Key Provisions of the 2017 Tax Legislation

Legal Alert Key Provisions of the 2017 Tax Legislation January 2018 On December 22, 2017, President Trump signed a comprehensive tax reform bill into law previously known as the Tax Cuts and Jobs Act of 2017 (the "Act"). The Act is the first major overhaul of the federal tax code in 30 years, and includes sweeping individual, corporate, partnership, estate, and international tax reform, impacting individuals and both for-profit and tax-exempt entities. In light of these changes, individuals and entities should consult with tax professionals to reassess their financial plans and organizational structure. This summary provides a high level overview of selected provisions of the Act. Please see below for the provisions that are of greatest significance for individuals, tax-exempt organizations and small business owners. I. Individual Taxpayers Individual Tax Rates The maximum individual tax rate has been decreased from 39.6% for compensation over $426,000 (for single tax payers) and $480,000 (for married tax payers), to 37% for compensation over $500,000 (for single tax payers) and $600,000 (for married tax payers). The Act reduces the marginal income tax rates and also reduces the taxable income level ranges, meaning that lower tax rates will apply at lower thresholds of taxable income. Exemption, Phase-out, and Repeal of the Individual Alternative Minimum Tax The Alternative Minimum Tax Exemption amount for married taxpayers is increased to $109,400 from $84,500 and to $70,300 from $54,300 for all other taxpayers (other than estates and trusts). Pursuant to the Act, the threshold for phase outs will be $1,000,000 for married taxpayers filing jointly and $500,000 for other taxpayers. Individual Standard Deduction/Personal Exemptions The standard deduction for married taxpayers is increased to $24,000 from $12,700, to $18,000 from $9,350 for heads of households, and to $12,000 from $6,350 for single taxpayers and married taxpayers filing separately. Pursuant to the Act, the threshold for phase outs will be $1,000,000 for married taxpayers filing jointly and $500,000 for other taxpayers. Personal exemptions have been repealed for all income levels, whereas the personal exemption was $4,150, subject to phase out for higher incomes. Itemized Deductions/SALT Individual itemized deductions have been substantially curtailed. Under previous law, taxpayers were entitled to deduct the greater of the "standard deduction," or the sum of itemized deductions. Under current law, the standard deduction is $6,350 for single taxpayers and $12,700 for married taxpayers. Under the new law, all miscellaneous deductions that previously were subject to the two percent (2%) floor may no longer be taken as an itemized deduction, such as unreimbursed employee expenses (which was a relatively lengthy list of deductions) and tax preparation fees. The individual deduction for state and local taxes for income, sales and property tax (commonly known as "SALT") is now limited to $10,000 (married and single filers) and $5,000 (married filing separately). This negatively impacts taxpayers in high tax states such as New York, New Jersey and California. State legislatures are expected to mount challenges to this THIS MATERIAL MAY BE CONSIDERED ATTORNEY ADVERTISING UNDER CERTAIN RULES OF PROFESSIONAL CONDUCT. garfunkelwild.com (continued) 2018 Garfunkel, Wild, P.C

GW Legal Alert Page 2 provision, and alternatively, alter local state taxation regimes to restore tax breaks by making local taxes deductible (e.g., by having employers pay the local taxes, which could be deductible to the employer entity, or possibly having taxpayers make charitable contributions to state governments in lieu of taxes). State and Local Tax Deduction (Deduction for Taxes Not Paid or Accrued in a Trade or Business) Under current law, individuals may deduct for state and local taxes for property and income taxes paid. After December 31, 2017, individuals are only allowed to claim deductions for state and local property and sales taxes, as previously stated, up to $10,000 (married and single filers) and $5,000 (marr ied filing separately), or when paid or accrued in the operation of a trade, business, or activity as described in Internal Revenue Code ("IRC") Section 212. Note that the transfer of a personal residence to a business (i.e., limited liability company) wi ll ordinarily not create a profit making incentive sufficient to justify the deduction of such property taxes. Mortgage Interest Cap at $750,000 Under the new law, individuals are generally allowed an itemized deduction for interest on a principal residence and second residence mortgages up to an aggregate $750,000 for debt incurred after December 31, 2017. For debt incurred on or before December 15, 2017, the itemized deduction for mortgage interest paid on a principal residence and second residence will continue to be a combined $1,000,000. Individuals who entered into binding contracts before December 15, 2017 to close on principal residences before January 1, 2018 will be eligible for the itemized deduction for mortgage interest up to $1,000,000 if they purchase the residences before April 1, 