Tax reform potpourri. cooperatives. Overview of key provisions affecting. Presented By:

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1 Tax reform potpourri Overview of key provisions affecting cooperatives Presented By: David Antoni, KPMG LLP National Society of Accountants for Cooperatives 2018 Tax, Finance & Accounting Conference for Cooperatives Austin, TX August 6, 2018

2 Notice The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 2

3 Topics 1. TCJA general changes to Sub Chapter C a. Corporate rate reduction b. Repeal of the corporate AMT c. New net operating loss (NOL) rules and 199A (g) a. Repeal of section 199 manufacturing deduction b. Enactment of section 199A(g) 3. Revisions to section New employer credit for paid family and medical leave 5. New tax recognition rules under section Small business use of cash method of accounting 7. FDII 3

4 TCJA changes affecting cooperatives

5 Key provisions overview Provision Corporate rate Corporate AMT Net operating losses (NOLs) Repealed 199 Enactment of 199A(g) Like-kind exchange rules Employer credits Recognition rules Cash method threshold FDII Business 21%, effective for taxable years beginning after 12/31/17. Special rules for fiscal year filers Repeal corporate AMT; credit carryforwards partially refundable in years 2019, 2020 and 2021; fully refundable by 2022 Indefinite carryforward; generally no carrybacks; limited to 80% of taxable income offset Repeal section 199 manufacturing deduction beginning Other deductions and preferences limited or eliminated. Section 199A(g) agricultural cooperative manufacturing deduction Nonrecognition only applies for exchanges of real property Employer credit for paid family and medical leave Section 451 new tax revenue recognition rules Increased threshold to $25 million (3 year average gross receipts test) for small business use of the cash method of accounting Provides reduced effective tax rate with respect to a defined category of foreign derived income of U.S. corporate shareholders 5

6 Corporate tax rate reduction Permanent reduction of the corporate tax rate from 35% to 21% Effective for taxable years beginning after December 31, 2017 Special rules for fiscal year filers - Fiscal year taxpayers apply section 15 for prorated tax rate e.g., if 8/31/18 rate is 25.7% 6

7 Repeal of corporate AMT TCJA repealed application of AMT, under section 55 to corporations - Effective for tax years beginning after December 31, 2017 Existing AMT credits refunded in cash between AMT credits refunded are subject to the sequester, so not 100 cents on the dollar Impact on credit carryforwards - Credit carryforwards partially refundable in Credit carryforwards fully refundable by 2022 Corporation with a fiscal or tax year that begins before January 1, 2018, and ends after December 31, 2017 addressed in Notice : - Must apply section 15(a) to determine the amount of federal income tax imposed under section 11 for that tax year - IR must show blended rate 7

8 New net operating loss (NOL) rules NOLs can only be applied against 80% of taxable income - Effective for tax years BEGINNING after December 31, 2017 Indefinite NOL carryforwards (with no inflation adjustment) Elimination of carrybacks Carryforward and carryback effective date: - Statutory text provides that these two provisions are effective for NOLs arising in tax years ENDING after December 31, 2017 NOL carryback rules for fiscal year filers requires technical correction - Both the Conference Report and JCT table indicate that these provisions are effective for NOLs arising in tax years BEGINNING after December 31, 2017 Special caveat for farmers: - Two year carryback 8

9 199 and 199A(g)

10 199 repeal and 199A(g) enactment Repeal of section 199 manufacturing deduction effective for tax years beginning after December 31, The Consolidated Appropriations Act, 2018 (Pub. L. No ) that the president signed into law on March 23, 2018, includes amendments to section 199A including section 199A(g) applicable to specified agricultural and horticultural cooperatives. - Amendments to 199A are retroactive to January 1, 2018 and expire December 31, Amendments to section 199A(g) includes enactment of a new agricultural cooperative manufacturing deduction under section 199A(g) - Generally incorporates prior section 199(d)(3) provisions for specified agricultural or horticultural cooperatives related to a 9% deduction on qualified production activities income limited to 50% of production wages. - Allocable portion of a cooperative s section 199A(g) deduction is allowed as a deduction to a patron who is an eligible taxpayer who receives a qualified payment from the cooperative, and the deduction is identified by such cooperative in a written notice mailed to such taxpayer-patron during the section 1382(d) payment period. Eligible patron - taxpayer other than a corporation or a specified agricultural or horticultural cooperative; corporation does not include S corporation for this purpose. 10

11 199 repeal and 199A(g) enactment Qualified payment- amount which is described in paragraphs (1) or (3) of section 1385(a) (patronage dividends and per-unit retain allocations paid in qualified per-unit retain certificates including any advances) Similar to section 199 a cooperative s section 199A(g) deduction may be allocated in whole or part among its patrons on the basis of the quantity or value of business done with or for such patron by the cooperative Under section 199A, for farmer patrons who enter into transactions with a cooperative: - Their 20% deduction on Qualified Business Income will be reduced by the lesser of: (1) 9% of qualified business income allocable to qualified payments received from cooperatives; or (2) 50% of wages allocable to such qualified payments. - This reduction applies regardless of the amount of section 199A(g) deduction passed through by the cooperative. This treatment is intended to replicate the deduction the farmer had foregone by dealing with the cooperative under prior-law section 199. Exception: Taxpayers, including patrons of cooperatives structured as C corporations, are not eligible for the 199A deduction including the pass-through deduction under section 199A(g) from specified agricultural and horticultural cooperatives. 11

