12/19/2018 THOUGHTWARE. Financial Services THOUGHTWARE. Tax Reform Update. Income Tax Update for Financial Institutions

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1 THOUGHTWARE Financial Services THOUGHTWARE Financial Services Tax Reform Update Income Tax Update for Financial Institutions December 20,

2 To Receive CPE Credit Individuals Participate in entire webinar Answer polls when they are provided Groups Group leader is the person who registered & logged on to the webinar Answer polls when they are provided Complete group attendance form Group leader sign bottom of form Submit group attendance form to within 24 hours of webinar If all eligibility requirements are met, each participant will be ed their CPE certificate within 15 business days of webinar Gwyn Eastom, CPA Director Fort Wayne, IN Steve Cunningham, CPA Senior Manager Houston, TX

3 What We ll Cover Today 1 Tax reform: what has changed? 2 Tax reform: what does this mean going forward? What are the new rules for C corporations? 3

4 C Corporations? AMT repealed effective January 1, 2018!!! AMT credit carryover refundable tax years Reduce regular tax liability by any available AMT credit Refund 50 percent of excess AMT credit carryover Reduced by sequestration rate (6.6 percent for refund offset transactions processed on/after October 1, 2017, & on/before September 30, 2018) 2021 tax year: refund remaining AMT credit carryover C Corps & S Corp Shareholders? Net operating loss carryback Old law two years New law none (applies to losses arising in tax years ending after December 31, 2017) Net operating loss carryforward Old law 20 years New law indefinite (applies to losses arising in tax years ending after December 31, 2017) 4

5 C Corps & S Corp Shareholders? Net operating loss deduction allowed (as a percent of taxable income) Old law 100 percent New law 80 percent (applies to losses arising in tax years beginning after December 31, 2017) C Corporations? Dividends received deduction Less than 20 percent ownership Old law 70 percent deduction New law 50 percent deduction 20 percent ownership to less than 80 percent ownership Old law 80 percent deduction New law 65 percent deduction 5

6 C Corporations? Cash method of accounting Old law: average gross receipts cannot exceed $5 million New law: average gross receipts less than $25 million C Corporations? Section 162(m) excessive employee remuneration Deduction limited to $1 million for covered employees CFO was added as a covered employee Performance based compensation is now included Covered employees at any point during the year 6

7 C Corporations? FDIC premium deduction Phased out for banks > $10 billion year-end consolidated total assets (completely phased out at $50 billion) S Corporation Shareholders? Qualified business income deduction Old law deduction did not exist New law Section 199A Deduction for 20 percent of qualified business income Subject to limitations Sunsets after December 31,

8 S Corporation Shareholders? What is qualified trade or business income? The net amount of items of income, gain, deduction & loss with respect to any qualified trade or business except Reasonable compensation Guaranteed payments Investment income Short-term & long-term capital gain/loss (includes 1231 gain/loss) Dividend income Interest income S Corporation Shareholders? Limitations on the QBI deduction? If taxable income is less than $157,500 S/$315,000 MFJ Deduction limited to 20 percent of the excess taxable income over the sum of any net capital gain No wage or qualified property limitations 8

9 S Corporation Shareholders? Limitations on QBI deduction? If taxable income exceeds $157,500 S/$315,000 MFJ Are you a specified service trade or business? If yes, deduction begins phases out over the next $50,000 S/$100,000 MFJ of taxable income & is eliminated for taxable incomes over these amounts If no, deduction limited to the greater of following (limitation phased in over the next $50,000 S/ $100,000 MFJ of taxable income) 50 percent of total W-2 wages paid with respect to the business 25 percent of total W-2 wages paid with respect to the business plus 2.5 percent of the unadjusted basis (immediately after acquisition) of all qualified property S Corporation Shareholders? What is a specified service trade or business? Any trade or business involving performance of services such as Health, law, accounting, actuarial science Investing, investment management & trading/dealing in securities Consulting Financial services Brokerage services Performing arts Principal asset is reputation or skill of employees or owners 9

10 S Corporation Shareholders? Specified service trade or business Does banking fall under financial services? NO... or so it seems, according to the proposed regulations recently issued Proposed regulations indicate the term financial services should be narrowly defined to include "services provided by financial advisors, investment bankers, wealth planners & retirement advisors & other similar professionals, but does not include taking deposits or making loans S Corporations? Specified service trade or business What about banks with excluded specified services? Proposed regulations provide a de minimis safe harbor rule allowing taxpayers to treat income from an SSTB as being non-sstb income if Gross receipts from SSTB activities do not exceed 5 percent of gross receipts & average gross receipts are less than $25 million Gross receipts from SSTB activities do not exceed 10 percent of gross receipts & average gross receipts are greater than/equal to $25 million 10

11 S Corporations? Effective for tax years ending after December 22, 2017 SSTB includes any trades or businesses with 80 percent or more of its property or services to SSTB if 50 percent or more common ownership of the trade or business, i.e., crack & pack Multiple trusts treated as single trust if have substantially same grantors & beneficiaries & principal purpose is to avoid federal income tax Employees can t be converted to independent contractors S Corporations? Facts 11

12 S Corporations? Qualified business income deduction = $50,000 C & S Corporations? Bonus depreciation September 28, 2017 December 31, percent percent percent percent percent 2027 none Now available for both new & used assets 12

13 C & S Corporations? Bonus depreciation Pre-TCJA (15- & 39-year property eligible for 50 percent) Qualified leasehold improvement property Qualified restaurant property Qualified retail improvement property Qualified improvement property Post-TCJA (39-year property not eligible for bonus) Qualified improvement property However, the former 15-year property is now eligible for 179 expense Bonus depreciation oops!!! 13

