Navigating Tax Reform

Transcription

1 2013 CliftonLarsonAllen LLP Navigating Tax Reform CliftonLarsonAllen, LLP Susan S. Roberts, CPA, CGMA Principal CliftonLarsonAllen LLP Claconnect.com cliftonlarsonallen.com

2 2013 CliftonLarsonAllen LLP 122A

3 Tax Simplification Starts with the Name Was: The Tax Cuts & Jobs Act 2013 CliftonLarsonAllen LLP Now: To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 * Changing the name to the shorter version violated a guideline called The Byrd Rule. 3

4 CliftonLarsonAllen LLP

5 2013 CliftonLarsonAllen LLP 2013 CliftonLarsonAllen LLP Provisions for Individual Taxpayers cliftonlarsonallen.com Claconnect.com 5

6 New Rate Schedule for MFJ Below $19,050 = 10% $19,051 to $77,400 = 12% $77,401 to $165,000 = 22% $165,000 to $315,000 = 24% $315,001 to $400,000 = 32% $400,001 to $600,000 = 35% Above $600,000 = 37% 2013 CliftonLarsonAllen LLP (p. 19-2)

7 Comparison of MFJ Rates: Old 2017 Rates* vs. Tax Act Income range 2017 Rates* Tax Act Winning No Change Losing 2013 CliftonLarsonAllen LLP $1 to $19,050 10% 10% $19,051 to $77,400 15% 12% $77,401 to $156,150 25% 22% $156,150 to $165,000 28% 22% $165,001 to $237,950 28% 24% $237,951 to $315,000 33% 24% $315,001 to $400,000 33% 32% $400,001 to $424,950 33% 35% $424,950 to $480,050 35% 35% $480,051 to $600,000 CAUTIONS: Taxable income measures 39.6% differ; child credit rather than dependency exemption but with age differences. 35% Over $600, % 37% * Rates Adjusted for Inflation 7

8 Other Rates Single rate schedule = ½ MFJ breakpoints 37% bracket starts at $500,000 Heads of Households 10% up to $13,600 (v. $19,050 for MFJ) 12% over $13,600 to $51,800 (v. $77,400 MFJ) 22% over $51,800 to $82,500 (v. $165,000 MFJ) 24% over $82,500 to $157,500 (v. $315,000 MFJ) 32% over $157,500 to $200,000 (v. $400,000 MFJ) 35% over $200,000 to $500,000 (v. $600,000 MFJ) 37% over $500, CliftonLarsonAllen LLP

9 Capital Gains: Preserve Pre-Act System 2013 CliftonLarsonAllen LLP Long Term Capital Gains Rate MFJ H of H Single Estate, Trust 0% $ 77,200 $ 51,700 $ 38,600 $ 2,600 15% $ 479,000 $ 452,400 $ 425,800 $ 12,700 20% % In excess The system: Ordinary fills the lower brackets first, then capital gains on top. Deductions offset ordinary. (p. 19-3)

10 Estates and Trusts Income Tax Rates 10% up to $2,550 24% over $2,550 to $9,150 35% over $9,150 to $12,500 37% over $12,500 Note: Only four rate brackets 2013 CliftonLarsonAllen LLP

11 Standard Deduction & Personal Exemption: 2018 Standard Deduction Tax Act MFJ $12,700 $24,000 Single $6,350 $12,000 HoH $9,350 $18,000 Personal Deduction Tax Act MFJ $8,100* $0 Single $4,050 $0 HoH $8,100* $ CliftonLarsonAllen LLP Total Deduction Tax Act True Increase in Deduction MFJ $20,800* $24,000 $3,200 Single $10,400 $12,000 $1,600 HoH $17,450* $18,000 $550 * - Assumes 2 Personal Exemptions are Claimed 11

12 Kiddie Tax 2017: Unearned Kiddie income taxed at higher of: Parents marginal rate after adding in sibling income, or Child s tax rate Kiddie Defined: Child under the age of 19 and College students under the age of : Kiddie tax to use estate and trust rates No longer tied to parents marginal rate No longer affected by income of siblings 2013 CliftonLarsonAllen LLP

13 2015 CliftonLarsonAllen LLP 20% Deduction for Pass-through Income 13

14 20% Deduction for Pass-through Income Congress Giveth Individuals, estates, and trusts may deduct 20% of domestic qualified business income from a PS, S Corp, or Sole Proprietorship (SP) Congress Taketh Away Deduction is only for certain businesses That pay W-2 wages or Have machinery, equipment, etc. Deduction does not apply to service companies Deduction is not applied to W-2 income or guaranteed payments paid to owner; only to flow-through income Deduction does not apply to investment income 2013 CliftonLarsonAllen LLP 14

15 20% Deduction: Business Deduction Limitation SP, partner or S shareholder deduction is limited to the greater of: 50% of wages paid, or Sum of 25% of wages plus 2.5% of unadjusted basis of qualified property Qualified property Depreciable tangible property on hand at end of year Used in the production of qualified business income Depreciable period has not ended before year end 2013 CliftonLarsonAllen LLP

16 20% Deduction: Depreciable Period Defined Starts: Date property is placed in service Ends: Later of 10 years after the start date, or The last day of the last full year of depreciation 2013 CliftonLarsonAllen LLP Do we need to keep track of the cost of fully depreciated assets for 10 years? Tax Simplification? 16

17 20% Deduction: Exceptions to the Exceptions General Rule: TP can only take deduction if business has W-2 wages/guaranteed payments or PP&E, and is not a service company Exception: Above limitations do not apply if TP income is below $315k for MFJ, or $157.5k for other taxpayers Phase-out of Exception: Deduction phases out at 20% as follows unless TP meets W-2/PP&E Requirements: $315k 415k for MFJ $157.5k - $207.5k for other taxpayers Phase-out applies to service companies even if they have W- 2/PP&E CliftonLarsonAllen LLP

18 20% Deduction: Qualified Business Income (QBI) Defined Net amount of domestic income from all qualified businesses If net is a loss, the loss reduces QBI in the next year QBI includes the following: Dividend income from a REIT Dividends from qualified cooperatives Dividends from publicly traded partnerships QBI does NOT include wages/guaranteed payments paid to TP Personal service businesses are NOT qualified businesses 2013 CliftonLarsonAllen LLP

19 20% Deduction: Personal Service Business Defined No 20% deduction for personal service businesses Includes Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, & brokerage services Unless income is below the $315k/$157.5k threshold Also includes: any other trade or business where the principal asset is the reputation or skill of one or more of its employees Personal service does not include architects & engineers 2013 CliftonLarsonAllen LLP

20 20% Deduction: Other Rules Allowed against AMT income Not a deduction to arrive at AGI Does not reduce AGI for purposes of AGI thresholds Allowed to non-itemizers Does not reduce income for application of the Net Investment Income tax (3.8%) Appears to apply to qualified passive income 2013 CliftonLarsonAllen LLP

