2017 TAX REFERENCE GUIDE

Transcription

1 2017 TAX REFERENCE GUIDE

2 Contents 2 Income taxes Ordinary income tax rates Long-term capital gains and qualified dividends Doubling down on deferral General tax benefits High-income phaseouts 10 Employment, investment and alternative minimum taxes Employment and investment taxes Alternative minimum tax 14 Filing and reporting requirements Annual returns FBAR Information returns 20 Estate and gift taxes Leveraging your exclusions and exemptions 24 Compensation and benefits Health savings accounts 28 Businesses

3 INTRODUCTION It s an exciting and uncertain time for the tax code. President Donald Trump s election victory raises the prospects for tax reform to heights we haven t seen in years. With Republicans controlling the White House and Congress, tax reform suddenly appears within reach. But there are still many obstacles, and no one knows yet how long reform might take, how the current proposals will evolve, or whether the effort will eventually be successful. The uncertain outlook is not an excuse for paralysis. Tax planning is just as important as ever. Republicans are proposing to lower tax rates, which means your normal planning goals not only still make sense, but may be even more powerful. You still want to defer taxes by accelerating deductions and deferring income. If a rate cut is eventually enacted, the payoff is even bigger because you got to use deductions against a higher rate but are recognizing income when rates are lower. Of course it s possible that lawmakers change the tax code retroactively from the beginning of This could take the extra juice out of deferring tax from 2017 to 2018, and it could even take away tax benefits you were counting on for We think this is unlikely, but it will be important to stay apprised of the latest legislative outlook. Either way, your planning should start with the basics. You need to know how credits, exemptions, deductions, phaseouts, tax rate tables and other items in the code have changed for This reference guide has detailed tables containing many of the most important 2017 tax figures for you and your business, as well as planning tips for the new environment. As always, tax laws are subject to change. Please consult a Grant Thornton LLP professional to confirm the latest information. This guide was prepared for print on March 1, 2017.

4 1 INCOME TAXES Tax planning should always start at the individual level. No matter where your business, investment or employment income is earned, it will eventually be taxed on an individual return. Your individual income is taxed at different rates and in different ways, depending on the type of income. The key to tax planning is to understand how your various streams of income will be treated. Most income is considered ordinary income. This includes items like salary, wages, bonuses, self-employment income, interest, dividends, retirement plan distributions and almost all general business income that flows through to you from a pass-through. Two kinds of investment income are subject to special lower rates: qualified dividends and long-term capital gains from assets held more than one year. The top rate on ordinary income is 39.6% while the top rate on long-term capital gains and qualifying dividends is 20%. These figures don t include employment tax and net investment income (NII) tax. We ve included tables with the full tax brackets for ordinary income and for qualified dividends and long-term capital gains. These tax brackets received only modest bumps for 2017, as the IRS used an approximate inflation rate of just 1.2% to make its annual adjustments Tax Reference Guide

5 Ordinary income tax rates Single filer Head of household Rate % $1+ $1+ $1+ $1+ 15% $9,276+ $9,326+ $13,251+ $13, % $37,651+ $37,951+ $50,401+ $50, % $91,151+ $91,901+ $130,151+ $131, % $190,151+ $191,651+ $210,801+ $212, % $413,351+ $416,701+ $413,351+ $416, % $415,051+ $418,401+ $441,001+ $445,551+ Married filing jointly Married filing separately Rate % $1+ $1+ $1+ $1+ 15% $18,551+ $18,651+ $9,276+ $9, % $75,301+ $75,901+ $37,651+ $37, % $151,901+ $153,101+ $75,951+ $76, % $231,451+ $233,351+ $115,726+ $116, % $413,351+ $416,701+ $206,676+ $208, % $466,951+ $470,701+ $233,476+ $235,351+ Trusts and estates Rate % $1+ $1+ 25% $2,551+ $2, % $5,951+ $6, % $9,051+ $9, % $12,401+ $12,501+

6 Long-term capital gains and qualified dividends These do not include 3.8% Medicare tax on net investment income. Income amounts refer to taxpayer total taxable income, including ordinary income. Single filer Head of household Rate % $1+ $1+ $1+ $1+ 15% $37,651+ $37,951+ $50,401+ $50, % $415,051+ $418,401+ $441,001+ $445,551+ Married filing jointly Married filing separately Rate % $1+ $1+ $1+ $1+ 15% $75,301+ $76,551+ $37,651+ $37, % $466,951+ $470,701+ $233,476+ $235,351+ Trusts and estates Rate % $1+ $1+ 15% $2,551+ $2, % $12,401+ $12, Tax Reference Guide

