Tax Cuts and Jobs Act 2017 February 8, 2018
Disclaimer This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any specific taxpayer s facts and circumstances This is for education purposes only and not intended, and should not be relied upon, as accounting advice
Today s Presenters Jennifer Barnes Tax Partner (216) 472-4450 jbarnes@peasecpa.com Kathleen Moran Tax Manager (216) 472-4474 kmoran@peasecpa.com Joseph Velkos Tax Senior Manager (216) 472-4488 jvelkos@peasecpa.com Melanice Hicks Tax Manager (216) 472-4457 mhicks@peasecpa.com
Background Signed by the President President Trump signed into law The Tax Cuts and Jobs Act, on December 22, 2017, a sweeping tax reform law that promises to entirely change the tax landscape Effective Date Most of the changes are effective for tax years beginning after December 31, 2017 Sunset Date Most individual provisions expire after 2025
Proposals That Did Not Make Final Bill Elimination of estate tax after 2023 Elimination of AMT for individuals Repealing deduction for student loan interest Repealing completely - Schedule A deduction for medical expenses Repeal of work opportunity tax credit
Today s Agenda Business Tax Provisions Individual Tax Provisions Estate Tax Provisions
Business Tax Provisions Kathleen Moran Tax Manager (216) 472-4474 kmoran@peasecpa.com
Corporate Change C Corp Tax Rates Current Corporate Tax Rate = 21% Flat Rate For years ending on or before December 31, 2017, the Corporate Tax Rates were as follows: Taxable Income Tax Rate $0 - $50,000 15.00% $50,001 - $75,000 25.00% $75,001 - $10,000,000 34.00% Over $10,000,000 35.00%
Corporate Change - Dividends Received Deduction For years following December 31, 2017, the Dividend Received Deductions will be reduced as follows: Stock Ownership % Current DRD% New DRD% < 20% 70.00% 50.00% 20% < 80% 80.00% 65.00% > 80% 100.00% 100.00%
C Corporation Change AMT Repeal of C Corporation AMT AMT Credit Carryforward Credit for prior year minimum tax still available Credit partially refundable in 2018, 2019 and 2020 Balance of credit refundable in 2021
C Corporation Change NOL s 2018 - NOL s generated in 2017 and prior years can offset 100% of taxable income Beginning in 2019: NOL s incurred in 2017 and prior years can offset 100% of taxable income NOL s incurred in 2018 and later years can only offset 80% of taxable income Other rules for NOL s generated in 2018 & later years Indefinite carryover Generally no carryback allowed
Business Change Bonus Depreciation Expense 100% of cost of property Property must be acquired and placed in service after September 27, 2017 and before January 1, 2023 Property no longer has to be new, but must be the taxpayer s first use Taxpayers can opt out, but must do so for all assets within the class they elect to do so Bonus depreciation can create a net operating loss Phase out of bonus depreciation thresholds, as follows: Period Applicable Percentage 9/27/2017 2022 100.00% 2023 80.00% 2024 60.00% 2025 40.00% 2026 20.00%
Business Change Luxury Autos Luxury Automobiles The limits for deductions for luxury autos placed in service after 2017, as follows: Period 2017 TCJA First year $3,160 $10,000 Second year $5,100 $16,000 Third year $3,050 $9,600 Fourth and later years $1,875 $5,760
Business Change Section 179 Expensing Section 179 Expensing Tax Year Beginning Expense Phase Out Starts 2016 $500,000 $2,010,000 2017 $500,000 $2,030,000 After 2017 $1,000,000 $2,500,000 The Act allows 179 for subsequent improvements to commercial real property for roofs, heating and A/C, fire protection, alarm systems, and security systems after 2017 and for personal property to furnish lodging beds, furniture, appliances, etc. Effective date for increased expensing is for tax years beginning after December 31, 2017 The above numbers will continue to be indexed for inflation Section 179 is allowed up to the amount of taxable income, but cannot create a loss Maximum for SUV s of 6,000 lbs. remains at $25,000, but indexed after 2018
Business Change Accounting Methods Cash accounting method can be used as long as average gross receipts do not exceed $25 million. The previous limit was $5 million Entities can account for inventories using the method reflected on their financial statements The threshold was raised before Section 263A Uniform Capitalization is required File Form 3115 Application for Accounting Method to adopt any of these changes
Business Change Interest Expense Deduction Interest expense in excess of 30% of a business s adjusted taxable income can no longer be deducted Adjusted taxable income is computed without regard to allowable deductions for depreciation, amortization or depletion through 2021 Deductible interest amount is determined at the tax filer level Any interest disallowed is carried forward indefinitely Limitation does not apply to: Floor plan financing of auto dealers Real estate trades or businesses that elect to take ADS depreciation in lieu of bonus depreciation Businesses with average gross receipts for the prior three years of less than $25 million
