Overview. The New Tax Law: Business Planning Opportunities. Tax Reform Changes. Choice of Entity Considerations

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1 The New Tax Law: Business Planning Opportunities Brandon Lagarde Kathryn Pittman December 18, 2018 assurance - consulting - tax - technology - pncpa.com Postlethwaite & Netterville, A Professional Accounting Corporation Overview Tax Reform Changes Business Changes Pass-Through Deduction Choice of Entity Considerations 1

2 Tax Reform Changes Business Changes Corporate Tax Rates 2

3 Corporate Net Operating Losses Business Expensing/Bonus Depreciation 3

4 Small Business Accounting Method Interest Expense 4

5 Meals and Entertainment Deduction Treatment Under Old Law Treatment Under New Law Employee-Related Expenses Expenses for meals during employee travel 50% 50% Expenses for food and beverages for employees furnished on the business premises 100% 50% Expenses for recreational, social, or similar activities for the benefit of employees 100% 100% Expenses directly related to business meetings of his employees, stockholders, agents, or directors Client Lunches/Dinners Facility: 100% F&B: 50% Facility: 100% F&B: 50% Business Lunches (i.e., business lunch meetings with clients during the workday) Networking events/cocktail parties with clients/referrals Entertainment Expenses 50% 50% 50%; retain detailed itemized billing 50%; retain detailed itemized billing Expenses for entertainment without any food/beverage component Expenses for entertainment with food and beverage component Expenses related to tickets for any sports event which is organized for the primary purpose of benefiting certain charities 50% 0% Entertainment: 50% F&B: 50% Entertainment: 0% F&B: 50%; retain detailed itemized billing 100% 0% Other Expenses Expenses for goods, services, and facilities made available to the general public 100% 100% Meals and Entertainment Deduction - Examples 5

6 Pass-through Business Income Pass-through Income - Expires 12/31/25 6

7 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. What is QBI: Trade or Business Requirements Requirements Must have profit motive Must be engaged in regularly and continually 7

8 What is QBI? Statute says What is QBI: Trade or Business Requirements 8

9 Pass-through Income Limitations 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 9

10 Specified Service Trade or Businesses 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. 10

11 Specified Service Trade or Businesses - Required Aggregation 50% Common Ownership Non SSTB Less than 5% gross Shares expenses SSTB Required aggregation 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 11

12 Pass-through Income Limitations 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) If your taxable income is between No limitation Limitation applies Partial Limitation 12

13 Aggregation of Multiple Trades or Businesses 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 13

14 Multiple Businesses Aggregation Schedule C/Sole Proprietorship S Corp Owned 100% Qualified Business Income 300, , ,000 Guaranteed Payment Share of W 2 Wages N/A 500,000 N/A Qualified Property 100, , ,000 Taxable income on , , ,000 Initial Deduction 60,000 60,000 20,000 50% Wages N/A 250,000 N/A 25% Wages/2.5% Property 2, ,500 2,500 Partnership 99%/1% Tentative Deduction 2,500 60,000 2,500 Total Deduction = $65,000 Multiple Businesses Aggregation Schedule C/Sole Proprietorship S Corp Owned 100% Partnership 99%/1% Aggregated Qualified Business 300, , , ,000 Income Guaranteed Payment Share of W 2 Wages N/A 500,000 N/A 500,000 Qualified Property 100, , , ,000 Taxable income on , , , ,000 Initial Deduction 60,000 60,000 20, ,000 50% Wages N/A 250,000 N/A 250,000 25% Wages/2.5% Property 2, ,500 2, ,500 Tentative Deduction 2,500 60,000 2, ,000 14

15 Pass-through Income Overall Limitation Treatment of Losses ($100) QBI $200 QBI $200 QBI 15

16 Multiple Businesses Loss Schedule C/Sole Proprietorship S Corp Owned 100% Qualified Business Income 200, ,000 (100,000) Qualified Business Income (after loss 150, ,000 0 allocation) Share of W 2 Wages N/A 125, ,000 Qualified Property 100, , ,000 Taxable income on , , ,000 Initial Deduction 30,000 30, % Wages N/A N/A N/A 25% Wages/2.5% Propert N/A N/A N/A Partnership 99%/1% Tentative Deduction 30,000 30,000 0 Multiple Businesses Loss Schedule C/Sole Proprietorship S Corp Owned 100% Qualified Business Income 500, ,000 (100,000) Qualified Business Income (after loss 450, ,000 0 allocation) Share of W 2 Wages N/A 125, ,000 Qualified Property 100, , ,000 Taxable income on , , ,000 Initial Deduction 90,000 90, % Wages N/A 62,500 N/A 25% Wages/2.5% Property 2,500 33,750 N/A Partnership 99%/1% Tentative Deduction 2,500 62,

17 Multiple Businesses Loss and Aggregation Schedule C/Sole Proprietorship S Corp Owned 100% Partnership 99%/1% Aggregated Qualified Business Income 500, ,000 (100,000) 900,000 Qualified Business Income 450, , ,000 (after loss allocation) Share of W 2 Wages N/A 125, , ,000 Qualified Property 100, , , ,000 Taxable income on , , , ,000 Initial Deduction 90,000 90, ,000 50% Wages N/A 62,500 N/A 312,500 25% Wages/2.5% Property 2,500 33,750 2, ,750 Tentative Deduction 2,500 62, ,000 Treatment of Losses ($300) QBI $200 QBI 17

18 Planning for 199A Deduction Planning for 199A Deduction 18

19 Choice of Entity Considerations What does all this mean to the classification of my entity? 19

20 When to use a C corp? 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% 20

21 C corp v. Pass-through C corp/personal Service Corp Pass-through 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% 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 21

22 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 When to use a S corporation vs. Partnership/LLC? 22

23 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 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 23

24 Conclusions Contact Us Brandon Lagarde, CPA, JD Tax Director (800) Kathryn Pittman, JD Tax Associate Director (225)

25 A Professional Accounting Corporation 25