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2 Adam Williams Principal 734.302.4179 adam.williams@rehmann.com Anthony Licavoli Tax Manager 248.463.4598 anthony.licavoli@rehmann.com
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5 What is your impression about the speed at which Congress was able to pass tax legislation? 1. Too slow been waiting on this for years 2. Just right - seems like they spent enough time but didn t over analyze 3. Too fast why didn t they take some time to think 4. I m just happy they got something done POLLING QUESTION #1
6 November 16, 2017 House of Representatives passed, H.R. 1, the Tax Cuts and Jobs Act. The bill was approved by a vote of 227 to 205. S M T W T F S December 2, 2017 Senate passed its version of tax legislation (the Tax Cuts and Jobs Act ) by a vote of 51 to 49. 1 2 3 4 5 6 7 8 9 10 11 12 December 15, 2017 The tax conference committee reached agreement reconciling the two bills. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 December 22, 2017 President Trump signed into law. 27 28 29 39 31
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8 Topic Prior Law Tax Cuts & Jobs Act Rates Seven Brackets: 10% 15% 25% 28% 33% 35% 39.6% Seven Brackets: 10% 12% 22% 24% 32% 35% 37% Brackets Joint Individual Joint Individual 10% $0 - $18,650 10% $0 - $9,325 10% $0 - $19,050 10% $0 - $9,525 15% $18,650 - $75,900 15% $9,325 - $37,950 12% $19,051 - $77,400 12% $9,526 - $38,700 25% $75,900 - $153,100 25% $37,950 - $91,900 22% $77,401 - $165,000 22% $38,701 - $82,500 28% $153,100 - $233,350 28% $91,900 - $191,650 24% $165,001 - $315,000 24% $82,501 - $157,500 33% $233,350 - $416,700 33% $191,650 - $416,700 32% $315,001 - $400,000 32% $157,501 - $200,000 35% $416,700 - $470,700 35% $416,700 - $,418,400 35% $400,001 - $600,000 35% $200,001 - $500,000 39.6% Over $470,700 39.6% Over $418,400 37% Over $600,000 37% Over $500,000
9 Topic Prior Law Tax Cuts & Jobs Act Investment Income Interest & Short-term Capital Gains: Taxed at ordinary income tax rates plus 3.8% net investment income tax Interest & Short-term Capital Gains: Maintain current tax structure plus 3.8% net investment income tax Qualified Dividends & Long-term Capital Gains: Taxed at 15% 20% plus 3.8% net investment income tax Qualified Dividends & Long-term Capital Gains: Maintain current rates and 3.8% net investment income tax Kiddie Tax on Unearned Income Unearned income taxed at the higher of the parent s or child s tax rate Unearned income taxed at the trusts and estates tax rates Estates & Trusts Top tax rate: 39.6% Top tax rate: 37%
10 Topic Prior Law Tax Cuts & Jobs Act Standard Deduction $6,350 Single $12,700 MFJ $12,000 Single $24,000 MFJ Personal Exemption: $4,050 Eliminate Personal Exemptions Prior Law Tax Cuts & Jobs Act Single Individual Family of Four Single Individual Family of Four Standard Deduction Personal Exemptions Total Deductions $6,350 $12,700 $12,000 $24,000 $4,050 $16,200 0 0 $10,400 $28,900 $12,000 $24,000
11 Topic Prior Law Tax Cuts & Jobs Act Child Tax Credit Child Credit: $1,000 Phaseout: $75K Single/ $110K MFJ Child Credit: $2,000 ($1,400 refundable) Phaseout: $200K Single/ $400K MFJ Dependent Care Credit N/A Non-child Dependent Credit: $500 nonrefundable Alimony Payments Education Credits Above-the-line deduction for payor and included in income for payee American Opportunity Tax Credit Hope Scholarship Credit Lifetime Learning Credit No longer deductible for payor or included in income of the payee for agreements entered into after 2018 No change from Prior Law. Provisions in original House or Senate bills not included in committee agreement 529 Plans Tax free distributions for qualified higher education expenses such as tuition, books, supplies and room and board ACA Individual Mandate Individuals are required to have minimal health care coverage or they are subject to a tax known as individual shared responsibility payment Qualified higher education expanded to include public, private, and religious elementary and secondary schools (up to $10K per year per student) Individual shared responsibility payment reduced to zero effectively removing the individual healthcare mandate
12 Topic Prior Law Tax Cuts & Jobs Act Excess Business Loss Limitation Passive losses generally only deductible against passive income, but nonpassive owners can generally deduct business losses against all other sources of income $250K Single/$500K MFJ loss limitation on aggregate trade or business passthrough income/loss items Excess losses would be added to NOL carry-forward Partnerships/S-corps: determined on the partner or shareholder level Example Prior Law Tax Cuts & Jobs Act Facts Married taxpayer Wages: $800,000 Active Partnership Loss: $600,000 Sufficient basis to take entire loss Income: $800,000 Loss: $600,000 Taxable Income: $200,000 Income: $800,000 Limited Loss: $500,000 Taxable Income: $300,000 Loss Carryforward: $100,000
