Welcome to DHG s Tax Reform Briefing! The Tax Cuts and Jobs Act A Discussion of Key Provisions Impacting You

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1 FEBRUARY 7, 2018 Welcome to DHG s Tax Reform Briefing! The Tax Cuts and Jobs Act A Discussion of Key Provisions Impacting You

2 C Corporations Accounting Methods Impact on Financial Statements Other Changes Impacting Businesses Impact on Pass-through Entities Entity Selection Considerations: S Corp vs. C Corp Impact to Individuals Charitable Planning and Exempt Organizations 2

3 Tax Reform: Impacts to Corporations Haley Roberts, Tax Manager Federal Tax Specialty Services

4 HISTORICAL REFORM FOR CORPORATIONS Corporate tax rates Fiscal year end filers Dividends received deduction Corporate AMT Net operating losses Other miscellaneous corporate and business reforms Accounting methods 4

5 Corporate Tax Rate 2017 Tax Law Tax Reform Law Tax Rate If taxable income is: 15% $0 - $50,000 25% $50,001 - $75,000 34% $75,001 - $10,000,000 35% $10,000, % Personal Service Corporation Tax Rate If taxable income is: 21% $0 and more 21% Personal Service Corporation 5

6 Corporate Tax Rate: Fiscal Year End Filers Blended rate used for the tax year straddling January 1, 2018 Calculate two tentative tax liabilities: - First by applying pre-enactment tax rates to taxable income for the full year - Second by applying newly enacted tax rates to taxable income for the full year Each tentative tax is pro rated based on number of days Tax for the full year is the sum of the proportion of each tentative tax 6

7 Corporate Tax Rate: Fiscal Year End Filers EXAMPLE Fiscal year ending 4/30/2018 Taxable income for period 5/1/2017 through 4/30/2018 is $1,000,000 Effective date of corporate tax rate change is 1/1/2018 Tentative Tax One: Taxable Income $1,000,000 Pre-enactment Tax Rate 35% Tentative Tax Liability One $350,000 Tentative Tax Two: Taxable Income $1,000,000 Post-enactment Tax Rate 21% Tentative Tax Liability Two $210,000 Total Tax Liability for FYE 4/30/2018: / 365 of $350,000 $235, / 365 of $210,000 69,000 Total Tax Liability FYE 4/30/2018 $304,000 7

8 Corporate Dividends Received Deduction 2017 Tax Law Tax Reform Law Deduction % Ownership % 80% 20% or more ownership 70% Less than 20% ownership Deduction % Ownership % 65% 20% or more ownership 50% Less than 20% ownership 8

9 Corporate AMT 2017 Tax Law Tax Reform Law Corporations subject to a Corporate AMT much like individuals Corporate AMT repealed beginning after December 31, 2017 AMT calculation could have created credit carryovers Any remaining AMT credit carryovers may be utilized to the extent of regular tax liability For 2018, 2019 and 2020, to the extent they exceed regular tax, 50% of excess carryovers are refundable, with the balance refunded in

10 Net Operating Losses 2017 Tax Law Tax Reform Law NOLs applied 100% against current year taxable income (90% for AMT) Limits NOL deduction to 80% of taxable income for NOLs created after year optional carryback of excess NOL s 20 year carryforward of excess NOL s Repeals the carryback provision Indefinite carryforward of NOLs New provision applies to losses arising in tax years ending after December 31,

11 Example: NOL & AMT Credit Carryforwards FACTS Corporate Taxpayer with calendar year end AMT Credit Carryforward at December 31, 2017: $100 Taxable Income / (Loss) as follows: ($1,500) ($4,000) $1,000 $3,000 $1,500 11

12 Example: NOL & AMT Credit Carryforwards ($1,500) ($4,000) $1,000 $3,000 $1, NOL of $1,500 Law allows carryback two years or carryforward 20 years No income to offset in carryback period; Must be carried forward ($1,500) ($4,000) $1,000 $3,000 $1, NOL of $4,000 May only be carried forward indefinitely; Usage limited to 80% of pre- NOL taxable income 12

13 Example: NOL & AMT Credit Carryforwards Taxable Income ($1,500) ($4,000) $1,000 $3,000 $1,500 Pre-Reform NOL - - (1,000) (500) - Post-Reform NOL (2,400) (1,200) Net Taxable Income ($1,500) ($4,000) - $100 $300 Tax Rate 35% 21% 21% 21% 21% Tax Liability $21 $63 AMT Credit C/F (60) (40) Net Tax Liability / (Refund) ($39) $23 AMT Credit Usage 2020 Allowable Credit $21 50% of Excess $39 ($100 - $21 = $79 x 50%) Total Allowable Credit $60 13

14 MISCELLANEOUS CORPORATE AND BUSINESS PROVISIONS Business interest expense Domestic production activity deduction (DPAD) Like-kind exchange Special rule for taxable year of inclusion Deduction for certain fines, penalties, and other amounts Local lobbying expense Business credits Other miscellaneous business provisions 14

15 Business Interest Expense 2017 Tax Law Tax Reform Law Business interest expense is generally deductible, subject to certain limitations Limits the deduction of business interest expense in excess of: - Business interest income, plus - 30% of business adjusted taxable income, plus - Floor plan financing interest Any disallowed interest expense is carried forward indefinitely Does not apply to floor-plan financing interest Defined formula for adjusted taxable income Defined business interest expense and business interest income 15

16 Domestic Production Activity Deduction (DPAD) 2017 Tax Law Tax Reform Law Certain businesses that have Domestic Production Activity (as defined in section 199) may be able to claim a deduction no greater than: - 9% of Domestic Production Activity Income - 9% of W-2 wages The deduction for domestic production activities provided under section 199 is repealed Note: If a company was taking a 9% DPAD deduction and they now claim the 20% passthrough deduction, the marginal benefit of the pass-through deduction is only 11% 16

17 Like-Kind Exchanges 2017 Tax Law Tax Reform Law Section 1031 allows for the rollover exchange of like real property, tangible personal property, and intangible property Section 1031 still allowed for likekind real property Section 1031 disallowed for tangible personal property and intangible property Transition rules are applied and still need to be defined by the Secretary 17

18 Special Rule for Taxable Year of Inclusion 2017 Tax Law Tax Reform Law Under 451, an accrual method taxpayer includes an amount in taxable income when all events have occurred which fix the taxpayer s right to receive the income and the amount can be determined with reasonable accuracy All events have occurred at the earliest time when one of the following occurs: - An amount is received; - The taxpayer has the right to bill an amount; or - The amount is earned Possible that all events have not occurred until after an amount is recognized for financial reporting purposes The all events test is satisfied no later than when an amount is recognized as revenue in the taxpayer s applicable financial statements Advance payments received must be recognized as taxable revenue no later than the end of the tax year following the year of receipt 18

19 Special Rule for Taxable Year of Inclusion: Example 1 FACTS XYZ Corporation (an accrual method taxpayer) is awarded a contract worth $2,000,000 to develop an advanced software program which will allow humans to translate dolphin-speak into common English - The contract is for services and does not meet the definition of a long-term contract XYZ estimates the program will cost $1,600,000 to complete (a 25% profit margin) Stipulations of the contract: - Payment is not due to XYZ until the successful demonstration of the final software program s capabilities - XYZ corporation will not be paid for any work done if the program is not completed or fails to perform as specified - The program must understand all documented species of ocean and river dolphin On its applicable financial statements, XYZ recognizes revenue equal to 125% of costs as costs are incurred 19

20 Special Rule for Taxable Year of Inclusion: Example 1 FACTS (cont.) The program is still in its nascent stages at the end of Year One and is non-functional By the end of Year Two, the program understands common bottlenose dolphins but not Amazon River dolphins The program is completed, successfully tested, and demonstrated to the customer s satisfaction during Year Three XYZ invoices the customer for the full contract price during Year Three but does not receive payment until Year Four 20

21 Special Rule for Taxable Year of Inclusion: Example Tax Law Tax Reform Law Income is generally recognized only when the all events test is met which occurs at the earliest of: (1) when payment is received, (2) when entitled to invoice for work done, or (3) when the amount is earned (e.g., when the work is complete) Same as 2017 tax law with one new addition The all events test is met no later than when the amount is recognized as revenue in the taxpayer s applicable financial statements 21

22 Special Rule for Taxable Year of Inclusion: Example 1 Year One Year Two Year Three Year Four Total Amount Received $ - $ - $ - $2,000,000 $2,000,000 Right to Bill Amount $ - $ - $2,000,000 $ - $2,000,000 Income Earned No No Yes Yes (Year 3) All Events Test Met? No No Yes Yes (Year 3) Revenue per AFS $800,000 $500,000 $700,000 $ - $2,000,000 Taxable Revenue Pre-Reform Law $ - $ - $2,000,000 $ - $2,000,000 Post-Reform Law $800,000 $500,000 $700,000 $ - $2,000,000 22

23 Special Rule for Taxable Year of Inclusion: Example 2 ADVANCE PAYMENTS UNDER ABC Co. is an accrual method taxpayer In Year 1, ABC receives a customer payment of $5,000 toward the $15,000 purchase price for electric motors to be provided in Year 3 ABC follows Treasury Regulation , which allows a taxpayer to defer recognition of certain advance payments for goods until the taxable year in which properly accruable under its method of accounting ABC does not meet the all events test for this contract until Year 3 23

24 Special Rule for Taxable Year of Inclusion: Example 2 ADVANCE PAYMENTS UNDER Year One Year Two Year Three Total Amount Received $5,000 $ - $10,000 $15,000 All Events Test Met? No No Yes Revenue per AFS $ - $ - $15,000 $15,000 Taxable Revenue Pre-Reform Law $ - $ - $15,000 $15,000 Post-Reform Law $ - $5,000 $10,000 $15,000 24

25 Deduction for Fines and Penalties 2017 Tax Law Tax Reform Law Amounts paid to any government or government agency for violations of law are non-deductible Amounts paid to, or at the direction of, a government or governmental entity for violation of a law are nondeductible Also applies to amounts paid to investigate any such potential violation Does not apply to amounts paid: - As restitution/remediation for violation of the law - To come into compliance with violated law; or - As restitution for failure to pay otherwise deductible taxes 25