21 20% QBI Deduction Example Assumptions Schedule C Information: Gross Receipts from Schedule C 1,000,000 Gross farm Coop Distributions 0 Total Gross Receipts 1,000,000 Less Business Expenses 700,000 Net Business Income 300,000 Wages and Business Assets Wages 70,000 Qualified Business Assets 1,100,000 Personal Information Taxable Income 400,000 Capital Gains included in taxable income 30,000 Filing Status MFJ Threshold Amount 315,000 Threshold Phase Out Amount 100,000 Does Phase Out Apply? Yes Threshold Limitation Percentage % Computation Step 1: Tentative Deduction Net Business Income 300,000 Less: Farm Coop Distributions 0 Sub-total 300,000 Limited to 20% of Above 60,000 Step 2: Wage and Asset Limitation 50% of Wage Limitation 35,000 25% wages; 2.5% assets 45,000 Greater of Limitations 45,000 Step 3: Threshold Deduction Subject to Threshold? Yes Tentative Deduction from Step 1 60,000 Calculated Limit from Step 2 45,000 Is Limit Less than Deduction? Yes If Yes, what is difference? 15,000 Difference times Limitation % 12,750 Step 4: Net Business Income Deduction Tentative Deduction from Step 1 60,000 Less: Threshold reduction (12,750) Net Business Income Deduction*** 47,250 ***Cannot exceed 20% of taxable income less CG 2013 CliftonLarsonAllen LLP

22 2013 CliftonLarsonAllen LLP 2013 CliftonLarsonAllen LLP Changes to Itemized Deductions cliftonlarsonallen.com Claconnect.com 22

23 Overall Itemized Deductions & Home Mortgage Interest Repealed: Overall Itemized Deduction Phaseout Home equity loan interest deduction Changed: For new debt incurred after : Deduct interest on home acquisition debt up to $750,000 Was $1M Retains provisions for second home interest deduction Up to $750k debt limit, in total Grandfathered: Home debt incurred before (even if refinanced) 2013 CliftonLarsonAllen LLP (p )

24 Deduction for Taxes Itemized deductions for taxes limited to $10,000 State & local income tax or sales tax, plus U.S. real property tax No deduction for foreign RE tax 2013 CliftonLarsonAllen LLP 2017 strategies: Real estate tax paid for 2018 in 2017: Tax must be assessed Caution: AMT may negate federal benefit; (p )

25 Casualty & Theft Losses Repealed: Deduction for casualty losses Exception: Unless casualty results from a federallydeclared disaster Clarification of gambling losses Losses and expenses are limited to winnings Not Clear: Deductibility of theft loss? 2013 CliftonLarsonAllen LLP (p )

26 Charitable Deductions New: 50%-of-AGI limit increased to 60% Repealed: Deduction for payment to higher education institution for rights to purchase tickets to athletic events (prior law allowed 80% deduction) Retained: Exclusion for contribution of IRA to charity for people over 70.5 years old Avoids % limit on charitable contributions Avoids increase in AGI Get benefit when not itemizing 2013 CliftonLarsonAllen LLP (p )

27 Repealed: Miscellaneous Itemized Subject to 2% Repeals all misc. itemized ded subject to 2% floor Examples include Employee business expenses (!) Investment expense Uniforms and work clothes Tax preparation fees (!!) Professional dues Hobby loss expenses Home office for employee (!!!) Tools/supplies for taxpayer s work Safe Deposit Box 2013 CliftonLarsonAllen LLP (p )

28 Medical and Other Deductions Medical exp in excess of 7.5% of AGI is deductible For 2017 & 2018 only (10% floor starting in 2019) Retroactive change for 2017 (was 10% floor) Deductible for AMT also Repealed: Alimony deduction Effective for divorce decrees executed after 2018 Repealed: Moving expense deduction Except for active duty military, pursuant to military order, incident to permanent change of station Retained: Archer Medical Savings Account 2013 CliftonLarsonAllen LLP (p )

29 Summary: Itemized Deductions Not Repealed Medical in excess of 7.5% AGI Taxes limited to $10,000 Home mortgage interest on principal residence and second home New debt limit: $750K Investment interest expense limited to inv. income Charitable contributions Non-2% miscellaneous itemized deductions Except casualty losses 2013 CliftonLarsonAllen LLP

30 2015 CliftonLarsonAllen LLP Other Individual Provisions 30

31 Limitation on Excess Business Losses: For Taxpayers Other Than C Corporations Net non-passive business loss is limited to $500K MFJ / $250K single Applied after passive loss limitations Will limit passive losses freed up upon disposition of an interest in a partnership The excess loss is carried forward as part of the NOL Can only offset up to 80% of successive year income Limitation is applied at 1040 level Farm loss limitation repealed 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

32 Changes to Alternative Minimum Tax (AMT) Exemption amount increased: MFJ - $109,400 (up from $86,200) MFS is half of the above (up from $43,100) All other taxpayers - $70,300 (up from $54,700) Start of Phase-out of Exemption increased: MFJ - $1 million (up from $164,100) MFS is half of the above (up from $82,050) All other taxpayers - $500k (up from $123,100) 2013 CliftonLarsonAllen LLP 32

33 Child and Family Tax Credits 2013 CliftonLarsonAllen LLP Child credit: Increase from $1,000 to $2,000 No change to qualifying child definition: < age 17 Plus $500 credit for each taxpayer/spouse & dependent not a qualifying child for $2,000 credit Refundable portion increased to $1,400 Phase-out begins at MFJ - $400k (up from $110K); Single at $200,000 (up from $75K) (p. 19-8)

34 Education Provisions Retained Coverdell Ed Savings Account Interest expense on education loans Exclusion for employer-provided ed assistance Exclusion for US savings bond used for higher ed Deduction for qualified tuition and related expenses Exclusion for qualified tuition reduction programs Added Elementary and high school tuition up to $10,000/year qualified for 529 plan withdrawals Student Loan Discharge is excluded from income if due to death or total/permanent disability 2013 CliftonLarsonAllen LLP

35 Deferral of Income Inclusion: Stock Options & Restricted Stock Units (RSU) For Qualified Stock granted to Qualified Employees Granted by Eligible Corporation Does not defer payroll taxes (FICA & FUTA) Income included at earliest of: Stock becomes transferable Employee becomes excluded (1% owner, CEO, CFO, family member, one of 4 highest compensated officers) Other employees are Qualified Stock becomes readily tradable on securities market Five years after becoming vested Date employee revokes election 2013 CliftonLarsonAllen LLP

