New Tax Rules. For You and Your Business Owners

Transcription

1 New Tax Rules For You and Your Business Owners 199A-The 20% Deduction for Pass Throughs The New Rules for Meals & Entertainment QSBS-Qualified Small Business Stock And the New Depreciation Rules Presented by Laura Stees, CPA Partner & Business Strategist Stees, Walker & Company, LLP Keith Troutman, CPA Partner, Tax Department Squar Milner

2 The New Postcard-size Pages

3 The New Postcard-size Pages

4 Plus 6 Schedules Schedule 1 Additional Income and Adjustments To Income Schedule 2 Tax Schedule 3 Nonrefundable Credits Schedule 4 Other Taxes Schedule 5 Other Payments and Refundable Credits Schedule 6 Foreign Address and Third Party Designee

5 Entities - Change! Pass-throughs: Sec 199A 20% reduction (taken on the Individual return) Meals & Entertainment The New Rules QSBS Depreciation (bonus 179) Examples by Entity Good to Know: Corporate Tax Rate Reduction Modified NOL s Interest deduction limitation Qualified Opportunity Zones Individual Comparisons and Examples State and Local Non-Conformity

6 199A - 20% Deduction of Certain Pass-through Income (taken on the individual return) For tax years after 12/31/17, subject to a sunset at the end of 2025, the law generally allows an individual taxpayer (including a trust or estate) a deduction for 20% of the individual s domestic qualified business income from a partnership, S corporation, or sole proprietorship.

7 199A Beware of the Cliff When taxable income is greater than $207,500 (single) or $415,000 (married) you need wages and/or property to qualify for any 199A benefit, assuming you are an in favor business. Computation rules before the taxable income limitation lesser of: 1. 20% of qualified business income, or 2. Greater of: 50% of W-2 wages 25% of W-2 wages + 2.5% of unadjusted basis of qualified property

8 199A Qualified Property The term qualified property is generally defined to mean any qualified trade or business, tangible property of a character subject to depreciation that is: i. held by and available for use in the qualified trade or business at the close of the taxable year ii. iii. which is used at any point during the taxable year in the production of QBI, and the depreciable period for which has not ended before the close of the taxable year

9 199A Income That Does Not Qualify QBI includes the net domestic business taxable income, gain, deduction, and loss with respect to any qualified trade or business. QBI specifically excludes the following items of income, gain, deduction, or loss: 1) Investment-type income such as dividends, investment interest income, short-term & long-term capital gains, commodities gains, foreign currency gains, and similar items 2) Wages and guaranteed payments 3) Qualified REIT dividends, qualified cooperative dividends, or qualified PTP income.

10 199A Out of Favor Businesses Specified service trade or businesses are not included in qualified businesses Involves the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services Any trade or business of which the principal asset is the reputation or skill of one or more of its owners or employees (limited to product endorsements, use of a personal likeness, appearance fees)

11 199A Out of Favor Businesses (cont.) Any business that involves the performance of services that consist investment and investment managing trading or dealing in securities, partnership interest, or commodities. The deduction may apply to income from a specified service trade or business if the taxpayer s taxable income does not exceed $315,000 (for married individuals filing jointly or $157,500 for other individuals). Under the conference agreement, this benefit would be phased out over the next $100,000 of taxable income for married individuals filing jointly ($50,000 for other individuals).

12 199A Phase-out Graph

13 199A Flowchart

14 199A S VS C CORPORATION Tax rate comparison, including the double taxation effect S-Corp C-Corp C Corp Rate on 1120 Cap Gains on % Gains Effective % 79% of 3.8% NIIT Tax 10% 21% 21% 0% 12% 21% 21% 0% 22% 32.85% 21% 15% 11.85% 24% 35.85% 21% 15% 11.85% 3.002% 34% 35.85% 21% 15% 11.85% 3.002% 35% 35.85% 21% 15% 11.85% 3.002% 37% 39.8% 21% 20% 15.5% 3.002% Note: The breakpoints above are not exact, because the 2018 capital gains rates do not apply by brackets as they did in C-Corporations: Earnings are taxed at 21% + capital gains tax on dividends at a 79% effective rate (earnings less 21%) + NIIT tax

15 199A Example Not Specified Service Business QBI $ 500,000 W-2 Wages $ 215,000 Qualified Property $ 600,000 Taxable Income $ 650,000 Married Filing Joint Conclusion: Over the cliff 20% of QBI $ 100,000 50% of Wages $ 107,500 20% of QBI is less than 50% of Wages Full 20% deduction allowed Deduction $ 100,000

