May 8, 2018 Watkins Glen, New York

Transcription

1 May 8, 2018 Watkins Glen, New York

2 This presentation is intended for general educational and/or informational purposes only and does not replace specific, independent professional advice. This presentation is based on our current interpretations of the law. These interpretations may ultimately, after further IRS or other guidance, be changed. Statements and opinions expressed are those of the presenter or participants individually and, unless expressly stated to the contrary, are not the opinion or position of Bonadio & Co., LLP. Bonadio & Co., LLP assumes no responsibility for the content, accuracy or completeness of the information presented. Attendees should note that sessions may be audio-recorded and published in various media, including print, audio and video formats without further notice. 2

3 TC&JA Business Overview Corporate Tax Rate Reduction Corporate AMT Repeal NOL Modifications Territorial Tax Regime (& Deemed Repatriation Tax) Tax Credits Expensing of Capital Investments Interest Expense Limitation Pass-through Entity Deduction Like-kind Exchanges for Real Estate Only State Tax Update 3

4 TC&JA Individual Overview Business Loss Limitation Changes to Deductions Moving Expenses Alimony Payments Taxes (State income tax and property tax) Mortgage Interest Miscellaneous Itemized Deductions Increased Standard Deduction Enhanced Child Tax Credit Increase in AMT Exemption 2025 Sunset - for many individual tax law changes 4

5 C Corporation Modifications

6 C Corporation Modifications Corporate tax rate = Flat 21% Old Law = graduated tax rate up to max of 35% Fiscal Year Companies = Blended Rate for FY 18 June 30 th FY = 27.5% - 28% September 30 th FY = % % 6

7 C Corporation Modifications AMT = Repealed AMT Credit Carryforward Prior year minimum tax credit carryforward permitted to offset taxpayer s regular tax liability for any tax year Potential refund opportunity to the extent AMT credit carryovers exceed regular tax liability o Tax years Refundable credit = 50% x [AMT Credit C/F current year tax] o For tax years after 2021, AMT Credit C/F is 100% refundable Domestic Production Activities (DPAD) = Repealed Elimination of 9% DPAD deduction offsets rate reduction by 3% Dividends Received Deduction 65% DRD (for 20% or more owned corporation) Reduced from 80% 65% DRD (for less than 20% owned corporation) Reduced from 70% 7

8 C Corporation Modifications Net Operating Loss NOL s incurred 2018 forward o NOL deduction in any given tax year limited to offset only 80% of taxable income o Elimination of NOL carryback o Indefinite NOL carryforward NOL s incurred through 2017 tax year o 2-year NOL carryback o 20-year NOL carryforward o NOL deduction can offset 100% of taxable income for a tax year 2018 or after Fiscal Year Taxpayer NOLs arising in FY 2018 (tax years beginning before 12/31/2017 and ending after 12/31/2017) would not be subject to the 80% limitation, could not be carried back, but could be carried forward indefinitely 8

9 C Corporation Modifications FDIC Premiums $50B or more in assets, no deduction for FDIC premiums paid $10B - $50B in assets, deduction limited (based upon applicable percentage of FDIC premiums paid) $10B or less, no limitation on allowable deduction 9

10 Federal Tax Credits

11 Federal Tax Credits R&D Credit Remains in place under the TCJA Credits worth more under the TCJA (approximately 21% increase in value) Research & Experimental Expenditures (IRC 174) Under pre-tcja and through 2021 = immediate expense, including software development costs Post-12/31/2021 capitalize and amortize over five year period Low Income Housing Tax Credits (LIHTC) Credit structure remains unchanged Tax credits worth less since tax rates have decreased (35% vs 21%) Reduced pricing of credits by equity investors in future Projects may require more permanent financing and/or deferral of larger amounts of developer fees 11