13 Topic State and Local Taxes Mortgage Interest Itemized Deductions Retained with $10,000 combined deduction limitation for income, sales and property taxes Retained with additional limitations: Acquisition indebtedness limitation reduced to $750K on debt incurred after 12/15/2017 Applies to principal and second homes Existing or new home equity indebtedness interest no longer deductible unless debt proceeds used to substantially improve qualified residence Medical Expense Retained with temporary reduction in AGI floor to 7.5% Charitable Contributions Personal Casualty Loss Miscellaneous Deductions 2% floor Itemized Deduction Limitation (Pease Limitation) Retained Retained for losses incurred in federally-declared disaster areas only Eliminated Eliminated
14 Married filing Joint Prior Law Tax Cuts & Jobs Act Income $75,000 $75,000 Itemized Deductions n/a n/a Standard Deduction $12,700 $24,000 Personal Exemptions $16,200 n/a Taxable Income $46,100 $51,000 Marginal Tax Rate 15% 12% Child Tax Credit $2,000 $4,000 Tax $3,962 $1,739
15 Married filing Joint Prior Law Tax Cuts & Jobs Act Income $175,000 $175,000 Itemized Deductions* $31,135 $30,000 Standard Deduction n/a n/a Personal Exemptions $16,200 n/a Taxable Income $127,675 $145,000 Marginal Tax Rate 25% 22% Child Tax Credit/Dependent Credit n/a $4,000 Tax $23,226 $19,779 *Itemized Deductions Summary: $6,125 State Tax $5,000 Property Tax $5,000 Charitable Contributions $15,000 Mortgage Interest
16 Pass-Through Deduction Formula 1. The Lessor of: A. the combined qualified business income (deduction) of the taxpayer, the Lessor of (for each separate trade or business): I. 20% of the taxpayer s qualified business income or II. The Greater of: a. 50% of the W-2 wages with respect to the business, or b. 25% of the W-2 wages with respect to the business plus 2.5% of the unadjusted basis of all qualified property B. Or 20% of the excess of taxable income over the sum of any net capital gain 2. Plus the Lessor of: A. 20% of qualified REIT dividends, cooperative dividends, or PTP income B. Or taxable income less net capital gain
17 Topic Passthrough Deduction Qualified Business Income Limitations Pass-Through Income Deduction 20% of qualified business income (QBI) plus 20% of qualified REIT dividends and publicly traded partnership income for the tax year Applies to non-corporate taxpayers, including trust and estates, who have QBI from partnerships, S-corps and sole proprietorships Deduction is a reduction to taxable income not AGI Includes income, gain, deduction and loss items effectively connected with a US trade or business Trade or business not defined: Is a triple net lease a trade or business? Does not include investment type income, reasonable compensation paid to the taxpayer and guaranteed payments made to a partner for services to the business Wage & asset limitations: - 50% of allocable share of businesses W-2 wages - 25% of allocable share of businesses W-2 wages plus 2.5% of unadjusted basis of all tangible depreciable property used in the business Deduction does not apply to service businesses except engineering and architecture Taxpayers whose taxable income does not exceed $157K Single/$315K MFJ (phased-out) are not subject to either the W-2 or the service business limitation
18 Pass-Through Income Deduction: Specified Service Businesses Entities not eligible for deduction: Includes law firms, accounting firms, medical practices, and any other firms involved in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading, or dealing in securities partnership interests, or commodities. Architecture and engineering firms were specifically carved out and are still eligible for the deduction (maybe) Also defined as any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. How broad will the IRS interpret this? Exception to the exception: Taxpayers whose total taxable income does not exceed $157K Single/$315K MFJ are not subject to the specified services business limitation
19 Which of the provisions do you anticipate will have the greatest impact for you personally? 1. Lower individual tax rates 2. Pass-through deduction 3. State and local tax itemized deduction limitation 4. Excess business loss limitation POLLING QUESTION #2