Business Change Meals & Entertainment No deduction allowed for: Activity considered entertainment, amusement or recreation Membership dues in any club organized for business, pleasure, recreation, etc. Any amenities primarily used for personal enjoyment and not related directly to the taxpayer s trade or business, such as an on premises gym 50% Limitation: Only applies to qualified business meals and beverages with no deduction for entertainment Applies to convenience meals provided by an employer, such as an in-house cafeteria. However, this deduction is completely disallowed after 2025 Employee Achievement awards: No deduction allowed for cash, gift cards, vacations, etc. unless the value is included as income on the employee s W-2 Deduction for gold watch still allowed Research & Development expenses: All R&D expenses are required to be amortized over a five-year period, for tax years beginning on or after December 31, 2021
Business Change Meals & Entertainment Type of M&E Expenditure Prior Deductibility New Provision Deductibility Client entertainment 50% deductible 100% non-deductible (ND) Client meals 50% deductible Entertainment related 100% ND Business related 50% ND Employee travel meals 50% deductible 50% deductible Convenience of employer meals Deminimis meals (meals for employee meetings) Employee recreation 100% deductible Can be 100% or 50% deductible Can be 100% or 50% deductible 50% deductible. Becomes100% ND after 2025 50% deductible Can be100% deductible or 100% ND Overtime meals 100% deductible 50% deductible Skyboxes & Suites Can be 50% & 100% ND 100% ND * ND (non-deductible)
Business Tax Provisions Pass-Through Entity Changes Jennifer Barnes Tax Partner (216) 472-4450 jbarnes@peasecpa.com
Pass-Through Entity Change - Qualified Business Income Deduction 20% deduction for partnerships, S Corporations and sole proprietors Deduction is allowed for both regular tax purposes and for the computation of AMTI Investment income is excluded, including interest, dividends and capital gains Earned income is excluded, including salaries and guaranteed payments Owners wages may be excluded For businesses providing professional services, the QBI deduction is phased out as follows: Professional Services is defined as any trade of business including medical services, law, accounting, actuarial science, performing arts, consulting, athletic, financial services, and brokerage services Engineers and architects are excluded from the list of professional services QBI deduction applies for taxpayers who are below the threshold amounts of $315,000 Married Filing Jointly or $157,500 for all other taxpayers. The deduction phases out over a $100,000/$50,000 range for taxpayers Married Filing Jointly/Other Deduction eliminated completely after 12/31/2025 Section 199A is not deductible for Adjusted Gross Income (above the line) and is a deduction when computing taxable income W-2 Limitation: The 20% deduction is limited to 50% of the W-2 compensation paid by the entity during the taxable year
Pass-Through Entity Change - Qualified Business Income Deduction (continued) Alternate W-2 and asset based limitation: 20% deduction is limited to 25% of the taxpayers W-2 expense plus 2.5% of the unadjusted tax basis in the entity s depreciable assets Taxable income limitation: Deduction is limited to 20% of taxable income less net long-term capital gains per Section 1(h) Bob Smith Income Wages $ 200,000 Less QBI x 20% (Calc. 1 IRC 199A) S Corp 1 700,000 140,000 S Corp 2 300,000 60,000 S Corp 3 (400,000) 0 Other Income 75,000 Total $ 875,000 $ (200,000) Limitation 20% (Calc. 2 IRC 199A) $ (175,000) Taxable Income $ 700,000 Above W-2 and alternate W-2 and asset based limitations do not apply for taxpayers who are below the threshold amounts of $315,000 Married Filing Jointly or $157,500 for all other taxpayers
C Corporation vs. S Corporation Considerations Consider effective rates: Marginal Rate S Corporation Top Marginal Tax Rate Individuals 37.00% IRC 199A Deduction (20% of top rate) (7.40%) Total Effective Rate S Corp 29.60% Flat Rate C Corporation 21.00% Percentage of Earnings Distributed 100.0% 50.0% 20.0% 10.0% 0.0% After Tax Percentage to Distribute 79.00% 39.50% 15.80% 7.90% 0.00% Long Term Capital Gain Rate 23.80% 23.80% 23.80% 23.80% 23.80% Effective Rate of Distributed Earnings 18.80% 9.40% 3.76% 1.88% 0.00% Plus C Corp Tax Rate 21.00% 21.00% 21.00% 21.00% 21.00% Total Effective Rate C Corp 39.80% 30.40% 24.76% 22.88% 21.00%
C Corporation vs. S Corporation Considerations (continued) Carefully consider all impacts of electing a Pass-Through versus a C Corporation State tax deduction Check the box and S election can be made through March 15th Elections to revoke S election status or Q-SUB elections can also be made through March 15 th Consider prospective elections when additional guidance is available
C Corporation vs. S Corporation Planning AAA Balance @ 12/31/2017 = $15 million Declare a distribution of $15 million with a note. Must have note documentation with stated interest Annual income = $10 million Revoke S-Election effective 1/1/2018 No tax on principal payments on AAA note Re-evaluate corporate structure status in 5 th year