16 199A Example (cont.) Not Specified Service Business QBI $ 300,000 W-2 Wages $ 80,000 Qualified Property $ 600,000 Taxable Income $ 380,000 Married Filing Joint Conclusion: Phase in Range from $315,000 to $415,000 % into the phase in Range: $380,000 - $315,000 $ 65,000 20% of QBI $ 60,000 50% of Wages $ 40,000 65% 50% of wages are less than 20% of QBI Partial Deduction allowed Deduction $ 47,000 $60,000 - ($60,000-$40,000 x 65%)

17 199A Example (cont.) Specified Service Business QBI $ 300,000 W-2 Wages $ 150,000 Qualified Property $ - Taxable Income $ 380,000 Married Filing Joint Conclusion: Phase in Range from $315,000 to $415,000 % into the phase in Range: $380,000 - $315,000 $ 65,000 65% 20% of QBI $ 60,000 50% of Wages $ 75, % of Qualified Property $ - Wage limitation is higher than QBI Partial Deduction allowed Deduction $ 21,000 $60,000 X 35%

18 199A Example: Real Estate Not Specified Service Business -Real Estate QBI $ 400,000 W-2 Wages $ - Qualified Property $ 3,000,000 Taxable Income $ 450,000 Married Filing Joint Conclusion: 20% of QBI $ 80,000 50% of Wages $ - 2.5% of Qualified Property $ 75,000 Property limitation is lower than QBI Deduction $ 75,000

19 199A Planning Opportunities The Deduction sunsets Wage compensation planning issues Deduction planning for professional/service businesses Deduction planning with partnership guaranteed payments

20 199A Strategies to Increase QBI Deduction Reduce income especially at the phase-out levels Transform income from specified service business into non-specified service business Think about entity choice, compensation, and asset depreciation

21 199A Strategies to Reduce Income Possibly file separate returns if spouse earns enough income (non community property states or income) Increase retirement plan contributions Consider passing on bonus depreciation to extend benefit over multiple years

22 199A Entity Choice Example It is important to also consider the permanent nature of the C Corp tax rate decrease vs. the temporary nature of the 20% QBI deduction for pass-throughs in determining entity choice.

23 199A Advantage to S. Corp Assume sole owner of S Corp and 99% owner of partnership No outside employees Ignore basis in qualified property

24 199A Advantage to S. Corp Assume sole owner of S Corp and 99% owner of partnership Outside employees paid $200,000 in W-2 wages Ignore basis in qualified property

25 Meals & Entertainment (cont.)

26 Meals & Entertainment (cont.)

27 QSBS-Qualified Small Business Stock A qualified small business stock (QSBS) is the stock, or share, of a qualified small business (QSB), as defined by the Internal Revenue Code (IRC). A qualified small business is a domestic and active C-corporation whose gross assets, valued at original cost, do not exceed $50 million on and immediately after its stock issuance.

28 QSBS-Qualified Small Business Stock (cont.) The investor must not be a corporation Qualified small business stock (QSBS) is any stock acquired from a qualified small business (QSB) after 8/10/1993. To claim the tax benefits of a share being qualified, the following must apply: Must have acquired the stock at its original issue and not from the secondary market Purchase the stock with cash or property, or as payment for a service The investor must hold the stock for at least five years to reap the tax benefits of a QSBS. At least 80% of the issuing corporation's assets must be used in the operations of one or more of its qualified trades or businesses

29 QSBS - Qualified Small Business Stock (cont.) The Internal Revenue Code (IRC) Section 1202 defines a qualified small business (QSB). These QSBs do not operate in the hospitality industry, financial sector, farming business, or any business heavily dependent on the skill of one or more of its employees such as healthcare, law, accounting, engineering, consulting, architecture, and others. Businesses that qualify for QSB status include companies in the technology, retail, wholesale, and manufacturing fields. Qualified startups and qualified businesses looking to expand their operations may raise initial or additional capital through a QSBS offering. These companies may also use qualified small business stock (QSBS) as a form of an in-kind payment. In-kind payments are frequently utilized to compensate employees for services rendered when cash flow is minimal. QSBS can also be used to retain employees and as an incentive to help the company grow and succeed.