26 Local Lobbying Expenses 2017 Tax Law Tax Reform Law Exception to general rule disallowing a deduction for lobbying expenses for lobbying on legislation before local government bodies No deduction will be allowed for lobbying expenses with respect to legislation before local government bodies. 26

27 Business Credits 2017 Tax Law Tax Reform Law Orphan Drug Credit credit available equal to 50% of qualified clinical testing expenses related to drugs for rare diseases or conditions. Rehabilitation Credit (Historical Structures) 10% credit of qualified rehabilitation expenditures with respect to any qualified rehabilitated building; Increased to 20% for expenditures related to certified historic buildings. Orphan Drug Credit the amount of credit is reduced to 25% of qualified clinical testing expenses Rehabilitation Credit - 10% credit for qualified rehabilitated buildings is eliminated - 20% credit remains on certified historic buildings - Credit must be claimed ratably over five years 27

28 Business Credits (cont.) 2017 Tax Law Tax Reform Law Employer credit for paid family and medical leave no credit existed in 2017 Tax credit bonds Taxpayers holding certain bonds would receive tax credits in lieu of interest payments from bond issuers. Employer credit for paid family and medical leave - Eligible employers my claim a credit equal to 12.5% of paid leave paid to qualifying employees. - Credit is increased by 0.25% for each percentage point that wages paid during qualifying leave exceeds 50% of the wages normally paid to the employee. - Maximum credit of 25% Tax credit bonds - Repealed; No new issuances after 12/31/ Current holders of bonds issued prior to 12/31/2017 will continue to receive credits 28

29 Accounting Methods: Small Business Reforms Expands availability of cash method of accounting to certain taxpayers Expands exemption from requirement to account for inventories and to apply UNICAP for certain taxpayers Expands exemption from requirement to use the percentage-ofcompletion method for small contractors Modification of rules under

30 Small Business: Overall Cash Method of Accounting 2017 Tax Law Corporations and partnerships with corporate partners are prohibited from using the cash method of accounting unless their average gross receipts for the prior three taxable years is less than $5 million - This test must be satisfied for each of the taxpayer's tax years beginning after December 31, 1985 Farming corporations are generally prohibited from using the cash method of accounting if annual gross receipts exceed $1 million Closely-held and family-owned farming businesses are permitted to use the cash method if average gross receipts do not exceed $25 million Qualified personal service corporations are generally permitted to use the cash method regardless of gross receipts. 30

31 Small Business: Overall Cash Method of Accounting (cont.) Tax Reform Law All taxpayers (other than tax shelters) with 3-year average gross receipts less than $25 million (indexed for inflation) are permitted to use the cash method of accounting Application of this provision constitutes a change in method of accounting 31

32 Small Business: Overall Cash Method of Accounting (cont.) Factors to consider when evaluating overall cash method: - May be beneficial when Accounts Receivable are higher than Accounts Payable (allows taxpayer to defer income) - More flexibility with regard to timing of taxable income recognition (taxpayer can write checks at end of the year or bill clients soon after the close of the year to control expenses and income) - Reduced administrative burden - assuming the taxpayer does not have GAAP accrual-basis financial statements - Gives a better indication of cash on hand 32

33 Small Business: Inventories 2017 Tax Law Any business in which the production, purchase, or sale of merchandise is a material income-producing factor must generally account for inventories at the beginning and ending of each year Affected businesses must also use the accrual method of accounting for purchases and sales of inventory Taxpayers in qualifying trades or businesses may account for inventory as materials and supplies that are not incidental if average gross receipts for the prior three taxable years does not exceed $10 million - Must not otherwise be prohibited from using the cash method as overall method of accounting under

34 Small Business: Inventories (cont.) Tax Reform Law All taxpayers (other than tax shelters) with 3-year average gross receipts less than $25 million (indexed for inflation) are exempt from the requirement to account for inventories Eligible taxpayers may either treat inventories as materials and supplies that are not incidental or conform to the taxpayer s financial accounting treatment - Non-incidental materials and supplies are deducted as consumed or utilized in the taxpayer s operations Application of this provision constitutes a change in method of accounting 34

35 Small Business: Inventories Example FACTS Corporate Taxpayer producing wooden canoes Average annual gross receipts: $20M Annual purchases are fully consumed during the year of purchase but 20% remains on-hand in the form of canoes in process Annual wood purchases as follows: Year 1 Year 2 Year 3 $7,000,000 $9,000,000 $8,000,000 35

36 Small Business: Inventories Example Accounting for inventory under accrual method: Year 1 Year 2 Year 3 (A) Beginning Inventory $ - $1,400,000 $1,800,000 (B) Purchases 7,000,000 9,000,000 8,000,000 (C) Ending Inventory (20% of Purchases) 1,400,000 1,800,000 1,600,000 Cost of Goods Sold (A) + (B) (C) $5,600,000 $8,600,000 $8,200,000 Accounting for inventory as non-incidental materials and supplies Year 1 Year 2 Year 3 Purchases $7,000,000 $9,000,000 $8,000,000 Consumed (100% of Purchases) 7,000,000 9,000,000 8,000,000 Cost of Goods Sold = Amount Consumed $7,000,000 $9,000,000 $8,000,000 Difference in Taxable Income (Compared to accrual method) ($1,400,000) ($400,000) $200,000 36

37 Small Business: UNICAP 2017 Tax Law Taxpayers must capitalize certain direct and indirect costs related to real or tangible property, whether produced or acquired for resale Qualifying resellers whose average annual gross receipts do not exceed $10,000,000 are generally exempt from these requirement with respect to personal property acquired for resale Other taxpayers may be exempt from the requirements of IRC 263A based on certain industry classification or other limited exceptions 37

38 Small Business: UNICAP (cont.) Tax Reform Law All taxpayers (other than tax shelters) with 3-year average gross receipts less than $25 million (indexed for inflation) are exempt from the capitalization rules of IRC 263A Application of this provision constitutes a change in method of accounting 38

39 Small Business: Long-Term Contract Accounting (IRC 460) 2017 Tax Law Tax Reform Law Taxpayers with average gross receipts of less than $10 million for the three prior taxable years are exempt from the requirement to use the percentage-of-completion method of accounting for longterm construction contracts which are expected to be completed within two years of the date when related costs are first incurred Gross receipts threshold amount is increased to $25 million for all taxpayers (other than tax shelters) Application of this provision constitutes a change in method of accounting 39

40 Other Accounting Methods Opportunities Even though many of these provisions are not effective until 2018, taxpayers should explore opportunities to accelerate deductions into to 2017 and defer income into 2018 Not just timing! Will result in permanent tax savings due to lowering of income tax rate 40

41 Creating Value Through Deferral EXAMPLE Taxpayer recognizes revenue ratably as work is performed. Taxpayer changes its method to recognize revenue when earned (e.g., when work is complete or product is delivered). Taxpayer projects steady business activity and revenue going forward. Year 1 Year 2 Year 3 Years 4-10 Total Final Year Current Method 1,000 1,000 1,000 7,000 10,000 - New Method ,250 7,500 - Recognize PY Deferral ,750 2, Total 750 1,000 1,000 7,000 9, Difference (250) (250) 250 Tax 35% (88) (88) 88 Note: Example does not take into account IRR on cash tax savings. The opportunity to generate significant benefit is greater than illustrated here! 41

42 Creating Value Through Deferral EXAMPLE Same facts, but assume tax rate is 35% in Year 1 and is reduced to 21% in Year 2 and beyond. Year 1 Year 2 Year 3 Years 4-10 Total Final Year Current Method 1,000 1,000 1,000 7,000 10,000-35% 21% 21% 21% 21% ,470 2,240 - New Method ,250 7,500 - Recognize PY Deferral ,750 2, Total 750 1,000 1,000 7,000 9, % 21% 21% 21% 21% ,470 2, Annual Tax Savings (53) Permanent Tax Savings 35 Note: Example does not take into account IRR on cash tax savings. The opportunity to generate significant benefit is greater than illustrated here! 42

43 Other Accounting Methods Opportunities Automatic method changes may be made effective for 2017 through the date the 2017 tax return is filed (including extensions) - Overall accrual to cash - Prepaid maintenance, service or insurance contracts - Cost segregation studies - Accrued expenses fixed and determinable We are still awaiting guidance on the procedures for adopting new accounting methods provided in the tax reform legislation 43

44 Tax Reform: Impact on Financial Statements Jeremy Betsill, Assurance Partner

45 Tax Reform Headlines 45

46 Tax Reform Headlines 46

47 FINANCIAL STATEMENT CONSIDERATIONS Enacted date vs. effective date Re-measurement of deferred taxes International tax considerations

48 Enacted Date vs Effective Date DEFINITIONS Enacted - The date the legislation is signed into law Effective - The date the legislation (law) takes effect 48

49 Enacted Date vs Effective Date The President signed the bill into law on December 22, The new rates apply to tax years beginning on or after January 1, Enacted Date: December 22, 2017 Effective Date: January 1,

50 ASC 740: Enacted Date vs. Effective Date The effect of a change in tax laws or rates shall be recognized at the date of enactment. Implications: - Current taxes will remain under OLD tax regulations for 2017 since new law not effective until January 1, However, deferred tax assets and liabilities shall be adjusted for the effect of a change in tax laws or rates in the period enacted (i.e. 2017). 50

51 Current vs Deferred Taxes Current Taxes tax effects that are taxable or deductible in the current reporting period. Deferred Taxes - tax effects that will lead to taxable income or tax deductions in future periods. - GAAP requires deferred tax liability or asset to be recognized for the estimated future tax effects attributable to temporary differences and carryforwards. 51

52 Fiscal Year Ends (non-calendar) If a law is enacted subsequent to the balance sheet date but prior to issuance of the financial statements, it is considered a non-recognized subsequent event Example: - Legislation enacted December 22, 2017 would be a nonrecognized subsequent event for a corporation with a November 30th fiscal year end 52