Pass-Through Entity Change - Qualified Business Income Deduction
Loss Limitation Rules Business losses are limited to $500,000 Married Filing Jointly or $250,000 for all other taxpayers Any excess can only be carried forward and converted to Net Operating Loss
Partnership Change Repeal of Partnership technical termination provisions: Under prior law, a partnership terminated if within a 12-month period there was a sale or exchange of at least 50% of the total interest in partnership capital and profits The IRS may collect additional tax, interest, and penalty directly from the partnership rather than from the partners under the new IRS audit regime A partnership cannot elect out of the new IRS audit process if a partner is a partnership, trust (even if it is a grantor trust), IRA or nominee, LLC (even an SMLLC), or bankruptcy estate If you are unable to elect out, a Partnership Representative (PR) must be elected annually The PR has full authority. They represent and bind the partnership and its partners The PR does not have to be a partner in the Partnership
Individual & Estate Tax Provisions Melanice Hicks Tax Manager (216) 472-4457 mhicks@peasecpa.com
Individual Highlights Revised bracket structure Personal exemptions eliminated Standard deduction increased Itemized deduction changes Expanded child tax credit Kiddie tax simplification Section 529 plan enhancements AMT exemption and phase-out thresholds increased
Individual Income Tax Rates: 2017 tax brackets Tax Rate Single Head of Household 10% Up to $9,325 Up to $13,350 15% $9,326 to $37,950 $13,351 to $50,800 25% $37,951 to $91,900 $50,801 to $131,200 28% $91,901 to $191,650 $131,201 to $212,500 33% $191,651 to $416,700 $212,501 to $416,700 35% $416,701 to $418,400 $416,701 to $444,550 39.6% $418,401 or more $444,551 or more Tax Rate Married Filing Jointly or Qualifying Widow 10% Up to $18,650 Up to $9,325 Married Filing Separately 15% $18,651 to $75,900 $9,326 to $37,950 25% $75,901 to $153,100 $37,951 to $76,550 28% $153,101 to $233,350 $76,551 to $116,675 33% $233,351 to $416,700 $116,676 to $208,350 35% $416,701 to $470,000 $208,351 to $235,350 39.6% $470,001 or more $235,351 or more
Individual Income Tax Rates: 2018 tax brackets Tax Rate Single Head of Household 10% Up to $9,525 Up to $13,600 12% $9,526 to $38,700 $13,601 to $51,800 22% $38,701 to $82,500 $51,801 to $82,500 24% $82,501 to $157,500 $82,501 to $157,500 32% $157,501 to $200,000 $157,501 to $200,000 35% $200,001 to $500,000 $200,001 to $500,000 37% $500,001 or more $500,001 or more Tax Rate Married Filing Jointly or Qualifying Widow 10% Up to $19,050 Up to $9,525 Married Filing Separately 12% $19,051 to $77,400 $9,526 to $38,700 22% $77,401 to $165,000 $38,701 to $82,500 24% $165,001 to $315,000 $82,501 to $157,000 32% $315,001 to $400,000 $157,001 to $200,000 35% $400,001 to $600,000 $200,001 to $300,000 37% $600,001 or more $300,001 or more
Personal Exemption Personal exemptions are completely repealed at the end of 2017 Consolidated into the standard deduction Expanded child tax credit and a new family tax credit designed to offset the loss for families
Standard Deduction 2018 Standard Deduction: Filing Status Standard Deduction Married Filing Jointly/Surviving Spouse $24,000 Head of Household $18,000 Single $12,000 Married Filing Separately $12,000 2017 Standard Deduction: Filing Status Standard Deduction Married Filing Jointly/Surviving Spouse $13,000 Head of Household $9,550 Single $6,500 Married Filing Separately $6,500
Changes to Itemized Deductions Schedule A Medical expense deduction deduction threshold is 7.5% of AGI Real estate, personal property tax and state and local taxes limited to $10,000 Phase out for higher income taxpayers eliminated Mortgage interest Limited to interest on up to $750,000 of acquisition indebtedness (primary & secondary homes) incurred on or after December 15, 2017 HELOC (home equity line of credit) interest will still be deductible if the proceeds are used for substantial improvements to the home and the combined total of the first mortgage and HELOC or second mortgage does not exceed the new $750,000 limit on total mortgage indebtedness $1 million limit applies also to binding contracts incurred before December 15, 2017 providing residence is purchased before April 1, 2018 Refinanced existing acquisition debt permitted up to $1 million (grandfathered) Tracing of home equity debt proceeds for Schedule C, E, F or Investment still allowed
Changes to Itemized Deductions Schedule A (continued) Charitable contributions Deductions allowed up to 60% of Adjusted Gross Income (previously 50%) for cash donations to most charities. Five year carryover rules retained 80% deduction for college seating rights eliminated Personal Casualty losses repealed except for declared disasters All miscellaneous deductions subject to 2% of Adjusted Gross Income repealed Investment Advisory Fees Unreimbursed Employee Business Expenses Tax Preparation Fees Tip: Consider prepaying real estate taxes if $10,000 or less every other year to itemize. Also consider coordinating the timing of charitable contributions to itemize.