30 QSBS - Qualified Small Business Stock (cont.) Tax treatment for a QSB stock depends on when the stock was acquired and the length of its holding. The Protecting Americans from Tax Hikes Act (PATH Act), allows investors to exclude 100% of capital gains on qualified small business stock (QSBS) if the stock qualifies under Section 1202 of the IRC. The exclusion has a cap of $10 million, or 10 times the adjusted basis of the stock, whichever is greater.

31 QSBS - Qualified Small Business Stock (cont.) Additionally, there are holding requirements for the full exclusion of alternative minimum tax (AMT) and net investment income (NII) tax. The AMT is typically imposed on individuals or investors who have tax exemptions that allow them to decrease their income tax due 100% capital gains exclusion for QSBS acquired after 9/27/2010. A 100% exclusion on capital gain applies, which also includes exclusions from the AMT and NII tax 75% capital gains exclusion for QSBS acquired between 2/18/2009, and 9/27/2010. However, 7% of the gain is subject to AMT 50% capital gains exclusion for QSBS acquired between 8/11/1993, and 2/17/2009. However, 7% of the gain is subject to AMT

32 QSBS - Qualified Small Business Stock (cont.) Example of QSBS Capital Gains Taxation If you invested $1.5 million in a tech startup on 10/1/2010, and held that investment for five years, you can sell the QSBS for up to (10 x $1.5 million, which was the original investment) + $1.5 million = $16.5 million. Once you deduct your initial investment, you have a $15 million capital gain. You will pay zero federal tax on the $15 million capital gain. This case applies, of course, if the startup appreciates in value. Likewise, an investor who seeded $500,000 in the same tech startup will be able to sell up to $10 million + $500,000 = $10.5 million without tax being applied to the capital gain of $10 million.

33 QSBS - Qualified Small Business Stock (cont.) Example of QSBS Capital Gains Taxation (cont.) In the case of the investor above, if his total proceeds from the sale totaled $20 million, a 23.8% capital gains tax would be applied to the $5 million gain ($20 million - $15 million) If the stockholder wants to sell the stock but has not held it for the minimum 5-year holding period, Section 1045 of the IRC allows the investor to defer the gain by reinvesting the proceeds from the sale of the qualified small business stock (QSBS) into another QSBS within 60 days. This defers the tax due on any capital gain made on the original QSBS Landmine: DOES NOT WORK IN CALIFORNIA

34 Depreciation: 179 Expensing New law: Section 179 expensing election is modified to increase the maximum amount that can be deducted to $1 million (up from $500,000 under present law). The dollar limit is reduced dollar-for-dollar to the extent the total cost of section 179 property placed in service during the tax year exceeds $2.5 million (up from $2 million under present law). These limits are adjusted annually for inflation. The changes are effective for property placed in service in tax years beginning after 2017.

35 Depreciation: 179 Expensing (cont.) New law: Expands the availability of the expensing election to depreciable tangible personal property used in connection with furnishing lodging e.g., beds and other furniture for use in hotels and apartment buildings. The 179 election is further expanded to include, at the taxpayer s election, roofs, HVAC property, fire protection and alarm systems, and security systems, so long as these improvements are made to nonresidential real property and placed in service after the date the realty was first placed in service.

36 Bonus Depreciation Bonus depreciation percentage increased from 50% to 100% for property acquired and placed in service after 9/27/17, and before 2023 Phase down of the bonus depreciation percentage beginning in % deduction for property placed in service in % deduction for property placed in service in % deduction for property placed in service in % deduction for property placed in service in 2026 Property that is acquired prior to 9/28/17, but placed in service after 9/27/17, would remain subject to the bonus depreciation percentages available under prior law i.e., 50% for property placed in service in 2017, 40% for property placed in service in 2018, and 30% for property placed in service in 2019

37 Bonus Depreciation (cont.) New law: Changes the definition of qualified property (i.e., property eligible for bonus depreciation) to include used property acquired by purchase so long as the acquiring taxpayer had not previously used the acquired property and so long as the property is not acquired from a related party

38 Qualified Improvement Property Eliminates the special 15-year recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property Instead, it provides a single 15-year recovery period (20 years for ADS) for qualified improvement property, defined as certain interior improvements to nonresidential real property that are placed in service after the initial placed-in-service date of the realty