53 Re-measurement of Deferred Taxes Applies to C-corporations, pass-through entities (S-corps, LLC, etc.) are generally not subject to tax at the entity level Corporate rate of 21% for deferred tax assets and liabilities expected to reverse after 12/31/2017 Blended statutory tax rate for fiscal year taxpayers - Portion of year at 35%, portion at 21% Reduced federal benefit on state effective tax rates For U.S. GAAP purposes, all re-measurement effects of deferred tax balances should be recorded to income from continuing operations as of the enactment date 53

54 Re-measurement of Deferred Taxes (cont.) MECHANICS OF RE-MEASUREMENT AT DATE OF ENACTMENT Obtain U.S. deferred tax balances as of enactment date - In practice, one may expect to use 12/31/2017 balances as that may be the best information available Schedule the reversal of the deferred tax balances in the future Re-measure effect of temporary differences and carryforwards at new corporate tax rate of 21%. 54

55 Re-measurement of Deferred Taxes (cont.) Rate change may result in disproportionate tax effects being lodged in OCI - Could apply to various other items that are accounted for through OCI, such as unrealized gains or losses derived from pensions, currency translation, available-for-sale securities, etc. FASB recently issued a proposed ASU that allows a reclass from AOCI to retained earnings for the "lodged" tax effect that will reside in AOCI. 55

56 Re-measurement of Deferred Taxes Example OLD Rate Tax Reform NOL carryforward $1,000,000 $1,000,000 Tax rate 35% 21% Deferred tax asset $350,000 $210,000 Reduction of DTA = $140,000 charged to earnings through deferred tax expense 56

57 Net Operating Loss DTA Considerations Applicable for NOLs generated after 1/1/2018 NOL utilization limited to 80% of taxable income NOL carrybacks eliminated NOL carryforward period is indefinite Note: NOL changes to be considered in ability to utilize NOL carryforwards and need for valuation allowance 57

58 Multinational Considerations New law creates one-time transition tax on undistributed foreign earnings (since 1986) Unremitted Foreign Earnings is a GAAP concept, based on book earnings Earnings and Profits (E&P) is a tax concept, based on U.S. tax rules Caution: - In practice, the two above measures often vary by only an immaterial amount and differences between the two are often disregarded for ease of computation 58

59 One-Time Transition Tax Deemed Repatriation One-time transition tax on accumulated foreign earnings (E&P) Cash and Cash Equivalents taxed at 15.5% Operating Assets taxed at 8% Tax recorded in graduated installments over 8 years - Record tax payable balance as of 12/31/ Consider classification as current vs. non-current payable due to 8-year payment period. 59

60 SEC Implementation Guidance SEC guidance provides a measurement period for issuers to evaluate the impacts of tax reform on their financial statements Measurement period not to extend beyond one year from the enactment date During the measurement period, the SEC Staff expect that entities will be acting in good faith to complete the accounting under ASC Topic 740 Applies to publicly traded companies, may be used as guideline for privately-held companies 60

61 Other Changes Impacting Businesses

62 OTHER CHANGES IMPACTING BUSINESSES Cost Recovery Limitation on Deduction of Interest Meals and Entertainment Expenses State Tax Conformity International Implications 62

63 Other Changes Impacting Businesses: Cost Recovery Rachel Nightengale, Tax Manager

64 COST RECOVERY Increased expensing - Bonus depreciation - Section 179 expensing Changes to recovery periods for real property Modifications to depreciation limitations on luxury automobiles and personal use property Research and experimental expenses Planning considerations 64

65 Bonus Depreciation 2017 Tax Law Allows a 50% bonus depreciation deduction for first year placed in service Applies to new property only Not limited to taxable income of the entity Qualified property includes property with a MACRS life of 20 years or less Qualified property includes: - Property with a MACRS life of 20 years or less - Qualified leasehold improvement property - Certain qualified restaurant property - Certain qualified retail improvement property - Limitations apply to self rental or owner occupied property 65

66 Bonus Depreciation (cont.) Allows a 100% bonus depreciation deduction for first year placed in service Applies to new and used property Tax Reform Law Not limited to taxable income of the entity Qualified property - Technical issues discussed later Applies to property acquired and placed in service after September 27, 2017, subject to binding contract rules Phased down by 20% each year beginning in 2023 until completely phased on in

67 Bonus Depreciation Binding Contracts Eligible property must be both acquired and placed in service after 9/27/2017 Eligible property is considered acquired after 9/27/2017 only if there was not a written binding contract prior to the acquisition date Requirements of a binding contract: - Enforceable under state law - Does not limit damages to a specified amount - Any conditions are not within control of either party - Any changes to conditions are insubstantial - Supply agreements must include the amount and design specifications of the purchase to be binding - Purchasing a component or components of a larger asset is not considered a binding agreement to purchase the larger asset Note: An option to buy property is not considered a binding contract 67

68 Bonus Depreciation Effective Dates and Allowances Date Applicable Percentage Acquired before Sept. 27, % Acquired and placed in service after Sept. 27, 2017, and before January 1, % Acquired and placed in service after Sept. 27, 2017, and before Dec. 31, 2022 with an election made to use 50% rather than 100% 50% Acquired after December 31, 2022, and PIS in before January 1, % Acquired after December 31, 2023, and PIS in before January 1, % Acquired after December 31, 2024, and PIS before January 1, % Acquired after December 31, 2025, and PIS before January 1, % PIS on or after January 1, % 68

69 Applicable Recovery Period for Qualified Improvement Property Tax Reform Law Eliminates the 15 year recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property effective 1/1/2018 Eliminates qualified improvement property from the definition of eligible bonus depreciation property effective 1/1/2018 Congress intended to but DID NOT provide a single 15-year recovery period for qualified improvement property Qualified Improvement Property - certain interior improvements to nonresidential real property placed in service after the initial placed-in-service date of the property Starting in 2018, qualified improvement property is depreciated over 39 (MACRS) and 40 (ADS) years, generally not eligible for 100% expensing ADS recovery period for residential rental property is reduced from 40 to 30 years 69

70 Section 179 Expensing Election Maximum amount that may be deducted is $500,000 (indexed for inflation 2017 deduction is $510,000) Partial phase-out of deduction if more than $2,000,000 of section 179 eligible property is acquired during the tax year (indexed for inflation 2017 limitation is $2,030,000) Deduction fully phased out if purchases of section 179 eligible property exceeds $2,500,000 ($2,540,000 for 2017) Deduction limited to taxable income Amount of deduction disallowed due to taxable income limitation may carried forward indefinitely Deduction for Sport Utility Vehicles capped at $25,000 Expense election limited to 1245 property Available for new or used property 2017 Tax Law 70

71 Section 179 Expensing Election (cont.) Tax Reform Law Maximum amount that may be deducted is $1,000,000 (indexed for inflation after 2018) Partial phase-out of deduction if more than $2,500,000 of section 179 eligible property is acquired during the tax year (indexed for inflation after 2018) Deduction fully phased out if purchases of section 179 eligible property exceeds $3,500,000 Deduction limited to taxable income Amount of deduction disallowed due to taxable income limitation may carried forward indefinitely 71

72 Section 179 Expensing Election (cont.) Deduction for Sport Utility Vehicles remained capped at $25,000 but will be indexed for inflation after 2018 Expands expensing election to: Tax Reform Law (cont.) - Furnishing lodging property hospitality and apartment buildings - Roofs, HVAC property, fire protection, alarm and security systems (only applies to nonresidential real property under expansion or improvement, placed into service after the building was placed into service Applies to assets placed in service after December 31,

73 Cost Recovery Life Comparison 2017 Tax Law 2018 Tax Law Life Classification 27.5 Years Residential (MACRS) 40 Years Residential (ADS) 39 Years Nonresidential (MACRS) 40 Years Nonresidential (ADS) 15 years Qualified Leasehold Improvement (MACRS) 15 Years Qualified Restaurant Property (MACRS) 15 Years Qualified Retail Improvement (MACRS) 39 Years Qualified Leasehold Improvement (ADS) Life Classification 27.5 Years Residential (MACRS) 30 Years Residential (ADS) 39 Years Nonresidential (MACRS) 40 Years Nonresidential (ADS) 39 Years Qualified Improvement Property (MACRS) 40 years Qualified Improvement Property (ADS) Sec. 179 Roof, HVAC, Fire Protection, Security and Alarm Systems Not original UOP 39 Years Qualified Restaurant Property (ADS) 39 Years Qualified Retail Improvement (ADS) 73

74 Depreciation Limitations: Luxury Automobiles and Personal Use Property Increases to annual depreciation limitations placed on passenger automobiles New limitations will be indexed for inflation 2017 Tax Law 2018 Tax Law Year Limitation 1 $3,160 2 $5,100 3 $3, $1,875 Year Limitation 1 $10,000 2 $16,000 3 $9, $5,760 74

75 Research and Experimental Expenditures 2017 Tax Law Tax Reform Law R&E and software costs maybe expensed or elect to capitalize and amortize over 60 months section 174 Capitalized and amortized over 60 months starting with tax years beginning after December 31, 2021 Can elect to recover over 10 years, subject to AMT 59(e) Research conducted outside the United States capitalized and amortized over 15 years Current AMT considerations remain the same for individuals 75

76 Cost Recovery: Planning Considerations 100% bonus depreciation and impact on qualified business income deduction 100% bonus depreciation in a year that creates or increases a net operating loss M&A considerations benefits created for both buyers and sellers in deals structured as asset sales and deemed asset sales 76

77 Other Changes Impacting Businesses: Limitation on Deduction of Interest Tracey Erbe, Tax Manager

78 Business Interest Expense 2017 Tax Law Tax Reform Law Business interest expense is generally deductible, subject to certain limitations Limits the deduction of business interest expense in excess of: - Business interest income, plus - 30% of business adjusted taxable income, plus - Floor plan financing interest Any disallowed interest expense is carried forward indefinitely Does not apply to floor-plan financing interest Defined formula for adjusted taxable income Defined business interest expense and business interest income 78

