Quickfinder. Small Business Quickfinder Handbook (2017 Tax Year) Updates for the Tax Cuts and Jobs Act of 2017 and Other Recent Guidance

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1 Quickfinder Small Business Quickfinder Handbook (2017 Tax Year) Updates for the Tax Cuts and Jobs Act of 2017 and Other Recent Guidance Instructions: This packet contains marked up changes to the pages in the Small Business Quickfinder Handbook that were affected by the Tax Cuts and Jobs Act of 2017, which was enacted after the Handbook was published. Additionally, changes were made based on other guidance issued after the Handbook was published. To update your Handbook, you can make the same changes in your Handbook or print the revised page and paste over the original page.

2 2017 Tax Year Patent Pending Small Business Quickfinder Form 1120 Handbook Corporation Tax Rate Schedule Quick Tax Method and before 2018 For tax years beginning after December 31, 1992 Taxable Income % Minus $ = Tax $ 0 $ 50,000 15% minus $ 0 = Tax 50,001 75, minus 5,000 = Tax 75, , minus 11,750 = Tax 100, , minus 16,750 = Tax 335,001 10,000, minus 0 = Tax 10,000,001 15,000, minus 100,000 = Tax 15,000,001 18,333, minus 550,000 = Tax 18,333,334 and over 35 minus 0 = Tax Note: See Basics of Corporations on Page C-1 for exceptions to above tax rates and an example of how to use the Quick Tax Method. Form Fiduciary Tax Rate Schedule Quick Tax Method Taxable Income % Minus $ = Tax $ 0 $ 2,550 15% minus $ 0.00 = Tax 2,551 6, minus = Tax 6,001 9, minus = Tax 9,151 12, minus = Tax 12,501 and over 39.6 minus 1, = Tax Note: The 10% tax bracket that applies to individuals does not apply to estates and trusts. Filing Information Tax Return Return Due Extensions Form 1065: Partnership/LLC Form 1120: Corporation Form 1120S: S Corporation Form 1041: Estates and Trusts Form 706: Estates Form 709: Gift Tax Form 990: Exempt Organizations 15th day of third month following close of tax year. 15th day of fourth (third if 6/30 FY) month following close of tax year. 15th day of third month following close of tax year. 15th day of fourth month following close of tax year. Nine months after date of decedent s death. April 15th following close of tax year of gift. 15th day of fifth month following close of tax year. Note: CY calendar year end; FY fiscal year end. Form 7004 extends deadline six months. Form 7004 extends deadline six if CY (seven if 6/30 FY; six if other FY) months. Form 7004 extends deadline six months. Form 7004 extends deadline five-and-one-half months. Form 4768 extends deadline six months. Form 4868 or 8892 extends deadline six months. Form 8868 extends deadline six months. Forms: 1065, 1120, 1120S, 1041, 706, 709 and 990 Forms 706 and 709 Estate and Gift Tax Rate Schedule Quick Tax Method For gifts made and estates of decedents dying after 2012 Taxable Amount % Minus $ = Tax 1 $ 0 $ 10,000 18% minus $ 0 = Tax 10,001 20, minus 200 = Tax 20,001 40, minus 600 = Tax 40,001 60, minus 1,400 = Tax 60,001 80, minus 2,600 = Tax 80, , minus 4,200 = Tax 100, , minus 6,200 = Tax 150, , minus 9,200 = Tax 250, , minus 14,200 = Tax 500, , minus 29,200 = Tax 750,001 1,000, minus 44,200 = Tax 1,000,001 and over 40 minus 54,200 = Tax 1 Less applicable credit amount. See the charts at the beginning of Tab H. Estate Tax Exclusion Estate and Gift Tax Exclusion Amounts Gift Tax Exclusion 1 Annual Gift Exclusion $5,490,000 $5,490,000 $14,000 1 Plus the amount of any deceased spousal unused exclusion and/or any restored exclusion related to lifetime gifts to a same-sex spouse see Tab H Business Quick Facts Section 179 Deduction: Maximum deduction... $ 510,000 Qualifying property limit... 2,030,000 SUV deduction limit... 25,000 Depreciation Limits (First Year): Luxury autos... $ 3,160 1 Light trucks and vans... 3,560 1 Standard Mileage Rate: Business miles... $.535 Depreciation component Charitable Medical and moving Plus $8,000 if special (bonus) depreciation is claimed. TAX PREPARATION

3 Reference Materials and Worksheets Where to File: Business Returns Filing Addresses 2017 Returns...Page A-1 Principal Business Activity Codes Forms 1065, 1120 and 1120S...Page A-1 Business Quick Facts Data Sheet...Page A-1 Types of Payments Where to Report...Page A-2 Guide to Information Returns...Page A-3 Cash and Accrual Accounting Methods Treating Commonly Encountered Items...Page A-6 S Corporation Shareholder s Adjusted Basis Worksheet...Page A-7 Partner s Adjusted Basis Worksheet...Page A-8 Tax Info for Partnership, Corporation, LLC and LLP Returns...Page A-9 Transferor s Section 351 Statement... Page A-11 Tab A Topics Tax Info Sheet for Gift Tax Returns...Page A-12 Estate Inventory Worksheet...Page A-13 Reconciliation of Income Reported on Final Form 1040 and Estate s Fiduciary Return (or Beneficiary s Return)...Page A-14 Allocation of Indirect Costs to Ending Inventory Under IRC Sec. 263A...Page A-15 Business Valuation Worksheet...Page A-16 Foreign Asset Reporting