14 C & S Corporations? Section 179 expense Deduction increased to $1 million Phaseout increased to begin at $2.5 million of assets placed in service Still available for both new & used assets Definition of qualified property expanded to include certain improvements to nonresidential real property, including roofs, HVAC systems, fire protection & alarm systems & security system C & S Corporations? 50 percent deductible food & beverages Furnished on the business premises of the taxpayer primarily for its employees & considered a de minimis fringe benefit Directly related to business meetings for employees, stockholders, agents or directors Directly related to attendance of a business meeting or convention of a tax-exempt organization under 501(c)(6) & 501(a) Client business meals not considered entertainment, amusement or recreation Business meals during travel Certain other de minimis fringe benefits 14

15 C & S Corporations? 100 percent deductible meals Included in an employee s compensation Reimbursed by another party under an agreement Provided for recreational, social or similar activities (including facilities), primarily for the benefit of employees (other than employees who are considered highly compensated) Provided to the general public Meals sold to customers Includible in income of persons who aren t employees C & S Corporations? 100 percent deductible entertainment Provided to the general public Entertainment, amusement & recreation expenses directly related to business meetings for employees, stockholders, agents or directors Entertainment, amusement & recreation expenses directly related & necessary to attendance at a business meeting or convention of any organization described in 501(c)(6) & exempt from taxation under 501(a) Entertainment sold to customers Includible in income of persons who aren t employees 15

16 C & S Corporations? 100 percent deductible entertainment Included in an employee s compensation Reimbursed by another party under an agreement Provided for recreational, social or similar activities (including facilities therefor), primarily for the benefit of employees (other than employees who are considered highly compensated) C & S Corporations? 100 percent nondeductible entertainment All entertainment, amusement & recreation expenses not meeting one of the above categories Such nondeductible expenses may include entertaining at night clubs, cocktail lounges, theaters, country clubs, golf & athletic clubs, sporting events & on hunting, fishing, vacation & similar trips 16

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18 C & S Corporations? Historic rehabilitation tax credits Old law 10 percent credit if related to a qualified rehabilitated building 20 percent credit if related to a certified historic structure Credit claimed in year placed in service New law 10 percent credit repealed 20 percent credit for qualified rehabilitation expenditures Credit claimed over 60-month period Transition rules available for projects in process to comply with old law C & S Corporations? State & local incentives Old law generally considered nontaxable capital contribution New law generally considered taxable income when received 18

19 What Is Next for C Corporations? Reduced corporate income tax rate Tax equivalent yields Excess capital Impact of the new 162(m) rules Effective tax rate Deferred tax asset Repeal of AMT Impact on investment strategy Refundable AMT credits What Is Next for S Corporations? Is S corporation still the right answer? Items for consideration Current tax rates S corporation election revocation process S corporation election revocation impact Future tax rates Ownership & succession 19

20 What Is Next for S Corporations? Current tax rates Individuals Top rate of 37 percent (plus 3.8 net investment income tax) 20 QBI deduction Shareholders not taxed on distributions from AAA AMT Limitation on SALT deduction C corporations Flat rate of 21 percent Shareholders taxed at top rate of 23.8 percent on qualified dividends AMT repealed No limitation on SALT deduction What Is Next for S Corporations? Corporation Pass-through Taxable income $100,000 $100, percent of QBI deduction (20,000) State income tax deduction* Adjusted taxable income 100,000 80,000 Tax (21% 37%) (21,000) (29,600) Cash distributed to owner 79,000 70,400 Tax on distribution (23.8% 0%) 18,802 Net cash to owner $60,198 $70,400 Effective tax rate 39.80% 29.60% *Assumes individual cap on individual state & local tax deduction already reached 20

21 What Is Next for S Corporations? Corporation Pass-through Taxable income $100,000 $100, percent of QBI deduction State income tax deduction* 6,000 Adjusted taxable income 100, ,000 Tax (21% 37%) (21,000) (39,220) Cash distributed to owner 79,000 60,780 Tax on distribution (23.8% 0%) 18,802 Net cash to owner $60,198 $60,780 Effective tax rate 39.80% 39.22% *Assumes individual cap on individual state & local tax deduction not reached What Is Next for S Corporations? S corporation election revocation process Statement filed within the first 75 days of tax year (March 15 for calendar-year taxpayers) in order to be effective in the current year Greater than 50 percent shareholder approval It took 100 percent shareholder approval to elect S status Five-year re-election period Once you revoke you must wait five years to re-elect S status 21

22 What Is Next for S Corporations? S corporation election revocation impact Deferred income taxes Timing of recording deferred taxes the change in status from a nontaxable entity to a taxable entity should be reflected at the filing date, if approval is not necessary (which is the case under 1362) Deferred taxes should be provided at the date of change for temporary differences (at that date) that will reverse after the effective date Post-termination transition period distributions Distributions in year one as a C corporation post revocation can be from AAA Shareholder basis Typically increases as an S corporation but remains unchanged as a C corporation What Is Next for S Corporations? S corporation election revocation impact Eligible terminated S corporation (new under the TCJA) Revocation within two years of enactment of TCJA or by December 22, 2019 Ownership of stock is identical on date of revocation as on date of the TCJA enactment Special rules for eligible terminated S corporations Section 481(a) adjustments taken into income ratably over six years Rather than four years Post-revocation distributions prorated between AAA & AE&P 22

23 What Is Next for S Corporations? Future tax rates Individuals Top rate of 37 percent sunsets December 31, percent QBI deduction sunsets December 31, 2025 AMT Limitation on SALT deduction Corporations Flat rate of 21 percent permanent 23.8 percent top tax rate on qualified dividends permanent AMT repealed permanent No limitation on SALT deduction permanent What Is Next for S Corporations? Ownership & succession Exit strategy Succession plan Estate tax exclusion M&A Ability/need to raise capital Distribution requirements 23

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