79 Business Interest Expense: Adjusted Taxable Income Start with Taxable income of taxpayer Less: Wages earned as an employee (applies to individual taxpayers only) Less: Any item of interest income or gain that is not allocable to trade or business (investment income) Less: Business interest income Less: Income from electing out real property trades or businesses Less: All items of income or gain of partnership or S corporation Plus: Any item of deduction or loss that is not allocable to trade or business (investment losses) Plus: Business interest expense Plus: Net Operating Loss deduction Plus: Depreciation, amortization and depletion before January 1, 2022 * Plus: Losses from electing out real property trades or businesses Plus: All items of deduction or loss of partnership or S corporation Plus: Partner s share of partnership excess taxable income End with Adjusted taxable income (May not be less than zero) *Addback for Depreciation, amortization and depletion not permitted after 2021 Secretary to provide other adjustments to the computation of adjusted taxable income 79

80 Business Interest DEFINITION OF BUSINESS INTEREST Business Interest Income - The amount of interest includible in the taxpayer's gross income and allocable to a trade or business Business Interest Expense - Any interest paid or accrued on indebtedness properly allocable to a trade or business - Does not include investment interest - Floor plan financing interest is excluded from limitation Defined as interest associated with indebtedness to finance self-propelled vehicle, boat, or farm machinery or equipment held for sale or lease 80

81 Business Interest Expense BUSINESS INTEREST EXPENSE LIMITATION DOES NOT APPLY TO: Small businesses with 3-year average annual gross receipts less than $25,000,000 Real property trades or businesses may elect out, but are required to use alternative depreciation system (ADS) to depreciate: - Nonresidential real property - Residential real property - Qualified improvement property Farming businesses may elect out, but are required to use ADS to depreciate any property with a recovery period of 10 years or more Certain regulated public utilities Floor plan financing interest 81

82 Business Interest Expense: Does not apply to REAL PROPERTY TRADES OR BUSINESSES Includes any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing or brokerage trades or businesses (IRC 469(c)(7)(C)) Election out of interest limitation is irrevocable Requirement to use ADS system could include switch for existing property in addition to any new and future acquisitions 82

83 Business Interest Expense: Treatment by Pass-throughs Interest deduction applies first at the entity level - Any deduction is taken into account in determining the non-separately stated taxable income or loss of pass-through entity Business interest not deducted can be carried forward indefinitely - Special rules apply to partnerships Adjusted taxable income of each partner or shareholder is determined without regard to partner s or shareholder s distributive share of income or deductions of the entity - This rule prevents double counting of same dollars used in computing the adjusted taxable income of entity from generating additional interest deductions from income passed through to the partners or shareholders 83

84 Business Interest Expense: Treatment by Pass-throughs Excess taxable income of a pass-through is passed through to partners or shareholders - If an entity has excess taxable income for purposes of deduction limit, such excess is passed through to partners of shareholders - Adjusted taxable income of each partner or shareholder is increased by its share of the entity s taxable income Excess taxable income from a pass-through increases the partner s adjusted taxable income, which can increase the interest deduction at the partner level - It cannot be used to deduct disallowed interest from other pass-through entities Disallowed partnership interest is passed through to the partners and is carried forward to the next year. It may only be deducted to the extent of 30% of excess taxable income from that same partnership activity 84

85 Business Interest Expense: Treatment by Pass-throughs Excess taxable income is a percentage of the entity s adjusted taxable income. Percentage is: - The excess of: 30% of the entity s adjusted taxable income, over The amount (if any) by which the entity s business interest expense, reduced by floor plan financing interest, exceeds the entity s business interest income - Divided by 30% of the entity s adjusted taxable income This excess taxable income is added to a partner s or shareholder s adjusted taxable income which allows the taxpayer to deduct more interest to the extent the entity could have deducted more interest 85

86 Business Interest Expense: Treatment by Pass-throughs EXAMPLE 1 Roy is a 50% partner in ABC Partnership ABC Partnership has adjusted taxable income of $100,000 and business interest expense of $20,000 ABC Partnership deducts $20,000 of business interest because the amount does not exceed its business interest expense limitation of $30,000 ($100,000 x 30%) Since ABC Partnership could have deducted an additional $10,000, Roy is allocated $16,667 of excess taxable income [($10,000 / $30,000) x $100,000 x 50%]. This allows Roy to deduct an additional $5,000 of interest ($16,667 x 30%) 86

87 Business Interest Expense: Treatment by Pass-throughs EXCESS BUSINESS INTERSET EXPENSE For S corporations, carryforward stays at corporate level For partnerships, excess is allocated to each partner as non-separately stated taxable income or loss 87

88 Business Interest Expense: Treatment by Pass-throughs EXCESS BUSINESS INTEREST EXPENSE FROM PARTNERSHIPS (NOT APPLICABLE TO S CORPS) Partners treat excess business interest as business interest in succeeding taxable year Allocated excess interest carried forward to a succeeding year by a partner is treated as paid or incurred by such partner in succeeding year only to extent the partner is allocated excess taxable income from such partnership in succeeding year If partner does have enough excess taxable income from the entity to offset excess business interest carried forward to that year, excess becomes interest not deemed paid by partner in that year. Therefore, excess business interest carried forward to succeeding tax years. Adjusted basis of partner s interest in partnership is reduced in the year excess business interest is allocated to partner (but not below zero) Excess business income does not carryforward Upon disposition of applicable partnership interest, remaining excess business interest is added to partnership interest tax basis 88

89 Business Interest Expense: Treatment by Pass-throughs EXAMPLE 2 Partnership P is owned 50/50 by XYZ Corporation and an individual P s adjusted taxable income (before interest expense): $200 P s business interest expense: $60 XYZ Corp has adjusted taxable income of zero (excludes interest expense) XYZ Corp s business interest expense is $25 89

90 Business Interest Expense: Treatment by Pass-throughs EXAMPLE 2 Step One: Calculate limitation and income at Partnership level P s interest deduction limit is $200 x 30% = $60 P s taxable income is $200 - $60 = $140 XYZ Corp and the individual each receive $70 of taxable business income 90

91 Business Interest Expense: Treatment by Pass-throughs EXAMPLE 2 Step Two: Calculate limitation and income at XYZ Corp level Maximum interest deduction deducted at P level - No interest deductions limited - No excess business income - P s income is disregarded for XYZ adjusted taxable income calculation XYZ s interest deduction limit: $0 x 30% XYZ s $25 of business interest expense is limited XYZ has a $25 interest expense carryover (carryover is indefinite) 91

92 Business Interest Expense: Treatment by Pass-throughs EXAMPLE 3 Partnership P is owned 50/50 by XYZ Corporation and an individual P s adjusted taxable (before interest income): $200 P s business interest expense: $40 XYZ Corp has net taxable income of zero (Excludes interest expense) XYZ Corp s business interest expense: $25 92

93 Business Interest Expense: Treatment by Pass-throughs EXAMPLE 3 Step One: Calculate limitation and income at Partnership level P s interest deduction limit: $200 x 30% = $60 P s taxable income $200 - $40 = $160 Full income limit isn t used Calculate excess taxable income allocated to XYZ corporation: (Int. deduction limit Int. expense + Floor Plan Int. Bus. Int. Income) Int. deduction limit ( ) / 60 x 200 = $66.67 x Adjusted taxable income XYZ Corporation and individual each receive an allocation of $80 of taxable income and $33.33 of excess taxable income 93

94 Business Interest Expense: Treatment by Pass-throughs EXAMPLE 3 Step Two: Calculate limitation at XYZ Corp level Distributive share of excess taxable income from P is added to the adjusted taxable income of XYZ XYZ s deduction for business interest is limited to 30% of the sum of: - Adjusted taxable income - Allocation of excess taxable income from P XYZ s interest deduction limit: 30% x ($0 + $33.33) = $10 XYZ Corporation s $25 of interest expense is limited to $10 XYZ Corp has a $15 interest expense carryover (carryover is indefinite) 94

95 Other Changes Impacting Businesses: Meals & Entertainment Expenses Rudy Thomas, Tax Partner

96 Meals & Entertainment Changes Old Law 50% deduction for eligible meals & entertainment expenses 100% deduction for meals provided at employer-operated eating facility and meals provided for the convenience of employer New Law No deduction allowed for activities considered to be entertainment, amusement, recreation Meal expenses limited to 50% for meals provided on employer premises Important Considerations No deduction allowed for operation of employeroperated eating facilities after 12/31/2025 No deduction allowed for employee meals provided for the convenience of the employer after 12/31/2025 Planning Item Create separate general ledger account for nondeductible entertainment expenses 96

97 Deduction of Entertainment and Fringe Benefits: Examples Examples of items which are no longer deductible in any part: Entertainment (i.e., tickets to sporting events) Dues to any club formed for the principle purpose of entertainment may include pleasure, business, recreation, or social clubs Transportation fringe benefits Expenses incurred to provide transportation for employees commuting purposes 97

98 Deduction of Entertainment: Dues Dues are deductible if the taxpayer is engaged in a trade or business, the dues are incurred in carrying on that trade or business, and the payment is an ordinary and necessary expense. Payments to the following organizations are deductible (unless the organization s principal purpose is providing entertainment to members): - Business leagues - Trade associations - Chambers of commerce - Boards of trade - Real estate boards - Profession organizations (e.g., bar and medical associations) - Civic or public service organizations (e.g., Kiwanis, Lions, Rotary and Civitan) 98

99 Other Changes Impacting Businesses: State Conformity Rudy Thomas, Tax Partner

100 State Conformity: Types of Conformity For most states, the IRC is the starting part for calculating state taxable income. For these states, IRC conformity can be broken into 3 categories: Fixed - The states conform to the IRC as of a certain date - Conformity for these states is generally NOT automatic - The state Legislature must affirmatively conform to any IRC changes subsequent to that date Rolling - The states conform to the IRC as applicable for Federal tax purposes - Conformity for these states is generally automatic - The state Legislature must then affirmatively decouple from any IRC changes Selective - The states either conform or decouple from various code sections and/or public laws that are passed - Conformity in these states can depend on whether an existing section of the IRC is being amended or if a new section is being introduced. 100