20 Topic Prior Law Tax Cuts & Jobs Act Estate and Gift: Unified Credit Base Unified Credit: $5,000,000 Indexed for Inflation 2017 $5,490,000 Base Unified Credit: $10,000,000 Indexed for Inflation - 2018 $11,200,000 Estate and Gift: Estate/GST Top Rate: 40% Stepped-Up Basis Top Rate: 40% Stepped-Up Basis Estate and Gift: Gift Top Rate: 40% $14,000 Annual Gift Exclusion Top Rate: 40% $14,000 Annual Gift Exclusion
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22 Topic Prior Law Tax Cuts & Jobs Act Individual AMT Enacted Exemption Amounts: $54,300 Single/$84,500 MFJ Exemption Phase-out Threshold: $120,700 Single/$160,900 MFJ Enacted Exemption Amounts: $70,300 Single/$109,400 MFJ Exemption Phase-out Threshold: $500,000 Single/$1,000,000 MFJ Corporate AMT Enacted Repealed Prior year minimum credit available for future years on a phased-in basis
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24 Topic Prior Law Tax Cuts & Jobs Act Corporate Rates Top Rate: 35% Personal Service Corporations: 35% Flat Rate: 21% effective 2018 Personal Service Corporations: 21% effective 2018 C Corporation Example Double Taxation Earned income 35% Dividend Top Rate 23.8% Combined Rate 50.47% (35% + (65% * 23.8%) Double Taxation Earned income 21% Dividend Top Rate 23.8% Combined Rate 39.8% (21% + (79% * 23.8%) S Corporation Partnership Sole Proprietor Example Single Level of Tax Individual Top Rate - 39.6% Single Level of Tax Individual Top Rate 37% After Pass Through Deduction 29.6% (37% - 20% Deduction = 29.6%)
25 Topic Prior Law Tax Cuts & Jobs Act Bonus Depreciation 50% phased down to 0% by 2020 Original use of property required 100% through 2022 phased down 20% per year for through 2026 Expanded to taxpayer s first use of property required (used property) Effective for property acquired and placed in service after Sept 27, 2017 Property purchased before Sept 28, 2017 and placed at a later date is subject to current bonus rules
26 Bonus Depreciation Rate Schedule Placed-in Service Year Depreciation Deduction % Prior Law New law 2017 (Pre September 27) 50% 50% 2017 (Post September 27) 50% 100% 2018 40% 100% 2019 30% 100% 2020-2022 0% 100% 2023 0% 80% 2024 0% 60% 2025 0% 40% 2026 0% 20%
27 Topic Prior Law Tax Cuts & Jobs Act Section 179 Expensing Amortization of Research and Development $500K Limitation $2M Phase-out for property placed in-service Specified R&D and software development expenditures: Election to expense as incurred $1M Limitation $2.5M Phase-out for property placed inservice Qualified Improvements now qualify Roofs HVAC Systems Fire/Alarm/Security Systems Inflation-Adjusted after 2018 Permanent increase Specified R&D and software development expenditures: Required to be capitalized and amortized over a 5 years (15 years if attributable to research conducted outside of the United States) Effective for amounts incurred after 2021
28 Topic Prior Law Tax Cuts & Jobs Act Interest Expense Deduction Generally 100% deductible in year paid or accrued unless paid to a related party who paid no US tax Deduction limited for net interest expense in excess of 30% of adjusted business income Deduction limited for net interest expense in excess of 30% of adjusted business income Adjusted taxable income: Taxable income without regard to business interest expense, business interest income, net operating losses, and depreciation, amortization, and depletion (After 2021 would no longer back out depreciation, amortization, and depletion) Limitation determined on the filer level (partnership not the partner) Disallowed interest is carried forward indefinitely Small Business Exception: The business interest limitation does not apply to taxpayer s that average less than $25,000,000 in gross receipts over a three year period
29 Topic Prior Law Tax Cuts & Jobs Act Meals - General Meals Convenience of Employer 50% limitation 50% limitation Generally 100% deductible 50% limitation After 2025 non-deductible Entertainment Expenses Generally 50% of entertainment expenses with a valid business purpose are nondeductible. All entertainment expenses are nondeductible regardless of business purpose
30 Topic Prior Law Tax Cuts & Jobs Act Entertaining Clients Meals: 50% deductible Entertainment: 50% deductible Meals: 50% deductible Entertainment: Non-deductible Employee Travel Meals 50% deductible 50% limitation Meals Provided for Convenience of Employer Generally 100% deductible 2018-2025: 50% limitation 2025: Non-deductible Office Holiday Parties 100% deductible 100% deductible Based on these changes, we suggest a minimum of the following general ledger accounts: 1. 100% nondeductible entertainment 2. 50% deductible meals 3. 100% deductible meals for office holiday parties, etc.