7 Doubling down on deferral The tax code is loaded with special provisions that can lower your tax burden with careful planning. We ve included tables with the 2017 figures for many important tax rules and benefits. Many of these benefits, like the standard deduction and personal exemption, were adjusted modestly this year. See our table on high-income phaseouts to see where deduction and credits will be limited this year. Lawmakers will likely seek to limit or even repeal popular deductions and credits during tax reform. So leveraging beneficial provisions this year may be even more important (it s also possible, though unlikely, that tax reform cuts benefits for the 2017 year). Many common deductions and credits can be powerful tools. Some of the simplest strategies about when and how you use deductions and when you recognize income can profoundly affect when and how much you pay. Accelerating deductions and deferring income in 2017 will provide an extra boost if tax reform is successful and lowers rates in You want to use your deductions and credits against this year s higher tax rates (and while they are still available) and recognize income when rates are potentially lower in But there are many important considerations to keep in mind. See our planning tip to learn more.

8 Planning tip: When you can t reduce, defer Sometimes you can t control whether you pay tax, but you can control when. The time value of money can make deferral a powerful strategy, but it is even more important this year because of the potential for tax reform. Tax reform could lower future rates, meaning the deferral of income would provide a permanent benefit. It will also be beneficial to use deductions while they are still available against today s higher rates. There are many items for which you may be able to control timing. Income Consulting income Self-employment income Real estate sales Gain on stock sales Other property sales Retirement plan distributions Because deferral is such a good strategy anyway, accelerating deductions and deferring income won t usually come back to haunt you if tax reform doesn t go as expected. But there are still many reasons to be cautious. It is possible that rates are lowered and tax benefits are retroactively repealed for all of It s also possible tax reform doesn t lower rates until 2018 or later, or fails altogether. More importantly, accelerating deductions can backfire if you run into limits. For example, there are adjusted gross income (AGI) limits on charitable deductions, so donating more when you re already at the limit won t provide any benefit. Finally, you may want to delay an itemized deduction to bunch it with future expenses, or your tax planning may be affected by the AMT. Expenses State and local income taxes Losses on sales of stock and other investment property Real estate taxes Mortgage interest Margin interest Charitable contributions Tax Reference Guide

9 General tax benefits Tax benefit thresholds Personal exemption Per exemption $4,050 $4,050 Standard deduction Single and married filing separately $6,300 $6,350 Head of household $9,300 $9,350 Married filing jointly $12,600 $12,700 Additional deduction for aged or blind $1,250 $1,250 Additional deduction for unmarried aged or blind $1,550 $1,550 Deduction if you can be claimed by another (or $350 plus earned income if greater) $1,050 $1,050 Transportation fringe benefit Transit $255 $255 Parking $255 $255 Standard mileage rates Business $0.54 $ Charity (not indexed) $0.14 $0.14 Medical/moving $0.19 $0.17 Kiddie tax First $1,050 not taxed $0+ $0+ Next thousand taxed at child s rate $1,050+ $1,050+ Over $2,100 taxed at parent s rate $2,100+ $2,100+ Adoption benefits Adoption credit $13,460 $13,570 Employer adoption benefit income exclusion $13,460 $13,570 Expatriation Average income threshold for determining if subject to tax $161,000 $162,000 Exclusion from tax $693,000 $699,000 Foreign earned income exclusion Per person $101,300 $102,100 Retirement accounts 401(k)/403(b) deferrals $18,000 $18, (k)/403(b) catch-up deferral $6,000 $6,000 IRA contribution $5,500 $5,500 IRA catch-up contributions $1,000 $1,000

10 High-income phaseouts All figures refer to AGI and represent the start of the phaseout thresholds. High-income phaseouts Personal exemption phaseout (PEP) Single $259,400 $261,500 Head of household $285,350 $287,650 Joint $311,300 $313,800 Separate $155,650 $156,900 Pease phaseout of itemized deductions Single $259,400 $261,500 Head of household $285,350 $287,650 Joint $311,300 $313,800 Separate $155,650 $156,900 Child tax credit phaseout (not indexed) Single and head of household $75,000 $75,000 Separate $55,000 $55,000 Joint $110,000 $110,000 Adoption benefits (all filing statuses) Credit $201,920 $203,540 Benefit exclusion amount $201,920 $203,540 Limit on contributing to Roth IRA Single and head of household $117,000 $118,000 Joint $184,000 $186, Tax Reference Guide