39 Qualified Improvement Property (cont.) A large portion of restaurant building and building improvement property will be required to be depreciated as non-residential real property over a 39-year recovery period due to the change in the definition of qualified restaurant property Only the qualified restaurant property that meets the qualified improvement property definition will be 15-year property and thus eligible for bonus depreciation NOTE: Waiting on a technical correction. As currently written, all QIP is 39 year property

40 ADS Recovery Period The ADS recovery period for residential rental property is shortened from 40 years to 30 years Any real property trade or business that elects out of the interest deduction limitation (explained next slide) is required to depreciate building property under ADS. QIP 20 year straight-line under ADS* Residential Rental 30 years under ADS Non-Residential Real 40 years under ADS

41 Business Interest Expense Limitation Section 163(j) is amended to disallow a deduction for net business interest expense of any taxpayer in excess of 30% of a business s adjusted taxable income plus floor plan financing interest. Adjusted taxable income generally would be a business s taxable income computed without regard to: (1) any item of interest, gain, deduction, or loss that is not properly allocable to a trade or business; (2) business interest or business interest income; (3) the amount of any net operating loss deduction; (4) the 20% deduction for certain pass-through income, and (5) in the case of tax years beginning before 1/1/2022, any deduction allowable for depreciation, amortization, or depletion.

42 Business Interest Expense Limitation (cont.) Section 163(j) is amended to disallow a deduction for net business interest expense of any taxpayer in excess of 30% of a business s adjusted taxable income plus floor plan financing interest. Adjusted taxable income generally would be a business s taxable income computed without regard to: (1) Any item of interest, gain, deduction, or loss that is not properly allocable to a trade or business; (2) Business interest or business interest income; (3) The amount of any net operating loss deduction; (4) The 20% deduction for certain pass-through income, and (5) In the case of tax years beginning before 1/1/2022, any deduction allowable for depreciation, amortization, or depletion.

43 Business Interest Expense Limitation (cont.) Business interest is defined as any interest paid or accrued on indebtedness properly allocable to a trade or business. This does not include investment interest expense, which is subject to its own limitations. An exception to the limitation applies to taxpayers with average annual gross receipts for the threetaxable-year period ending with the prior tax year that do not exceed $25 million.

44 Good to Know Corporate Tax Rate Reduction Modified NOL s Interest deduction limitation Qualified Opportunity Zones Individual Comparisons and Examples State and Local Non-Conformity

45 Corporate Tax Rate Reduction Old law: Progressive structure up to 35% New law: Flat tax rate of 21% 80% dividends received deduction lowered to 65% 70% dividends received deduction lowered to 50%, effective for tax years 2017 and beyond

46 Corporate Tax Rate Reduction (cont.) The corporate rate reduction will greatly affect choice-of-entity decisions for some business entities. Aggregate U.S. Federal Income Tax Rate on Domestic Business Income (incl. 3.8% Medicare Tax) Pre-Tax Reform Post-Tax Reform C Corporation 50.5% 39.8% Flow-Through Entity 43.4% 33.4% %

47 Corporate AMT Repeal of the corporate AMT effective 12/31/17 AMT credit carryovers can be used to the extent of the taxpayer s regular tax liability For 2018, 2019, and 2020, to the extent that AMT credit carryovers exceed regular tax liability, 50% of the excess AMT credit carryovers would be refundable Any remaining AMT credit would be fully refundable in 2021

48 Modified NOL Deduction New law: Limits the NOL deduction to 80% of taxable income, effective with respect to losses arising in tax years beginning after 12/31/17. Will require separate tracking of NOLs before and after this date Current law: Generally provides a 2-yr carryback and 20-yr carryforward for NOLs New law: Provides indefinite carryforward of NOLs arising in tax years ending after 12/31/17

49 Modified NOL Deduction (cont.) Due to language in the law, losses arising in fiscal years that begin before 12/31/17 and end after 12/31/17 are subject to the new carryback and carry forward rules but not the 80% limitation Deferred purchases to 2019 could be advantageous because the 80% NOL limitation would create an NOL in 2018

50 Election Out of Interest Expense Limitation Certain taxpayers can elect for the interest expense limitation not to apply Businesses making this election would be required to use the alternative depreciation system (ADS) to depreciate certain property For an electing real estate business, ADS would be used to depreciate nonresidential real property (40yr SL), residential rental property (30yr SL), and qualified improvement property (20yr SL)