101 State Conformity: Types of Conformity 101

102 State Conformity: Items to be Addressed by States Some of the items that will need to be addressed by states include: Bonus Depreciation Will states continue to decouple from bonus depreciation and will more consider doing so? Interest Limitations Will the states follow the Federal interest limitations, even if the state decouples from bonus depreciation? NOL Limitations For states which require tracking state specific NOLs, will the new NOL limitations be applied? 102

103 State Conformity: When Will We Know It will take time for the state impact of tax reform to become clear - For the states with fixed and selective conformity, the Legislatures must meet and determine whether or not to conform - For states with rolling conformity, the Legislatures still must meet and decide to decouple from specific provisions The current conformity for states will be unique for each particular state 103

104 Tax Reform: International Implications Stani Fowler, Tax Senior Manager

105 U.S. in a Global Tax Context 105

106 Tax Competitiveness Rankings 2017 Country Overall Rank Estonia 1 New Zealand 2 Switzerland 3 United Kingdom 14 Germany 23 Mexico 25 Greece 29 United States 30 France

107 Worldwide Tax System Trends 107

108 Worldwide Tax System Trends 108

109 International provisions Main purpose is to introduce a territorial system of taxation Includes introduction of participation exemption Transition rules for deferred income Strengthening of base erosion rules 109

110 INTERNATIONAL TAX Participation exemption for dividends ( DRD ) Deemed repatriation of Post 1986 Earnings and Profits Base Erosion Anti-Abuse Tax ( BEAT ) Global Intangible Low Taxed Income ( GILTI ) Deduction for Foreign Derived Intangible Income ( FDII ) 110

111 International: Participation Exemption System New IRC 245A Tax Reform Law 100% DRD for foreign-source dividends received from 10% owned foreign corporations No credit for foreign withholding taxes on incoming dividends DRD does not apply to individual shareholders or S-corporations 111

112 International: Deemed Repatriation Tax is assessed on accumulated earnings and profits (E&P) at rates of: % of E&P attributable to liquid assets (i.e., cash and cash equivalents) - 8% of E&P attributable to illiquid assets (i.e., all other assets) Tax can be paid over 8 years Tax Reform Law Tax applies to Specified Foreign Corporations - CFC or foreign corporation that has at least one domestic shareholder that is a US corporation. Foreign tax credits can be applied, subject to a haircut for the reduction in US tax rate 112

113 International: Base Erosion and Anti-Abuse Tax Tax Reform Law Base erosion and anti-abuse tax (BEAT) new IRC 59A An attempt to level the playing field between US-headquartered parent companies and foreign-headquartered parent companies. -Unified Framework Acts as a minimum tax for corporations imposed on certain cross-border relatedparty payments made by large multi-nationals Applies to US corporations: - With average annual gross receipts > 500 million, and - Which have a base erosion percentage 3% or higher Base Erosion % equals Base Erosion Payments divided by Total Deductions 113

114 International: Base Erosion and Anti-Abuse Tax DEFINITIONS Base Erosion Payment is any payment to a foreign related person after 2017 for which a deduction is allowable - Excludes amounts paid for costs of goods sold and eligible services Total Deductions for purposes of calculating the BEAT percentage means total deductions allowable for the year, excluding NOLs, the participation exemption, the deduction allowed under new IRC 250 for foreign intangible income, and any amounts paid for costs of goods sold and eligible services 114

115 International: Base Erosion and Anti-Abuse Tax DEFINITIONS Related person for purposes of applying the BEAT rules means - Any foreign shareholder with direct, indirect, or constructive ownership of at least 25% (vote or value) - Any person related to the corporation or 25% owner under IRC 267(b) or 707(b)(1) - Any person related for purposes of transfer pricing rules under IRC

116 International: Base Erosion and Anti-Abuse Tax COMPUTATION BEAT minimum tax amount is equal to excess of (a) over (b) (a)10% x Modified Taxable Income (b)pre-credit regular income tax liability reduced by: R&D credits 80% of applicable IRC 38 credits No FTCs or deductions In tax years beginning after The percentage applied to modified taxable income in (a) above is increased from 10% to 12.5% - R&D credits and applicable IRC 38 credits may no longer reduce the pre-credit regular income tax liability in (b) above 116

117 International: Global Intangible Low-Taxed Income (GILTI) Tax Reform Law Global intangible low-tax income (GILTI) provisions under new IRC 951A require US shareholders of a CFC to include currently in income its GILTI. Similar to current Subpart F regime GILTI generally means the excess (if any) of a US shareholder s net CFC tested income over the shareholder s net deemed tangible income return with respect to the CFC s tangible assets for the year Net deemed tangible return equal to excess of 10% of qualified business asset investment over interest expense deducted in determining tested income GILTI is determined on an aggregate basis by taking into account the income and losses of each CFC with respect to which the shareholder is a US shareholder. IRC 951A requires US shareholders of CFCs to include their pro rata share of GILTI in current income, similar to other Subpart F inclusions 117

118 International: Global Intangible Low-Taxed Income (GILTI) US shareholders that are C Corporations are allowed a deduction of up to 50% of the GILTI inclusion amount resulting in an ETR of 10.5% Non-corporate shareholders pay tax on GILTI at ordinary income rates with no deduction A foreign tax credit is available to corporate shareholders, limited to 80% of foreign taxes paid. 118

119 International: Global Intangible Low-Taxed Income (GILTI) EXAMPLE A CFC that is a qualified foreign corporation earns $1,000,000 of non-subpart F income and pays $150,000 of foreign tax. The CFC has $500,000 of adjusted basis in its tangible personal property. The GILTI inclusion for the US shareholder is $800,000 ($850,000 of net CFC tested income less $50,000 of net deemed tangible income return). 119

120 International: Global Intangible Low-Taxed Income (GILTI) EXAMPLE Implications for Corporate Shareholder GILTI Inclusion (plus 78 gross up) $800,000 Less: 50% Deduction for GILTI (400,000 ) Equals: US Taxable Income Inclusion $400,000 US Tax on GILIT Inclusion at 20% $84,000 Less: Credit for Foreign Taxes (84,000) Net US Tax Due $0 120

121 International: Global Intangible Low-Taxed Income (GILTI) EXAMPLE Implications for Individual Shareholder GILTI Inclusion (plus 78 gross up) $800,000 No Deduction for GILTI (0) Equals: US Taxable Income Inclusion $800,000 US Tax on GILIT Inclusion at 37% $296,000 Less: Credit for Foreign Taxes (0) Net US Tax Due $296,

122 International: Foreign-Derived Intangible Income (FDII) Deduction Tax Reform Law Foreign Derived Intangible Income (FDII) provisions under new IRC 250 imposes a tax on excess returns earned directly by a US corporation from foreign sales or services Provides for a deduction of up to 37.5% of a domestic corporations FDII for the year (resulting in an effective rate on FDII of %) The deduction decreases to % for years beginning after December 31, 2025 (resulting in an effective rate of %) FDII is only available to C corporations other than RICs or REITs FDII will benefit corporations with low fixed asset values, such as companies in services or technology sectors 122

123 International: Foreign-Derived Intangible Income (FDII) Deduction INCOME ELIGIBLE FOR FDII DEDUCTION Income derived from - Property sold, including licenses and leases, to any non-us person which is for foreign use, or - Services provided to foreign persons or with respect to property located outside the US Foreign use means any use, consumption or disposition which is not in the US 123

124 International: Foreign-Derived Intangible Income (FDII) Deduction COMPUTING THE DEDUCTION FOR FDII FDII is NOT deductible, rather it is used to determine the ratio of FDII to Gross income. This ratio is then applied to deemed intangible income Deemed intangible income is equal to net income less the deemed tangible income return Deemed tangible income return is equal to 10% of qualified business asset investments 124

125 International: Foreign-Derived Intangible Income (FDII) Deduction EXAMPLE 3 US MANUFACTURING COMPANY US SERVICE COMPANY Net Income from Domestic Sales $700 Net Income from Domestic Sales $700 Net Income from Foreign Sales 300 Net Income from Foreign Sales 300 Total Net Income $1,000 Total Net Income $1,000 Tangible Property $5,000 Tangible Property -0- Deemed Intangible Income $500 Deemed Intangible Income $1,000 Equal to: $1,000 ($5,000 x 10%) Equal to: $1,000 ($0 x 10%) Foreign Derived Intangible Income $150 Foreign Derived Intangible Income $300 Equal to: $500 x ($300 / $1,000) Equal to: $1,000 x ($300 / $1,000) FII Deduction $56 FII Deduction $113 Equal to: $150 x 37.5% Equal to: $300 x 37.5% 125

126 Tax Reform: Impact on Pass-Through Entities Robert Bradham, Tax Partner Blair Clawson, Tax Manager

127 Pass-through: Qualified Business Income Deduction For tax years beginning after December 31, 2017, allows an individual taxpayer (and a trust or estate) a deduction up to 20% based on an individual s domestic qualified business income from a partnership, S Corporation, or sole proprietorship Assuming in highest 37% bracket with full deduction allowed, it produces an effective 29.6% Federal rate Set to expire at the end of Under the new legislation, the deduction is not available for tax years beginning on or after January 1, Increased reporting for pass-through entities to partners and shareholders This is the opposite of tax simplification it can be a complex calculation & has areas of uncertainty 127

128 Pass-through: Qualified Business Income Deduction Items of consideration: What are qualifying business activities? What is qualified business income or QBI? Claiming the deduction (netting, overall TI, more limitations) Income limitation exception (AGI thresholds) Computations and complications 128

129 Pass-through: Qualified Business Income Deduction QUALIFYING BUSINESS ACTIVITIES Qualified trades or businesses that meets the following criteria: - Generally must be U.S. domestic trade or business - Based on qualified business income (includes both passive and non-passive) - Excludes trade or businesses of performing services as an employee - Excludes specified service trade or businesses: Fields of health, accounting, law, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services (excludes engineers and architecture) Where the principal asset is the reputation or skill of the owners or employees That involves the performance of services of investing and investment managing trading or dealing in securities, partnership interests, or commodities 129

