Tax Cuts and Jobs Act Update

Transcription

1 Tax Cuts and Jobs Act Update INSIGHTS FOR BUSINESSES & INDIVIDUALS JUNE 14, 2018 TO RECEIVE CPE CREDIT Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to within 24 hours of webinar If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of webinar 1

2 OUR PRESENTERS Jesse Palmer, CPA Director of Tax Quality Control Damien Martin, CPA National Tax Assistant Director Chris Clifton, CPA Tax Director International TAX REFORM TIMELINE & WHAT S NEXT November 2, 2017 Tax Cuts and Jobs Act (TCJA) introduced in House Ways & Means Committee December 22, 2017 TCJA signed into law by President Trump February 9, 2018 Bipartisan Budget Act of 2018 March 23, 2018 Consolidated Appropriations Act, 2018 signed into law Guidance 2

3 TCJA & UNCERTAINTY AT A GLANCE Reduced Tax Rates Enhanced Capital Expensing Limited Deductions Made Significant International Changes Changed Choice of Entity Analysis Key areas we re watching Guidance on pass-through business deduction Guidance on qualified opportunity zones CORPORATE INCOME TAX RATE Taxable Income Previous Law $0 $50,000 15% TCJA $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10,000,000 34% 21% $10,000,001 $15,000,000 35% $15,000,001 $18,333,333 38% Over $18,333,333 35% 3

4 INDIVIDUAL INCOME TAX RATE Click here for printable version of all individual brackets Plus 3.8 percent net investment income tax on unearned income when modified adjusted gross income exceeds $200,000 ($250,000) Expires after December 31, 2025 PASS-THROUGH BUSINESS DEDUCTION Noncorporate taxpayer? YES Domestic income? YES Qualified business income (QBI)? YES Specified agri/ horticultural co-op? YES DEDUCTION(3) = 9% OF LESSER OF NO QUALIFIED PRODUCTION ACTIVITIES INCOME OR CO-OP TAXABLE INCOME(3) NO NO NO NO NO Taxable income < threshold?(2) YES Taxable income > full phaseout?(1) YES YES NO DEDUCTION Specified service trade/business? NO DEDUCTION(4) = 20% QBI + 20% QUAL REIT DIVS 20% QUAL PTP INCOME (1) $207,500 (single) $415,000 (MFJ), indexed for inflation annually (2) $157,500 (single) $315,000 (MFJ), indexed for inflation annually NO PARTIAL DEDUCTION DEDUCTION(4) = LESSER OF OF GREATER OF OF 20% 50% W-2 WAGES OR OR QBI OR 25% W-2 WAGES + 2.5% QUAL PROPERTY + 20% QUAL REIT DIVS + 20% QUAL PTP INCOME PATRONS OF SPECIFIED AGRICULTURAL OR HORTICULTURAL CO-OPS: REDUCE BY LESSER OF 9% OF QBI ALLOCABLE TO QUAL PAYMENTS FROM CO-OP (3) Deduction limited to 50 percent of W-2 wages allocable to domestic production gross receipts. Taxable income determined before any deduction for patronage dividends, perunit retain allocations & nonpatronage dividends (4) Limited to 20 percent of excess of taxable income over the sum of any net capital gain OR 50% OF W-2 WAGES ALLOCABLE TO QUAL PAYMENTS FROM CO-OP 4

5 TCJA & UNCERTAINTY AT A GLANCE Reduced Tax Rates Enhanced Capital Expensing Limited Deductions Made Significant International Changes Changed Choice of Entity Analysis Key areas we re watching Section 168(k) guidance over the summer Qualified improvement property (technical correction) TAX REFORM AT A GLANCE Enhanced Bonus Depreciation Now available for both new & used assets September 28, % December 31, % % % % Expanded Section 179 Up to $1 million; phaseout beginning at $2.5 million of assets placed in service (adjusted for inflation) 5

6 TCJA & UNCERTAINTY AT A GLANCE Reduced Tax Rates Enhanced Capital Expensing Limited Deductions Made Significant International Changes Changed Choice of Entity Analysis Key areas we re watching Guidance on limitation on net business interest expense Net operating loss deduction limitation (technical correction) Guidance on deduction for meals & entertainment expense BUSINESS INTEREST EXPENSE LIMITATION Limitation Previous Law New Law Entity type Revenue threshold C corporations only (domestic or foreign) Applies regardless of revenue level Applies to all entity types Applies only if average gross receipts > $25 million* Business sector Any business sector Does not apply to regulated public utilities, electing real property trade/business or electing farm business** *Exception for tax shelters **An electing real property or farm business must use ADS method of depreciating certain fixed assets 6