Forms 8938 and FinCEN Page A-17 Types of Foreign Assets and Whether They are Reportable...Page A-17 Worksheet to Allocate Purchase/Sale Price to Specific Assets...Page A-18 Where to File: Business Returns Filing Addresses 2017 Returns Note: At the time of publication, the IRS had not released the 2017 filing addresses for business returns. This information will be posted to the Handbook Updates section of tax.thomsonreuters.com/quickfinder when available. Principal Business Activity Codes Forms 1065, 1120 and 1120S Note: At the time of publication, the IRS had not released the 2017 principal business activity codes for business returns. This information will be posted to the Handbook Updates section of tax.thomsonreuters.com/quickfinder when available. Business Quick Facts Data Sheet FICA/SE Taxes Maximum earnings subject to tax: Social Security tax $ 128,400 $ 127,200 $ 118,500 $ 118,500 $ 117,000 Medicare tax No Limit No Limit No Limit No Limit No Limit Maximum tax paid by: Employee Social Security $ 7, $ 7, $ 7, $ 7, $ 7, SE Social Security 15, , , , , Employee or SE Medicare No Limit No Limit No Limit No Limit No Limit Business Deductions Section 179 deduction limit $ 1,000,000 $ 510,000 $ 500,000 $ 500,000 $ 500,000 Section 179 deduction SUV limit (per vehicle) 25,000 25,000 25,000 25,000 25,000 Section 179 deduction qualifying property phase-out threshold 2,500,000 2,030,000 2,010,000 2,000,000 2,000,000 Depreciation limit autos (1 st year with special depreciation) 18,000 11,160 11,160 11,160 11,160 Depreciation limit autos (1 st year with no special depreciation) 10,000 3,160 3,160 3,160 3,160 Depreciation limit trucks and vans (1 st year with special depreciation) 18,000 11,560 11,560 11,460 11,460 Depreciation limit trucks and vans (1 st year with no special depreciation) 10,000 3,560 3,560 3,460 3,460 Retirement Plans SIMPLE IRA plan elective deferral limits: Under age 50 at year end $ 12,500 $ 12,500 $ 12,500 $ 12,500 $ 12,000 Age 50 or older at year end 15,500 15,500 15,500 15,500 14, (k), 403(b), 457 and SARSEP elective deferral limits: Under age 50 at year end $ 18,500 $ 18,000 $ 18,000 $ 18,000 $ 17,500 Age 50 or older at year end 24,500 24,000 24,000 24,000 23,000 Profit-sharing plan/sep contribution limits 55,000 54,000 53,000 53,000 52,000 Compensation limit (for employer contributions to profit-sharing plans) 275, , , , ,000 Defined benefit plans annual benefit limit 220, , , , ,000 Key employee compensation threshold 175, , , , ,000 Highly compensated threshold 120, , , , ,000 Estate and Gift Taxes Estate tax exclusion $11,200,000 3 $ 5,490,000 3 $5,450,000 3 $5,430,000 3 $5,340,000 3 Gift tax exclusion 11,200, ,490, ,450, ,430, ,340,000 3 GST tax exemption 11,200,000 5,490,000 5,450,000 5,430,000 5,340,000 Gift tax annual exclusion 15,000 14,000 14,000 14,000 14,000 1 See Tab 3 in the 1040 Quickfinder Handbook for an expanded Quick Facts Data Sheet. Not used. 2 Amount not released by IRS at publication time. Tax professionals should watch for developments. 3 Plus the amount of any deceased spousal unused exclusion and/or any restored exclusion related to lifetime gifts to a same-sex spouse see Tab H Tax Year Small Business Quickfinder Handbook A-1

4 After December 22, 2017, any contribution made by a governmental entity or civic group also is taxable to the corporation. Instead of four equal installment payments, estimates can be based on an annualized income method or the adjusted seasonal installment method. See Annualized Income Methods below. For more on the adjusted seasonal installment method, see the instructions to Form 2220 and IRS Pub Estimated payments must be made by the following dates: First payment... 15th day of the fourth month Second payment... 15th day of the sixth month Third payment... 15th day of the ninth month Fourth payment... 15th day of the 12th month For calendar-year corporations, those dates are April 15, June 15, September 15 and December 15. If the 15th of the month due date falls on a Saturday, Sunday or legal holiday, the installment is due on the next business day. Annualized Income Methods Corporations can compute current-year tax for each estimated tax installment under one of three annualized income methods: (1) Standard, (2) Option 1 and (3) Option 2. [IRC Sec. 6655(e)] An election to use either of the optional periods is effective only for the tax year for which it is made. The election must be made on or before the date required for paying the first installment for the tax year. Corporate Annualization Methods and Periods Methods Form 8842 Installment Periods Number Name Required First Second Third Fourth 1 Standard No Option 1 Yes Option 2 Yes Note: Each installment is based on annualized income for the number of months given the method. For example, if using the Standard method the third installment is based on annualized income from the first six months. Related forms: Form 8842 (Election To Use Different Annualization Periods