12 Federal Tax Credits Historic Tax Credit 20% of qualified rehabilitation expenditures remains in place under the TCJA Will need to be taken over five year period vs. when building placed into service 10% non-historic tax credit repealed as part of TCJA Work Opportunity Tax Credit (WOTC) Remains in place under TCJA Expires at end of

13 Entertainment and Fringe Benefit Modifications

14 Meals & Entertainment Entertainment No deduction allowed Business Meals o Any business expenses incurred for recreation or amusement, including golf outings, sporting events, concerts, theater tickets, hunting trips, country club dues, etc. Entirely non-deductible (even if substantial and bona fide business purpose) 50% Deductible Employee Meals o o Directly related or associated with the active conduct of the taxpayer s business (i.e.- purpose is to obtain new business or encourage the continuation of a business relationship) Directly Related = concrete business benefit expected to be derived (a sale or immediate revenue), not just general goodwill Associated With = precedes or follows a substantial and bona fide business discussion/meeting Food and beverages consumed during entertainment activities deductible as business meals if: broken out separately, and business purpose documented Old law Permitted 100% deduction if provided either (a) in a company cafeteria, or (b) on the employer s premises for the convenience of the employer New law All employee meals = 50% deductible o Applies to meals served in a company cafeteria, meals provided for the convenience of the employer, employee meals while traveling, meals for company meetings, and meals provided to employees as fringe benefits (such as meals provided to enable an employee to work overtime) 14

15 Meals & Entertainment 100% Deduction To Do Expenses associated with recreation or social activities primarily for the benefit of employees o Holiday parties, employee gym facilities, etc. Review current accounting, reimbursement, and employee meal policies Create separate general ledger accounts for entertainment, meals, holiday parties, etc., in order to have expenses properly categorized for year-end tax purposes Review documentation procedures o o Burden of proof rests with the taxpayer If a meal is determined to be part of an entertainment expense, such meal would be nondeductible Taxpayer must establish that a business meal is not an entertainment expense Proper Documentation Amount, time, place, business purpose, business relationship with those present, etc. Clearly state how much of expense relates to entertainment vs. food/beverage 15

16 Cost Recovery

17 Expensing of Capital Investments Bonus Depreciation = 100% Both new & used assets Assets placed in service after 9/27/ Deduction o For 2017 T/R s, can elect either 50% or 100% bonus on post-9/27/17 assets Increased to $1M, with a phase-out threshold of $2.5M o Assets placed in service starting in can now be applied to: o o o Tangible personal property used in a trade or business (historical rule) Residential rental property, and Replacement of roof, HVAC, fire and security systems in a commercial building 17

18 Qualified Improvement Property Qualified Improvement Property 2017 = 39-year depreciable life 2018 forward = 15-year depreciable life Definition o o o Improvement to an interior portion of non-residential real property Improvement is placed in service after the date the building was first placed in service Excludes: Building additions Elevators and escalators Internal structural framework of the building External building improvements 18

19 Interest Expense Limitation

20 Interest Expense Limitation Effective for taxable years beginning after December 31, 2017 Amount allowed as a business interest deduction for any taxable year should not exceed the sum of: The business interest income of such taxpayer, plus 30% of the adjusted taxable income of such taxpayer, plus The floor plan financing interest of such taxpayer (IRC 163(j)) Interest Expense Limitation 163(j) limitation should be applied after other interest disallowance, deferral, capitalization or other limitation provisions. This limitation applies at the taxpayer level. However, in the case of a group of affiliated corporations, the limitation applies at the consolidated tax return filing level. Disallowed Business Interest Carryforward = Indefinite Carryover amounts would be taken into account in the case of certain corporate acquisition described in IRC 381, and would be subject to limitation under IRC 382 Business interest expense and income Relates to indebtedness that is properly allocable to a trade or business and does not include investment interest expense or income (as defined under IRC 163(d)(3)) 20