11 High-income phaseouts (continued) Deducting a contribution to a traditional IRA Single and head of household (if covered by work plan) $61,000 $62,000 Joint (if contributor covered by work plan) $98,000 $99,000 Joint (if contributor s spouse covered by work plan) $184,000 $186,000 Savers credit Single and separate $18,500 $18,500 Head of household $27,750 $27,750 Joint $37,000 $37,000 Coverdell ESA contributions (not indexed) Single and head of household $95,000 $95,000 Joint $190,000 $190,000 American opportunity tax credit (not indexed) Single and head of household $80,000 $80,000 Joint $160,000 $160,000 Lifetime learning tax credit Single and head of household $55,000 $56,000 Joint $110,000 $112,000 Student loan interest deduction Single and head of household $65,000 $65,000 Joint $130,000 $135,000 Tuition and fees deduction (not indexed) Single and head of household $65,000 $65,000 Joint $130,000 $130,000

12 2 EMPLOYMENT, INVESTMENT, AND ALTERNATIVE MINIMUM TAXES Your tax bill doesn t end with income taxes. Additional taxes are levied against earned income and, for now, investment income. In addition, many business owners, investors and executives have been successful enough to be subject to alternative minimum tax (AMT). All these separate tax bases can complicate your planning, but don t give up. There are a variety ways to mitigate the impact of the AMT and the 3.8% tax on net investment income (NII). Medicare and Social Security rate change thresholds Social Security wage cap (earned income) Per individual $118,500 $127,200 Threshold for additional 0.9% Medicare tax (earned income) Single (not indexed) $200,000 $200,000 Joint (not indexed) $250,000 $250,000 Threshold for 3.8% Medicare tax on investment income (AGI) Single (not indexed) $200,000 $200,000 Joint (not indexed) $250,000 $250,000 Trusts and estates $12,401 $12,501 Medicare and Social Security rates below and above thresholds Rate Below threshold Above threshold Social Security Medicare tax on earned income 6.2% employee 6.2% employer 1.45% employee 1.45% employer 0% employee 0% employer 2.35% employee 1.45% employer Medicare tax on net investment income 0% individual 3.8% individual Tax Reference Guide

13 Employment and investment taxes The Federal Insurance Contributions Act has long required employees and employers to pay equal shares of Medicare and Social Security taxes on earned income (self-employed taxpayers pay both shares). The 3.8% NII tax was enacted in 2013 as part of the Affordable Care Act (ACA) to provide an equivalent tax on certain kinds of investment income. Social Security tax is capped, but the Medicare tax on earned income has no limit. Both employees and employers pay Medicare tax at a 1.45% rate until earned income reaches $200,000 for singles or $250,000 for joint filers, and then the employee rate share increases to 2.35%. The NII tax is 3.8% (equal to the top combined rate of Medicare tax on earned income) and becomes effective at the same thresholds, which are not indexed for inflation. See our tables on page 10 for a breakdown of the thresholds, caps and rates. Republicans have pledged to repeal the 3.8% NII tax and the additional 0.9% Medicare tax with the rest of the ACA. These taxes may indeed be repealed, but the legislative process is always uncertain. There is no guarantee that they will be repealed effective for 2017 or whether repeal will ultimately be successful. You should continue to assume the taxes will be effective in 2017 when paying your estimated taxes unless repeal legislation has actually been enacted.

14 Alternative minimum tax The AMT is essentially a separate tax system with its own set of rules. You must calculate your tax liability under the normal income tax system and the AMT, and then pay the higher amount. The AMT has a lower top rate than the regular income tax system, with just two tax brackets of 26% and 28%. So, how can your AMT be greater than your normal income tax? It s because many deductions and credits aren t allowed against the AMT. Taxpayers with substantial deductions or benefits that are reduced or not allowed under the AMT are the ones stuck paying it. Fortunately, the AMT has a large exemption, and AMT brackets and exemptions were indexed for inflation beginning in See our tables for the important AMT figures for Start of AMT AMT exemption exemption phaseout Single/head of household $53,900 $54,300 $119,700 $120,700 Joint $83,800 $84,500 $159,700 $160,900 Separate $41,900 $42,250 $79,850 $80,450 Trusts and estates $23,900 $24,100 AMT brackets % $1+ $1+ 28% $186,301+ $187,801+ Married filing separate is half these amounts Tax Reference Guide