130 Pass-through: Qualified Business Income Deduction QUALIFYING INCOME Qualified business income Qualified cooperative dividends Qualified REIT dividends (excludes REIT capital gains) Qualified publicly traded partnership income 130

131 Pass-through: Qualified Business Income Deduction CLAIMING THE DEDUCTION Individuals, estates and trusts are eligible for the qualified business income deduction The deduction is calculated at the taxpayer level with information supplied by the qualified trade or business The deduction is claimed on the taxpayer s tax return For individuals, deduction claimed after taxable income is computed - Below the line, not a deduction for AGI; not an itemized deduction Deduction available to taxpayers that itemize deductions, as well as those that do not Deduction does not reduce self-employment income Same for AMT and Regular Tax 131

132 Pass-through: Qualified Business Income Deduction INCOME LIMITATION EXCEPTION FOR SPECIFIED SERVICE TRADES OR BUSINESSES Taxpayers with income from a specified service trade or business may qualify for 20% deduction if taxable income is less than $315,000 (MFJ) or $157,500 (all other filers) The 20% deduction is phased out as taxpayers taxable income increases from $315,000 to $415,000 (MFJ) and $157,500 to $207,500 (all other filers) 132

133 Pass-through: Qualified Business Income Deduction INCOME LIMITATION EXCEPTION If taxable income is less than $315,000 (MFJ) or $157,500 (all other taxpayers), the limitation related to W-2 wages / capital does not apply If taxable income is between $315,000 and $415,000 (MFJ) or $157,500 and $207,500 (all other taxpayers), the limitation related to W-2 wages / capital phases in 133

134 Pass-through: Qualified Business Income Deduction CALCULATING THE DEDUCTION Equal to the lesser of (1) or (2): (1) Combined Qualified Business Income = (a) + (b) + (c) (a) The lesser of (i) or (ii) (i) 20% of the business income of the qualified trade or business, or (ii) The W-2 Wage / Capital Limitation, which is the greater of (A) or (B): (A) 50% of W-2 wages paid with respect to the qualified trade or business, or (B) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property (b) 20% of the aggregate REIT dividends and qualified publicly traded partnership income (c) Lesser of (i) or (ii) (i) 20% of qualified cooperative dividends, or (ii) Taxable income reduced by net capital gain (2) 20% of taxable income less net capital gain 134

135 Pass-through: Qualified Business Income Deduction MULTIPLE QUALIFIED BUSINESSES Compute the 20% Deduction for each qualified trade or business (Step 1) and add them together Then apply the overall limitation (Step 2) - The sum of the deductions cannot exceed 20% of the excess of taxable income over net capital gains 135

136 Pass-through: Qualified Business Income Deduction DEFINITIONS W-2 wages are generally wages and deferred compensation reported to the Social Security Administration Taxpayers wages derived from the Qualified Trade or Business are not added back to determine Qualified Business Income For fiscal year partnerships and S corporations, W-2 wages are the calendar year wages paid by the business during the calendar year ending during the taxable year - Example: A partnership with a 5/31/2018 fiscal year end would use W-2 wages paid for the calendar year ending 12/31/2017 for purposes of applying the wage limitation 136

137 Pass-through: Qualified Business Income Deduction DEFINITION OF QUALIFIED PROPERTY The acquisition cost (unadjusted basis) of tangible and real property (excluding land) Held for use by the qualified trade or business at the close of the tax year Used at any point during the tax year Depreciable period for which has not ended before the close of the taxable year - Depreciable period is the period beginning on date the property was first placed in service and ending on the later of: 10 years after such date, or The last day of the last full year in the applicable recovery period under section 168 (GDS recovery period) - Example: A calendar year partnership acquires equipment with a 5 year GDS recovery period on 7/1/2015. The equipment is considered qualified property through the 2025 tax year 137

138 Pass-through: Qualified Business Income Deduction REAL ESTATE Owners of real estate-related businesses may qualify for the new 20% pass-through deduction Will need additional guidance from IRS/Department of Treasury EXAMPLE Oscar owns an office building constructed in 2012 and pays no wages Original cost basis and depreciable lives are as follows Land $200,000 Building $1,000,000/ 39 Years FF&E $400,000/ 5 Years 138

139 Pass-through: Qualified Business Income Deduction EXAMPLE CONTINUED In 2018, his pass-through deduction is limited to 2.5% * $1,400,000 = $35,000 - Both the cost of the building and the equipment qualifies, because each asset was owned for the longer of its depreciable life or 10 years as of 2018 Now assume the building was constructed in Only the building qualifies for the calculation because as of 2018, the FF&E is all older than 10 years or it s depreciable life has expired - Deduction is limited to 2.5% * $1,000,000 = $25,

140 Pass-through: Qualified Business Income Deduction RECAP: WHAT DO WE KNOW? Taxable Income under $315K - 20% Deduction not subject to wage or property limitations - Applies to SSTB and Qualified Business Activities Taxable Income between $315K and $415K - Wage and property limitations are phased-in* - Applies to SSTB and Qualified Business Activities Taxable Income over $415K Qualifying Business Activities - Wage and property limitations fully phased-in* Taxable Income over $415K SSTB - No Deduction *Wage and property limitations may not apply in cases where calculations yield an amount exceeding 20% of your QBI *Deduction is always limited to 20% of Taxable Income less Net Capital Gain 140

141 Pass-through: Qualified Business Income Deduction WHAT DON T WE KNOW? Congress instructed the Secretary to issue regulations Awaiting guidance on: - Application of provision to tiered entities - Application of the rules in short tax years and in years of acquisition or disposition of a major portion of a trade or business - Anti-abuse rules for W-2s - Determining unadjusted basis for like kind exchange or involuntary conversion property - Examples and instruction regarding activities where the principal asset is the reputation or skill of the owners or employees 141

142 Qualified Business Income Deduction: Example 1 FACTS Taxpayer, Robert, owns an S corp that sells golf clubs and earns $100,000 in wages and $150,000 in qualified business income Spouse, Claire, works as an accountant and earns a salary Robert and Claire s joint taxable income is $300,000 and they file MFJ Net Capital Gains equal $15,000 (with $0 REIT/cooperative dividends or PTP income) 142

143 Qualified Business Income Deduction: Example 1 DEDUCTION Business income is not from an SSTB Taxable income before the deduction falls below $315,000 threshold, so there are no wage or capital limitations Deduction is the lessor of: 1) 20% of Qualified Business Income 20% * $150,000 = $30,000 or 2) 20% of Taxable Income over Net Capital Gains 20% * (300,000-15,000) = 57,000 Total Deduction is $30,

144 Qualified Business Income Deduction: Example 2 FACTS Taxpayer, Dog, owns a pass-through veterinary practice and earns $200,000 in wages and $100,000 in business income Spouse, Kat, sells pet clothing on Etsy; Kat s qualified business income totals $220,000 Kat s share of allocable wages from her qualified business is $70,000 and her share of the unadjusted basis of qualified property is $500,000 Dog and Kat s joint taxable income is $520,000 and they file MFJ (with $0 capital gain/reit/cooperative dividends/ptp income) 144

145 Qualified Business Income Deduction: Example 2 DEDUCTION Taxable income before the deduction exceeds $415,000 threshold; the wage and capital limitation is fully phased in Dog s business income does not qualify since he operates a Specified Service Trade or Business 145

146 Qualified Business Income Deduction: Example 2 DEDUCTION CONTINUED Deduction is the lesser of: 1) The lesser of (i) or (ii) (i) 20% of qualified business income 20% * 220,000 = 44,000 (ii) The W-2 Wage / Capital Limitation, which is the greater of (A) or (B): (A) 50% of W-2 wages paid with respect to the qualified trade or business, or 50% * 70,000 = 35,000 (B) 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property 25% * 70, % * 500,000 = 30,000 2) 20% of Taxable Income over Net Capital Gains 20% * (520,000-0) = 104,000 Total Deduction is $35,

147 Qualified Business Income Deduction: Example 3 PROPERTY AND WAGE LIMITATION COMPARISON No Wages - Holds Property With Wages With Wages and Property Qualified Business Income 500, , ,000 Share of W-2 Wages 0 80,000 80,000 Qualified Property 1,000, ,000,000 Taxable Income on , , ,000 Initial Deduction 100, , ,000 50% Wage Limitation 0 40,000 40,000 25% Wage + 2.5% Property Limitation 25,000 20,000 45,000 Tentative Deduction 25,000 40,000 45,

148 Qualified Business Income Deduction: Example 4 PROPERTY AND WAGE LIMITATION: VARYING INCOME LEVELS $315k $345K $415K Qualified Business Income 300, , ,000 Share of W-2 Wages 80,000 80,000 80,000 Qualified Property 1,000,000 1,000,000 1,000,000 Initial Deduction 60,000 60,000 60,000 50% Wage Limitation 40,000 40,000 40,000 25% Wage + 2.5% Property Limitation 45,000 45,000 45,000 Reduction in Initial Deduction 0 15,000 0 Phase-In of Reduction (30%) 0 4,500 0 Tentative Deduction 60,000 55,500 45,

149 Pass-through: Qualified Business Income Deduction LOSSES & CARRYOVERS If the total of all qualified trade or business amounts results in an net negative amount for the tax year, the negative amount is carried forward and offsets the 20% deduction amount calculated in the following year EXAMPLE Dwight and Angela file MFJ and both have qualifying business activities Taxable income is less than $315,000 and they have zero capital gains In 2018, they have qualified business income/(loss) totaling ($50,000) In 2019, Dwight has qualifying business income from beet sales of $150,000 and Angela has a qualified business loss from her cat daycare of ($40,000) 149

150 Pass-through: Qualified Business Income Deduction DEDUCTION No deduction is allowed in deduction is calculated as follows: 2019 Qualified Business Income 150,000 x 20% = 30, Qualified Business Loss (40,000) x 20% = (8,000) 2018 QBI Loss Carryover (50,000) x 20% = (10,000) Total 2019 Deduction 12,

