Questions. Top 10 Things You Need to Know about Tax Reform

Transcription

1 and present Top 10 Things You Need to Know about Tax Reform Conducted in Cooperation with Questions Type Questions into the Questions Pane of the Go to Webinar Panel Surgent assembled a team of tax experts who will provide typed answers to your typed questions. When appropriate, panelists will share the questions and answers with all attendees Training experts from both Surgent and Woodard are available to answer any questions you have about other educational programs, many of which are also free. 1

2 About Your Host Joe Woodard CEO, Woodard Events, LLC About Woodard TM Education Community Coaching Resources Scaling New Heights Conference for Small Business Advisors 2012, Top 100 Most Influential People by Accounting Today Published author in Accounting Today, CPA Practice Advisor, Insightful Accountant and the Journal of Accountancy About Your Instructor Michael J. Tucker, CPA Tax Expert, Surgent McCoy CPE and T.M. Byxbee Co Published author on a wide range of accounting topics. Veteran television and live seminar presenter. Writes and hosts webinars and live broadcasts for Surgent McCoy, including The All Star Tax Series, sponsored by Edward Jones. Worked for KPMG and Deloitte and served as a professor at Quinnipiac University in Hamden, Conn. 2

3 Thanks to Intuit Our Partner for Today s Webinar Intuit is offering tax preparers a discount on their Cloud Tax Preparation Solution called Intuit ProConnect Online Use Intuit ProConnect Online to Prepare Returns between January 8 and January 28 and Receive a 15% Discount. Enjoy this offer by visiting online Note: The special offer will be available at the link above between January 8 and January 28 only. Thanks to Intuit Our Partner for Today s Webinar Polling Question 3

4 and present Top 10 Things You Need to Know about Tax Reform Conducted in Cooperation with Number 1: New Standard Deduction and Repeal of the Personal Exemptions The new law temporarily increased the amount of the standard deduction to: $24,000 for married individuals filing a joint return $18,000 for head of household filers, and $12,000 for all other individuals 4

5 Number 1: New Standard Deduction and Repeal of the Personal Exemptions The new law indexed the standard deduction for inflation using the Chained CPI for taxable years beginning after December 31, 2018 The new law temporarily suspended the deduction for personal exemptions and modified the withholding rules to reflect the fact that taxpayers no longer can claim personal exemptions Number 1: New Standard Deduction and Repeal of the Personal Exemptions The new law provides that the IRS may administer the withholding rules for taxable years beginning before January 1, 2019, without regard to the amendments made under the new law Thus, at the IRS s discretion, wage withholding rules may remain the same as under present law for 2018 IRS is currently reviewing the withholding provisions and is attempting to make an easy transition for employers, employees and payroll service providers. 5

6 The deduction is 20% of qualified business income (QBI) from a partnership, S corporation, or sole proprietorship QBI is the net amount of items of income, gain, deduction, and loss with respect to a trade or business Business must be conducted within the U.S. to qualify Example Sally is a small business owner with a Schedule C who makes $100,000 from her business. Sally s taxable income is $70,000. Sally s Section 199A deduction is 20% * $70,000 or $14,000 6

7 Qualified business income (QBI) is determined for each qualified trade or business of the taxpayer. For any taxable year, qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to the qualified trade (s) or business (es) of the taxpayer. Treatment of Investment Qualified items do not include specified investmentrelated income, deductions, or loss. Specifically, qualified items of income, gain, deduction and loss do not include: 1. Any item taken into account in determining net long term capital gain or net long term capital loss, 2. Dividends, income equivalent to a dividend, or payments in lieu of dividends, 3. Interest income other than that which is properly allocable to a trade or business, 7

8 Treatment of Investment 4. The excess of gain over loss from commodities transactions, other than those entered into in the normal course of the trade or business or with respect to stock in trade or property held primarily for sale to customers in the ordinary course of the trade or business, property used in the trade or business, or supplies regularly used or consumed in the trade or business, 5. The excess of foreign currency gains over foreign currency losses from section 988 transactions, other than transactions directly related to the business needs of the business activity, Treatment of Investment 6. Net income from notional principal contracts, other than clearly identified hedging transactions that are treated as ordinary (i.e., not treated as capital assets), and 7. Any amount received from an annuity that is not used in the trade or business of the business activity 8

9 Qualified Trade or Business A qualified trade or business means any trade or business other than a specified service trade or business and other than the trade or business of being an employee Special Service Business A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, including investing and investment management, trading, or dealing in securities, partnership interests, or commodities. 9