for Corporate Estimated Tax) is filed to make the election to use optional methods 1 or 2. Form 1120-W. Used by corporations to estimate amount of required payments. This form is retained in the corporation s records and not filed with the IRS. Form Used to figure underpayment penalty or to show exception to penalty under the annualized income method. Quick Refund of Estimated Tax A corporation that has overpaid its estimated tax may apply for a quick refund if the overpayment is: 1) At least 10% of its expected income tax liability and 2) At least $500. To apply for a quick refund, complete Form 4466 (Corporation Application for Quick Refund of Overpayment of Estimated Tax). Mail Form 4466 to the IRS service center specified in the instructions of Form 4466 before the 16th day of the fourth month after the end of the tax year, and before the tax return is filed. Attach a second copy to the corporation s tax return. An extension of time to file the tax return will not extend the time to file Form Capital Contributions Contributions to capital of a corporation are called paid-in capital. A corporation does not recognize gain or loss when it issues stock in exchange for cash or property. (IRC Sec. 1032) Shareholders do not recognize gain or loss upon contribution of cash in exchange for stock. Shareholders may recognize gain or loss upon exchange of property for stock. When services are performed in exchange for stock, the fair market value (FMV) of the service is taxable compensation. The amount included in income becomes the shareholder s stock basis. Contributions to capital by nonshareholders. The basis of property contributed to a corporation by a nonshareholder is zero. For example, if a municipality gives land to a corporation as inducement to locate there, the corporation accounts for the property as a contribution to capital with zero basis. If cash is contributed by a nonshareholder, basis in the corporation s assets is reduced by the amount of the contribution. Note: Contributions made by a customer or potential customer are taxable income to the corporation, not capital contributions. See IRS Pub. 542 for more information about contributions from nonshareholders. Transfers of Property Generally, when property is transferred to a corporation in exchange for stock, the transaction is treated as if the property were sold to the corporation at FMV. Example: Ed exchanges property with FMV of $10,000 and adjusted basis of $4,000 for 70% of PIE Corporation s stock. Ed recognizes $6,000 gain on the transaction. His basis in stock received is $10,000. Nontaxable Exchange of Property for Stock Section 351 Transfers In a nontaxable Section 351 exchange, the corporation takes the transferor s basis in the transferred property. No gain or loss is recognized if one or more persons transfer cash or property to a corporation solely in exchange for stock if the person or persons control the corporation immediately after the exchange. Control is defined as owning at least 80% of the voting stock and 80% of all other classes of stock. Example: Mr. Bean owns a sole proprietorship, which contains assets with FMV of $10,000 and basis of $2,000. He changes the business entity to a corporation, and transfers the assets from the sole proprietorship to the corporation in exchange for 100% of the corporation s stock. The exchange qualifies under IRC Sec. 351, and no gain is recognized on the transaction. Note: Nonrecognition treatment under IRC Sec. 351 does not apply to: (1) transfer of property to an investment company, (2) transfer of property in a bankruptcy in exchange for stock used to pay creditors or (3) stock received in exchange for the corporation s debt or for interest on the corporation s debt that accrued while the transferor held the debt. Basis. See Basis of Property Exchanged for Corporate Stock on Page C-4. Generally, a corporation s basis in property received under IRC Sec. 351 is equal to the transferor s basis. However, IRC Sec. 362(e) includes a carryover basis limitation to prevent (1) the importation of built-in losses into the U.S. by transferors who are not subject to U.S. tax and (2) the double deduction of a single economic loss by transferring built-in loss property to a corporation in a carryover basis transaction with the transferee deducting a loss on the sale of the property and the transferor deducting a loss on the sale of stock Tax Year Small Business Quickfinder Handbook C-3

