11/7/2017. Bio. Our agenda. Year-End Tax Planning for Private or Small Businesses & Individuals Webinar Heather Alley, CPA & Nathan Clark, CPA

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1 Year-End Tax Planning for Private or Small Businesses & Individuals Webinar Heather Alley, CPA & Nathan Clark, CPA Bio Heather Alley Partner, DHG Tax Nathan Clark Partner, DHG Tax Our agenda Tax planning and risk mitigation techniques for pass-through entities and individuals to consider before year-end and enactment of tax reform 1

2 Our topics Tax reform overview R&D credit Section 179D, bonus depreciation phase downs, Fixed asset review Succession planning, review documents, gifts, asset protection AMT tax planning tips Roth IRA for IC-DISC Defer revenue Advance payments Accelerate deductions Prepaid payment liabilities, Bad debts, Payment liabilities and exceptions, Sales, rebates & returns allowances Partnership audit regulations Responsible person, amending partnership agreements Charitable contributions Documentation for appraisals of non-cash contributions Polling Question How long have we been discussing tax reform? a. Forever b. Since December 16, 1773 c. At least since we began this presentation d. Tell me more about this so-called tax reform... The outlook for tax reform is uncertain When will it be effective? What will tax reform look like? 2

3 Unified Framework Business Tax Reform Proposals C corp. 20% maximum tax rate C corp. limitation on interest deduction Small and family owned business pass-throughs limited to maximum of 25% tax rate Measures to prevent wealthy taxpayers from shifting salary income to pass-through business income to avoid top individual tax rate Expensing of new depreciable capital investments for at least 5 years R&D and Low Income Housing Credits preserved Domestic Production Activities Deduction eliminated Repatriation and tax on all untaxed accumulated foreign income, payable over several years 100% exemption to U.S. parent on dividends received from foreign subs Broad, conceptual reductions in the tax on foreign profits earned by domestic businesses. Unified Framework Individual Tax Proposals 12%, 25%, 35% tax rates, additional top tax bracket? Itemized deductions mostly eliminated Mortgage interest, charitable deductions preserved Elimination of exemptions for dependents Increased standard deductions to $12,000 for single filers, $24,000 for joint filers Repeal of the estate tax and generation-skipping transfer tax AMT Repeal Encourage work, higher education, retirement security Increased eligibility for Child Tax Credit Tax Reform & Congressional Timeline Mid October /27 9/30 10/15 10/31 12/31 3/18 Q1 Q2 Big 6 Release Framework DRAFT Tax Reform Tax Reform Passed Tax Reform Possibility? Language ACA Repeal Deadline Very Aggressive Debt Ceiling Vote House & Senate Budget Resolution Reconciliation 3

4 Likely Reforms Early 2018 is realistic, 2017 is possible $1.5 trillion in tax cuts over 10 years Business: + Reduced tax rates: 20-25% + Pass-through tax rate maximum + Liberalized full expensing, within limits + Repatriation and toll tax on foreign earnings + Corporate Integration Dividend Deduction INDIVIDUAL: + Reduced rates + Enhanced standard deduction + Eliminated exemptions + Limited itemized deductions + AMT and estate tax repeal Polling question Which quote about tax reform was NOT said in 2017? a) Cheez Doodle reform: lots of puff and color but mostly air b) We won t let the American people down on tax reform c) It s about the economy d) We're going to surprise you with speed of tax reform The R&D credit In 2015 Congress enhanced the R&D credit and made it permanent Available to claim on an original or amended federal tax return State R&D tax credits available Certain small businesses with gross receipts of $5M or less can use the R&D tax credit to offset payroll taxes up to $250,000 per year AMT offset starting in 2016 for small, non-public businesses Internal Use Software (IUS) Regulations issued in

5 179D Energy Efficiency Deduction 179D Planning Considerations 179D Planning Considerations Example : 50,000 sq feet x $1.80 x 39.60% = $35,640 50,000 sq feet x $1.80 x 25.00% = $22,500 Permanent Savings $13,140 Plus Time Value of Money up to 39 years Combine with Cost Segregation Study and/or fixed asset review for maximum impact 5

6 Fixed Asset Review Items to consider: + Reclassification of property - Cost Segregation - Qualified Real Property - Non-depreciable to depreciable + Bonus depreciation - Phase down - Missed Bonus Depreciation - Qualified improvement property + Immediate Expensing - Repair and maintenance - Casualty losses - Self developed / internal use software - De minimis expensing safe harbor + In addition to regular fixed asset additions, opportunity is applicable to assets acquired in stock acquisition + Generally automatic Form 3115 change Succession planning As of October 4, 2017, the Treasury has withdrawn Section 2704 regulations on discounts for lack of control/marketability This is a taxpayer-friendly development and the door is open to gifts for family members or selling to key employees Year-end transfer of ownership Year-end transfer of ownership units to family members or key employees requires an attorney for title change When selling to non-family members, you can issue a promissory note to structure for extended payment Your CPA can assist you with business valuations and year-end planning, but you ll need an attorney to handle title change 6

