% S Corp (active; w/ 199A) 39.6% 29.6% -10.0% S Corp (passive; w/199a) 43.4% 33.4% -10.0% C Corporation 35.0% 21.0% -14.0%

111

112 3 Scenarios & Choice of Entity Implications Business generating tax losses Business distributing all profits Business retaining all profits to finance growth

113 Business Generating Tax Losses

114 Business Distributing all Profits to Owners C Corp S Corp 21 % Flat Tax Rate Dividends to individuals at 15% Net Investment Income Tax (NIIT) 3.8% Total rate % Top Individual Rate 37% Full QBI deduction of 20% Assume no Investment Income Tax (NIIT) Total rate %

115 Business Distributing all Profits to Owners C Corporation S Corporation Earnings $300,000 $300,000 Less: corporate tax - 63,000 0 Available for distribution $237,000 $300,000 Less: tax at owner level - 56,406-88,800 Available after-tax earnings $180,594 $211,200

116 Business Distributing all Profits to Owners Earnings $100,000 $200,000 $300,000 Salary $40,000 $80,000 $120,000 Payroll tax (15.3%) $6,120 $12,240 $18,360 Income tax 6,980 24,150 44,266 Total S Corp Taxes $13,100 $36,390 $62,626

117 Business Distributing all Profits to Owners Earnings $100,000 $200,000 $300,000 Less: corp. tax (21%) - 21,000-42,000-63,000 Dividends $79,000 $158,000 $237,000 Dividend tax $0 $23,700 $44,556 Total C Corp Taxes $21,100 $65,700 $107,556

118 Business Distributing all Profits to Owners Earnings $100,000 $200,000 $300,000 C Corp Taxes $21,000 $65,700 $107,556 S Corp Taxes -13,100-36,390-62,626 S Corp Savings $7,900 $29,310 $44,930

119 Business Retaining Profits to Finance Growth C Corp 21 % Flat Tax Rate Dividends to individuals at 15% 3.8% NIIT Total 39.8% Rate S Corp Top Individual Rate 37% Full QBI deduction of 20% Assume no NIIT Total 29.6% Rate

120 C Corp - Advantages and Disadvantages Advantages Deductibility of fringe benefits Corporate AMT is eliminated Distributions for 1 year receives special tax treatment Ability to choose any fiscal year Shareholders do not have to be natural persons Disadvantages Electing to C Corp may require use of accrual method of accounting Double taxation No 199A Deduction Penalty taxes such as PHC Taxes and accumulated earnings taxes

121 S Corp - Advantages & Disadvantages Advantages 199A Deduction Ability to pass losses to shareholders More flexibility to respond to future tax rate changes South Carolina - reduced individual tax rate for S Corps Disadvantages No deductibility of fringe benefits Disallowance of 199A deduction for high income service business owners or wage limited businesses Cannot reelect S status for 5 years if revoked Built in gains

122 Selling the Business C Corp Company can sell assets or stock Sale of assets will trigger 21% corporate tax as well as capital gains tax if corp liquidated Company will generate more cash flow for debt repayment C Corp may be more attractive if a sale is much farther down the road 21% rate is permanent S Corp Owners basis is increased by undistributed earnings Owners can give the buyer a step up in basis ( 338(h)(10) election) Owners receive capital gain treatment on sales proceeds 199A deduction expires in 2026 along with the reduced individual rate

123

124 MISCELLANEOUS ITEMS

125 Partnership Technical Terminations - Revised 708(b)(1) Prior law partnership terminated if: (a) No part of business continues to be carried on in partnership, or (b) Sale or exchange of more than 50% of total interests in capital and profits within 12 months New law technical terminations only apply in (a) above

126 Accounting Method Reform Prior law cash method only available to individuals and businesses which use the cash method for financial accounting purposes New law cash method now usable by all taxpayers with average annual gross receipts up to $25 million for prior 3 tax years

127 NOL Carrybacks Prior law NOLs carried forward up to 20 years and carried back up to 2 years New law: Carryforward capped at 80% of taxable income NOL carrybacks generally repealed Indefinite carryforward