2018. Refinancing will not reduce the $1,000,000 threshold in the case of a principal residence. Alimony Payments and Corresponding Inclusion in Gross Income Under the Act, effective for any divorce or separation agreement or instrument consummated after December 31, 2018, alimony will no longer be deductible by the payor spouse, or includible as income by the recipient spouse. Furthermore, any divorce or separation agreement or instrument executed on or before December 31, 2018, and modified after that date are subject to this disallowance if such modification provides that this amendment applies to such amendment. Individual Essential Health Insurance Mandate The Patient Protection and Affordable Care Act originally required that individuals procure individual health care coverage that provides minimum essential coverage. Individuals who elected not to procure such coverage were liable for a tax. For 2017 and 2018, such tax assessed is $695 per year. For subsequent tax years, there is no longer any tax due. Like-Kind Exchanges of Real Property The Act limits the non-recognition of gain in like-kind exchanges only to real property held for productive use or investment and not held primarily for sale. II. Estates, Gifts, and Trusts Increase in Estate, Gift, and Generation-Skipping Transfer Tax Exemption The exemption amount for taxable transfers by gift and at death is doubled by the Act, effective for gifts and estates of decedents made after December 31, 2017 through 2025. The exemption amount, indexed for inflation, doubles to approximately $11.2 million for single filers and $22.4 million for married joint filers. Because this provision sunsets on January 1, 2026, slated to then revert to 2018 original amounts, taxpayers should revisit their estate plan to consider whether lifetime gifting makes sense to take advantage of this temporary high exemption amount and update their wills if they refer to the exemption amount to determine any legacies. A careful analysis of estate plans is warranted to address the various tax issues, including capital gains and tax basis considerations.

GW Legal Alert Page 3 III. Tax-Exempt and Non-Profit Businesses Excise Tax on Executive Compensation of Tax-Exempt Organizations Beginning in 2018, the Act assesses a twenty one percent (21%) excise tax on a tax-exempt organization for any covered employee whose compensation is greater than $1 million and on "excess parachute payments" made to certain highlycompensated employees. The excise tax applies to any organization that is tax-exempt under IRC Section 501(a), farmer organizations, organizations whose income is excluded under IRC Section 115 (e.g., governmental hospitals and state colleges and universities), and political organizations under IRC Section 527. Once "covered," always "covered." A "covered employee" is any employee or former employee if the employee is one of the top five highest-compensated employees for the taxable year or was a covered employee in any year after December 31, 2016. Thus, once an individual is considered a covered employee, the individual will always be considered a covered employee as long as the individual or his/her beneficiary continues to receive compensation from the employer. Compensation defined. Compensation means wages as reported on Form W-2, Box 1 excluding Roth contributions. Deferred compensation is taken into account when taxable pursuant to IRC Section 457(f), namely, when compensation is no longer subject to a "substantial risk of forfeiture." The Conference Report clarifies that "substantial risk of forfeiture" is based on the definition under IRC Section 457(f)(3)(B) which applies to ineligible deferred compensation subject to IRC Section 457(f). Accordingly, the tax imposed by this provision can apply to the value of remuneration that is vested (and any increases in such value or vested remuneration) under this definition, even if it is not yet received. Medical professionals carveout. Practicing doctors, veterinarians and nurses are excluded from the definition of covered employee with respect to medical services, but not administrative services. More guidance is expected from future IRS regulations, but at the very least this requires organizations to allocate and track medical professionals time. For multi-entity tax-exempt systems, the excise tax applies on an entity-by-entity basis. So if two tax-exempt entities within the system each have 5 persons earning in excess of $1 million, all 10 employees will incur the excise tax. The tax is allocated back to each related organization on a pro rata basis. Of note for New York taxpayers, this definition differs from Executive Order 38 which excludes from the definition of "Covered Executives" administrative services, specifically, "clinical and program personnel fulfilling administrative functions that are directly attributable to and comprise Program Services." Tax-Exempt Bonds Provisions in the final Act are less draconian than feared based on earlier drafts of the tax reform bill. Earlier versions of the bill would have been a death knell for private activity bonds (by repealing the exception from the exclusion from gross income for interest paid), eliminating