Enhanced Child Tax Credit Tax Credit 2017 2018 Credit for children $1,000 $2,000 Credit for other family members $0 $500 Phase-out begins (Married Filing Jointly) $110,000 $400,000 Refundable portion of child tax credit $1,000 $1,400
Kiddie Tax Simplification Kiddie tax simplified by effectively applying ordinary and capital gains rate applicable to trusts and estates to the net unearned income of a child Maximum tax rate is 37% on income of $12,500 and higher
Adjustments to Income - Repealed Alimony for divorce agreements executed after December 31, 2018, alimony payments are no longer deductible and the recipient will no longer have taxable income For agreements before December 31, 2018, modifications can be made to conform with new treatment Moving expenses (exclusion for military)
Education Provisions Section 529 Plans The Act modifies Section 529 plans to allow such plans to distribute not more than $10,000 in expenses for tuition incurred during the taxable year in connection with the enrollment or attendance of the designated beneficiary at a public, private or religious elementary or secondary school The limitation is applied on a per student basis, rather than a peraccount basis Discharge of Student Loan Indebtedness Starting in 2018, forgiveness of student loan debt will not be taxable income to the student as a result of the student s death or total disability
Alternative Minimum Tax - Individuals The AMT exemption and phase-out thresholds Joint/surviving spouse Old Law TCJA Exemption $86,200 $109,400 Phase-out threshold Unmarried $164,100 $1,000,000 Exemption $55,400 $70,300 Phase-out threshold $123,100 $500,000 The phase-out remains at 25% of any AMTI in excess of thresholds
Loss Limitation Rules Amends 461 to add a new subsection (l) Active business loss limited to $500,000 Married Filing Jointly or $250,000 for all other taxpayers Applied on taxpayer level (rather than business level) Excess can be carried forward and converted to Net Operating Loss New fourth tier: Basis Limit At-Risk Limit 465 Passive Loss Limit 469 Active Loss Limit 461
Net Operating Losses Net operating losses Limited to 80% taxable income Losses carried forward will no longer be limited to 20 years No carryback allowed after 2017 Exceptions exist in case of casualty or disaster losses and farmers
Individual Taxation Effective Dates Permanent Temporary 2017 2018 2019 2020 2021 2022 2023 2024 2025 + Individual rates/brackets Higher standard deduction Repeal of personal exemption Repeal of Pease limitation Higher child tax credit & non-child dependent credit Higher AMT exemptions/phaseout Higher estate & gift tax exemptions SALT deduction limitation Mortgage interest deduction limitation Elimination of ACA individual penalty Longer holding requirement for carried interest gains Higher charitable giving deduction limit Repeal of deductions for personal casualty losses, tax prep, business expenses & moving expenses Repeal of deduction for alimony payments Lower floor for medical expense deduction
Planning Ideas New seven bracket system provides a slower increase in reaching highest tax bracket Consider prepaying real estate taxes every other year to itemize Coordinate timing of charitable deductions to itemize Marriage penalty eliminated except for highest tax bracket, consider delaying marriage for dual high income earners Due to limitation of SALT deduction, U.S. Treasuries may be a more attractive investment alternative than state muni bonds for residents of states imposing income tax
Estate and Gift Taxes The Act increases the federal estate and gift tax unified credit basic exclusion amount to $10 million (adjusted for inflation from the same 2010 base year), effective for decedents dying and gifts made after 2017 and before 2026 For 2018, the exclusion amount is $11.2 million per individual and $22.4 million per couple The portability rules remain unchanged. These rules allow the unused exclusion from the first spouse death to be transferred to the surviving spouse For years before 2018 and after 2025, the exclusion amount is set at $5 million, (adjusted for inflation from a base year of 2010) $5.6 million for decedents dying and gifts made in 2017
Estate and Gift Taxes Step-up in basis retained at death Higher exclusion and exemption amounts sunset on December 31, 2025
Generation-Skipping Transfer Tax (GST) The Act increases the federal GST exemption amount to $11.2 million per individual (adjusted for inflation from the same 2010 base year), effective for generationskipping transfers made after 2017 and before 2026.
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