21 Interest Expense Limitation Effective for taxable years beginning after December 31, 2017 The term trade or business shall not include: The trade or business of performing services as an employee Any electing real property trade or business Any electing farming business or The trade or business of the furnishing or sale of electrical energy, water, or sewage disposal services, gas or steam through a local distribution system, or transportation of gas or steam by pipeline if the rates for such furnishing or sale have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, by a public service or public utility commission or other similar body of any State or political subdivision thereof, or by the governing or ratemaking body of an electric cooperative (IRC 163(j)(7)(A)) 21

22 Interest Expense Limitation Adjusted Taxable Income = Taxable income of the taxpayer computed without regard to (IRC 163(j)(8)): any item of income, gain, deduction, or loss which is not properly allocable to a trade or business, Any business interest expense or business interest income The amount of any NOL deduction under IRC 172 The amount of any deduction allowed under IRC 199A Any deduction allowable for depreciation, amortization, or depletion (if it is a taxable year beginning before January 1, 2022) Computed with such other adjusted as provided by the Secretary Note: While currently the adjusted taxable income allows for the removal of depreciation and amortization before calculating the limitation, it is only for the first five years. For taxable years beginning after January 1, 2022, the limitation will apply after depreciation and amortization are taken, significantly increasing the limitation. 22

23 Interest Expense Limitation Example Interest Expense Limitation Test Scenario 1 Scenario 2 Interest Expense Incurred during the TY $500,408 $514,091 Preliminary Taxable Income 165, ,054 Plus Interest Expense 500, ,091 Less Interest Income (7,989) (4,128) Plus Depreciation, Amortization, or Depletion (before 1/1/2022) 493, ,077 Adjusted Taxable Income $1,151,790 $1,719,094 30% Limitation $345,537 $515,728 Plus Interest Income 7,989 4,128 Plus floor plan financing 0 0 Interest Deduction for the Taxable Year $353,526 $519,856 Disallowed Interest $146,882 $0 23

24 Interest Expense Limitation Exceptions Electing Real Property Trade or Business (IRC 163(j)(7)(B)): Any trade or business (as defined under IRC 469(c)(7)(C)) which makes an irrevocable election The term real property trade or business means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business (IRC 469(c)(7)(C)) If an election is made non-residential real property, residential rental property, and qualified improvement property must utilize ADS and bonus depreciation is not allowed Future ADS depreciation is recalculated by recasting the remaining net tax basis of ALL of your QIP, 27.5 and 39 year assets in the year of election. (See Treas. Reg (i)-4 (d)(6) Example 3 to see how to calculate this based on the Senate Committee comments to their bill) Bonus depreciation would be available for all other property (i.e. personal property and land improvements) Exception for certain small businesses (IRC 163(j)(3)): IRC 163(j) will not apply to a taxpayer if the average annual gross receipts of such entity for the 3-taxableyear period ending with the taxable year which precedes such taxable year does not exceed $25,000,000 (IRC 448(c)) In the case of any taxpayer which is not a corporation or a partnership, the gross receipts test will be applied in the same manner as if such taxpayer were a corporation or partnership Aggregation rules do apply for purposes of determining whether the $25,000,000 gross receipts test is met 24

25 Pass-Through Deduction

26 Pass-through Entity Updates: Pass Through Deduction New Pass Through Deduction: IRC 199A A new 20% deduction of qualified business income is allowed for individuals, estates and trusts that own partnerships, S corporations and sole proprietorships. The tentative deduction is made for each separate business and totaled. There is not a grouping election for businesses at this time Although the deduction is generally based on business income, it is taken against taxable income The deduction is available to a service business only if taxable income is low enough The deduction is available for both itemizers and non-itemizers 26

27 Pass-through Entity Updates: Pass Through Deduction Qualified Business Income means qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer. The term qualified trade or business does not include specified service trades or businesses ( SSTB ): any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees or Which involves the performance of services that consist of investing and investment management, trading, or dealing in securities, partnership interests, or commodities If taxable income of a taxpayer is less than $415,000 (MFJ) or $207,500 (all others), then SSTB will be considered a qualified trade or business for purposes of IRC 199A. 27