an important source of funding for many nonprofit organizations. That said, the final Act does include a repeal of the exclusion for interest payments received from advanced refunding bonds (bonds issued to refinance an existing bond which is issued more than 90 days before the earliest permitted redemption date of the bond to be refinanced generally a ten year period), effectively eliminating advanced refunding bonds as a source of funding. While this will limit the available avenues for refinancing existing tax-exempt debt where interest rate conditions are favorable, alternative financing structures may exist to accomplish this, and should be explored with your financial and legal advisors. Unrelated business income tax ("UBIT") UBIT is now calculated separately for each business activity, so that losses from one activity cannot offset income from another. This provision differs from for-profit corporate treatment, and may incentivize tax-exempt organizations to combine their UBIT businesses into a subsidiary. Losses from an activity will carry forward and, if appropriate, may offset future income from the activity. Net operating loss carryforwards from years beginning before January 1, 2018, will continue to carry forward and will not be affected by this change. On a positive note, if UBIT is triggered, it will now be taxed at the lower corporate rate of 21 percent instead of the previous higher corporate tax rates in effect.

GW Legal Alert Page 4 Excise Tax on the Net Investment Income of Private Colleges and Universities The Act imposes a one and four tenths percent (1.4%) tax on net investment income of a private college or university. The tax is applicable to institutions that: (1) is not a state college or university; (2) whose aggregate fair market value of assets at end of the previous taxable year (other than those used directly in carrying on tax-exempt purpose) is at least $500,000 per student. Net investment income will be determined under rules similar to those used by private foundations. These thresholds include the investment portfolio of all organizations under common control. This "control" rule affects colleges and universities that have related organizations, such as academic medical centers. The term 'related organization means, with respect to an educational institution, any organization which: (1) controls, or is controlled by, such institution; (2) is cont rolled by one or more persons which also control such institution, or (3) is a supported organization (as defined in IRC Section 509(f)(3)), or an organization described in IRC Section 509(a)(3), during the taxable year with respect to such institution. Charitable Contribution for Athletic Tickets The Act repeals IRC Section 170(l) and eliminates charitable deductions for contributions to obtain the right to purchase tickets to an athletic event at a college or university. IV. Partnerships and Corporations Reduction in Corporate Tax Rate The tax rate for C Corporations is reduced from thirty five percent (35%) to twenty one percent (21%) for tax years after December 31, 2017. Repeal of the Corporate Alternative Minimum Tax The Alternative Minimum Tax is repealed for corporations after December 31, 2017. Treatment of Business Income In order to keep Partnerships and S Corporations, which do not pay tax at the entity level, in parity with C Corporations, the Act provides for a deduction of qualified business income derived from the operation of Partnerships and S Corporations. Individual taxpayers generally may deduct twenty percent (20%) of qualified business income stemming from ownership in a Partnership, S Corporation, or a sole proprietorship. Additionally, individual taxpayers may deduct twenty percent (20%) of qualified dividends from real estate investment trusts, qualified publicly traded partnership income, and qualified cooperative dividends. The deduction comes with numerous caveats and is limited to the greater of: (1) fifty percent (50%) of W-2 wages paid, meaning the deduction cannot exceed fifty percent (50%) of such individual's share of W -2 wages paid by the business, or (2) the sum of twenty five percent (25%) of W -2 wages plus two and one half percent (2½%) of the unadjusted basis (i.e., the original purchase price) of property used in the production of income. For this purpose, qualified business income excludes S Corporation dividends treated as reasonable compensation, guaranteed payments made to partners pursuant to IRC Section 707(c) who are acting outside of his or her capacity as a partner for services, and payments made to partners pursuant to IRC Section 707(a) for services rendered with respect to the trade or business. For "specified service trades or businesses," (i) the twenty percent (20%) deduction applies fully if taxpayer s taxable income is less than $157,500 ($315,000 for joint return); (ii) no deduction is available if taxable income exceeds $207,500 ($415,000 for joint return); and (iii) a partial deduction is available if taxable income is between those two limits. Specified service trades and businesses include medicine, accounting, law, consulting, financial advisors, etc., but excludes engineering and architecture.