15 Planning tip: Cut down your AMT triggers One of the best ways to lower your AMT bill is to eliminate or reduce the triggers that cause it. Common AMT triggers include the following: State and local income and sales taxes, especially in high-tax states Real estate or personal property taxes Investment advisory fees Employee business expenses Incentive stock options Interest on a home equity loan not used to build or improve your residence Tax-exempt interest on certain private activity bonds Accelerated depreciation adjustments and related gain or loss differences on disposition You may be able to control the recognition of some of the items. Consider postponing payment on state and local taxes. Many people choose to prepay fourth-quarter state taxes and real estate taxes that are not due until January. You also may be able to capitalize real estate taxes held on land for investment by electing to capitalize carrying costs. This will give you a higher basis instead of a deduction that you can t use. Also consider reallocating your portfolio to avoid too much tax-exempt interest from private activity bonds. Compare the return to other types of tax-exempt bonds that would not potentially subject you to additional AMT. But remember, postponing deductions can backfire if tax reform lowers rates in the future, and lawmakers have discussed repealing the AMT as part of reform.

16 3 FILING AND REPORTING REQUIREMENTS Payment and reporting rules can be just as important as the rules for determining tax, especially after a series of law changes tightening the requirements. Legislation has more than doubled most information return penalties since 2015, accelerated the most important information-reporting deadlines and shifted the due dates for annual tax returns. Annual returns Congress shifted the return due dates for C corporations and partnerships, effective for tax years beginning after Dec. 31, This means the 2017 due dates for 2016 calendar returns are changing. The original deadline for C corporations is now one month later, and they are still allowed a full six-month extension (except for C corporations with a June 30 year-end, which are subject to special rules). Partnership returns are now due 30 days earlier (March 15 for calendar-year partnerships), but the automatic extension has been increased from five months to six months so the extended deadline remains the same (Sept. 15 for calendar-year partnerships). For full details, including the changes to trust returns, see our tables Tax Reference Guide

17 2017 filing deadlines for the 2016 calendar year Original Extension Change from previous rule Partnerships (Form 1065) March 15 Sept. 15 Original deadline 1 month earlier S corporations (Form 1120-S) March 15 Sept. 15 No change C corporations (Form 1120) April 18 Oct. 16 Original and extended deadline 1 month later Trusts (Form 1041) April 18 Sept. 30 Extended deadline 15 days later Individuals (Form 1040) April 18 Oct. 16 No change Fiscal year filing deadlines for tax years beginning after Dec. 31, 2015 Original Extension Change from previous rule Partnerships (Form 1065) 2.5 months 6 months Original deadline 1 month earlier S corporations (Form 1120-S) 2.5 months 6 months No change C corporations (Form 1120) (unless 6/30 year-end) 3.5 months 6 months Original and extended deadline 1 month later C corporations with 6/30 year-end* 2.5 months* 7 months* Extended deadline 1 month later* Trusts (Form 1041) 3.5 months 5.5 months Extended deadline 15 days later * In 2026, the original due date for C corporations with fiscal years ending on June 30 will be pushed back to 3.5 months and the extension will be reduced to 6 months.

18 FBAR FinCEN Report 114, Report of Foreign Bank and Financial Accounts (FBAR), is used to report a financial interest in or signature authority over a foreign financial asset. It has been filed directly with Treasury by June 30 in the past, with no extension available. The filing deadline has been moved to April 15 (April 18 in 2017), but a six-month automatic extension is now available. FinCEN additionally announced that no form or request will be required to receive the automatic 6-month extension, so the deadline is essentially Oct. 15. Information returns Congress changed the due dates for employee wage and tax statements on Forms W-2 and W-3 as well as Form 1099-MISC for nonemployee compensation to battle identity thieves. These forms are now due to the IRS and the Social Security Administration (SSA) on the same day they are due to recipients, which is Jan. 31. Previously, the forms were not due to the IRS or the SSA until Feb. 28 if filed on paper or March 31 if filed electronically. The deadlines have not changed for Forms 1099-MISC that do not report nonemployee compensation, for other forms in the Form 1099 series, or for information returns such as Forms 1096 and Penalties for failures can be severe. See our tables for a full list of the filing deadlines and the potential penalty amounts Tax Reference Guide

19 Information return deadlines in 2017 Employee wage and tax statement: Forms W-2 and W-3 Jan. 31 Furnish to employee and SSA by paper or electronically Form 1099-MISC for nonemployee compensation Jan. 31 Furnish to recipient and IRS by paper or electronically All other Forms 1099 and Forms 1094, 1095, 1096, 1098, 3921, 3922 Jan. 31 Furnish to recipient Feb. 28 Furnish to IRS, if paper March 31 Furnish to IRS, if electronic (1096 not needed if electronic) Annual report of foreign financial account: Foreign Bank Account Report (FBAR) April 18* File with Treasury Oct. 15* Extended due date Calendar-year employee benefit plan report: Form 5500 July 31 Original due date Oct. 15 Extended due date * The FBAR extension is automatic and requires no form or request, so that the overall deadline is effectively Oct. 15.