28 Pass-through Entity Updates: Pass Through Deduction The term qualified items of income, gain, deduction, and loss means items of income, gain, deduction and loss to the extent such are : Effectively connected with the conduct of a trade or business within the U.S., and Included or allowed in determining taxable income Items of income, gain, deduction, and loss do NOT include: Specified investment-related income (i.e. capital gains, dividends, interest income not related to a trade or business) Amounts paid by an S corporation to the shareholder that are treated as reasonable compensation of the taxpayer Guaranteed payments remitted for services Amounts paid to a partner for services outside of being a partner 28

29 Pass-through Entity Updates: Pass Through Deduction Assuming there are no qualified cooperative dividends for the taxpayer, the deduction is equal to the lesser of: the Combined Qualified Business Income ( CQBI ) of the taxpayer, or 20% of the excess of the taxpayer's taxable income over the sum of any net capital gain for the taxable year 29

30 Pass-through Entity Updates: Pass Through Deduction Where there is no REIT or publicly traded partnership income, CQBI means with respect to any taxable year, an amount equal to: Taxable Income of $315,000 or less in case of joint return ($157,500 for all others) Taxable Income between $315,000 and $415,000 for joint returns (between $157,500 and $207,500 for all others) Taxable Income above $415,000 for joint returns(or $207,500 for all others) Qualified Business 20% QBI Complicated Calculation Deduction of 20% of adjusted taxable income or QBI LIMITED to 50% of the W-2 wages or 25% of W-2 wages + 2.5% unadjusted basis of qualified property Service Business** 20% QBI Complicated Calculation No Deduction This is more like a tentative deduction because the actual deduction is limited to 20% of taxable income over capital gains. 30

31 Pass-through versus C Corporation Analysis Items of consideration when analyzing whether to convert a flow-through entity to a C Corporation include: How much taxable income is expected? Is the business eligible for the pass-through deduction, and if so do limitations apply? As a flow-through entity, what are the self-employment taxes and net investment income tax (if any) that are being assessed? Are there regular and consistent distributions made from the business that will need to continue to be made in the future? If the business becomes a C Corporation, what state income tax will be assessed? Is the entity a manufacturing entity? Will New York State (and others) adopt the pass-through deduction? What other states does the entity have nexus in? What is the exit strategy for the owners of the business? Considerations regarding the political climate. The reduced individual tax rates are a sunset provision (end as of 2025) but the corporate tax rate could be adjusted with a different political party in control. 31

32 New York State Budget

33 New York State Budget Three Items Targeted toward Individuals Employer Compensation Expense Tax Charitable Deduction Regime Decoupling from Federal Changes of TCJA 33

34 New York State Budget Employer Compensation Expense Tax (ECET) Try to mitigate TCJA impact of SALT limitations on individual federal return Shift a portion of employees NYS income tax burden to employers Employer Option as to whether to participate in ECET regime Imposed on payroll expenses paid by employers 1.5% in % in % 2021 and after Employee gets tax credit on NYS return 34

35 New York State Budget Charitable Deduction Regime Try to mitigate TCJA impact of SALT limitations on individual federal return For tax years beginning 1/1/19 Income tax credit = 85% of donation made to state operated charitable funds Offset NYS income/property taxes Cities, counties, school districts can set up charitable funds as well Tax credit = 95% of donation made Offsets local property taxes Hope is these contributions would qualify for Federal charitable deduction Timing Mismatch NYS 2019 contribution would result in NYS tax credit on 2020 tax return Federal 2019 contribution would result (hopefully) in deduction on 2019 Federal tax return Commentators believe structure is legally suspect 35