5 Under the Tax Cuts and Jobs Act, special allocation rules apply to PTTP distributions if the terminated S corporation (1) was an S corporation before December 22, 2017; (2) revoked its S corporation election during the two-year period beginning on December 22, 2017 and (3) had the same owners on December 22, 2017 and the revocation date. Election to distribute AE&P first. An election is available to make distributions first from AE&P. The election is made on a year-by-year basis. See Reg (f). Note: Some S corporations have a retained earnings account called previously taxed income (PTI). PTI represents undistributed earnings from pre-1983 S corporation years. See the instructions for Schedule M-2, Form 1120S, for more information. Post-Termination Transition Period When a corporation s S status terminates, a post-termination transition period (PTTP) begins [IRC Sec. 1377(b)]. During the PTTP, distributions from the AAA retain their character as nontaxable distributions (to the extent of stock basis). The distributions reduce the shareholder s basis [IRC Sec. 1371(e)(1)]. Any AAA remaining after the PTTP ends can no longer be distributed tax free. Election. With the consent of all shareholders to whom distributions are made during the PTTP, the corporation can elect to treat distributions as dividends up to the AE&P of the corporation. The election is made by attaching a statement to Form 1120 for the year the PTTP ends. The statement should contain a declaration that the corporation elects to have IRC Sec. 1371(e) (2) apply to distributions during the period, and should be signed by a corporate officer, with all shareholders who received PTTP distributions signing the consent. (Reg ) The PTTP ends the later of [IRC Sec. 1377(b)]: One year after the PTTP begins, Due date for last S corporation return, including extensions or 120 days after a court decision, agreement with the IRS or audit determination stating that the corporation did not qualify as an S corporation. the S corporation must reduce its accumulated adjustments account. (CCA ) Comparing AAA and Stock Basis How items affect a shareholder s basis in stock vs. the corporate AAA is illustrated in the following chart. Item Stock Basis AAA Original basis in stock Increase No Effect Stock purchase Increase No Effect Taxable income Increase Increase Nontaxable income Increase No Effect Capital gains Increase Increase Deductible expenses Decrease Decrease Nondeductible expenses Decrease Decrease Tax-exempt related expenses Decrease No Effect Ordinary and capital losses Decrease Decrease Depletion in excess of basis Increase Increase Depletion not in excess Decrease Decrease Nontaxable distributions (FMV) Decrease Decrease Taxable distributions of AE&P No Effect No Effect Notes: The shareholder s stock basis cannot be decreased below zero; however, the corporate AAA can be negative. The chart above assumes the S corporation has AE&P. Taxexempt income and related expenses are recorded in the OAA, not in AAA. If the corporation has no AE&P, the OAA is not used and the taxability of distributions is not determined by reference to AAA, but by the amount of stock basis (nontaxable to extent of basis; capital gain in excess of basis). Deemed Dividends If an S corporation wants to make dividend distributions, but lacks sufficient capital, the corporation may elect to make a deemed dividend. The dividend is considered to have been made on the last day of the tax year, even though no money is distributed. The amount of the deemed dividend is treated by the shareholder as dividend income, and a subsequent capital contribution that increases the basis of his stock. Election. The election is made by attaching a statement to the S corporation s timely filed original or amended Form 1120S for the year in which the distributions are made. The election is irrevocable and made on a year-by-year basis. See Reg (f). Property Distributions When property is distributed, the shareholder uses the FMV of the property to figure the tax effect and the adjustment to basis of his stock. If the property is appreciated property, the S corporation is considered to have sold the property to the shareholder at FMV, and recognizes gain accordingly. [IRC Sec. 311(b)] Reporting. An S corporation that distributes property other than cash to shareholders attaches a statement to its Form 1120S providing (1) the date the property was acquired, (2) the date of the distribution, (3) the property s FMV on the date of the distribution and (4) the corporation s basis in the property. Note: In an informal Chief Counsel Advice, the IRS says that an S corporation s disallowed loss under IRC Sec. 311(a) for distributions of stock or property that aren t in complete liquidation of its stock will be treated as a nondeductible, noncapital expense under IRC Sec. 1367(a)(2)(D). Thus, the Section 311(a) loss will reduce the shareholders bases in S corporation stock, and S Corporation Example A comprehensive S corporation example with line-by-line instructions to help in the preparation of Form 1120S Compare with Forms 1065 and This example reflects the same business activity as the examples in Tab B (Partnerships) and Tab C (C Corporations). Compare the differences in tax reporting for each type of business entity. History. Jerry and Bob agreed to go into business together operating a skydiver training facility called Shout and Jump. Organizational costs and start-up costs/amortization. Jerry