GW Legal Alert Page 5 Reduction in Dividends Received Deduction Corporate deductions with respect to dividends received from other taxable domestic corporations are reduced from seventy percent (70%) of the dividends received to fifty percent (50%). For dividends received from a twenty percent (20%) owned corporation, the deduction is also reduced from eighty percent (80%) to sixty five percent (65%). Modification of Rules for Expensing Depreciable Business Assets The Act expands the definition of IRC Section 179 property eligible for depreciation to include various tangible personal properties used for lodging and improvements to nonresidential real property such as heating, ventilation, air-conditioning, and security systems. Additionally, the Act increases the maximum amount a taxpayer can expense under IRC Section 179 to $1,000,000 and the phase-out threshold to $2,500,000. Small Business Accounting Methods Reform and Simplification The Act expands the eligibility of taxpayers to use the cash method of accounting. The cash method of accounting may be used by taxpayers when they satisfy the "gross receipts" test, regardless of whether merchandise was purchased, produced or sold as an income-producing factor. In essence, taxpayers with annual average gross receipts less than $25,000,000 are eligible for a three-prior taxable-year period to use the cash method of accounting after December 31, 2017. Modification of Net Operating Loss Deduction A net operating loss ("NOL") generally means the amount by which an entity's deductions exceed its gross income. NOLs offset taxable income and previously could be utilized in designated prior years (2 years) and future years (20 years). NOLs are now limited to eighty percent (80%) of taxable income for losses arising after December 31, 2017, can be carried forward indefinitely, and are no longer subject to expiration. After the effective date, NOL carryovers attributable to losses are annually increased to compensate for time value of money. Furthermore, the two year and special carryback provisions are repealed except for certain small businesses. Limitation on Deduction by Employers of Fringe Benefits The Act disallows deductions with respect to (1) an activity generally considered to be entertainment, amusement, or recreation; (2) membership dues w ith respect to any club organized for business, pleasure, recreation, or other social purposes; or (3) the use of a facility or portion thereof in connection with the above items. Further, the Act disallows deductions for expenses associated with any qualified transportation fringe to employees of the taxpayer. Deductions for any expenses incurred for providing transportation for employees between their residence and place of employment will also be disallowed, except as necessary for ensuring the safety of employees. This provision is applicable for both for profit and non-profit businesses. Denial of Deduction for Settlements Relating to Sexual Harassment or Sexual Abuse IRC Section 162 has been amended to eliminate a business deduction for payments made in settlement of sexual harassment and sexual abuse claims. Additionally, the legal fees associated with the settlement or payment of such claims is also disallowed. Exclusion for Employment Achievement Awards Previously, deductions for employee achievement awards were subject to a per employee annual limit of $400 for awards that are not related to a qualified plan award and $1,600 for awards that are related to qualified plan awards. The Act disallows the deduction limitation for employee achievement awards, and disallows the exclusion from gross income and wages for employees. The Act also adds a definition for "tangible personal property" that is considered deductible for purposes of employee achievement awards. In this case, "tangible personal property" does not include cash, cash equivalents, gift cards, gift coupons, gift certificates, or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds and other securities.