36 New York State Budget Decoupling from Federal Changes of TCJA Prior to TCJA, conformity existed between claiming standard/itemized deduction on Federal and NYS individual tax returns Passage of NYS Budget allows decoupling can take standard deduction on Federal return and itemize deductions on NYS return Alimony can continue to claim as deduction for NYS purposes Moving expenses can continue to claim as deduction for NYS purposes 36

37 State Tax Reminders

38 NYS Tax Considerations Mortgage Recording Tax credits Eligible = 1-6 units Refundable o Refundable credit claims under NYS desk audit Optimizing S-Mod/REIT benefits REIT in place for one day during year = T-Mod Comparison to S-Mod deduction 38

39 NYS S Modification: Is the Loan A Qualifying Loan? 39

40 NYS S Modification (Cont.) Definitions: Residential Real Estate Loan (1) Loan secured by an interest in real property which is, or will become, residential real property. Also includes a loan made for the improvement of residential real property. Therefore, the definition could include such items as the home equity loan or a refinance. Residential real property includes single or multi-family dwellings, facilities in residential developments dedicated to public use or property used on a nonprofit basis for residents, and mobile homes used on a transient basis. Active business (2) A business qualifies as an active business if the value of the financial instruments (i.e.- stocks, bonds, and other investment securities that are marked to market) it holds for investment do not exceed 50% of the value of its total assets. < 100 employees (3) Employee count is not including general executive officers. Affiliated Group (4) A business may not be part of an affiliated group, unless the group would have itself met, as a group, the active business, employee and gross-receipts requirements as stated. 40

41 Multi-State Tax Considerations Economic Nexus States expanding reach under economic nexus standard Revenue by State reports important to produce Adjacent State Provisions PA Shares Tax = $100k of PA sourced income NJ = No de minimis gross receipts test o One customer in theory triggers nexus Min tax = $500 o Worldwide payroll in excess of $5M = Min tax of $2,000 CT = $500,000 of CT gross receipts MA = $500,000 of MA sourced income or $10M in MA assets or 100 MA customers 41

42 Summary

43 2017 Tax Return Maximize 34% Tax Rate Timing Differences Important Deductions at 34% worth more than at 21% o Maximize Depreciation Deductions Bonus Depreciation QIP, New & Used property post 9/27/ Max of $510,000 Cost Seg Study move 39-year property to 5, 7, or 15-year bonus eligible Pension Plan contribution Prepaid Expenses Automatic accounting method change Maximize DRD/Tax-exempt Interest Deductions Proper classification of income important Double Benefit o o Permanent cash flow savings Reduction of F/S tax expense State Tax Considerations S-Mod maximization or REIT optimization Maximize opportunity for refundable MRT credits 43

44 2018 F/S Tax Reporting Effective Tax Rate (ETR) F/S Tax Expense = Current tax expense +/- change in deferreds, or F/S Tax Expense = (PTBI +/- Permanent differences) x Tax Rate o Tax Rate Fed = 21% o Tax Rate NYS = 5.135% (6.5% x 79%) Accounting Standards Update ASU Single line item B/S presentation for net DTA/(DTL) as non-current o Effective Date = 2017 for public companies; 2018 for non-public ASU Equity investments required to be measured at FMV thru P&L (rather than OCI) o o Cumulative effect adjustment to B/S as of beginning of the FY of adoption Effective Date = 2018 for public companies; 2019 for non-public ASU Stock Compensation Difference between tax deduction and book expense recognized through tax expense on P&L [rather than current treatment recognized in equity (APIC pool)] o Effective Date = 2017 for public companies; 2018 for non-public 44

45 Loan Dept. Review of T/R s Significant Changes to 2018 T/R Evaluation Expensing of Capital Expenditures 100% Bonus Depreciation (New & Used Property) Interest Expense Limitation 30% of Adjusted Taxable Income Pass-through Entity Deduction 20% of qualified Business Income Business Loss Limitation - $500,000 MFJ; $250,000 (Single) 45