51 Example of Business Interest Expense Calc. ABC partnership generates $200 of noninterest income. Its only expenses are $80 of business interest and $30 of depreciation (taxable income before limitation = $90) Under the law, the deduction for business interest is limited to 30% of adjusted taxable income, that is, 30% x $200 = $60 ABC deducts $60 of business interest and allocates the $20 of excess business interest to the partners (additional K-1 reporting)

52 Investors: K-1 s from partnerships/s-corps The new 20% deduction and limitation on interest deduction require flow-through entities to provide additional information to partners for use on individual returns 20% deduction income, w-2 wages, property basis, REIT dividends, PTP income Limitation on interest deduction - excess taxable income, excess business interest income

53 Qualified Opportunity Zones The Tax Cuts and Jobs Act of 2018 contains provisions for reduction of capital gains where qualifying funds are invested for long term in qualifying investments in qualifying areas Definition of qualifying investment funds is generous Definition of qualifying investments is broad Definition of qualifying areas is diverse across the U.S. Opportunity for gain deferral and potential exclusion from future taxation

54 Qualified Opportunity Zones (cont.) Taxpayer must reinvest capital gain into qualified opportunity zone fund Must generally reinvest within 180 days of the capital gain event Provides for gain deferral up until 12/31/2026 on reinvested capital gain If investment is held for more than 10 years, then potential exclusion available on appreciation of investment Can be a closely-held fund or a syndicated investment vehicle Complex legislation with many potential traps, so consultation with tax advisors before investment is important

55 Qualified Opportunity Zones Example Investor sells stock for $2M ($1M of long term capital gain) on 7/1/2018 Investor invests $1M in an interest in a QOZ Fund on 11/1/2018 Does not need to invest the entire $2M 12/31/2026: Investor s tax basis in the QOZ Fund was increased by $150K (15% of $1M) $50K on 11/1/2023, and $100K on 11/1/2025 Investor has to pay tax on $850K long-term capital gain 11/2/2028: Investment in the QOZ Fund has appreciated from $1M to $5M ($4M in potential gain). If the investment in the QOZ Fund is sold, then there is no taxable gain on the $4M of appreciation * Results/outcomes may vary

56 Individuals - Change! Most changes effective after 12/31/17 Most individual changes are temporary Many taxpayers will no longer be itemizers MFJ: $24k standard deduction Many taxpayers will no longer owe AMT Some taxpayers will pay more, others will pay less

57 Key Individual Comparisons Item 2018 Pre-Tax Reform Tax Reform Tax brackets 7 rates: 10, 15, 25, 28, 33, 35, 39.6% 7 rates: 10, 12, 22, 24, 32, 35, 37% Taxable Income Family provisions Many deductions Personal and dependency exemptions. $1,000 child credit if under age 17; phaseout starts $110K for MFJ Fewer deductions (state tax, property tax), new one for certain business owners( 199A). $2,000 Child credit if under age 17 ($1,400 refundable); need valid SSN + $500 non-child dependent credit (not refundable); phaseout starts at $200K ($400K if MFJ). Itemized vs standard deduction 33% of individuals itemize deductions Increase in standard deduction; reduction in itemized deductions. Far fewer individuals will itemize. Inflation adjustment CPI-U Chained Consumer Price Index Capital gains / qualified dividends Basically unchanged MFJ: 0% rate up to $77,200; 15% rate up to $479,000; 20% over $479,000 AMT Several preferences and adj; exemptions adj for inflation Retained; higher exemptions; adjustments modified due to regular tax changes

58 Key Individual Comparisons - MFJ Income range 2018 Rate Pre-Tax Reform Tax Reform Rate $ Difference $1 to $19,050 10% 10% 0 $19,051 to $77,400 15% 12% 1,750 $77,401 to $156,150 25% 22% 2,362 $156,151 to $165,000 28% 22% 531 $165,001 to $237,950 28% 24% 2,918 $237,951 to $315,000 33% 24% 6,934 $315,001 to $400,000 33% 32% 850 $400,001 to $424,950 33% 35% -499 $424,951 to $480,050 35% 35% 0 $480,051 to $600, % 35% 5,517 Over $600, % 37% Depends on income

59 Key Individual Comparisons Itemized Deduction Medical Mortgage interest on principal and 2nd homes Investment interest expense State taxes Charitable contribution deduction Casualty/theft loss Misc itemized ded subject to 2% AGI threshold Overall limitation on itemized deductions Tax Reform Rate Retain; 7.5% threshold for 2017 & 2018 (also for AMT) Debt up to $750K (remains $1 million for debt that exists on or before 12/15/17) Retain Maximum $10K ($5K if MFS) Cash contribution limit increased to 60% of AGI Repeal, except for federally-declared disasters Repealed Repealed