7 Annual Gift Tax Exclusion Annual gift tax exclusion is $14,000 for 2017 ($28,000 for couples) Gift $14,000 to as many individuals as you want Increased to $15,000 for 2018 Annual exclusion gifts don t count toward the lifetime gift exemption Fund 529 college savings accounts or a gift trust Use em or lose em Lifetime gift tax exemption Lifetime gift tax exemption is $5,490,000 for 2017 Exemption equals federal estate tax exemption and is indexed for inflation Taxable gifts must be reported to the IRS on Form 709 and is due on the same date as your personal income tax return (April 15 of the year after the year in which you make your taxable gift) Exemption is $5.6 million for 2018 AMT Tax What it is Alternative tax regime with different rates (flatter), preferences/adjustments & exclusion amounts Pay Higher of Regular Tax or AMT Tax Two types of preferences/adjustments + Exclusion Preferences + Deferred Preferences AMT Tax paid on deferral preferences may generate credits 7

8 AMT Tax What it is Common Exclusion Preferences/Adjustments + Standard deduction and personal exemptions + Income taxes, property taxes + Miscellaneous itemized deductions + Percentage depletion + Tax Exempt Interest private activity bonds exclusion from gain qualified small business stock Common Deferral Preferences/Adjustments + Depreciation and gain/loss on disposal + Mining costs, excluding oil and gas + Long Term Construction Contracts + Research and experimental expenditures of passive activities + Excess Intangible Drilling Costs + Passive Activity losses and credits differing limitations than for regular tax *Owners of pass-through entities and/or schedule C businesses frequently have substantial adjustments AMT Tax Planning Current - Standard objective is to reduce total taxes paid over multiple tax years Tax Reform? How low can you go IC-DISC: Eligibility Who qualifies? + IC-DISC benefits are often available to every person in the supply chain + Components of larger products often qualify + Qualified exports must be manufactured in the US with > 50% US content + Manufactured goods definition is broad; can include films shot in the U.S. that are distributed abroad and software and agricultural products Who will benefit? + Companies with qualified export receipts >$1M + Companies with annual taxable income from qualified exports >$100K 8

9 IC-DISC: Basic Benefits Calculation Benefits of IC-DISC structure: + Capitalizes on the tax rate differential between ordinary income (39.6%) and dividend rates (23.8%) Tax Savings on Commission Expense: $1,000,000 * 39.6% = $396,000 Tax Cost on Dividend: $1,000,000 * 23.8% = $238,000 Total Tax Savings from IC-DISC: $396,000 $238,000 = $158,000 Share Holders $1,000,000 Dividend (Taxed to Shareholders at dividend rate) 15.8% Effective Tax Savings Exporter $1,000,000 Commission (Deducted from Export Co s ordinary income) IC-DISC Defer Revenue Advance payments for Goods and Services 1-Year Deferral Method + Advance payments included in income year of receipt, to the extent included in taxpayer s applicable financial statements, with remaining amount deferred to next tax + Automatic Form 3115 change 2-Year Deferral Method (includes gift cards/certificates) + Deferral period is the period for financial accounting purposes + For inventoriable goods, deferral period generally may not extend beyond last day of second taxable year following year advance payment is received. + Non-automatic Form 3115 change Timing of Deductions When are liabilities deductible? 3-prong test for accrual taxpayer deductions + All events have occurred that establish the fact of liability + Liability amount is determinable with reasonable accuracy + Economic performance has occurred Certain overrides require capitalization + Capital expenditures + Compensation + Related party transactions + Rents 9

10 Prepaid Expenses Items to Consider Automatic Form 3115 method change + Must meet the 12-month rule and be a proper deduction under overall accounting method + For example, the liability is incurred when paid for payment liabilities (insurance, taxes, gov t licenses and permits, certain warranties or service contracts) Non-automatic Form 3115 change simultaneous change under the 12-month rule and the 3-1/2 month rule for prepaid services/goods or recurring item exception Bad Debts Items to Consider Identify during the tax year bad debts that are wholly/partially worthless Claim a deduction for the (partial) worthlessness of specifically identified bad debt Write off receivable or write down receivable via specific reserve account for books/records May or may not involve accounting method change, depending on facts and circumstances Automatic Form 3115 change Timing of Deductions Economic Performance cont d Payment is economic performance for certain liabilities (payment liabilities) + Worker s compensation, tort, breach of contract, or violation of law + Rebates, refunds of similar payment + Awards, prizes and jackpots + Insurance + Warranty/service contract (entered into with the same party that sold/leased underlying property to taxpayer) + Taxes (imposed by government authority) + Licensing fees (required by government authority) + Others not classified elsewhere in income tax regulations, revenue ruling or revenue procedure ( default ) 10