31 Which of the provisions do you anticipate will have the greatest impact on your business? 1. Corporate rate reductions to 21% 2. 100% expensing 3. Interest expense limitation 4. N/A POLLING QUESTION #3
32 Topic Prior Law Tax Cuts & Jobs Act NOL Deductions Carryforward: 20 years Carryback: 2 years Up to 100% of taxable income (unless in AMT) Domestic Producers Activity Deduction Deduction up to 9% of qualified production activities income Carried Interest 1-year holding period requirement for certain interests received for services to be taxed as a long-term capital gain. If not met, treated as short-term capital gain. Carryforward: Indefinitely Carryback: Disallowed Up to 80% of taxable income Repealed 3-year holding period requirement for certain interests received for services to be taxed as a long-term capital gain. If not met, treated as short-term capital gain. Corporate Dividends Received Deduction Like-Kind Exchanges Over 80% Ownership: 100% deduction Over 20% Ownership: 80% deduction 20% Ownership: 70% deduction Real property and tangible personal property eligible Over 80% Ownership: 100% deduction Over 20% Ownership: 65% deduction 20% Ownership: 50% deduction Only real property eligible
33 Topic Small Business Accounting Methods Cash Method of Accounting Under the Act, the $5 million threshold would be increased to $25 million Accounting for Inventories Under the Act, businesses with average gross receipts of $25 million or less would be permitted to use the cash method of accounting even if the business has inventories UNICAP Under the Act, businesses with average gross receipts of $25 million or less would be fully exempt from the uniform capitalization (UNICAP) rules Accounting for Long-term Contracts Under the Act, the $10 million average gross receipts exception to the percentage-of-completion method would be increased to $25 million for eligible contracts entered in after 2017
34 Topic Employer-Paid Family and Medical Leave Research and Development Credit Work Opportunity Tax Credit Employer-Provided Child Care Credit Low Income Housing Credit New Markets Credit Energy Investment Tax Credit Enhanced Oil Recovery Credit Marginal Well Production Credit Rehabilitation Credit Employer Social Security Tax Credit on Tips Production Tax Credit Orphan Drug Credit Business Credits Enacted Retained Retained Retained Retained Retained Retained Retained Retained Modified Modified Modified Modified
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36 Topic Prior Law Tax Cuts & Jobs Act Territorial System Worldwide tax system with deferral on income kept overseas for corporations Territorial (sort of) tax system with 100% deduction for foreign-source dividends paid to 10% US corporate shareholders Foreign tax credit or deduction allowed to mitigate double-taxation of foreign earnings No credit or deduction allowed for taxes paid or accrued on exempt foreign dividends Transition Tax N/A Deemed Repatriation of accumulated foreign profits (deferred foreign income) Cash or cash equivalents: 15.5% rate Other assets: 8% rate Election to pay tax over 8 years Election for S-corporations shareholders to defer tax until triggering event
37 Topic Prior Law Tax Cuts & Jobs Act Global Intangible Low-taxed Income (GILTI) N/A US shareholders of controlled foreign corporations subject to taxation on share of global intangible lowtaxed income GILTI = the excess (if any) of net CFC tested income over the shareholder s net deemed tangible income return. 50% offsetting deduction available for corporations