36 Qualified Stock & Eligible Corporation Defined Qualified Stock: Granted for performance of services by a Eligible Corp Employee cannot sell stock or receive cash in lieu of stock Eligible Corp: Not tradable on securities market previously Written plan including: At least 80% of US employees are granted options or restricted stock units Eff. options exercised or RSUs settled after 2017 Employer deduction deferred until income recognized 2013 CliftonLarsonAllen LLP

37 The Election: Deferral of Income Inclusion: Effects on Employee: Election must be made within 30 days of vesting Effects on Employer: Employer must inform employee of eligibility Election does not defer withholding of payroll taxes (FICA & FUTA) When included in income, FIT Withholding will be at highest rate Employer cannot deduct compensation until included in employee s income Disclosures required on Form W CliftonLarsonAllen LLP

38 Estate & Gift Tax Exclusion Doubled: $5M to $10M + indexing Deaths in 2017: Exclusion is $5,490,000 Should be $11.2 million for 2018 Maintain stepped-up basis Gift/Estate tax rate remains unchanged (40%) Retain annual gift tax exclusion $15K for 2018 $14k for CliftonLarsonAllen LLP (p )

39 Affordable Care Act Changes Prior Law: If individual does not have minimum coverage, he will be subject to a tax Called Shared Responsibility Tax New Law: Shared Responsibility Tax is repealed Starting in CliftonLarsonAllen LLP 39

40 CliftonLarsonAllen LLP Provisions for Businesses WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 40

41 Corporate Taxes Flat 21% rate effective years beginning after 2017 Repealed: Higher tax rate on Personal Service Corps (PSC) Fiscal year end taxpayers: Will file using a blended rate of prior law and current law 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

42 Use of C Corporation vs. Pass-thru Entity Double Taxation of Intangible Asset Gain 2013 CliftonLarsonAllen LLP Double Taxation S Corp. of Inside Gain Taxation Capital gain on sale $ 1.00 $1.00 Corp. tax (.21) Net in corp..79 Sale/liquidation/ redemption $.79 Less 23.8% LTCG/div. (no 1202) (.19) Less 1040 capital gain rate if MP (.20) Net after tax $.60 $.80

43 Use of C Corporation vs. Pass-thru Entity Double Taxation of Income 2013 CliftonLarsonAllen LLP Double Taxation S Corp. of Marginal Earnings Taxation Net income (>W-2/rent) $ 1.00 $1.00 Corp. tax (.21) Net in corp..79 Sale/liquidation/ redemption $.79 Less 23.8% LTCG/div. (no 1202) (.19) Less top 1040 rate (37%) after 20% subtraction (.296) Net after tax $.60 $.704

44 GREAT NEWS!! Corporate AMT Repealed!!! 20% corporate AMT repealed for taxable years beginning after December 31, 2017 AMT Credit may be used against regular tax To extent the credit exceeds regular tax, 50% of excess credit is refundable For years 2018, 2019, & 2020 Unused credit will be refunded in CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

45 Bad News Business Net Operating Loss (NOL) Provisions NOL carrybacks: Repealed Old law allowed a 2 year carryback Two-year carryback retained for qualified farms only NOL carryforwards: Indefinite Applies to post-2017 NOLs BAD NEWS: NOL Carryover can only offset 80% of taxable income Example: Corp has a $100k loss in year 1. Corp has $80k of income in year 2. The NOL Carryforward can only offset $64k of year 2 income. Tax must be paid on the remaining $16k at a rate of 21%. $36k of remaining NOL continues to carry forward CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

46 Congress Giveth.AGAIN!: Repeal of Corporate AMT 2015 CliftonLarsonAllen LLP Congress Taketh Away..AGAIN!: Limitation on NOL deduction to 80% of taxable income Simplification AGAIN? Corps must track pre- 1/1/18 NOLs separately from post-12/31/17 WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 46

47 CliftonLarsonAllen LLP Cost Recovery for Fixed Assets: Depreciation Changes WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 47

48 Section 179 Amounts: Enhanced for Qualified Property Sec. 179 Asset Addn. Tax yr. beginning in Limit Phase-out Range 2007 $125,000 $500K - $625K $250,000 $800K - $1.05M $500,000 $2M - $2.5M 2018 $1 million* $2.5M - $3.5M* 2013 CliftonLarsonAllen LLP * - Will be adjusted for inflation 48

49 Sec. 179 Qualified Property Defined Qualified Property Includes: Property with a recovery period of 20 years or less Off the Shelf depreciable software Water utility property, & Qualified improvement property Expanded to include: Tangible personal property used in furnishing of lodging (e.g., furniture, appliances used in hotels & apartments) & Qualified improvement property (must make election) Nonresidential real property improvements placed in service after building placed in service Roofs, HVAC, fire protection, fire alarm systems, & security system Replaces qualified leasehold, retail, & restaurant improvements 2013 CliftonLarsonAllen LLP 49

50 Bonus Depreciation Enhancements Increased to 100% expensing!! For FA acquired and placed in service after and before 2023 (retroactive provision) Expanded to include USED property! If purchased by TP Not previously owned by TP Not purchased from related party Phase-out doesn t start until 2023 Delay phase-out by 1 year for longer production prop. Transition rule allows 50% for first taxable year ending after CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

51 Depreciation of Bldgs Retains 39 year and 27.5 year provisions Eliminates separate definitions of 15 year property Qualified leasehold improvement property Qualified restaurant property Qualified retail improvement property Focus is on qualified improvement property Improvements to interior portion of building Nonresidential Placed in service after date building placed in service Straight line 15 year, with 20 year ADS 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 51

52 Depreciation Enhancements: Luxury Auto Limitation Maximum depreciation for passenger autos weighing 6k lbs or less increased: Year 1: $10,000 (up from $3,160) Year 2: $16,000 (up from $5,100) Year 3: $9,600 All subsequent years: $5,760 Claiming bonus depreciation adds another $8,000 to the first year maximum WoW! Vehicle is NOT LUXURY unless it costs more than $50k!!! (Up from $15,800) 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

53 Depreciation for Farms New farm equipment now depreciated over 5 year (down from 7) No longer required use of 150% DB Effective assets placed in service after 2017 in taxable years ending after 2017 Electing farming business uses ADS for property with recovery period > 10 years Avoids business interest limitation for farms over $25 million average gross receipts limit 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

54 Self-Created Property Sale of certain self-created property will be taxed as ordinary income: Patent, invention, model or design (whether or not patented), secret formula or process Held by the creator or person with substituted basis from the creator 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

55 Self-Created Property: Exceptions to allow Capital Gain Treatment For Patents (Sec. 1235): Allows qualified holder capital gain treatment Qualified Holder: Individual whose efforts created the patent Other individual who acquired property prior to actual use of the invention covered by the patent Other individual cannot be an Employee of the creator, or Related to the creator For Other Intangibles Goodwill, client lists, customer contracts, etc. are still eligible for capital gain treatment 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 55