7 BUSINESS INTEREST EXPENSE LIMITATION Limitation Previous Law New Law Debt-to-equity safe harbor Type of interest expense Net interest expense subject to limitation Current year interest not limited if debt-to-equity ratio at or below 1.5-to-1.0 Interest paid to foreignrelated party to extent not subject to U.S. withholding tax & interest on debt guaranteed by foreignrelated party Interest expense less interest income Applies regardless of debt-toequity ratio All business interest subject to exceptions regardless of payee or guarantor Business interest expense less business interest income less floor plan financing interest expense BUSINESS INTEREST EXPENSE LIMITATION Limitation Previous Law New Law Income limitation Deduction limited to 50 percent of adjusted taxable income Adjusted gross income Cash basis, tax basis EBITDA Carryover of excess limitation Carryover of disallowed interest Up to three years; added to adjusted taxable income limit in carryover year Indefinite Deduction limited to 30 percent of adjusted taxable income Cash basis, tax basis EBITDA until 2022; EBIT for taxable years beginning after 12/31/2021 Excess does not carryover (pre-tcja excess limitation does not carryover to post- TCJA years) Indefinite 7

8 NET OPERATING LOSS (NOL) Deduction limited 80 percent of taxable income Applies to losses arising in tax years beginning after December 31, 2017 No carryback Applies to losses arising in tax years ending after December 31, 2017 (except property/casualty insurance companies & certain farm losses) Carried forward indefinitely Applies to losses arising in tax years ending after December 31, 2017 TCJA & UNCERTAINTY AT A GLANCE Reduced Tax Rates Enhanced Capital Expensing Limited Deductions Made Significant International Changes Changed Choice of Entity Analysis Key areas we re watching guidance on Repatriation tax (Section 965) Global intangible low-tax income (GILTI) Base erosion minimum tax (BEAT) 8

9 KEY INTERNATIONAL PROVISIONS Dividend received deduction Repatriation tax GILTI (Income & deduction) FIDII (Deduction) BEAT (Anti-Abuse Minimum Tax) GLOBAL INTANGIBLE LOW-TAX INCOME GILTI CFC Income (generally) 10% x Adjusted Basis Fixed Assets Interest Expense *Includes assets subject to depreciation under 167, not amortizable assets 9

10 FOREIGN-DERIVED INTANGIBLE INCOME FDII Deduction 37.5% FDII (income) Foreign Source Income FDII Net Income 10% x Fixed Asset Basis Total Income SECTION 965 IRS FAQs March 13, 2018 Reporting & election procedures June 4, 2018 Estimated tax penalty relief for 2018 Q1 if IRS applies overpayment to years 2 8 installments that taxpayer intended to apply to 2018 estimated taxes Individual payments in case of late paid first installment & late 8-year payment election April 13, 2018 IRS intends to apply overpayments from 2017 returns to years 2 8 installments of transition tax before issuing refunds or applying overpayments to

11 WHAT WE RE SEEING: INTERNATIONAL Migration to U.S. corporations for ownership of CFCs (& other foreign entities) Repatriation & GILTI inclusion: Individuals can make 962 election to claim deemed foreign taxes paid Need for E&P studies Entity classification planning strategies for U.S. companies & for U.S. ownership of foreign subs IC-DISC structures remain attractive TCJA & UNCERTAINTY AT A GLANCE Reduced Tax Rates Enhanced Capital Expensing Limited Deductions Made Significant International Changes Changed Choice of Entity Analysis Key areas of uncertainty Pass-through business deduction guidance Guidance on international provisions State & local tax reform & conformity 11

12 CHOICE OF ENTITY AFTER THE TCJA Effective tax rate for corporations & pass-throughs International provisions State & local conformity to federal law Future tax rate changes Individual provisions sunset December 31, 2025 Permanent corporate/qualified dividend tax can be changed Accounting methods expanded Employee benefit & owner compensation options Ownership & succession considerations TAX RATES AFTER THE TCJA Corporations Pass-throughs Number of tax brackets One, flat rate Seven brackets for individuals (four for trusts/estates) Top tax rate 21 percent percent on qualified dividends 37 percent percent net investment income tax Alternative minimum tax None 28 percent (exemption $70,300 single/$109,400 MFJ; phaseout $500,000/$1 million MFJ) Other tax Accumulated earnings tax (20 percent) Tax on undistributed personal holding company income (20 percent) Other rate considerations Full/partial gain exclusion on qualified small business stock Self-employment tax (15.3 percent) Built-in gains tax Pass-through business deduction (20 percent) Limitation on SALT deduction Limitation on losses 12