12 Other key provisions

13 Like kind exchange revisions Section of TJCA limits the like-kind exchange rules under section 1031 to exchanges of real property - eliminated deferral for tangible personal property, including livestock, and intangible property - Effective to exchanges completed after December 31, 2017 Further limitations on deferral, under section 1031, for exchanges of real property: - Not allowed for an exchange of real property held primarily for sale - Real property is not considered like-kind to real property located outside the U.S. Transition rule: new section 1031 rules do not apply to any exchange in which the taxpayer disposed of relinquished property, or received replacement property, on or before December 31, 2017 Observations: - For tangible personal property, the new law s allowance for full expensing may offset the negative impact of elimination of the gain deferral under section For personal property not subject to full expensing and intangible property, the limitation to section 1031 would have an adverse impact 13

14 New employer credit New tax credit, under section 455, for employers that pay employees while on family and medical leave Allows federal income tax credit to eligible employers that pay their employees while on family and medical leave Credit: % times the hourly wages (defined in section 3306(b)) paid to the employee - If the payments exceed 50% of an employee s wages, the credit percentage is increased by.25% for each percentage point above 50%. - Eliminated deferral for tangible personal property, including livestock, and intangible property Limitation: - Percentage cannot exceed 25% of the employee s wages - Maximum amount of family and medical paid leave eligible for the credit cannot exceed 12 weeks - Threshold compensation for highly compensated individuals = $120,000 Effective for wages paid in tax years after 2017 and before 2020 Deduction is not allowed for the compensation that qualifies for the credit, but the employer can make an election not to take the credit 14

15 New employer credit (continued) What is FML? - Defined under Family Medical Leave Act of 1993 ( FMLA ) For the birth of a son/daughter of employee to take care of son or daughter Placement of son or daughter for adoption or foster care Care of spouse, son, daughter, parent, of employee, if they have a serious health condition Any qualifying emergency arising out of the fact that the spouse, or a son, daughter, or parent of employee is on covered active duty in the Armed forces Care of a service member who is employee s spouse, child, parent, or next of kin What employers are eligible? - Employers that have a written policy that includes: Full-time employees at least two-weeks of annual paid family and medical leave Part-time employee (4980E(d)(4)(B)) a ratable percentage of paid family and medical leave as that of a fulltime employee based on numbers of hours expected to work over number hours a full-time employee is expected to work Rate of payment under the employer s policy is not less than 50% of wages normally paid to such employee for services performed for the employer 15

16 New employer credit (continued) New added employer rules - Eligible employer, whether or not covered under FMLA, who offers paid family and medical leave to added employees (qualifying employees who are not covered under FMLA) - Eligible for credit if written policy: Does not interfere, restrain or deny exercise or attempt to exercise any right provided under the policy Does not discharge or discriminate against any individual for opposing any practice prohibited by the policy 16

17 Revenue recognition- 451(b) 451(b) - Test now: revenue recognized at the earliest of when received, due, earned or recognized for financial reporting purposes Requires allocating transaction price among discrete performance obligations consistently with allocation for book purposes Codifies the deferral method in Rev. Proc obsoleting Treas. Reg two year deferral Does not revise rules associated with realization for federal income tax purposes Does not override special methods of accounting For purposes of this section, the all events test is met with respect to any item of gross income if all the events have occurred which fix the right to receive such income and the amount of such income can be determined with reasonable accuracy 17

18 Revenue recognition- 451(c) 451(c) - Allows accrual method taxpayers to elect a limited deferral of the inclusion of income associated with certain advance payments - Accrual method taxpayer generally must include an advance payment in gross income in the tax year of receipt, but alternatively, that accrual method taxpayers may elect to defer the recognition of all (or a portion) of an advance payment to the tax year following the tax year of receipt except for the portion of the advancement that must be included in gross income in the year of receipt pursuant to 451(b) - Notice if a taxpayer is receiving advance payments, the taxpayer may continue to rely on Rev. Proc until future guidance is effective 18

19 Small business use of cash method Pre-TCJA - With certain exceptions, a C corporation or partnership with a C corporation partner could use the cash method of accounting only if, for each prior tax year, its average annual gross receipts (based on prior three tax years) do not exceed $5 million. - Farm corporations and farm partnerships with C corp. partners could use cash method of accounting if for each prior tax year their gross receipts do not exceed $1 million ($25 mill for certain family farm corps.). Effective for tax years beginning after December 31, 2017: - Threshold under the three-year average annual gross receipts test is increased to $25 million (indexed for inflation for tax years beginning after 2018), and applies to all C corporations and partnerships with C corporation partners (other than tax shelters), including the farming C corporations and farming partnerships. - Three year average test is applied annually under the legislation. - A change from or to the cash method of accounting as a result of the provision is treated as a voluntary change in the taxpayer s method of accounting, subject to a section 481(a) adjustment. 19

20 FDII Provides reduced effective tax rate with respect to a defined category of foreign derived income of U.S. corporate shareholders The lower rate is realized via deduction from qualified income % allowable deduction for the taxable years beginning after 12/31/17 to 12/31/25 (resulting in an ETR of % on qualified income ) % allowable deduction for taxable years beginning after 12/31/2025 (resulting in an ETR of % on qualified income) Qualifying income - Sales to foreign persons and for foreign use - Exchanges with, or other dispositions to foreign persons and for foreign use - Leases and licenses to foreign persons and for foreign use - Services to foreign person, or with respect to property located outside the US 20

21 Questions?

22 Thank you

23 Contact information David Antoni KPMG LLP Managing Director, Tax T: F:

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