56 CliftonLarsonAllen LLP Limitations on Net Business Interest Expense WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 56

57 Business Interest Expense Limitation Interest expense limited to Interest income, plus 30% of adjusted taxable income (ATI), plus Floor plan interest Financing for motor vehicles, boats, farm machinery Determined at entity level Adjusted taxable income (ATI): Start with Taxable Income Subtract: Taxable interest income, nonbusiness gain, & flow through income, then Add Back: Interest expense, NOL, 20% deduction, nonbusiness loss, depreciation, amortization, & depletion After 2021, depreciation, amort, & depl not added back (p ) Applies at consolidated/affiliated level of business 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

58 Exceptions: Business Interest Limits Small business exception: No disallowance for business with average gross receipts of $25 million or less for last 3 years Elections out available: Real estate professionals Farming business If election out is taken, TP must use ADS depreciation for certain fixed assets 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

59 Partnership & S Corp Interest Expense: Special Rules Partner can deduct additional interest expense to the extent the partnership could have deducted Called Excess Adjusted Taxable Income (EATI) Computation: ((ATI x 30%) - (int exp int inc)/ati x 30%) x ATI) The above amount is reported to ptrs & SHs based on their distributive share Should allow interest expense to acquire ownership to be part of computation 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

60 Excess Interest Expense For C Corps and S Corps: Excess interest expense carries over at entity level For Partnerships: Excess interest expense is allocated to partners in same manner as ordinary business income/loss Treated as though interest exp was paid by partner in succeeding years Can only offset excess adjusted taxable income from same PS Excess interest expense carries over indefinitely at partner level 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

61 Effect on Partner Basis Partner s basis reduced when excess business interest is allocated Basis increased if interest expense unused at sale Not applicable to S corps and shareholders since excess interest is trapped at S corporation 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

62 Example Interest Limitation Assumptions: o Average annual revenue $200M o Taxable income: $10M o Interest income: $500K o Interest expense: $7.5M Calculation Adjusted Taxable Income: Taxable Income $10,000,000 Add: Depreciation and Amortization $3,000,000 Add: Interest Expense Deducted 7,500,000 Subtract: Interest Income Included in Taxable Income (500,000) Equals: Adjusted Taxable Income 20,000,000 Limitation Calculation: 30% Adjusted Taxable Income $6,000,000 Plus: Interest Income $500,000 Limitation based on ATI $6,500,000 Lesser of Above Limit ($6.5M) or Interest Expense ($7.5M) $6,500,000 WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 2015 CliftonLarsonAllen LLP

63 2015 CliftonLarsonAllen LLP Accounting Method Changes 63

64 Expansion of Cash Method of Accounting All businesses with average gross receipts < $25 million permitted to use cash method But account for inventories as non-incidental supplies In essence, account for inventory in the previous manner 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

65 Example Accrual to Cash Impact ABC Manufacturing Corporation Assets Cash 31,000 Accounts Receivable, Net 736,000 Inventory Raw Material 1,750,000 Inventory Work in Process Labor and Overhead 250,000 Inventory Materials and Supplies 100,000 Prepaid Expenses 75,000 Property, Plant, and Equipment, Net 450,000 Total Assets $3,392,000 Liabilities and Equity Accounts Payable 303,000 Mortgage Payable 1,290,000 Accrued Payroll 150,000 Customer Deposits 300,000 Capital Stock 200,000 Retained Earnings 1,149,000 Total Liabilities and Equity $3,392,000 ***$250,000 of costs capitalized to ending inventory under 263A 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

66 Example Accrual to Cash Impact, cont CliftonLarsonAllen LLP 481(a) Calculation Deduct Assets: Accounts Receivable, Net (736,000) Inventory Work in Process Labor and Overhead (250,000) Prepaid Expenses (75,000) Addback Accrued Liabilities: Accounts Payable 303,000 Accrued Payroll 150,000 Deduct 263A Costs Previously Capitalized 263A Costs (250,000) Net 481(a) adjustment (858,000) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

67 Expansion of Completed Contract Method & Contraction of Sec. 263A UNICAP 2015 CliftonLarsonAllen LLP All businesses with average gross receipts < $25 million are exempt from 263A (UNICAP) For resellers, manufacturers, & real estate construction All businesses with average gross receipts < $25 may use completed contract method if item is produced in less than 2 years Automatic Consent Accounting Method Change Conversion is done on a cut-off basis for new contracts WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 67

68 Income Inclusion for Tax Now Tied to Applicable Financial Statements (AFS) Accrual method taxpayers must recognize income no later than the year the item is recognized on AFS Unbilled receivables for partially performed services must be recognized when recognized in AFS Cannot wait until services are completed Advance payments for goods and revenue from the sale of gift cards are no longer deferred longer than one tax year Income from credit card fees (such as late-payment, cash advance, and interchange fees) will be accelerated Contracts containing multiple performance obligations must allocate the contract s transaction price among the performance obligations for tax to match AFS Codification of Rev. Proc CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 68

69 CliftonLarsonAllen LLP Other Business Provisions WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 69

70 Carried Interest in a Partnership Applicable PS Interests may be reclassed from LTCG to STCG Definition of Applicable PS Interest Interest in PS was transferred to taxpayer in exchange for services performed in an applicable trade or business Applicable Trade or Business Defined Activity conducted on a regular basis, that includes Raising or returning capital AND Investing in or disposing of specified assets OR Developing specified assets (securities, commodities, real estate held for investment or rent, cash, options, etc.) 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 70

71 Carried Interest in a Partnership STCG Treatment Income must be classified as STCG by the holder of a carried interest if Gain is generated from the disposition of a carried interest within 3 years of its acquisition; and Any gain passed through to a carried interest holder from the disposition of an asset held by the partnership for less than 3 years In essence the LTCG holding period is increased from 1 year to 3 years 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 71

72 Like-Kind Exchanges (Sec. 1031) For real property ONLY Personal property exchanges taxable But enhanced asset expensing may offset the gain Can no longer avoid Built-In Gain tax by trading equipment 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

73 118: Contributions to Capital (C Corps Only) Pre-Act: General Rule: No income recognized upon transfer of contributions to capital Post-Act: Exceptions: Taxable contributions include: Contribution in aid of construction Contribution from a customer or potential customer Added to Taxable Contributions: Contribution by any governmental or civic group (other than by a shareholder) Commentary: provision designed to impose taxable income on grants and subsidies from state & local government entities to businesses that locate operations within their jurisdiction CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