13 TAX RATES AFTER THE TCJA Effective tax rates after the TCJA Previous Tax Law Corporation 50.47% (35% +.65 * 23.8%) Pass-through 43.4% (39.6% + 3.8%) Effective tax rate case study fact pattern New Tax Law 39.8% (21% * 23.8%) 40.8% (37% + 3.8%) S corporation Business income: $1 million State income tax rate: 6 percent (entity & shareholder) State does not conform to IRC Section 199A SCENARIO 1: QBI DEDUCTION Previous Tax Law New Tax Law Corp S Corp Corp S Corp Business income $1,000,000 $1,000,000 $1,000,000 $1,000,000 Pass-through business deduction (200,000) State income tax (entity level) (60,000) - - (60,000) - - Taxable income 940,000 1,000, , ,000 State income tax (shareholder level) - - (60,000) - - (60,000) Federal income tax on business income (319,600) (325,623) (197,400) (226,499) Tax on distribution to owner (184,879) - - (221,295) - - Total tax (564,479) (385,623) (478,695) (286,499) Net cash to owner $435,521 $614,377 $521,305 $713,501 Combined effective tax rate 56.45% 38.56% 47.87% 28.65% 13

14 SCENARIO 2: NO QBI DEDUCTION Previous Tax Law New Tax Law Corp S Corp Corp S Corp Business income $1,000,000 $1,000,000 $1,000,000 $1,000,000 Pass-through business deduction State income tax (entity level) (60,000) - - (60,000) - - Taxable income 940,000 1,000, ,000 1,000,000 State income tax (shareholder level) - - (60,000) - - (60,000) Federal income tax on business income (319,600) (325,623) (197,400) (300,499) Tax on distribution to owner (184,879) - - (221,295) - - Total tax (564,479) (385,623) (478,695) (360,499) Net cash to owner $435,521 $614,377 $521,305 $639,501 Combined effective tax rate 56.45% 38.56% 47.87% 36.05% SCENARIO 3: RETAIN 50% OF INCOME Previous Tax Law New Tax Law Corp S Corp Corp S Corp Business income $1,000,000 $1,000,000 $1,000,000 $1,000,000 Pass-through business deduction State income tax (entity level) (60,000) - - (60,000) - - Taxable income 940,000 1,000, ,000 1,000,000 State income tax (shareholder level) - - (60,000) - - (60,000) Federal income tax on business income (319,600) (325,623) (197,400) (300,499) Tax on distribution to owner (92,440) - - (110,647) - - Total tax (472,040) (385,623) (368,047) (360,499) Net cash to owner 217, , , ,501 Net cash retained in business 310, , , ,000 Total net cash after taxes $527,960 $614,377 $631,953 $639,501 Combined effective tax rate 47.20% 38.56% 36.80% 36.05% 14

15 KEY TAKEAWAY #1 The impact of tax reform will depend on your unique situation. KEY TAKEAWAY #2 There are many significant uncertainties surrounding the new pass-through business deduction; many are taking a wait-and-see approach. 15

16 KEY TAKEAWAY #3 The international provisions of the TCJA are complex & require detailed analysis. LEARN MORE & STAY CURRENT Tax Reform Resource Center bkd.com/taxreform Simply Tax Podcast bkd.com/simplytax BKD Thoughtware bkd.com/thoughtware 16

17 QUESTIONS? CONTINUING PROFESSIONAL EDUCATION (CPE) CREDIT BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: The information contained in these slides is presented by professionals for your information only & is not to be considered as legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor or legal counsel before acting on any matters covered. 17

18 CPE CREDIT CPE credit may be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please the BKD Learning & Development Department at The information contained in these slides is for your information only, based on data available as of the date of the presentation, & is not to be considered as tax or legal advice. Applying specific information to your situation requires careful consideration of facts & circumstances. We are under no obligation to update these slides if changes occur. Consult your BKD advisor before acting on any matters covered. 18

19 THANK YOU! Jesse Palmer Damien Martin Chris Clifton 19