20 Penalty per return/statement for information-reporting failures Corrected return issued within 30 days $50 $50 Corrected return filed by Aug. 1 $100 $100 No timely corrected return filed $260 $260 Intentional disregard $530 $530 Maximum penalty for information-reporting failures $5 million or more in gross receipts Corrected return issued within 30 days $532,000 $536,000 Corrected return filed by Aug. 1 $1,596,500 $1,609,000 No timely corrected return filed $3,193,000 $3,218,500 Intentional disregard No limit No limit Less than $5 million in gross receipts Corrected return issued within 30 days $186,000 $187,500 Corrected return filed by Aug. 1 $532,000 $536,000 No timely corrected return filed $1,064,000 $1,072,500 Intentional disregard No limit No limit Estimated tax payments for individuals for 2017 Estimated tax payments for calendar-year corporations for st quarter April 18 April 18 2nd quarter June 15 June 15 3rd quarter Sept. 15 Sept. 15 4th quarter Jan. 15 Dec Tax Reference Guide

21 Planning tip: Abate a penalty You don t have to accept an IRS penalty on its face; there are many opportunities to abate it. The IRS can impose penalties for a variety of failures by a taxpayer. Sometimes these notices can be resolved with a simple letter to the IRS explaining that the taxpayer s mistake was due to reasonable cause. This is essentially an argument that the taxpayer was acting responsibly and the mistake was unintentional. It can also mean that the penalty should be abated because the mistake was made by someone other than the taxpayer, like a tax adviser. The IRS s own policy is to impose penalties to enhance voluntary compliance. A taxpayer who has been compliant aside from an isolated error isn t going to become more compliant based on a penalty. Taxpayers may be able to demonstrate that penalties in these cases don t serve the IRS s policy of voluntary compliance. A taxpayer can rely on several arguments to abate penalties, including the following: First-time abatement If you ve never been penalized, you may be eligible for a first-time abatement. This program won t free you from every type of penalty, but for many common failures, the IRS will waive the penalty under this program. Corrective measure If you have been penalized in the past, you can still show that you ve made changes that have prevented failures in subsequent years. Acted reasonably You may also be able to show that you ve exercised ordinary business care and prudence, and the error is isolated and inadvertent.

22 4 ESTATE AND GIFT TAXES Don t drop the ball. Scores of taxpayers with large estates have been celebrating the possibility that the 2016 election results could mean the end of the estate tax. And it s true: Estate tax repeal has long been a cornerstone of the Republican platform and Trump and congressional tax writers are proposing to repeal it. If only repeal were that easy. Don t forget the lesson learned from the last time estate tax repeal was on the menu. From 2000 through 2006, Republicans also controlled the White House, House and Senate. They made estate tax repeal a top priority and at one point enjoyed 55 votes in the Senate plus five Democrats who had publicly opposed the estate tax. Republicans were only able to achieve repeal for one year in 2010, and it didn t stick. Anyone who stopped estate planning in anticipation of repeal made a big mistake. Repeal is again possible, but it is again not assured. Republicans will face some of the same obstacles they did in the early 2000s: the cost, competing priorities, and the lack of 60 votes needed in the Senate to overcome procedural hurdles. Stopping your estate planning now could be just as big of a mistake as it would have been 10 years ago. You may want to avoid estate planning techniques that involve paying gift tax, but don t be afraid to employ planning techniques that include using your exemptions or moving future appreciation to the next generation. This is especially important because estate planning is an ongoing process. Transferring your wealth to loved ones tax efficiently is a lifelong endeavor that is usually more about giving during your lifetime. The good news is that today s low interest rates and growing asset values make it an ideal time for many wealth transfer techniques to be successful Tax Reference Guide