and Bob met with an accountant and an attorney to discuss which business entity would best fit their needs. After determining they preferred the corporate form of business but wanted flow-through treatment because they expect to generate significant profits that won t be left in the business, these professionals advised them to form an S corporation (see the Entity Comparison Chart on Pages M-2 and M-3). The accountant helped establish a bookkeeping system. The attorney drafted an incorporation agreement. The accountant s fee was $1,200; the attorney s fee was $1,800. Both are considered organizational costs. The corporation paid advertising costs of $2,016 before its grand opening, which is considered a start-up cost. The expenses for the accountant, attorney and advertising are considered capital expenses because the costs were incurred before the start of business operations. Such expenses may be deducted as business expenses in an amount not exceeding $5,000 for start-up costs and $5,000 for organizational costs. Expenditures in excess of $5,000 for each type of cost are amortized over a period of 180 months. Taxpayers are deemed to elect to deduct (and, if applicable, amortize) start-up and organizational costs in the year the business begins. No election statement is required Tax Year Small Business Quickfinder Handbook D-11

6 Income and Expense Chart for a Decedent (Continued) Cash Method of Accounting Category Where to Report Explanation Medical Expenses Final Form 1040, Schedule A Medical expenses paid before death. Can elect to deduct medical expenses incurred before death but paid from the estate within one year of the day following death [Reg (d)]. Election does not apply to medical expenses for a decedent s dependents. To elect, attach a statement to Form 1040 stating the estate has waived the right to claim medical expense for estate tax. With the election, deduction is taken on Form 1040, Schedule A in year costs were incurred (a Form 1040X may be needed). Amounts not allowed due to 10%-of-AGI Miscellaneous Itemized Deductions Net Investment Income Tax Partnership Income (Loss) Form 706, Schedule K threshold cannot be claimed on Form 706. Unpaid medical expenses at death are reported on Form 706 as a claim against the estate, unless an election is made to report on decedent s final Form Amounts deducted on Form 706 are not subject to the 10% of AGI deduction threshold. If deduction taken on Form 1040, amount not allowed due to 10% of AGI threshold cannot be claimed on Form 706. Form 1041 Any insurance reimbursements after death of amounts previously deducted on Form Report as IRD. Final Form 1040, Schedule A Miscellaneous itemized deductions paid before death. Form 706, Schedule J or Form Unpaid miscellaneous itemized deductions at date of death are reported on Form 706. When paid, deduct on 1041 Form 1041 as DRD. Form 1041 Incurred and paid after death: may be subject to 2% AGI limit. See Deductions on Page G-5. Form 8960 Estates are subject to the 3.8% net investment income tax. See Tab G for additional discussion. Final Form 1040, Schedule E Form 1041 (or beneficiary s Income (or loss) up to date of death using any reasonable method of allocating income (loss). Allocation is often based on pro rata amount for year or interim closing of books. Income (or loss) after death not included on final Form Passive Losses Final Form 1040 Losses are allowed to extent of passive income, plus accumulated unused losses to extent they exceed any increase in basis allocated to the activity. For example, if a passive activity s basis is increased $6,000 upon taxpayer s death, and unused passive activity losses as of date of death are $8,000, decedent s deduction is $2,000 ($8,000 $6,000). Form 1041 Estates are subject to the same passive loss limitation rules as individuals. The fiduciary s level of participation determines the classification. If decedent actively participated in a rental real estate activity before death, the estate will be allowed the special $25,000 rental real estate exemption for up to two years after decedent s death. Personal Residence Form 1041 The Section 121 exclusion of gain from sale of personal residence does not apply to estates. If personal residence is a capital asset to the estate (either held for investment or rental purposes), estate can deduct loss on sale. If property is used by estate beneficiaries for personal purposes, loss on sale is not deductible. If home was not subject to probate and passed directly to heirs, sale of home is reported on beneficiaries Form Real Estate, State and Local Income Taxes Rental Income and Expenses S Corporation Income (Loss) Savings Bond Interest (Decedent did not elect to report interest annually) Savings Bond Interest (Decedent elected to report interest annually) Final Form 1040, Schedule A Form 706, Schedule K and Form 1041 (or beneficiary s Paid before death. General sales taxes deductible if state and local income