Tax Cut and Jobs Act of 2018 Projection of Effect on Form 1040 (Sample from the 2017 Small Business Tax Basics Webinar) Discussion Agenda

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1 Click to edit Master title style Tax Cut and Jobs Act of 2018 Projection of Effect on Form 1040 (Sample from the 2017 Small Business Tax Basics Webinar) 1 Discussion Agenda 1. General Complex Provisions offset Affects employer/employee Temporary NOT permanent Changes inflation adjustments 2. Individual Moving, alimony, exemptions, AMT, misc. expense eliminated Lowers 7 tax rate categories Doubles standard deduction Doubled estate tax exclusion 3. Businesses Rate cut 35% to 21%, no AMT 20% pass through deductions Professional ill defined No loss carry back only forward Limits interest deductions R & D now must be amortized Foreign profit repatriation 4. Conclusion Harder to select corporate entity ER EE relationships changed Much still undefined, such as forms redesign 2 1

2 Presentation Plan Use a 2017 Sample Net Income Schedule C LLC $46,240 Form 1065 Partnership $18,000 Form 1120S S Corp $16,000 Tax Due from Sample Business owner $16,000 Compare Old and New Sections of Forms Separate Individual and Business Changes Married Couple for Illustration Keep It Simple 3 Caveats Changes are Very Complex Covers individuals and corporations Last Similar Rewrite, 30 Years Ago IRS and Congress Still Digesting for Implementation Amendments, Forms Design Law is Temporary for 10 Years, Not Permanent Provisions Offset Like Standard Deduction Up, Exemptions Eliminated Affects Employer/Employee Relations, Like Unreimbursed Expenses or Awards 4 2

3 Typical Business Owner Tax Return Contents Form 1040 U.S. Individual Tax Return Schedule A Itemized Deductions Schedule B Interest and Dividends Schedule C Profit and Loss from Business Schedule D Capital Gains and Losses Schedule E Partnership/S Corp, If Any Schedule SE Self Employment Tax Return 5 Sample Form 1040, Tax Return Page 1 Indicates Self-Employed Elements 6 3

4 AGI - Changes Moving Expenses Old Code: If You Moved for Work, Moving Expenses Were Deductible New Code: No Deduction Except for Military Alimony Paid Old Code: Deductible by Person Paying, and Income to Recipient. New Code: Not Deductible or Taxable 7 Sample Form 1040 Tax Return, Page 2 8 4

5 Changes to Adjusted Gross Income Standard Deduction Doubled from $12,700 to $24,000, or, Option of Itemized Schedule A Deductions, Next Slide Eliminates Exemption of $4,050 Per Person, but then Doubled Child Tax Credit to $2,000 Plus New $500 Credit for Other Dependents 9 Schedule A Itemized Deduction Changes 7.5% Medical Limit Ends 1/1/2019 $10,000 Cap on Taxes Mortgage Interest only on loans to $750,000 Donations Unchanged No Unreimbursed ee travel, expenses, etc. Misc. Deductions Eliminated 10 5

6 Other Changes for Individuals Alternate Tax Threshold Increased from $160,900 to $1 Million for a Married Couple Repeal of Obamacare Penalties in 2019 Allows 529 Savings Accounts for K 12 Private Tuition and Higher Education Raised Estate Tax Exclusion from $5.49 Million to $11.2 Million Per Person Inflation Adjustment Tied to Chained CPI Versus CPI and Is Slower to Recognize Increases 11 Individual Tax Rate Brackets 12 6

7 Discussion Shift to Business Prior Changes for Individuals also Affect Businesses BUT The Following Relate Directly to Business Taxes C Corporations LLCs Partnerships S Corporations 13 Business Tax Rates C Corporations Rate reduced from 35% to 21% Alternative Minimum Tax eliminated Pass Through Entities Sole Proprietors, Limited Liability Companies, Partnerships and S Corporations 20% deduction of net income as Form 1040 credit Limited by 50% of wages, or 25% of wages plus 2.5% of depreciable assets Professional service income eligibility phased out over $315,000 for married couples 14 7

8 20% Pass-Through Deduction Form 1040 Adds a New Below the Line Category? Due Complexity, Tax Professionals Expect the 20% Reduction to be Added to Page 2 of Form 1040 Or, Incorporate into Each Pass through Entity form: Schedule C, Form 1065 and 1120S? Or K 1? 15 Other Business Tax Changes -1 Operating Loss Old: Back 2 and Forward 20 Years New Law: No Carry Back, Carry Forward Limited to 80% of Taxable Income Research & Development Was Immediately Deductible, Now Amortized Over Five Years Loan Interest Was No Limit, Now only 30% of Net Income before EBITDA 16 8