10 Special Service Business Any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees Owners of rental property are entitled to take the Section 199 deduction Specified Service Business s Eligibility for the 20% Deduction A taxpayer s whose income falls under the threshold amount(s) ($157,500/$315,000) is entitled to use the Section 199A deduction even if the taxpayer s business is a specified service business The threshold amount(s) ($157,500/$315,000) will be annually adjusted for inflation 10

11 Example Dave, unmarried, has a CPA practice where he earns $100,000. Assuming Dave's taxable income is under $157,000, he is entitled to use the Section 199A deduction His Section 199A deduction would be 20% * $100,000 Reasonable Compensation and Guaranteed Payments QBI does not include any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer QBI does not include any guaranteed payment for services rendered with respect to the trade or business QBI does not include any amount paid or incurred by a partnership to a partner who is acting other than in his or her capacity as a partner for services. 11

12 QBI The deduction is taken below the line, i.e., it reduces taxable income but not adjusted gross income Thus the deduction is available regardless of whether a taxpayer itemizes deductions or takes the standard deduction Deduction cannot exceed 20% of the excess of taxable income over net capital gain. If QBI is less than zero it is treated as a loss from a qualified business in the following year. QBI For taxpayers with taxable income above $157,500 ($315,000 for joint filers), an exclusion from QBI of income from specified service trades or businesses is phased in. These are trades or businesses involving the performance of services in the fields of health, law, consulting, athletics, financial or brokerage services, or where the principal asset is the reputation or skill of one or more employees or owners 12

13 QBI If taxable income is at least $50,000 above the threshold, i.e., $207,500 ($157,500 + $50,000), all of the net income from the specified service trade or business is excluded from QBI. Joint filers would use an amount $100,000 above the $315,000 threshold, viz., $415,000 QBI If taxable income is between $157,500 and $207,500, exclude only that percentage of income derived from a fraction the numerator of which is the excess of taxable income over $157,500 and the denominator of which is $50,000 13

14 QBI If taxable income is $167,500 ($10,000 above $157,500), 20% of the specified service income would be excluded from QBI ($10,000/$50,000) For joint filers, the same operation would apply using the $315,000 threshold, and a $100,000 phase out range Example Taxable income $167,500 Base amount $157,500 Amount over base $10,000 % excluded $10,000/$50,000 QBHI $100,000 Exclusion $20,000 (20% * $100,000) Adjusted QBI $80,000 20% = $16,000 14

15 About Surgent Training AFSP and EA Exam Prep CPA Exam Prep CPE for CPAs, CE for EAs and CE for CFPs Live and On Demand Virtual Training Options Live Seminars throughout the U.S. Free Training Options through Accounting Cred Learn more at Note: Surgent just finished developing an exhaustive, four hour course on the new tax bill! About Surgent Training Polling Question 15

16 Number 3: Limitations on the Business Interest Deduction business interest is limited to the sum of: 1. Business interest income; 2. 30% of the adjusted taxable income of the taxpayer for the taxable year; and 3. The floor plan financing interest of the taxpayer for the taxable year. Number 3: Limitations on the Business Interest Deduction Business interest not allowed as a deduction for any taxable year may be carried forward indefinitely beyond the year in which the business interest was paid or accrued, treating business interest as allowed as a deduction on a FIFO basis 16

17 Number 3: Limitations on the Business Interest Deduction Business Interest Business interest means any interest paid or accrued on indebtedness properly allocable to a trade or business. Number 3: Limitations on the Business Interest Deduction Adjusted Taxable Adjusted taxable income means the taxable income of the taxpayer computed without regard to 1. Any item of income, gain, deduction, or loss which is not properly allocable to a trade or business; 2. Any business interest or business interest income; 3. The amount of any net operating loss deduction 17

18 Number 3: Limitations on the Business Interest Deduction Floor Plan Financing Interest Floor plan financing indebtedness means indebtedness used to finance the acquisition of motor vehicles held for sale or lease to retail customers and secured by the inventory so acquired A motor vehicle means any self propelled vehicle designed for transporting persons or property on a public street, highway or road. Number 4: Limitation on losses for taxpayers other than corporations For taxable years beginning after December 31, 2017 and before January 1, 2026, excess business losses of a taxpayer other than a corporation are not allowed for the taxable year These losses are carried forward and treated as part of the taxpayer s net operating loss (NOL) carryforward in subsequent taxable years. An excess business loss is defined as the excess of aggregate deductions of the taxpayer attributable to trades or businesses over the sum of aggregate gross income or gain of the taxpayer plus a threshold amount (which is initially $500,000 (for married individuals filing jointly) or $250,000 (for other individuals). 18