74 Lobbying Expenses Lobbying Expenses (Pre-TCJA) o Deduction disallowed for any lobbying expenses to influence legislation and other politically-related expenditures o Expenses related to local legislation and before local government bodies permitted (including Indian tribal governments) Includes expenses in connection with appearances before, submission of statements to, communication to and dues paid to lobbying organizations Lobbying Expenses (Under TCJA) o Expenses related to local legislation disallowed o Effective for amounts paid or incurred after the date of enactment (December 22, 2017) 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

75 Repealed: Section 199: Domestic Production Activities Deduction 2015 CliftonLarsonAllen LLP Section 199 domestic production deduction repealed for years beginning after 2017 Fiscal year C corporations receive benefit of Sec. 199 together with blended income tax rates (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

76 Disallowance of Entertainment Entertainment Expense: Non-Deductible! Disallowed: Expenses for entertainment, amusement, and recreation, including facilities for these Exception: Entertainment for benefit of employees is still 100% deductible Disallowed: Transportation passes and parking fringes Disallowed: Social, athletic and sporting club membership costs 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

77 Changes to Meals Deduction Limited to 50%: Employer-provided food Fringe benefit food (Coffee, bottled water, snacks) Meals provided for the convenience of employer (lunch during a meeting) Repeals employer deduction for employer-provided on premises meals after 2025 Pre-TCJA: 100% Deductible Meals consumed on work travel remain 50% deductible 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

78 Technical Termination of Partnership Section 708(b)(1)(B) Sale or exchange of at least 50% of the interests in partnership capital and profits Creates need for separate partnership return Re-sets accounting methods Collapses depreciation schedule to re-start cost recovery periods. Repealed for years beginning after CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

79 S Corporation Changes A nonresident alien individual may be a potential current beneficiary of an ESBT ESBT will apply charitable limits of individuals Required change in acctg. reported over six years Distributions from corporation revoking its S election for 2-year period beginning with the date of enactment Distributions after the PTTP will be allocated between AAA and qualified dividend from AE&P Only if owners are identical to owners at date of enactment 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

80 Business Credits Retained: o Employer-Provided Child Care Credit o Research & Development Credit o 20% Credit for Rehab of Certified Historic Structure o Work Opportunity Tax Credit (WOTC) o New Markets Tax Credit o Investment in Qualified Community Development o Disabled Access Credit o Employer Tip Credit Modified: o Orphan Drug Credit Modified from 50% to 25% of qualified clinical testing expenses Repealed: (p ) o 10% credit for qualified rehabilitation expenditures with respect to pre-1936 buildings 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING

81 Research Expenses Pre-Act: Deductible in the year incurred 2015 CliftonLarsonAllen LLP Post-Act: Specified R&E Expenses must be capitalized and amortized over 5+ years Includes expenses for software development (5 year amort) R&E Expenses incurred outside the USA will be amortized over 15 years Not Included: Expenses for land or depreciable property used in connection with R&E Effective for amounts paid or incurred in tax years beginning after 2021 WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 81

82 New Credit: Employer-Paid Family & Medical Leave Credit Credit = 12.5% wages paid by eligible employer to employees during any period in which employees are on family and medical leave (FMLA) Rate of payment must be > 50% wages normally paid Credit increased 0.25% for each percentage point by which payment rate exceeds 50% Maximum credit = 25% Maximum 12 Weeks Not available to the extent that FMLA is mandated by state or local law Eligible Employer Requires written policy allowing all qualifying full-time employees not less than two weeks annual paid family & medical leave Pro Rata amount for part time employees Available for 2018 and 2019 Only Allowed Against AMT 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 82

83 International Reform Deemed Repatriation Tax Automatically taxes certain offshore earnings of U.S. multinationals 15.5% on cash and cash equivalents 8% on noncash amounts Election to spread repatriation over 8 years Applies to specified 10-percent owned foreign corporations by U.S. Corporate Shareholders Participation Exemption Exempts foreign source dividends received from specified 10 percent owned foreign corporations 2015 CliftonLarsonAllen LLP WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 83

84 Other Provisions Craft beverage provisions Reduced excise tax Relief from Sec. 263A, as it pertains to interest expense 2015 CliftonLarsonAllen LLP (p ) WEALTH ADVISORY OUTSOURCING AUDIT, TAX, AND CONSULTING 84

85 2013 CliftonLarsonAllen LLP Susan S. Roberts, CPA, CGMA Principal CliftonLarsonAllen LLP cliftonlarsonallen.com Claconnect.com twitter.com/ CLA_CPAs facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 85

86 2018 CliftonLarsonAllen LLP Navigating Tax Reform CliftonLarsonAllen, LLP Jason A. Duffner, CPA Principal 2018 CliftonLarsonAllen LLP Minimize your tax costs and take advantage of all available opportunities. Whether your needs are business or individual, international or local, CliftonLarsonAllen (CLA) professionals can help you plan ahead, apply tax strategies, and understand applicable.

87 Navigating Tax Reform Provisions for Individuals Tax Rates & Credits Itemized Deductions AMT Changes (NOT REPEALED FOR INDIVIDUALS) Stock Options/Restricted Stock in Privately Held Business Estate Tax Law Changes Healthcare Mandate Intermission 2018 CliftonLarsonAllen LLP 2

88 Navigating Tax Reform Provisions for Businesses Tax Rates, C vs. S, AMT, & DRD Depreciation Changes Business Interest Expense Limitations Accounting Methods Business Loss Provisions (Corp. & Individual) 1031 Exchanges and Sec 118 Contributions by Nonshareholders 2018 CliftonLarsonAllen LLP 3

89 Navigating Tax Reform Provisions for Businesses Carrried Interest / Profits Interest Changes Nondeductible Entertainment Business Credits Passthrough Business Deduction International Reform Q&A 2018 CliftonLarsonAllen LLP 4

90 Is this Really Tax Simplification? 2018 CliftonLarsonAllen LLP 122A

91 Not Even the Name is Simple Was: The Tax Cuts & Jobs Act 2018 CliftonLarsonAllen LLP Now: To provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018 * Changing the name to the shorter version violated a guideline called The Byrd Rule. 6

92 2013 CliftonLarsonAllen LLP 2018 CliftonLarsonAllen LLP Provisions for Individual Taxpayers 7

93 New Rate Schedule for MFJ Below $19,050 = 10% $19,051 to $77,400 = 12% $77,401 to $165,000 = 22% $165,000 to $315,000 = 24% $315,001 to $400,000 = 32% $400,001 to $600,000 = 35% Above $600,000 = 37% 2018 CliftonLarsonAllen LLP

94 Comparison of MFJ Rates: Old 2017 Rates* vs. Tax Act Income range 2017 Rates* Tax Act Winning No Change Losing 2018 CliftonLarsonAllen LLP $1 to $19,050 10% 10% $19,051 to $77,400 15% 12% $77,401 to $156,150 25% 22% $156,150 to $165,000 28% 22% $165,001 to $237,950 28% 24% $237,951 to $315,000 33% 24% $315,001 to $400,000 33% 32% $400,001 to $424,950 33% 35% $424,950 to $480,050 35% 35% $480,051 to $600,000 CAUTIONS: Taxable income measures 39.6% differ; child credit rather than dependency exemption but with age differences. 35% Over $600, % 37% * Rates Adjusted for Inflation 9