23 Estate and gift tax filing deadlines Form Estate tax return (Form 706) Estate asset valuation reporting (Form 8971) Estate income tax return (Form 1041) Gift tax return (Form 709) Deadline Within 9 months of decedent s death 6-month automatic extension available with Form 4768 Within 30 days of when Form 706 is filed (or 30 days from due date, including extensions if earlier) April 18, 2017, for calendar year 2016 (unless fiscal year) 5-month automatic extension available with Form 7004 April 18, 2017, for gifts made in month automatic extension is available by filing Form 8892 or by extending your income tax return with Form 4868 Estate and gift tax adjustments Unified lifetime credit against gift and estate tax $5.45 million $5.49 million Lifetime credit for generation-skipping transfer tax $5.45 million $5.49 million Annual gift tax exclusion $14,000 $14,000 Annual spousal exclusion for gifts to noncitizen $148,000 $149,000 Cap on aggregate decrease in value under Section 2032A valuation method for real estate Dollar amount for determining interest on an estate tax installment payment under Section 6601 $1.11 million $1.12 million $1.48 million $1.49 million

24 Leveraging your exclusions and exemptions The estate and gift taxes are unified. This means you have one lifetime exemption that can be used by your estate at death or during your life by giving. It is indexed for inflation and reached $5.49 million in Once your lifetime exemption is depleted (under current law), your wealth will generally be subject to the 40% gift and estate tax, regardless of whether it s imposed when you transfer assets while alive or when your estate transfers them after you ve died. You also have an annual gift exclusion that will remain at $14,000 for another year. Most of the best estate planning strategies involve giving while using the lifetime and annual exclusions. You can use a variety of techniques to get more bang for your buck, including grantor retained annuity trusts (GRATs), qualified terminable interest property trusts (QTIPs), irrevocable life insurance trusts (ILITs), intentionally defective grantor trusts (IDGTs), Crummey trusts, dynasty trusts and qualified personal residence trusts (QPRTs) Tax Reference Guide

25 Planning tip: Zero out your GRAT to save more GRATs allow you to remove assets from your taxable estate at a reduced value for gift tax purposes while you receive payments from the trust. The income you receive from the trust is an annuity based on the value of the assets on the date the trust is formed. At the end of the term, the principal passes to your beneficiaries. It s possible to plan the trust term and payouts so that there is no taxable gift. This is called zeroing out the GRAT and happens when the GRAT is structured so that the value of the annuity interest when the GRAT is created equals the value of the assets transferred to the GRAT. So, the remainder s value for gift tax purposes is zero or close to zero. Assuming the GRAT appreciates faster than the rate used to determine the remainder value, you ve passed on assets tax-free. Example Imagine you transfer $1 million of stock to a three-year GRAT. You must designate an annuity payment. To zero out the GRAT, the current value of the annuity payment must equal the $1 million transfer. The current value of an annuity payment is calculated using IRS interest rates. With recent applicable interest rates lower than 2%, you could set the annual payment as low as 35% of the principal, and the current value of the annuity interest rate would be $1 million. There would be no taxable gift, but if the stock appreciated more than 2%, the remainder value passed on to heirs could be significant. If the stock appreciated at 10%, you would transfer $172,500 tax-free. Example Year Principal Growth Payment Remainder 1 $1 million $100,000 $350,000 $750,000 2 $750,000 $75,000 $350,000 $475,000 3 $475,000 $47,500 $350,000 $172,500

26 5 COMPENSATION AND BENEFITS Compensation and benefits represent tricky issues for many businesses. Benefit plans and employee compensation are big expenses for most employers, but they re also the key to retaining and attracting top talent. Your first step should be understanding all the requirements because running afoul of the many restrictions built into compensation and benefits laws can be costly. The second step should be taking a hard look at plan design so you can be sure your plans are cost-effective and attract the right employees. The political situation will make everything even harder. The top priority for Republicans this year is repealing the ACA, and it is one of the areas where they are likely to achieve at least some legislative success. Any change could have a major impact on your health plans. But it s hard to predict exactly how the final legislation will look. There are several popular ACA features (like the ban on refusing coverage for pre-existing conditions) which could be preserved. Even repeal of some of the least popular provisions, like the shared responsibility payments for failing to offer coverage, could have delayed effective dates so Republicans can enact replacement legislation. The key will be to ensure that you are remaining in compliance with the current rules while keeping an eye on the legislative landscape. Remaining in compliance with the current rules means understanding what rates, rules and exemptions have changed since last year. Many important compensation and benefits tax provisions are indexed for inflation and change from year to year. See our table for the 2017 figures Tax Reference Guide