GW Legal Alert Page 6 Employer Credit for Paid Family and Medical Leave New provision IRC Section 45S allows eligible employers to claim a general business credit equal to twelve and one-half percent (12½%) (as further adjusted by.25% for each percentage point by which the rate of payment exceeds 50%) of wages paid to qualifying employees. Eligible employers can claim this credit during any period which such employees are on family and medical leave if the rate of payment under the program is fifty percent (50%) of the wages normally paid to an employee. Eligible employers are those who have a written policy allowing all qualifying full-time employees not less than two weeks of annual paid family and medical leave. Such eligible employers must also provide less-than-full-time employees a proportionate amount of leave on a pro rata basis. The amount of family leave that may be taken into account for this purpose shall not exceed twelve (12) weeks. A qualified employee is (a) any employee as defined in section 3(e) of the Fair Labor Standards Act of 1938; (b) who has been employed by the employer for one year or more; and (c) had compensation less than 60 percent of the compensation threshold for highly compensated employees in the previous year. Profit Interests in Partnerships The Act attempts to close the profits interest loophole, codified in new IRC Section 1061. A "profits interest" in a partnership is the interest that a new partner receives upon entering a partnership when the partner only contributes services, not property or cash. The receipt of a profits interest for services was treated by the IRS as a non-taxable event. In contrast, a partnership capital interest received for services was includable in a partner's income. The IRS is attempting to close the profits interest loophole by providing for a three-year holding period with respect to any applicable partnership interest held by the taxpayer. Note that IRC Section 83 remains relevant and applies if the partnership interest conveyed is a partnership capital interest. Modification of Definition of Substantial Built-in Loss in the Case of Transfer of Partnership Interest The Act modifies the definition of "substantial built-in loss" for purposes of IRC Section 743 concerning transfers of partnership interests. After the effective date of the Act, a substantial built-in loss exists where the transferee would be allocated a net loss in excess of $250,000 upon a hypothetical liquidation of the partnership's assets. Repeal of Technical Termination of Partnerships Previously, a partnership could be technically terminated for federal tax purposes if, within a 12-month period, there is a sale or exchange of fifty percent (50%) or more of the total interest in partnership capital and profits. The Act repeals the technical termination of partnerships in connection with this sale or exchange requirement. Modification of Treatment of S Corporation Conversions to C Corporations IRC Section 481 provides for the rules in computing taxable income in cases where the taxpayer's income is computed under a different method than the previous year. Under the Act, an IRC Section 481(a) adjustment of eligible terminated S corporations attributable to the revocation of its S corporation election is accounted for ratably during the six (6) taxable year period beginning with the year of change. Eligible terminated S Corporations are any C corporations which: (1) is an S corporation the day before the enactment of the Act; (2) during the two -year period beginning on the date of such enactment revokes its S corporation election under section 1362(a); and (3) all of the owners of which on the date the S corporation election is revoked are the same owners in identical proportions as on the date of enactment. Where money is distributed by an eligible terminated S corporation, the accumulated adjustments account shall be allocated to the distribution and chargeable to accumulated earnings and profits in the same ratio as the amount of such accumulated adjustment account bears to the amount of such accumulated earnings and profits. Treatment of Qualified Equity Grants The existing rules govern the amount and timing of income inclusion by the employee and the timing of the associated compensation deduction by the employer. Where an employee's right to the stock had substantially vested after a transfer, the employee recognized income in an amount equal to the fair market value of the stock in the taxable year of the transfer. However, if a stock had not vested at the time of transfer, the employee could choose to make an IRC Section 83(b) election to recognize the income in the taxable year of the transfer. IRC Section 83(b) elections allow employees to include the amount of compensation capped at the fair market value of the stock as on the date of the transfer. After the effective date of the Act, qualified employees may also elect to defer inclusion of income attributable to

GW Legal Alert Page 7 a qualified stock transfer from the employer to the employee. Elections to defer income inclusion with respect to transfers of qualified stocks must be made no later than thirty (30) days after the first time the employee's right to the stock is substantially vested or transferable, whichever occurs earlier. * * * * * Should you have any questions regarding the subject matter of this summary, please feel free to contact the Garfunkel Wild attorney with whom you regularly work. About Garfunkel Wild, P.C. Garfunkel Wild, P.C. was founded in 1980 with a single purpose in mind: to become a pre-eminent health care law firm attending to the unique business and legal needs of its clients. Since then, the firm has grown to over 70 attorneys devoted to addressing the complex legal, regulatory, business and financial needs of its diverse clients. If you would like to receive Legal Alert mailings from Garfunkel Wild, P.C. electronically in the future, or if you would like to be removed from the mailing list, please contact us at info@garfunkelwild.com. You may also visit the Firm s website at garfunkelwild.com. THIS MATERIAL IS INTENDED AS INFORMATIONAL ONLY AND THE CONTENT SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. READERS SHOULD NOT ACT UPON INFORMATION IN THIS MATERIAL WITHOUT FIRST SEEKING PROFESSIONAL ADVICE