taxes not deducted. [IRC Sec. 164(b)(5)] Real estate taxes accrued before death but paid after death. Form 1041 (or beneficiary s Accrued and paid after death. Final Form 1040, Schedule E Income and expenses received or paid before death. Form 706 and Form 1041 (or Income and expenses accrued before death but not actually received or paid until after death (IRD and DRD). beneficiary s Passive activity loss rules apply to estates (for Form 1041 reporting). Form 1041 (use Schedule E of Income and expenses accrued and received or paid after death. Passive loss rules apply to estates. Form 1040) Final Form 1040, Schedule E Pro rata share of income (or loss) up to death. Generally, amount of income (or loss) is computed as follows: S corporation income or loss for the year, divided by number of days in S corporation s year, multiplied by number of days shareholder was alive. Can elect under Section 1377(a)(2) to close S corporation books on day of death. Form 1041 (or beneficiary s Income (or loss) after date of death and not included on final Form Final Form 1040 or Form 1041 Two options: (Rev. Rul ) 1) Executor elects to report interest accrued before death on final Form Interest accrued after death is reported on Form 1041 (or beneficiary s in year bond is redeemed or matures. 2) All interest (both before and after death) is reported on Form 1041 (or beneficiary s in year bond is redeemed, matures or an election is made to report income. Interest accrued before death is IRD. Alternatively, recipient of an inherited bond can elect to report interest annually. (Rev. Rul ) Form 706, Schedule B Final Form 1040 Form 1041 (or beneficiary s FMV of bonds, including interest accrued up to date of death, which may be IRD. Interest accrued up to date of death. Interest accrued after death. Note that the last Series E bonds matured in 2010 and the last Series H bonds matured in These bonds stopped paying interest at that time and any deferred interest should have been recognized on the 1040 in the year the bond matured. Form 706, Schedule B FMV of bonds as of date of death. No IRD. Social Security Final Form 1040 Payments cease at death; therefore, subject to reporting on final Form Standard Deduction Final Form 1040 Full amount allowed. No proration required. Wages Final Form 1040 Wages received before death. Form 706, Schedule F and Form 1041 (or beneficiary s Wages earned before death but received after death (IRD). 7.5% H Tax Year Small Business Quickfinder Handbook

7 Under SL, depreciation after the short tax year is determined by dividing the number one by the years remaining in the recovery period at the beginning of a year, then multiplying the result by the unrecovered adjusted basis. When figuring the number of years remaining, consider the convention used in the year the property is placed in service. If the number of years remaining is less than one, the depreciation rate for that tax year is 1.0 (100%). Example #5. Same facts as Example #4 except that SL is elected. Short tax year depreciation in first year is: 20X1: $ 2, = $60 Depreciation for years 20X1 through 20X7 is as follows: 20X2: $ 2,000 $ 60 = $ 1, yrs = $286 ( years is equal to 6 years months) 20X3: $ 1,940 $ 286 = $ 1, yrs = $286 20X4: $ 1,654 $ 286 = $ 1, yrs = $285 20X5: $ 1,368 $ 285 = $ 1, yrs = $286 20X6: $ 1,083 $ 286 = $ yrs = $285 20X7: $ 797 $ 285 = $ yrs = $286 20X8: $ 512 $ 286 = $ % = $226 Except for the first and last year, SL will thus produce the same results as if the short year rules were not used. 20X1: Using short year rules = $60 20X2 through 20X7: $2,000 7 = $286 20X8: Remaining unrecovered adjusted basis 100% = $224 (100% for property acquired and placed in service after September 27, 2017) Special (Bonus) Depreciation For 2017, a special (bonus) depreciation allowance equal to 50% of the qualified property s depreciable basis (cost or other basis less Section 179 deduction and credits) is available. The amount of the special depreciation allowance is not affected by a short tax year or by the applicable convention. However, assets for which the special depreciation allowance is claimed are still counted for determining whether the mid-quarter convention applies for the normal MACRS deduction. If the special depreciation allowance is taken, there are no AMT adjustments for depreciation for that asset for the year placed in service or any later year. See Special (Bonus) Depreciation in Tab 10 of the 1040 Quickfinder Handbook for more information. Section 179 Deduction in a Short Tax Year When a Section 179 deduction is elected in a short year, no proration is required. Section 179 yearly limitations apply as if the short year was a full tax year. [Reg (c)(1)] Depreciation Recapture Ordinary Income Treatment When depreciation is recaptured, some or all of the gain may be treated as ordinary income. The depreciation recapture rules often convert what would otherwise have been a Section 1231 gain (potentially taxed