95 Other Rates Single rate schedule = ½ MFJ breakpoints 37% bracket starts at $500,000 Heads of Households 10% up to $13,600 (v. $19,050 for MFJ) 12% over $13,600 to $51,800 (v. $77,400 MFJ) 22% over $51,800 to $82,500 (v. $165,000 MFJ) 24% over $82,500 to $157,500 (v. $315,000 MFJ) 32% over $157,500 to $200,000 (v. $400,000 MFJ) 35% over $200,000 to $500,000 (v. $600,000 MFJ) 37% over $500, CliftonLarsonAllen LLP

96 Capital Gains: Preserve Present System 2018 CliftonLarsonAllen LLP Long Term Capital Gains Rate MFJ H of H Single Estate, Trust 0% $ 77,200 $ 51,700 $ 38,600 $ 2,600 15% $ 479,000 $ 452,400 $ 425,800 $ 12,700 20% % In excess The system: Ordinary fills the lower brackets first, then capital gains on top. Deductions offset ordinary.

97 Estates and Trusts Income Tax Rates 10% up to $2,550 24% over $2,550 to $9,150 35% over $9,150 to $12,500 37% over $12,500 Note: Only four rate brackets 2018 CliftonLarsonAllen LLP

98 Standard Deduction & Personal Exemption: 2018 Standard Deduction Tax Act MFJ $12,700 $24,000 Single $6,350 $12,000 HoH $9,350 $18,000 Personal Deduction Tax Act MFJ $8,100* $0 Single $4,050 $0 HoH $8,100* $ CliftonLarsonAllen LLP Total Deduction Tax Act True Increase in Deduction MFJ $20,800* $24,000 $3,200 Single $10,400 $12,000 $1,600 HoH $17,450* $18,000 $550 * - Assumes 2 Personal Exemptions are Claimed 13

99 Kiddie Tax 2017: Unearned Kiddie income taxed at higher of: Parents marginal rate after adding in sibling income, or Child s tax rate Kiddie Defined: Child under the age of 19 and College students under the age of : Kiddie tax to use estate and trust rates No longer tied to parents marginal rate No longer affected by income of siblings 2018 CliftonLarsonAllen LLP

100 Child and Family Tax Credits 2018 CliftonLarsonAllen LLP Child credit: Increase from $1,000 to $2,000 No change to qualifying child definition: < age 17 Plus $500 credit for each taxpayer/spouse & dependent not a qualifying child for $2,000 credit Refundable portion increased to $1,400 Phase-out begins at MFJ - $400k (up from $110K); Single at $200,000 (up from $75K)

101 Education Provisions Retained Coverdell Ed Savings Account Interest expense on education loans Exclusion for employer-provided ed assistance Exclusion for US savings bond used for higher ed Deduction for qualified tuition and related expenses Exclusion for qualified tuition reduction programs Added Elementary and high school tuition up to $10,000/year qualified for 529 plan withdrawals Student Loan Discharge is excluded from income if due to death or total/permanent disability 2018 CliftonLarsonAllen LLP

102 2013 CliftonLarsonAllen LLP 2018 CliftonLarsonAllen LLP Changes to Itemized Deductions 17

103 Overall Itemized Deductions & Home Mortgage Interest Repealed: Overall Itemized Deduction Phaseout Home equity loan interest deduction Changed: For new debt incurred after : Deduct interest on home acquisition debt up to $750,000 Was $1M Retains provisions for second home interest deduction Up to $750k debt limit, in total Grandfathered: Home debt incurred before (even if refinanced) 2018 CliftonLarsonAllen LLP

104 Deduction for Taxes Itemized deductions for taxes limited to $10,000 State & local income tax or sales tax, plus U.S. real property tax No deduction for foreign RE tax 2018 CliftonLarsonAllen LLP 2017 strategies: Real estate tax paid for 2018 in 2017: Tax must be assessed Caution: AMT may negate federal benefit;

105 Casualty & Theft Losses Repealed: Deduction for casualty losses Exception: Unless casualty results from a federallydeclared disaster Clarification of gambling losses Losses and expenses are limited to winnings Not Clear: Deductibility of theft loss 2018 CliftonLarsonAllen LLP

106 Charitable Deductions New: 50%-of-AGI limit increased to 60% Repealed: Deduction for payment to higher education institution for rights to purchase tickets to athletic events (prior law allowed 80% deduction) Retained: Exclusion for contribution of IRA to charity for people over 70.5 years old Avoids % limit on charitable contributions Avoids increase in AGI Get benefit when not itemizing 2018 CliftonLarsonAllen LLP

107 Repealed: Miscellaneous Itemized Subject to 2% Repeals all misc. itemized ded subject to 2% floor Examples include Employee business expenses Investment expense Uniforms and work clothes Tax preparation fees Professional dues Hobby loss expenses Home office for employee Tools/supplies for taxpayer s work Safe Deposit Box 2018 CliftonLarsonAllen LLP

108 Medical and Other Deductions Medical exp in excess of 7.5% of AGI is deductible For 2017 & 2018 only (10% floor starting in 2019) Retroactive change for 2017 (was 10% floor) Deductible for AMT also Repealed: Alimony deduction Effective for divorce decrees executed after 2018 Repealed: Moving expense deduction Except for active duty military, pursuant to military order, incident to permanent change of station Retained: Archer Medical Savings Account 2018 CliftonLarsonAllen LLP

109 Summary: Itemized Not Repealed Medical in excess of 7.5% AGI Taxes limited to $10,000 Home mortgage interest on principal residence and second home New debt limit: $750K Investment interest expense limited to inv. income Charitable contributions Non-2% miscellaneous itemized deductions Except casualty losses 2018 CliftonLarsonAllen LLP

110 Changes to Alternative Minimum Tax (AMT) Exemption amount increased: MFJ - $109,400 (up from $86,200) MFS is half of the above (up from $43,100) All other taxpayers - $70,300 (up from $54,700) Start of Phase-out of Exemption increased: MFJ - $1 million (up from $164,100) MFS is half of the above (up from $82,050) All other taxpayers - $500k (up from $123,100) 2018 CliftonLarsonAllen LLP 25

111 Deferral of Income Inclusion: Stock Options & Restricted Stock Units (RSU) For Qualified Stock granted to Qualified Employees Granted by Eligible Corporation Does not defer payroll taxes (FICA & FUTA) Income included at earliest of: Stock becomes transferable Employee becomes excluded (1% owner, CEO, CFO, family member, one of 4 highest compensated officers) Other employees are Qualified Stock becomes readily tradable on securities market Five years after becoming vested Date employee revokes election 2018 CliftonLarsonAllen LLP