9 Other Business Tax Changes - 2 Entertainment Expenses Was 50% of Events or 100% to Charitable Events. Now Not Deductible Office and Picnics Still 100% Deductible Fringe Benefits Employee parking and transit passes now not deductible Bike commuting reimbursements deductible Employee awards was up to $400 to $1,600 in any form. New law $ limits stay. But must be tangible personal property (no gift cards, tickets, stocks, coupons, meals, vacations, etc.) Meals by employer not income to employee. But employer can only deduct 50% 17 Other Business Tax Changes - 3 Expense 100% of New/Used Equipment Reduced in 2023 to 80% and 0% after 2027 Historic Rehab Credits Old code paid in first year of expenditure New code credits over a 5 year period Foreign Profits Repatriation $2.6 trillion held overseas by U.S. corporations Was subject to 35% rate if brought back to U.S. New law one time repatriation rate of 15% on cash and 8% illiquid assets like equipment 18 9

10 Form Business Income Example of Schedule E to Recap Pass Through Entity Income to a Business Owner s Form 1040 Personal Return 19 Form Schedule C Business Income Form for Sole Proprietors and One Owner LLCs 20 10

11 Partnership Form 1065 Sample based on an LLC 1065 is different vs Schedule C Income is identical Expense is identical but grouped differently Normally NO partner salaries Partners can guarantee pay Reconciles to LLC $46,240 Partners split the net based on % of ownership K 1 to each on percentage 21 S Corporation Form 1120S Sample Based on an LLC Form is Different vs Schedule C Income is Identical Expenses is Identical but grouped slightly different Owners MUST Be Paid May Pay Retirement Costs Subject to Limits Reconciles to LLC $46,240 Owners Get W 2 for salaries paid K 1 for share of income 22 11

12 Sample Partnership Form K-1 Analyzes Components of Income Investment type 1065s can have interest, capital gains, etc. Can Complicate 1040 Tax Filing Partnerships Splits net income $33,320 x.55% = $18,326 Assigns guaranteed payments = $12, Results if Effective in Example 2017 rates 2018 rates Taxable income $73,472 $73,472 Sch. D adjustments 3,765 3,765 1 st 18,650 = 19,050 = 1,905 2 nd 51,057 = 12% 50,657 = 6,079 Tax due 9,526 7, Pass Through Effect Marginal rate above before 20% deduction on Schedule C = 0, no salary, on Form 1065 = 3,656*, and on Form 1120S = 5,373* 9,038 deduction is less than 50% of salaries on Form 1065 and 1120S 1 st tax on 19,050 1,905 2 nd 12% 41,619 = 4,994 Tax due 6, Total Tax Effect on 2017 Form 1040 Example 2017 tax $9, tax example $6,899 2,627 reduction or 27.%

13 IRS Resources for HELP! The IRS is a Partner general website Personal Business Advocate service Small Business Topics Tax Videos CD, Pub. 1065C, Virtual Small Business Tax Workshop 25 Minnesota Resources for Help Minnesota Revenue is a Partner Income Tax: Withholding Tax: Sales Tax Information: MN Unemployment Insurance:

14 TurboTax Packages Personal Business Schedule C Partnerships S Corporations C Corporations Estates and Trusts 27 Questions and Answers Ask Your MN SCORE Chapter Counselor mn.org Contact a Local SCORE Chapter Counselor map SCORE Minnesota Resource Use DIYwebHelp@gmail.com for help Include zip code, phone and specific questions Go to your Chapters website for other workshops, counseling, roundtables and services

15 Disclaimers 2018 Tax Law is Still Undergoing Interpretation Contents Are Strictly for Training of Our Clients SCORE Minnesota Does Not Endorse Any Vendors or Products Screen Shots Are Provided for Illustration Only For Other Training or Counseling Contact your Local SCORE Chapter 29 Credits Our Topic Expert for this Webinar Has Been Virgil Dissmeyer, SCORE Minneapolis Counselor Intuit s TurboTax for the Screen Shots Veritas Marketing Technical Advisor SPEDCO Funding Sponsor 30 15