as a long-term capital gain) to ordinary income. U Caution: Any ordinary income due to Section 1245 or 1250 recapture cannot be reported on the installment method. The entire recapture income is recognized in the year of sale, regardless of the amount of payments received that year. Section 1245 Depreciation Recapture Section 1245 property is generally personal property (either tangible or intangible) that is (or has been) subject to depreciation or amortization. Examples include machinery, furniture, vehicles, livestock, franchises, covenants not to compete and Section 197 goodwill. When Section 1245 property is disposed of (whether by sale, exchange or involuntary conversion) at a gain, the gain is treated as ordinary income up to the lesser of: [IRC Sec. 1245(a)] The sum of all depreciation or amortization deductions allowed or allowable (see Allowed or Allowable Depreciation in the previous column) or Gain realized on the disposition. Any gain recognized that is more than the ordinary income from depreciation recapture is a Section 1231 gain. Section 1250 Depreciation Recapture Section 1250 property is any depreciable real property that is not and never has been Section 1245 property [Reg (e)]. Section 1250 property includes a depreciable leasehold of land or of Section 1250 property. However, a fee simple interest in land is not included because it is not depreciable. Gain on the disposition of Section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Held one year or less All the depreciation allowed or allowable is additional depreciation. Additional Depreciation Section 1250 Property Held longer than one year Excess of the depreciation allowed or allowable over the amount that would have been allowed using the SL method. Allowed or Allowable Depreciation Taxpayers must reduce the basis of depreciable property by the greater of allowed or allowable depreciation [IRC Sec. 1016(a)(2)]. Allowed depreciation is the depreciation deduction claimed on an income tax return accepted by the IRS. Allowable depreciation is the amount a taxpayer is entitled to deduct under the Code and regulations, etc. Sometimes a taxpayer will discover upon disposition of an asset that not all allowable depreciation was claimed, because the amount on the returns was less than that allowable. If so, the taxpayer may automatically change the depreciation accounting method for the under-depreciated assets, so as not to lose the benefit of the full allowable depreciation. (Rev. Proc ) This does not mean that depreciation should be corrected only upon asset disposition. It means that a taxpayer that discovers at disposition that it has under depreciated an asset has automatic IRS consent at that time to correct the depreciation and claim the remainder allowable in the disposition year. See Tab L for more information on accounting method changes. Unrecaptured Section 1250 Gain The term unrecaptured Section 1250 gain generally refers to gain attributable to SL depreciation on real property. For noncorporate taxpayers, this gain is treated as a capital gain subject to the maximum 25% rate [IRC Sec. 1(h)(1)(E)]. For how to calculate unrecaptured Section 1250 gain, see Tab 7 in the 1040 Quickfinder Handbook. Depreciation Recapture C Corporations Section 1245 recapture is computed the same way for corporations and individuals. However, Section 1250 recapture is different for C corporations [and S corporations that were C corporations in the last three years IRC Sec. 1363(b)(4)]. Under IRC Sec. 291(a)(1) for a sale of depreciable real estate that is Section 1250 property, 20% of the excess of the amount that would be treated as ordinary income if the property were Section 1245 property, over the amount treated as ordinary income under IRC Sec. 1250, is additional ordinary income. J Tax Year Small Business Quickfinder Handbook

8 Tax Cuts and Jobs Act of 2017 Enacted on December 22, 2017, the Act makes significant changes to individual and business taxes. Most provisions are effective beginning after See the Handbook Updates section of the Quickfinder website (tax.thomsonreuters.com/quickfinder) for a table summarizing the Act s key provisions. Inflation-Adjusted Amounts For a summary of inflation-adjusted amounts for 2017 (plus 2018 and 2016 and prior years) see the Business Quick Facts Data Sheet on Page A-1. Tab Q Topics Inflation-Adjusted Amounts... Page Q-1 Tax Legislation... Page Q-1 Additional Tax Relief for Hurricane Victims... Page Q-1 Disaster Tax Relief Act... Page Q-2 Expired Tax Breaks... Page Q-4 Key 2017 IRS Rulings and Tax Cases... Page Q-5 Quick List of Key 2017 IRS Rulings and Tax Cases... Page Q-5 Identity Theft Safeguarding Client Information... Page Q-6 Responding to a Security Breach of Client Data... Page Q-6 Tax Legislation Cures Act Enacted on December 13, 2016, the 21st Century Cures Act (Cures Act) was designed to help accelerate medical product development and bring new innovations and advances to