27 Qualified retirement plans: 401(k), 403(b) and most 457 plans Maximum employee contribution/deferral $18,000 $18,000 Catch-up employee contribution/deferral (age 50 and older) $6,000 $6,000 Maximum combined employer and employee contributions to a defined contribution plan $53,000 $54,000 Maximum annual benefit in a defined benefit plan $210,000 $215,000 Limit on compensation under 401(a)(17) that can be considered in calculating contributions to qualified plans Limit on compensation under 401(a)(17) for grandfathered employees for governmental plans under OBRA 93 Threshold for designation as highly compensated employee for nondiscrimination testing $265,000 $270,000 $395,000 $400,000 $120,000 $120,000 Definition of key employee in a top-heavy plan $170,000 $175,000 Individual retirement account (IRA) contribution limits Traditional and Roth IRA $5,500 $5,500 Traditional and Roth IRA catch-up contribution (age 50 and older) $1,000 $1,000 SIMPLE IRA $12,500 $12,500 SIMPLE IRA catch-up contribution (age 50 and older) $3,000 $3,000 SEP IRA (only employer may contribute)* $53,000 $54,000 Minimum compensation required to participate in SEP $600 $600 Maximum compensation for calculating contributions $265,000 $270,000 *SEP contributions are further limited to 25% of compensation.

28 Other compensation and benefits items Flat-rate per participant PBGC premium for single-employer plan $64 $69 Flat-rate per participant PBGC premium for multiemployer plan $27 $28 Variable rate per $1,000 unfunded vested benefits for single-employer plan $30 $34 Variable rate per participant cap for single-employer plan $500 $517 Required ESOP account balance required to lengthen 5-year distribution period Incremental ESOP account balance amount used to determine length beyond 5-year distribution period Compensation threshold to determine control employee for fringe benefit valuation purposes $1.07 million $1.08 million $210,000 $215,000 $105,000 $105,000 Maximum FSA contribution $2,550 $2,600 Monthly per employee payment for failing to offer health coverage to 95% of employees Monthly per employee payment for offering health coverage that fails affordability or minimum value requirements Maximum annual individual penalty for failing to obtain minimum essential coverage $180 $ $270 $ $325 $695 Health savings accounts HSA contribution limits Contribution limits for self-only coverage $3,350 $3,400 Contribution limits for family coverage $6,750 $6,750 Catch-up contributions (age 55 or older and not enrolled in Medicare) (not indexed) $1,000 $1,000 High-deductible health coverage requirements for HSAs Minimum deductible for self-only coverage $1,300 $1,300 Maximum deductible for self-only coverage $2,600 $2,600 Minimum deductible for family coverage $6,550 $6,550 Maximum deductible for family coverage $13,100 $13, Tax Reference Guide

29 Planning tip: Confirm your worker classification Many businesses rely heavily on independent contractors. The decision to hire a contractor rather than an employee is usually a business decision, but it can have a big impact on benefit plans and taxes. For independent contractors, you don t pay the employer share of payroll taxes, include them in benefit plans, or face excise taxes for failure to offer health coverage. The IRS understands the benefits to employers of using independent contractors instead of employees and has cracked down on the practice of misclassifying employeeemployer relationships as independent contractor relationships. Misclassifying your workers can be costly. The IRS has an ongoing voluntary reclassification program that allows taxpayers to correct improper classification with greatly reduced back taxes and penalties. If the IRS discovers an issue outside of this program, it is unlikely to be lenient. To prove the independent contractor relationship, documentation is imperative. You need to establish detailed policies, procedures and systems that employees responsible for hiring contractors can easily understand. To help establish a solid foundation for classifying workers as independent contractors, consider these suggestions: Develop a checklist that must be completed before hiring an independent contractor that includes a mandatory questionnaire asking about factors that indicate the worker s relationship to the company. Use a contract with specific language about the worker s relationship to the organization. Avoid using contract language that establishes the right of direction and control, including noncompete agreements, restrictions on hiring subcontractors, and payment of liability or workers compensation insurance. Create a formal internal policy document that clearly defines the required documentation and procedures and lists the departments responsible for implementing the procedures.