19 Number 4: Limitation on losses for taxpayers other than corporations Under the new law, NOL carryovers generally are allowed for a taxable year up to the lesser of the carryover amount or 80 percent of taxable income determined without regard to the deduction for NOLs The threshold amount is indexed for inflation. Number 4: Limitation on losses for taxpayers other than corporations In the case of a partnership or S corporation, the provision applies at the partner or shareholder level Each partner s distributive share and each S corporation shareholder s pro rata share of items of income, gain, deduction, or loss of the partnership or S corporation are taken into account in applying the limitation under the provision for the taxable year of the partner or S corporation shareholder. 19

20 Number 5: Changes to the Home Mortgage Interest Deduction The new law provides that, in the case of taxable years beginning after December 31, 2017, and beginning before January 1, 2026, a taxpayer may treat no more than $750,000 as acquisition indebtedness ($375,000 in the case of married taxpayers filing separately) In the case of acquisition indebtedness incurred before December 15, 2017, this limitation is $1 million ($500,000 in the case of married taxpayers filing separately) As of 2018, a deduction is no longer allowed for interest on home equity indebtedness Existing home equity loans are not grandfathered Number 6: The Estate and Gift Tax in 2018 and After The new law doubled the estate and gift tax exemption for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026 This is accomplished by increasing the basic exclusion amount provided in section 2010(c)(3) of $5 million to $10 million The $10 million amount is indexed for inflation occurring after Note: For 2017, the estate and gift tax exemption is $5.49 million per individual. 20

21 About Woodard s Annual Scaling New Heights Conference Four Days of Training Offering over 150 Unique Sessions to over 1,500 Attendees June 17 20, 2018 in Atlanta, GA Earn CPE Credits for CPAs and CE Credits for EAs Multiple Tax Tracks Offered by Surgent Advanced Excel and QuickBooks Training Practice Growth and Development Training Featured Keynote Presenter: Steve Forbes Learn more at About Scaling New Heights Polling Question 21

22 Number 7: Change to the Taxes not Paid in a Trade or Business The new law provides that in the case of an individual, State, local, and foreign property taxes and State and local sales taxes are allowed as a deduction only when paid or accrued in carrying on a trade or business, or an activity relating to expenses for the production of income. Number 7: Change to the deduction for taxes not paid in a trade or business In the case of an individual, State and local income, war profits, and excess profits taxes are not allowable as a deduction The provision contains an exception to the abovestated rule A taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of State and local property taxes not paid or accrued in carrying on a trade or business, or an activity described in section 212, and State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the taxable year. 22

23 Number 7: Change to the deduction for taxes not paid in a trade or business An individual could not have claimed an itemized deduction in 2017 on a prepayment of income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after Number 7: Change to the Taxes not Paid in a Trade or Business IRS said that a full deduction for the prepayment of state or local property taxes depended on whether the taxpayer made the payment in 2017 and whether the property taxes are assessed prior to 2018 A prepayment of anticipated real property taxes that have not been assessed prior to 2018 is not deductible in 2017 State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed 23

24 Number 8: Changes to the Casualty Loss Deduction The new law temporarily modified the deduction for personal casualty and theft losses so that a taxpayer may claim a personal casualty loss only if such loss was attributable to a disaster declared by the President under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act The provision is effective for losses incurred in taxable years beginning after December 31, 2017 but does not apply with respect to losses incurred after December 31, Number 9: Medical Expenses The new law provided that, for taxable years beginning after December 31, 2016 and ending before January 1, 2019, the threshold for deducting medical expenses is 7.5 percent of AGI for all taxpayers Starting in 2019, the 10% threshold will apply to all taxpayers. 24

25 Number 10: Repeal of the Alimony Payments The new law provided that alimony and separate maintenance payments are not deductible by the payor spouse. The new law repealed the Code provisions that specified that alimony and separate maintenance payments were included in income used for alimony payments is taxed at the rates applicable to the payor spouse rather than the recipient spouse The tax treatment of child support was not changed. Number 10: Repeal of the Alimony Payments The new law is effective for any divorce or separation instrument executed after December 31, 2018 or for any divorce or separation instrument executed on or before December 31, 2018, and modified after that date, if the modification expressly provides that the amendments made by this change apply to such modification 25

26 Thank you for Attending! and Top 10 Things You Need to Know about Tax Reform Conducted in Cooperation with 26