151 Pass-through: Modified Loss Limitation Rules Excess Business Loss of a non-passive activity cannot be deducted and shall be carried forward as a net operating loss Note NOLs carryovers generated after December 31, 2017 cannot offset more than 80% of taxable income Excess Business Loss for the tax year is defined as the excess of (a) the taxpayer s aggregate deduction attributable to trades or businesses, over (b) the sum of aggregate gross income or gain attributable to trades or businesses, plus (c) $500,000 for MFJ or $250,000 for other filers (indexed for inflation) For partnerships and S corporations, the excess business loss limitation applies at the partner/shareholder level This provision is applied after first applying the section 469 passive activity rules Bottom line individual taxpayers cannot apply more than $500,000 of business losses against non-business income in a given year ($250,000 for single filers) 151

152 Pass-through: Qualified Business Income Deduction PLANNING OPPORTUNITIES Examine choice of entity Tax planning to fall below $315,000 if subject to limitations Revisit reasonable compensation Examine business systems as a whole for reallocation opportunities Potential grouping planning Consider filing separate Capitalization planning 152

153 Pass-through: Qualified Business Income Deduction CONCLUSION Taxable income < $315,000 deduction MAY just be the lesser of 20% of QBI or 20% of taxable income less net capital gains Taxable income $315,000 $415,000 wage and capital limitations phased in Taxable income > $415,000 no deduction for SSTBs wage and capital limitation fully phased in for non-sstbs Stay tuned! More guidance to come! 153

154 Entity Selection Considerations: S Corp vs. C Corp Sarah Windham, Tax Partner

155 Entity Selection Tax reform brings significant individual and business tax modifications that may prompt taxpayers to reconsider entity structure There are many competing factors that should be carefully considered before making a hasty change to the choice of business entity from a tax perspective 155

156 Entity Selection: Overview C Corporations Reduced corporate tax rate from a maximum of 35% to 21% Double taxation regime - Earnings taxed when earned at the corporation level - Dividends taxed when distributed to shareholders Shareholders potentially subject to additional 3.8% net investment income tax on distributions Certain deductions are available to corporations that are not available to individual taxpayers - State and local tax deduction Pass-Through Entities Income taxed at individual tax rates which vary based on individual income levels - Highest individual tax rate of 37% New qualified business income deduction available for certain qualifying businesses allowing a reduction of up to 20% of qualified business income Reduced individual tax rates and qualified business income deduction are both set to expire for tax years beginning after December 31,

157 Eligible Terminated S Corporations 2017 Tax Law Tax Reform Law Distributions from a terminated S- Corporation are treated as paid out from its AAA Any adjustments arising from changes in methods of accounting necessitated by the conversion are taken into account over a 4- year period During the post-termination period, distributions are paid from AAA, and from E&P in the post termination period During the post-termination period, distributions are paid from AAA Distributions from a terminated S- Corporation after the posttermination period are treated as paid from AAA and E&P on a ratable basis Any adjustments arising from changes in methods of accounting necessitated by the conversion are taken into account over a 6-year period 157

158 Entity Selection Considerations EFFECTIVE TAX RATE: ASSUME HIGHEST INDIVIDUAL TAX BRACKET C Corporations Earnings 100 Corporate Tax Expense 21 Net Earnings Available for Distribution 79 Individual Tax Expense on Dividend 15.8 Net Investment Income Tax 3 Pass-through Entities Earnings 100 Entity-level Tax Expense 0 Net Earnings to Individual 100 Qualified Business Income Deduction (20) Net Taxable Earnings 80 Individual Tax Expense on Earnings 29.6 Total Tax Expense 39.8 Pre-tax Earnings 100 Effective Tax Rate 39.8% Total Tax Expense 29.6 Pre-tax Earnings 100 Effective Tax Rate 29.6% 158

159 Example 1 Current S-corporation Estimated profit of $1million in 2018 with 5% growth W-2 wages of $2.5 million with 8% growth No distributions other than to pay taxes as a S-corp Not a service business Estimated value of company: $10 million if stock sale $12 million as asset sale 159

160 Example 1 160

161 Example 1 161

162 Example 1 162

163 Example 1 163

164 Example 1 164

165 Example 2 Current S-corporation Estimated profit of $1million in 2018 with 5% growth W-2 wages of $2.5 million with 8% growth Distributions of 80% of profit annually Service business Estimated value of company: $10 million if stock sale $12 million as asset sale 165

166 Example 2 166

167 Example 2 167

168 Example 2 168

169 Example 2 169

170 Example 2 170

171 Entity Selection: Other Key Considerations Limitations on qualified business income deduction Certain business activities are ineligible for 20% deduction (specified service trades or businesses) Wage and capital limitations may reduce amount of deduction allowable Income levels and preferential tax rates on dividends Liquidity Needs - Accumulated earnings tax assessed on C corporations at 20% of retained earnings deemed to exceed the corporation s ordinary business needs 171

172 Entity Selection: Other Key Considerations Exit strategy - Buyers are incentivized to seek out asset sales - Double taxation on sale of assets at entity level and shareholder level - Need to leave enough cash in C corporation to pay tax upon eventual sale of assets Reduced individual and qualified business income deduction set to expire for tax years beginning after December 31, 2025 Reduction to C corporation tax rate is permanent 172

173 Tax Reform: Impact to Individuals Cristen Jones, Tax Manager Scott Russell, Tax Manager

174 INDIVIDUAL TAX REFORM CONSEQUENCES Individual tax rates Tax rate on capital gains and dividends Alternative minimum tax (AMT) Affordable Care Act Standard deduction Personal exemptions Child Tax credit and qualifying expenses Itemized deductions Other provisions 174

175 Individual Tax Rates Decrease of the top rate from 39.6% to 37% Tax brackets indexed for inflation to minimize bracket creep - New method of indexing for inflation based on chained CPI Tax rates are based upon taxable income Significant changes to taxable income computation Simplification of kiddie tax calculation 175

176 Individual Tax Rates: Married Filing Joint 2017 Tax Rates Tax Reform Rates Tax Rate If taxable income is: 10% $0 - $18,650 15% $18,651 - $75,900 25% $75,901 - $153,100 28% $153,101 - $233,350 33% $233,351 - $416,700 35% $416,701 - $470, % $470,701 or more Tax Rate If taxable income is: 10% $0 - $19,050 12% $19,051 - $77,400 22% $77,401 - $165,000 24% $165,001 - $315,000 32% $315,001 - $400,000 35% $400,001 - $600,000 37% $600,001 or more 176

177 Individual Tax Rates: Single 2017 Tax Rates Tax Reform Rates Tax Rate If taxable income is: 10% $0 - $9,325 15% $9,326 - $37,950 25% $37,951 - $91,900 28% $91,901 - $191,650 33% $191,651 - $416,700 35% $416,701 - $418, % $418,401 or more Tax Rate If taxable income is: 10% $0 - $9,525 12% $9,526 - $38,700 22% $38,701 - $82,500 24% $82,501 - $157,500 32% $157,501 - $200,000 35% $200,001 - $500,000 37% $500,001 or more 177

178 Tax Rate on Capital Gains and Dividends Current tax law and rates remain in place Net capital gains taxed at a maximum of 20% Qualified dividends taxed at a maximum of 20% Gains from collectibles and unrecaptured depreciation subject to higher rates 178

179 Alternative Minimum Tax (AMT) 2017 Tax Law Tax Reform Law AMT exemption amount for MFJ taxpayers is $84,500 Phase out threshold begins at $160,900 AMT exemption amount for MFJ taxpayers is $109,400 ($70,300 for single) Phase out threshold begins at $1,000,000 ($500,000 for single) Note: certain items disallowed or limited under the 2017 Tax Act negatively impacted AMT prior to 2018 such as SALT, miscellaneous deductions, etc. 179

180 Affordable Care Act 3.8% net investment income tax remains in place 0.9% additional Medicare tax on earned income above $250,000 for MFJ taxpayer s remains in place Excise tax imposed on individuals who do not obtain minimum essential coverage will be reduced to zero starting in Note: No other ACA provisions are addressed in the new law. AS such, excise tax on corporations that do not provide minimum essential coverage was not reduced to zero. 180

181 Standard Deduction 2017 Tax Law Tax Reform Law Filing Status Amount Single $6,350 Married filing separate $6,350 Head of household $9,350 Married filing jointly $12,700 Taxpayers that are blind or 65 or older are eligible for an increased standard deduction. The amount of the increase is dependent on the taxpayers filing status and age of both spouses if married Filing Status Amount Single $12,000 Married filing separate $12,000 Head of household $18,000 Married filing jointly $24,000 The increased standard deduction for taxpayers that are blind or 65 or older is retained 181

182 Personal Exemptions 2017 Tax Law Tax Reform Law Personal exemption for 2017 is $4,050 for single, spouse and each dependent, subject to phase-out Tax reform law suspends personal exemptions for single, spouse and each dependent starting in 2018 Increase in standard deduction intended to compensate for repealing many itemized deductions and the personal exemption 182

183 Child Tax and Qualifying Dependent Credit 2017 Tax Law Tax Reform Law $1,000 tax credit per qualifying child Credit phase-out at $110,000 of AGI for MFJ $2,000 tax credit per qualifying child Credit phase-out at $400,000 of AGI for MFJ $500 non-refundable credit for qualifying dependents other than qualifying child $1,400 of the credit is refundable, subject to phaseouts 183

184 Itemized Deductions: Medical Expenses 2017 Tax Law Tax Reform Law Medical deduction limited to qualified medical expenses in excess of 10% of adjusted gross income Medical deduction limited to excess of 7.5% of AGI for tax years 2017 and Medical deduction limited to excess of 10% of AGI for tax years after 2018 Deductions are the same for regular tax and AMT 184

185 Itemized Deductions: State and Local Tax (SALT) 2017 Tax Law Tax Reform Law Deduction for state income taxes Same taxes allowed for deduction Deduction for real estate taxes Deduction for personal property tax Deduction for other qualified taxes Deduction not to exceed $10,000 Could be significant change for some and insignificant for others AMT preference AMT preference 185