112 Qualified Stock & Eligible Corporation Defined Qualified Stock: Granted for performance of services by a Eligible Corp Employee cannot sell stock or receive cash in lieu of stock Eligible Corp: Not tradable on securities market previously Written plan including: At least 80% of US employees are granted options or restricted stock units Eff. options exercised or RSUs settled after 2017 Employer deduction deferred until income recognized 2018 CliftonLarsonAllen LLP

113 The Election: Deferral of Income Inclusion: Effects on Employee: Election must be made within 30 days of vesting Effects on Employer: Employer must inform employee of eligibility Election does not defer withholding of payroll taxes (FICA & FUTA) When included in income, FIT Withholding will be at highest rate Employer cannot deduct compensation until included in employee s income Disclosures required on Form W CliftonLarsonAllen LLP

114 Estate & Gift Tax Exclusion Doubled: $5M to $10M + indexing Deaths in 2017: Exclusion is $5,490,000 Should be $11.2 million for 2018 Maintain stepped-up basis Gift/Estate tax rate remains unchanged (40%) Retain annual gift tax exclusion $15K for 2018 $14k for CliftonLarsonAllen LLP

115 Affordable Care Act Changes Prior Law: If individual does not have minimum coverage, he will be subject to a tax Called Shared Responsibility Tax New Law: Shared Responsibility Tax is repealed Starting in CliftonLarsonAllen LLP 30

116 Questions? 2018 CliftonLarsonAllen LLP

117 CliftonLarsonAllen LLP LLP Provisions for Businesses and Business Owners Minimize your tax costs and take advantage of all available opportunities. Whether your needs are business or individual, international or local, CliftonLarsonAllen (CLA) professionals can help you plan ahead, apply tax strategies, and understand applicable. 32

118 Corporate Taxes Flat 21% rate effective years beginning after 2017 Repealed: Higher tax rate on Personal Service Corps (PSC) Fiscal year end taxpayers: Will file using a blended rate of prior law and current law 2018 CliftonLarsonAllen LLP

119 Use of C Corporation vs. Pass-thru Entity Double Taxation of Income 2018 CliftonLarsonAllen LLP Double Taxation S Corp. of Marginal Earnings Taxation Net income (>W-2/rent) $ 1.00 $1.00 Corp. tax (.21) Net in corp..79 Sale/liquidation/ redemption $.79 Less 23.8% LTCG/div. (no 1202) (.19) Less top 1040 rate (37%) after 20% subtraction (.296) Net after tax $.60 $.704

120 Use of C Corporation vs. Pass-thru Entity Double Taxation of Intangible Asset Gain 2018 CliftonLarsonAllen LLP Double Taxation S Corp. of Inside Gain Taxation Capital gain on sale $ 1.00 $1.00 Corp. tax (.21) Net in corp..79 Sale/liquidation/ redemption $.79 Less 23.8% LTCG/div. (no 1202) (.19) Less 1040 capital gain rate if MP (.20) Net after tax $.60 $.80

121 Corporate AMT Repealed 20% corporate AMT repealed for taxable years beginning after December 31, 2017 Minimum Tax Credit refundable up to 50% of the excess of AMT credits > regular tax liability for Refund excess CliftonLarsonAllen LLP

122 Dividend Received Deduction 80% becomes 65% Dividend received by 20% or more owned corporation Effective tax of 7.35% 70% becomes 50% Effective tax of 10.5% 2018 CliftonLarsonAllen LLP

123 Section 179 Amounts: Extender Legislation Sec. 179 Asset Addn. Tax yr. beginning in Limit Phase-out Range 2007 $125,000 $500K - $625K $250,000 $800K - $1.05M $500,000 $2M - $2.5M 2015 $500,000 $2M - $2.5M Permanent (plus indexed) 2018 $1 M $2.5M - $3.5M (Indexed for Inflation) 2018 CliftonLarsonAllen LLP 38

124 Sec. 179 Qualified Property Tangible personal property used in furnishing of lodging (e.g., furniture, appliances used in hotels & apartments) 2018 CliftonLarsonAllen LLP Expand Sec. 179 to roofs, HVAC, fire protection and alarms systems, security systems Nonresidential real property Placed in service after building placed in service 39

125 Bonus Depreciation Expense 100% acquired and placed in service > and before 2023 (only retroactive provision) Includes new and used Drops bonus to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, then zero Delay phase out by 1 year for longer production prop. Transition rule allows 50% for first taxable year ending after Election to accelerate AMT credits in lieu of bonus depreciation repealed 2018 CliftonLarsonAllen LLP

126 Building Depreciation Retains 39 year and 27.5 year provisions Eliminates separate definitions of 15 year property Qualified leasehold improvement property Qualified restaurant property Qualified retail improvement property Focus is on qualified improvement property Improvements to interior portion of building Nonresidential Placed in service after date building placed in service Straight line 15 year, with 20 year ADS 2018 CliftonLarsonAllen LLP

127 Disallowed Business Interest Expense Interest expense limited to interest income plus 30% of remaining adjusted taxable income Floor plan interest also allowed Financing for motor vehicles, boats, farm machinery Determined at entity level Remaining business adjusted taxable income Determined w/o interest income, NOL, 199A, depreciation, amortization, depletion After 2021, depreciation etc. not added back Determined at tax filer level (1065, 1120 S) Excess carried forward to succeeding five years 2018 CliftonLarsonAllen LLP

128 Exceptions to Business Interest Expense No disallowance for business with average gross receipts < $25 million Elections out available: Real estate professionals Farming business 2018 CliftonLarsonAllen LLP

129 Partnership Interest Expense Limits Partner can deduct additional interest expense to the extent the partnership could have deducted Also applies to S corporation shareholder Should allow interest expense to acquire ownership to be part of computation 2018 CliftonLarsonAllen LLP

130 Expansion of Cash Method of Accounting All businesses with average gross receipts < $25 million permitted to use cash method But account for inventories as non incidental supplies (hold cost until sold) Manufacturers: use Rev. Proc at higher receipts? Exempt 263A (UNICAP), including real estate construction May use completed contract method if < 2 years Automatic consent accounting method change 2018 CliftonLarsonAllen LLP

131 Deferred Revenue Recognition Codification of Rev. Proc Accrual method taxpayers must recognize income no later than the year the item is recognized on AFS Unbilled receivables for partially performed services must be recognized when recognized in AFS Cannot wait until services are completed Advance payments for goods and revenue from the sale of gift cards are no longer deferred longer than one tax year Income from credit card fees (such as late-payment, cash advance, and interchange fees) will be accelerated Contracts containing multiple performance obligations must allocate the contract s transaction price among the performance obligations for tax to match AFS 2018 CliftonLarsonAllen LLP