patients who need them faster and more efficiently. But it also included a provision that is good news for small employers wanting to help employees with medical expenses. It added IRC Sec. 9831(d) exempting qualified small employer health reimbursement arrangements (QSEHRAs) from the Affordable Care Act s market reform penalty, effective for tax years after See Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) on Page K-10 for details. Disaster Tax Relief Act Enacted on September 29, 2017, the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (Disaster Tax Relief Act) provides tax relief related to Hurricanes Harvey, Irma and Maria. Most of these tax provisions apply to hurricane victims and taxpayers located or doing business in the related disaster areas. However, the charitable contribution relief provisions benefit any taxpayer (including both individuals and corporations) that makes a qualifying charitable contribution for Hurricanes Harvey, Irma and Maria relief. Disaster relief provisions. See the table Disaster Tax Relief Act on Page Q-2 for the specific provisions. Disaster zones and disaster areas. The Disaster Tax Relief Act uses two terms when defining which taxpayers are eligible for the special provisions. Disaster area. The area with respect to which a major disaster has been declared by the President before September 21, 2017, under section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of the hurricane. Disaster zone. That portion of the hurricane disaster area determined by the President to warrant individual or individual and public assistance from the federal government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act by reason of the hurricane. What s New U Caution: In many cases, an eligible individual not only has to reside in the designated area or zone but also have sustained an economic loss or hardship because of the hurricane. Hurricane Harvey Disaster Zone Hurricane Harvey Disaster Area Hurricane Irma Disaster Zone Hurricane Irma Disaster Area Hurricanes Harvey and Irma Federally Declared Disaster Areas and Zones Texas counties: Aransas, Austin, Bastrop, Bee, Brazoria, Caldwell, Calhoun, Chambers, Colorado, DeWitt, Fayette, Fort Bend, Galveston, Goliad, Gonzales, Grimes, Hardin, Harris, Jackson, Jasper, Jefferson, Karnes, Kleberg, Lavaca, Lee, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Polk, Refugio, Sabine, San Jacinto, San Patricio, Tyler, Victoria, Walker, Waller and Wharton. Above counties plus the following: Bexar, Burleson, Comal, Dallas, Guadalupe, Jim Wells, Madison, Milam, San Augustine, Tarrant, Travis and Washington. Florida counties: Alachua, Baker, Bradford, Brevard, Broward, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Duval, Flagler, Gilchrist, Glades, Hardee, Hendry, Hernando, Highlands, Hillsborough, Indian River, Lafayette, Lake, Lee, Levy, Manatee, Marion, Martin, Miami-Dade, Monroe, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Union and Volusia. Georgia counties: Camden, Charlton, Chatham, Coffee, Glynn, Liberty and McIntosh. Above counties plus the following: Florida counties: All remaining counties. Georgia counties: All remaining counties. Note: Counties shown are as of the date of publication. See gov/disasters for Hurricane Maria disaster areas as well as locations in Puerto Rico and the U.S. Virgin Islands included in the Hurricane Irma disaster area. Additional Tax Relief for Hurricane Victims In addition to the Disaster Tax Relief Act enacted by Congress, the IRS provided various relief provisions that may be available to taxpayers affected by Hurricanes Harvey, Irma and Maria. In general, the IRS is providing some relief to individuals and businesses anywhere in Florida, Georgia, Puerto Rico and the Virgin Islands, as well as in parts of Texas, Louisiana and South Carolina. For some of the IRS relief provisions, eligible taxpayers include individuals residing in and businesses located in counties qualifying for individual assistance. Other IRS relief provisions are less restrictive, with eligible taxpayers including individuals residing in, and businesses located in, counties qualifying for either individual assistance or public assistance (this includes all counties in Florida and Georgia and certain counties in Texas see Hurricane Harvey Disaster Area in the table above). Because this relief that applies with regard to both individual and public assistance counties includes postponement of various tax deadlines, individuals residing in and businesses located in such counties have until January 31, 2018 to file any returns and pay any taxes due. Those eligible for the extra time include: (IR ) Individual filers whose tax-filing extension ran out on October 16, Because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief. Business filers, such as calendar-year partnerships, whose extensions ran out on September 15, Continued on the next page 2017 Tax Year Small Business Quickfinder Handbook Q-1