30 6 BUSINESSES Tax reform presents an excellent opportunity for businesses. No one knows yet whether Republicans will actually achieve reform or how their proposals may evolve along the way, but you can t ignore the fact that there is the significant possibility that business rates will be lower after In the long term, rate and rule changes could force businesses to re-examine everything from a tax perspective, including entity choice, structures, jurisdictions, activities and investments. You have time to watch the deliberations while you plan, but there is still plenty to do now. In the short term, businesses should be looking to turn deferral into permanent tax savings. If rates go down in 2018 (or later), accelerating deductions into 2017 and deferring income into 2018 (or later) could provide a permanent benefit. In the same way deferral can help individuals (as we described in chapter one), businesses can also use accelerated deductions against today s higher rates and recognize deferred income against potentially lower rates. In fact, businesses have even more opportunities to accelerate deductions and defer income. IRS rules provide many different methods for recognizing certain types of income and expenses. Most businesses employ dozens of separate accounting methods on everything from inventory and rebates to software development and advanced payments. Identifying a more favorable method of accounting often results in a favorable adjustment that can be taken fully in the year a change is made. The IRS has identified more than 150 accounting method changes that can be made automatically, and there are scores of others you can change after receiving IRS approval. Consider a comprehensive review of all your accounting methods now when deferral is even more powerful Tax Reference Guide

31 Common opportunities include: Deferral of income related to advanced payments Deferral of recognition of disputed income Acceleration of the deduction for liabilities and expenses related to the following: Computer software development expenses Self-insured medical expenses Prepaid expenses Real and personal property taxes Payroll taxes Rebates Reduction of amounts capitalized to inventory It is also the perfect time to consider your capital expenditures and the recovery period for your fixed assets. Building assets represent a very large expense for most businesses, and many owners incorrectly believe that all costs associated with these assets must be capitalized and depreciated over 39 years. This is not always the case. See our planning tip for more information about this opportunity. As always, you should consider your entire situation before making any major planning decisions. You will want to consider the ongoing impact of any method changes and understand whether tax reform could retroactively take away the tax benefit you are counting on for It s always possible that tax reform doesn t happen at all or that rate changes are made effective early or late so that there is no rate difference between 2017 and The good news is that deferring tax is typically a good strategy, if only for the cash flow benefits and the time value of money. Despite these benefits, many businesses, particularly public companies, are sometimes reluctant to exert any effort to take advantage of a timing change if it provides no book benefit for financial accounting purposes. But this may be the perfect year to take a second look at your tax accounting, as a rate cut could turn a timing change into a permanent benefit.

32 C corporation income tax brackets (not indexed) Tax rate Tax bracket 15% $0 $50,000 25% $50,001 $75,000 34% $75,001 $100,000 39% $100,001 $335,000 34% $335,001 $10,000,000 35% $10,000,001 $15,000,000 38% $15,000,001 $18,333,333 35% More than $18,333,333 Note: Personal service corporations are taxed at a flat 35% rate. Business item adjustments Section 179 expensing limit $500,000 $510,000 Section 179 phaseout (expensing limit reduced by the amount of property placed in service over this threshold) $2.01 million $2.03 million Bonus depreciation rate 50% 50% Depreciable life for qualified leasehold, retail and restaurant improvements Holding period to avoid built-in gains (BIG) tax after converting to an S corporation (now permanent) 15 years 15 years 5 years 5 years New markets tax credit allocation $3.5 billion $3.5 billion Exclusion for gain from qualified small business (QSB) stock (now permanent) State low-income housing credit cap (cap is $2.35 x state population if greater) State private activity bond overall cap (cap is $100 x state population if greater) 100% 100% $2.69 million $2.71 million $302,875,000 $305,315,000 Cap on private activity bond exception for first-time farmers $520,000 $524,200 Start of threshold for determining whether small employer is eligible for the Section 45R health care tax credit $25,900 $26,200 Tax on arrow shafts $0.49 $0.50 Per passenger excise tax on domestic flight segments $4.00 $4.10 Per passenger excise tax on international flight segments $17.80 $ Tax Reference Guide

33 Planning tip: Capital cost recovery review Commercial real estate is depreciated over nearly 40 years, so one of your biggest opportunities for tax savings might be identifying and reclassifying building assets that can be depreciated using shorter lives. Many taxpayers assume all costs associated with constructing or substantially remodeling a building must be capitalized and depreciated over 39 years. This is not always true. A cost segregation study can often identify scores of building components that can be segregated and depreciated more quickly. It is just as important to understand whether any of your capital improvements qualify as repair or maintenance costs that can be immediately deducted instead of depreciated over 39 years. The IRS recently finalized new rules covering this issue, and the rules allow many common expenses that are treated as improvements for book purposes to be deducted as repairs for tax purposes. Plus, you may be able to accelerate deductions to recover the basis in assets that are removed during a project, even when you must otherwise capitalize the costs. Consider a comprehensive review of your recent projects to determine if there are ways to accelerate your deductions.

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