132 Business Loss Provisions Repeal NOL carrybacks Two year carryback for farms (no disaster provision) Carryforwards: No limit Post 2017 NOL s c/o allowed to 80% of taxable income Corporate Pre-2017 NOL s No AMT limits (AMT Repealed) 20 Year Carryforward remains unchanged 2018 CliftonLarsonAllen LLP

133 Individual Business Loss Provisions Noncorporations only Net business loss limited to $500K jt./$250k single Applied at 1040 level Excess is treated as NOL c/o Farm loss limitation repealed 2018 CliftonLarsonAllen LLP

134 Section 199 & Partnership Technical Term. Sec. 199 REPEALED after 2017 Fiscal year C corporations receive benefit of Sec. 199 together with blended income tax rates Partnership Tech. Term. Sec. 708(b)(1)(B) Repealed for partnership tax years beginning after December 31, CliftonLarsonAllen LLP

135 Other Business Changes Section 1031 exchanges for only real property Personal property exchanges taxable; but asset expensing offsets the gain Can t avoid Sec BIG tax by trading equipment Sec. 118 non owner contrib. to capital is taxable Contribution in aid of construction Contribution by a customer or potential customer Contribution by governmental entity or civic group Deductions denied for local lobbying Appearances, submission of statements, portion of dues to lobbying organizations 2018 CliftonLarsonAllen LLP

136 Research Expenses Pre-Act: Deductible in the year incurred 2018 CliftonLarsonAllen LLP Post-Act: Specified R&E Expenses must be capitalized and amortized over 5+ years Includes expenses for software development (5 year amort) R&E Expenses incurred outside the USA will be amortized over 15 years Not Included: Expenses for land or depreciable property used in connection with R&E Effective for amounts paid or incurred in tax years beginning after

137 Carried Interest in a Partnership Applicable PS Interests may be reclassed from LTCG to STCG Definition of Applicable PS Interest Interest in PS was transferred to taxpayer in exchange for services performed in an applicable trade or business Applicable Trade or Business Defined Activity conducted on a regular basis, that includes Raising or returning capital AND Investing in or disposing of specified assets OR Developing specified assets (securities, commodities, real estate held for investment or rent, cash, options, etc.) 2018 CliftonLarsonAllen LLP 52

138 Carried Interest in a Partnership STCG Treatment Income must be classified as STCG by the holder of a carried interest if Gain is generated from the disposition of a carried interest within 3 years of its acquisition; and Any gain passed through to a carried interest holder from the disposition of an asset held by the partnership for less than 3 years In essence the LTCG holding period is increased from 1 year to 3 years 2018 CliftonLarsonAllen LLP 53

139 Disallowance of Entertainment No deduction for entertainment Transportation passes and parking fringes disallowed Social, athletic and sporting clubs treated as entertainment Meals provided for the Convenience of the Employer now subject to 50% disallowance 2018 CliftonLarsonAllen LLP

140 Business Credits Retained Employer provided child care credit 20% historic rehab credit over five years Repeal 10% pre 1936 building rehab credit WOTC (jobs credit) Deduction for unused business credit > 20 years New markets cr. (community development entity) Disabled access credit 2018 CliftonLarsonAllen LLP

141 20% Deduction for Passthrough Income Individuals, estates, and trusts may deduct 20% of domestic qualified business income from a PS, S Corp, or Sole Proprietorship (SP) Deduction is only for certain businesses That pay W-2 wages or Have machinery, equipment, etc. Deduction does not apply to companies that provide services Deduction is not applied to W-2 income or guaranteed payments paid to owner; only to flowthrough income Deduction does not apply to investment income 2018 CliftonLarsonAllen LLP 56

142 20% Deduction: Business Deduction Limitation If Taxable income is greater than $315k; Taxpayer deduction is limited to greater of: 50% of wages paid, or Sum of 25% of wages plus 2.5% of unadjusted basis of qualified property Qualified property Depreciable tangible property on hand at end of year Used in the production of qualified business income Depreciable period has not ended before year end 2018 CliftonLarsonAllen LLP

143 20% Deduction: Depreciable Period Defined Starts: Date property is placed in service Ends: Later of 10 years after the start date, or The last day of the last full year of depreciation 2018 CliftonLarsonAllen LLP Do we need to keep track of the cost of fully depreciated assets for 10 years? Tax Simplification? 58

144 20% Deduction: Exceptions to the Exceptions General Rule: TP can only take deduction if business has W-2 wages/guaranteed payments or PP&E, and is not a service company Exception: All limitations do not apply if TP income is below $315k for MFJ, or $157.5k for other taxpayers Phaseout: Deduction phases out For Professional Service Providers at 20% as follows: $315k 415k for MFJ $157.5k - $207.5k for other taxpayers 2018 CliftonLarsonAllen LLP 59

145 20% Deduction: Personal Service Business Defined No 20% deduction for higher income personal service businesses Includes Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, & brokerage services Unless income is below the $315k/$157.5k threshold Also includes: any other trade or business where the principal asset is the reputation or skill of one or more of its employees Personal service does not include architects & engineers 2018 CliftonLarsonAllen LLP

146 20% Deduction: Qualified Business Income (QBI) Defined Net amount of domestic income from all qualified businesses If net is a loss, the loss reduces QBI in the next year QBI includes the following: Dividend income from a REIT Dividends from qualified cooperatives Dividends from publicly traded partnerships QBI does NOT include wages/guaranteed payments paid to TP Personal service businesses are NOT qualified businesses 2018 CliftonLarsonAllen LLP

147 20% Deduction : Other Rules Allowed against AMT income Not a deduction to arrive at AGI Does not reduce AGI for purposes of AGI thresholds Allowed to non-itemizers Does not reduce income for application of the Net Investment Income tax (3.8%) Appears to apply to qualified passive business income 2018 CliftonLarsonAllen LLP

148 International Reform Deemed Repatriation Tax Automatically taxes certain offshore earnings of U.S. multinationals 15.5% on cash and cash equivalents 8% on noncash amounts Election to spread repatriation over 8 years Applies to specified 10-percent owned foreign corporations by U.S. Corporate Shareholders Participation Exemption Exempts foreign source dividends received from specified 10 percent owned foreign corporations 2018 CliftonLarsonAllen LLP 63

149 Questions? Thank you for joining us! 2018 CliftonLarsonAllen LLP

150 2013 CliftonLarsonAllen LLP Jason A. Duffner, CPA Principal CliftonLarsonAllen LLP twitter.com/claconnect facebook.com/ cliftonlarsonallen linkedin.com/company/ cliftonlarsonallen 65