186 Itemized Deductions: Home Mortgage Interest 2017 Tax Law Tax Reform Law Qualified residential interest First three bullets apply Qualified mortgage indebtedness = acquisition indebtedness Can deduct on 1 st and 2 nd qualifying home Qualified mortgage indebtedness not to exceed $1 million Qualified mortgage indebtedness not to exceed $750,000 Debt incurred before December 16, 2017 grandfathered Grandfathered debt cannot exceed $1 million Grandfathered debt can be refinanced, but cannot exceed amount of debt refinanced 186

187 Itemized Deductions: Home Equity Debt 2017 Tax Law Tax Reform Law Home equity loan interest deductible Home equity loan interest is not deductible Qualified home equity indebtedness not to exceed $100,000 No grandfather provision No tracing rules on proceeds of loan 187

188 Itemized Deductions: Charitable Contributions 2017 Tax Law Tax Reform Law Cash and non-cash contributions of nonappreciated property limited to 50% of AGI Appreciated property limited to 30% of AGI Contributions can be made to public charities and certain private foundations Cash contributions are subject to 60% of adjusted gross income Non-cash contributions remain limited to 50% AGI Contributions to colleges in exchange for seating rights to athletic events are not deductible 188

189 Itemized Deductions: Personal Casualty and Theft Losses 2017 Tax Law Tax Reform Law Deduction may be claimed for any loss sustained during the tax year Losses must exceed amounts compensated by insurance Subject to certain limitations 2017 losses incurred in a federally declared disaster zone maybe taken on the 2016 return (allows earlier tax proceeds) Limits losses to only those incurred in a federally declared disaster zone 189

190 Itemized Deductions: Miscellaneous Itemized Deductions 2017 Tax Law Tax Reform Law Individuals may claim itemized deductions for certain miscellaneous deductions subject to 2% of adjusted gross income Investment fees, safe deposit box rentals, tax preparation fees, etc. Unreimbursed employee business expenses Suspends all miscellaneous deductions that are subject to the 2% floor 190

191 Itemized Deductions: The Pease Limitation 2017 Tax Law Tax Reform Law Total amount of itemized deductions is reduced by 3% when adjusted gross income exceeds certain thresholds - Does not include medical expenses - Investment interest expense - Casualty theft - Gambling losses Suspends the overall limitation on itemized deductions 191

192 Individual Tax Impact Example FACTS Married filing joint taxpayer 3 dependent children AGI: $400,000 State income tax paid: $25,000 Personal property tax paid: $5,000 Mortgage interest paid: $20,000 Outstanding mortgage debt on primary home: $1,000,000 (assume not a grandfathered mortgage) 192

193 Individual Tax Impact Example Pre-Tax Reform Post Tax Reform Notes AGI $400,000 $400,000 Personal $4,050 each (2 adults; 3 children) (20,250) - Repealed by H.R. 1 State Income Taxes Paid (25,000) (10,000) Personal Property Tax Paid (5,000) - See above Mortgage Interest Paid (20,000) (15,000) Taxable Income $329,750 $375,000 Tax Liability 84,034 83,379 Child Tax Credit ($1,000 per prereform; $2,000 per post-reform) - (6,000) Net Tax Liability $84,034 $77,379 Effective Tax Rate 21.0% 19.3% Limited to $10,000 total for all state and local income and property taxes Deductible up to $750,000 of indebtedness ($750,000 / $1,000,000 = 75% x $20,000 interest paid) Fully $130,000 MAGI pre-reform; $420,000 MAGI post-reform 193

194 Qualified Moving Expense Reimbursement 2017 Tax Law Tax Reform Law Qualified moving expense reimbursements are excludable from an employee s gross income and from the employee s wages for employment tax purposes Reimbursement amounts include expenses that would have been deductible as moving expenses if directly paid or incurred by the employee Suspends the exclusion from gross income and wages for qualified moving expense reimbursements Exclusion is preserved for member of the U.S. Armed Forces and their family 194

195 Qualified Moving Expense 2017 Tax Law Tax Reform Law Individuals can claim an above the line deduction for allowable moving expenses paid or incurred Criteria included starting a new job at a new principal place of business Specified distance and employment status requirements met Suspends the deduction for moving expenses Certain provisions are preserved for member of the U.S. Armed Forces and their family 195

196 Alimony Payments 2017 Tax Law Tax Reform Law Alimony and separate maintenance payments are deductible by the payor and includible in income by the payee Alimony and separate maintenance payments are not deductible by the payor and are not includible in income by the payee Effective date of this provision is for any agreement executed after December 31, 2018 Also applies to agreements executed before December 31, 2018 and modified after that date as a result of the new law 196

197 Individual Provisions Set to Expire Key Provision Sunset Date Changes to individual income tax rates December 31, 2025 Changes to capital gain and qualified dividends tax rates December 31, 2025 Increased standard deduction December 31, 2025 Suspension of personal exemptions December 31, 2025 Increased child tax credit December 31, 2025 Suspension of Pease limitation on overall itemized deductions December 31, 2025 Suspension of 2% miscellaneous itemized deductions December 31, 2025 Limitation on home mortgage interest for indebtedness incurred after December 15, 2017 December 31, 2025 Itemized deduction limitation on state and local taxes December 31, 2025 Increased limitation for cash contributions December 31, 2025 Decrease in medical expense deduction December 31, 2018 Increase to AMT exemption and exemption phase-out amounts December 31,

198 Tax Reform: Charitable Planning and Exempt Organizations Harmony Romo, Tax Manager

199 Donor Related Provisions The adjusted gross income limitation for cash charitable contributions has been increased from 50% to 60% for cash contributions to public charities Planning Points: - Donors should be conscious that the increased standard deductions may impact whether they will itemize on the 1040 and therefore affect the impact that charitable giving has on their tax liability - Donors who are on the edge of being able to itemize may want to consider bunching their contributions from multiple years and make the actual distribution in the year that it is helpful to their tax situation - Donors who are able to itemize should determine which type of giving vehicle offers the best tax impact based on AGI limitations. 199

200 Donor Related Provisions THE GIVING VEHICLE Private Foundations Public Charities (DAF) Total Limit for all annual contributions 30% AGI 60% AGI Tax Deduction for contributions of longterm appreciated securities Tax Deduction for contributions of longterm appreciated assets and closely held securities FMV up to 20% AGI Cost Basis up to 20% AGI FMV up to 30% AGI FMV up to 30% AGI Tax Deduction for Cash Contributions Up to 30% AGI Up to 60% AGI 200

201 Exempt Organization Provisions COLLEGE ATHLETIC EVENT SEATING RIGHTS Effective for tax years beginning after 12/31/2017 a charitable deduction is no longer allowed for contributions made to a college to obtain the right to purchase tickets to an athletic event. 201

202 Donor Related Provisions The modifications in rules relating to charitable contributions to impact exempt organizations With the increase in the standard deductions, fewer individuals will be able to itemize on their tax returns leaving less financial incentive to make contributions Exempt Organizations likely to feel a direct impact in resources available to accomplish charitable activities 202

203 ABLE Accounts 2017 Tax Law Tax Reform Law Overall limit on contributions is $14,000 Same overall limit on contributions of $14,000 (indexed $15,000 for 2018) Once limit is reached designated beneficiary may contribute an additional amount limited to the lesser of: -The Federal poverty level line for a one-person household ($12,060 for 2018), or -The individual s compensation for the year Permitted to roll-over beneficiary 529 plan into ABLE account or 529 plan of a family member (limitations still apply) 203

204 529 Plans 2017 Tax Law Tax Reform Law Earnings from 529 plans are not taxable for federal purposes Distributions not taxable if used for qualified higher education expenses such as tuition, room and board, fees, books, supplies and equipment required for enrollment Qualified higher education expense is expanded to include certain expenses and tuition at an elementary or secondary public, private or religious school Tax-free distribution for tuition, at an elementary or secondary public private or religious school is limited to $10,000 per year per student 204

205 Estate, Gift and Generation-Skipping Tax 2017 Tax Law Tax Reform Law Taxes are imposed on certain gifts, certain transfers at death, and generation-skipping transfers. Gifts / Transfers at Death - Basic lifetime exclusion amount of $5,000,000 per individual (indexed for inflation after base year 2010; scheduled to be $5,600,000 in 2018) - Gift transfers and transfers at death are combined for purposes of applying the basic exclusion Generation-Skipping Transfers - Exemption amount is equal to gift tax exclusion amount Basic lifetime exclusion amount increased to $10,000,000 per individual (indexed for inflation after base year 2016; expected to be around $11,200,000 in 2018) - Increase applies to Generation- Skipping Transfers exemption amount Applies to estates of decedents dying and gifts made after December 31, 2017 and before January 1,

206 Exempt Organization Provisions EXCISE TAX ON EXECUTIVE COMPENSATION For tax years beginning after 12/31/2017 a TE Organization is subject to a 21% excess tax on the excess compensation paid over 1 million on the top 5 highest paid employees (there is an exclusion for compensation paid in remuneration for medical services by a licensed medical professionals). 206

207 Exempt Organization Provisions EXCISE TAX ON COLLEGES & UNIVERSITIES For tax years beginning after 12/31/2017 there will be a 1.4% excise tax on the net investment income of certain colleges and universities. This applies to colleges / universities with at least 500 students (50% of which are located in the US) and with assets (other than those used directly in carrying out the institutions exempt purpose) that exceed $500,000 per student. The number of students is based on the daily average number of full-time equivalent students. 207

208 Taxable Income Provisions UBI Separately Computed for Each Trade or Business: For tax years beginning after 12/31/2017, organizations must be calculate UBI tax liability for each trade or business separately. Losses from one trade or business cannot be used to offset income from another trade or business. Net Operating Losses (NOLs): NOLs generated in tax periods beginning after 12/31/2017 must be tracked separately. NOLs cannot be carried back but can be carried forward indefinitely. NOL Deduction limited to 80% of taxable income International provision related to transition tax 208

209 Tax Reform Assessment and Implementation Services Kip Hooker, Tax Partner

210 Tax Reform Assessment and Implementation Services 210

211 Tax Reform Assessment and Implementation Services 211

212 Assessment Tool Deliverable 212

213 Tax Reform Assessment and Implementation Services 213