11 Timing of Deductions 2 ½ Month Rule 3 ½ Month Rule Where Applicable Compensation/ benefits Ratable Service Contract Safe Harbor Rule Examples Compensation can be deducted if: Bonuses paid Amount is fixed and determinable; within 2 ½ Services are provided; and months (if fixed Paid within 2 ½ months after year end at year-end) Services provided under contract on a regular basis Contract does not exceed 12 months; and Each service provides independent value, not dependent upon receipt of prior or subsequent service Contract janitorial, landscaping, ongoing IT support Generally automatic accounting method changes Sales, Incentives, Rebates & Allowances Items to consider: + Many taxpayers provide various sales incentives to their customers in the form of price protection, returns, credit memos, volume bonuses, dealer funds, guaranteed profit, rebates, and allowances + Taxpayers tend to add these reserves back into taxable income and do not deduct these liabilities until paid (change in beginning and ending reserve balance) + Change accounting methods to deduct these liabilities when earned + Generally automatic Form 3115 change Polling question What are you doing to plan for tax reform? a) Looking for tax planning opportunities b) Currently implementing tax planning c) Playing tiddlywinks d) Moving to Canada 11

12 Partnership audit regulations The IRS has reissued proposed regulations for audits of partnerships under the Bipartisan Budget Act of 2015 (BBA) these regulations replace partnership audit rules for tax year beginning on or after January 1, 2018 Anticipating increased audits of partnerships Key developments Entity-level tax liability: audit adjustments occur at partnership level, with maximum statutory rate to calculate underpayment (due in the audit year with penalties and interest) + Partnership must calculate and collect individual partners share of the tax liability (former partners may share in the liability, as well as new partners who joined after the liability was incurred) Alternative Push Out Election: partnerships may elect to shift tax liability to individual partners + Affected partners are liable for the adjustment, penalties and interest Small Partnership Opt Out: eligible partnerships with 100 or fewer partners may elect out of the new partnership audit rules with an annual election on the partnership tax return + IRS will audit the partnership by issuing a separate audit report to each partner Partnership representative: has sole authority to act on behalf of partnership during IRS audit Moving forward Partnerships and LLCs taxed as partnerships should examine partnership and operating agreements Evaluate the opt out and its tax implications for the partnership and individual partners Consider actions to protect the partnership and partner interests in the event of an audit 12

13 Charitable contributions getting more for your charitable dollar Gifts of Appreciated Property + Deduction is allowed equal to the FMV of property donated* + Taxpayer does not recognize gain on property transferred + Donation of appreciated property will generally yield a better savings than a donation of cash equivalent to the property s FMV + Donation of publicly traded securities may be a very efficient choice for donation of appreciated property, particularly where it can be paired with the rebalancing of your portfolio + Tax Reform a charitable deduction this year may yield a bigger savings than making the same donation next year * However, generally this will not apply to inventory and other non-capital gain type property Charitable contributions Charitable Contributions all the i s must be dotted and all the t s must be crossed + Legislative based documentation and reporting requirements for both cash and non-cash contributions + Requirements vary based on amount of donation and type of property + Contemporaneous acknowledgement, containing specific information fields, required statement + Qualified Appraisals IRS has pursued and been successful in disallowing based on technicalities in this area, closely consult regulations to ensure all of the requirements are exactly met for your specific donation Charitable contributions: getting a better deduction for your charitable dollar Example: Large Cap Stocks have done very well over the past few years. Will s financial advisor has indicated that he needs to rebalance and suggested he should take profits in large US Cap Stocks and invest in US Small Cap and International stocks that are under priced Will is planning on making a $100k donation to his alma mater s building campaign 13

14 Charitable contributions: getting a better deduction for your charitable dollar Example: Cash Donations Tax paid on sale of securities Sale proceeds Securities 100,000 Cost basis securities (20,000) Gain on Sale 80,000 Tax paid on gain (20% LTCG) 16,000 Securities Donation Tax Savings on Contribution: Donation amount 100, ,000 Tax Benefit (39.6% ordinary income rate) 39,600 39,600 Donation costs Appraisal, etc 0 Tax benefit (cost) less related expenses 23,600 39,600 Charitable contributions: Other planning considerations Transfer value out of estate by donating property lifetime gifts, testamentary gifts Charitable Remainder Trusts Solve unique estate issues + Conservation easements of family farmers with significant land holding in areas of significant development Charitable Contributions: Donations of property too good to be true? IRS concerns with valuation, higher penalty (40%) for understatement of tax liability due to overstatement of value Special focus on certain conservation easement donation transactions + Partnership, promoted, deduction => 2 ½ times investment; or substantially similar + Notice states IRS will challenge on basis of over valuation, and possibly on other criteria + Disclosures with penalties for failure to disclose $5,000-$200,000 per form + Understatement penalties, 20%-40% or 75% if determined constitutes fraud Potential benefit or potential detriment? Use good judgement 14

15 Polling question What is most relevant to your tax situation? a) Changes to partnership IRS audit rules b) AMT planning c) Charitable contribution planning d) Changing accounting methods What You Can Do Now Implement tax planning previously tabled Refresh old tax planning studies Model impact of tax reforms Thank you for your interest! For more information, talk to your DHG Tax advisor or visit 15