60 State and Local Taxes 2018 through 2025 Total deduction is $10,000 ($5K if MFS) May deduct combination of: Income or sales tax State and local property taxes (no foreign real property taxes) Exceptions Taxes imposed at entity level or in carrying on a trade or business Property taxes for residential rental property or business property Property taxes on investment land (likely still allowed on Sch A) CA Excellence Fund

61 Interest Expense 2018 through 2025 Only interest on Acquisition Indebtedness (AI) up to $750K Unless debt existed at 12/15/17 (then still $1 million AI limit) Binding contract exception if entered into before 12/15/17, to close on purchase before 2018 and if purchase before 4/1/18 If refinance treat as incurred on date of original debt to extent doesn t exceed the refinanced debt. No deduction for interest on home equity debt Effective for 2018 tax year no grandfather rule

62 Loss Limitation (Other than C Corps) New law: Contains a significant change to non-passive losses of taxpayers other than C corporations. Excess business loss of such a taxpayer will not be allowed for the tax year. An excess business loss for the tax year would be $500,000 for married individuals filing jointly or $250,000 for other individuals. Because the rule doesn t affect a taxpayer s ability to offset income and losses from separate businesses, it provides incentive for taxpayers to classify their activities as trades or businesses to the extent possible. Any excess business loss of the taxpayer would be treated as part of the taxpayer s net operating loss (NOL) and carried forward to subsequent tax years.

63 A Few Examples Typical family of four earning median family income of $73k 2018 Pre-Tax Reform Tax Reform W-2 Earnings $73,000 $73,000 Standard Deduction -13,000-24,000 Personal Exemptions -16, Taxable Income $43,400 $49,000 Tax $5,558 $5,499 Child Tax Credit -2,000-4,000 Net Tax Liability $3,558 $1,499 Tax reduction under Tax Reform $2,059 Tax reduction under REFORM if children were not under age 17 but otherwise met the definition of a dependent (no child credit under current law and only $500 x 2 under Tax reform) $1,059

64 Effect Depends on Details of Each Situation Family of 4, wages $100K, state taxes $8K, mtg int $10.5K, charitable $500 Family of 4, wages $250K, mtg int $40K, State tax $35K, charitable $5K, misc. $3K Pre-Tax Reform Tax Reform Pre-Tax Reform Tax Reform Taxable income $64,400 $76,000 $150,400 $195,000 Tax $8,708 $8,739 $28,908 $35,379 Child credit $2,000 $4,000 $0 $4,000 AMT $0 $0 $3,372 $0 Net tax $6,708 $4,739 $32,280 $31,379 Savings (add l tax) $1,969 $901 Tax if kids 17 or older $8,708 $7,739 $32,280 $34,379 Savings (add l tax) $969 ($2,099)

65 Married Couple, No Children, Rents, Salary $150, Pre-Tax Reform Tax Reform W-2 Earnings $150,000 $150,000 Standard Deduction -13,000-24,000 Personal Exemptions -8, Taxable Income $128,700 $126,000 Tax $23,483 $19,599 Tax Reduction w/ Reform $3,884 Marginal Tax Rate 25% 22%

66 Example of High Income CA Couple Family of 4, wages $1,500,000, mtg int $40K, State taxes $160K, charitable $15K, miscellaneous $5K 2018 Pre-Tax Reform Tax Reform Taxable Income $1,280,000 $1,435,000 Tax $451,024 $470,329 Child Credit $0 $0 AMT $0 $0 Net Tax $451,024 $470,329 Additional Tax w/reform $19,305 Marginal Tax Rate 39.6% 37% Average Tax Rate 35.2% 32.8%

67 Example of High Income CA Couple (cont.) Family of 4, flow through income $1,500,000, mtg int $40K, State taxes $160K, charitable $15K, miscellaneous $5K 2018 pre-tax reform Tax Reform Taxable Income $1,280,000 $1,135,000 Tax $451,024 $359,329 Child Credit $0 $0 AMT $0 $0 Net Tax $451,024 $359,329 Additional Tax (Savings) w/reform $(91,695) Marginal Tax Rate 39.6% 37% Average Tax Rate 35.2% 31.7%