Food and Beverages Under pre-tcja law, food and beverages served on the business premises, including company cafeterias were 100% deductible by the employer. (Sec. 274(n)(2)(B) exception to 50% cut for de minimis fringe food & bev.) 2
New Law on Meals Expenses for food and beverages, and on premises eating facilities, excludable by the employees as a de minimus fringe under sec. 132(e), are 50% deductible through 2025, then become nondeductible. Effective: Amounts incurred or paid after Dec. 31, 2017. 3 (e) DE MINIMIS FRINGE DEFINED For purposes of this section (1) IN GENERAL The term de minimis fringe means any property or service the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer s employees) so small as to make accounting for it unreasonable or administratively impracticable. (2)TREATMENT OF CERTAIN EATING FACILITIES The operation by an employer of any eating facility for employees shall be treated as a de minimis fringe if (A) (B) such facility is located on or near the business premises of the employer, and revenue derived from such facility normally equals or exceeds the direct operating costs of such facility. 4
De Minimis Fringe Benefit Exclusion No Change Examples of de minimis fringe benefits are occasional cocktail parties, group meals, or picnics for employees and their guests; coffee, doughnuts, and soft drinks;. Reg. 1.132-6(e)(2) 5 6
50% deductible by employer for amounts paid or incurred after Dec. 31, 2017 (Sec. 274(n)(1)) 7 Exceptions to 50% Cut for Meals Include (Sec. 274 (n)(2)): Treated as Compensation. ((e)(2)) Reimbursed Expenses. ((e)(3)) Recreational, etc. expenses for Employees. ((e)(4))) Items Available to Public. ((e)(7)) Entertainment sold to customers. ((e)(8)) In income of nonemployees. ((e)(9)) Expense excludable as a de minimis fringe. 8
Exception (100% deductible) in sec. 274(e)(4) and Reg. 1.274-2(f)(2)(v): Any expenditure by a taxpayer for a recreational, social, or similar activity (or for use of a facility in connection therewith), primarily for the benefit of his employees generally, is not subject to the [rule that 50% of meals are nondeductible and 100% of entertainment is nondeductible] 9 Ordinarily, this exception applies to usual employee benefit programs such as expenses of a taxpayer (a) in holding Christmas parties, annual picnics, or summer outings [de minimis fringes], for his employees generally, or (b) of maintaining a swimming pool, baseball diamond, bowling alley, or golf course available to his employees generally.. 10
an expenditure for an activity will not be considered outside of this exception merely because, due to the large number of employees involved, the activity is intended to benefit only a limited number of such employees at one time, provided the activity does not discriminate in favor of officers, shareholders, other owners, or highly compensated employees. 11 In American Business Service Corporation v. Comm r, 93 T.C. 449 (1989), the rental of a 53-foot power boat for employee 1-day recreational cruises was an expense allowed (100%) by section 274(e)(4). 41 rides in 1981 at $1,000/trip. 12
13 50% deductible by employer for amounts paid or incurred after Dec. 31, 2017 14
Regulatory Concession for Reimbursed Food & Bev. Expenses In the case of any expenditure for food, or beverages made by one person in performing services for another person under a reimbursement or other expense allowance arrangement, the [50% deduction limit for food or beverages] apply either to the person who makes the expenditure or to the person who actually bears the expense, but not to both. (Reg. 1.274-2(f)(2)(iv)) 15 Employer Reimbursement of Travel Meals (no change but ) Employee excludes reimbursement as an accountable plan reimbursement (Sec. 62(a)(2)), effectively deducting 100% Employer deducts 50% of meal reimbursement. If unreimbursed, 50% limit applies to employee but no deduction to employee beginning in 2018 because a misc. itemized deduction. 16
If employer treats reimbursement of travel meals as compensation (and subjects the wages to withholding): o Employer deducts 100% (an exception to 50% cut) o Employee treats the expense as a miscellaneous itemized deduction zero deduction in 2018. 17 On premises dinning facility: chef s salary? 50% deductible for amounts paid or incurred after 12/31/2017 Compare Reg. 1.274-2(f)(2)(iii)(C) Example 18
Depreciation? 50% after 12/31/2017 19 50% Depreciation If deductions are disallowed under 1.274-2 with respect to any portion of a facility, such portion shall be treated as an asset which is used for personal, living, and family purposes (and not as an asset used in trade or business). Thus, the basis of such a facility will be adjusted for purposes of computing depreciation deductions and determining gain or loss on the sale of such facility in the same manner as other property (for example, a residence) which is regarded as used partly for business and partly for personal purposes. (Reg. 1.274-7) 20
On Premises Meals are Not Entertainment Any expenditure by a taxpayer for food and beverages (or for use of a facility ) furnished on the taxpayer's business premises primarily for his employees is not subject to the limitations on allowability of deductions provided for in paragraphs (a) through (e) of this section [Entertainment limits]. This exception applies not only to expenditures for food or beverages furnished in a typical company cafeteria or an executive dining room, but also to expenditures with respect to the operation of such facilities.. (Reg. 1.274-2(f)(2)(ii)) 21 After 2025: (o) Meals provided at convenience or employer. No deduction shall be allowed under this chapter for (1) any expense for the operation of a facility described in section 132(e)(2), and any expense for food or beverages, including under section 132(e)(1), associated with such facility, or (2) any expense for meals described in section 119(a). 22
Employee Exclusion 23 New law does not change the employee s ability to exclude food and beverages as a de-minimus fringe benefit (Sec. 132(e) New law, also does not change the employee s eligibility to exclude on premises meals provided by the employer under sec. 119. 24
Section 119(a)(1): Same as prior law. 25 Entertainment
Prior Law Deduction for Entertainment Expenses are deductible (if directly related or associated with entertainment) but generally limited to 50%. Exceptions in Sec. 274(e) (1) (9). 27 New Law on Entertainment Entertainment. Deductions are generally eliminated (0% instead of 50%) for entertainment, amusement or recreation (EAR) and facilities used in connection with EAR. Effective: Amounts incurred or paid after Dec. 31, 2017. 28
No Change in Exceptions (Sec. 274(a)): Food & Bev. on the premises for Eees ((e)(1)) Treated as Compensation. ((e)(2)) Reimbursed Expenses. ((e)(3)) employee perspect. Recreational, etc. expenses for Employees. ((e)(4))) Employee, stockholder, etc., bus. meetings ((e)(5)). Meetings of business leagues, etc. Items Available to Public. ((e)(7)) Entertainment sold to customers. ((e)(8)) In income of nonemployees. ((e)(9)) 29 The term entertainment is defined in Reg. 1.274-2(b)(1)(i) as any activity that is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips. 30
An objective test:.this objective test precludes arguments such as that entertainment means only entertainment of others or that an expenditure for entertainment should be characterized as an expenditure for advertising or public relations. 31 However, in applying this test the taxpayer's trade or business shall be considered. Thus, although attending a theatrical performance would generally be considered entertainment, it would not be so considered in the case of a professional theater critic, attending in his professional capacity. Similarly, if a manufacturer of dresses conducts a fashion show to introduce his products to a group of store buyers, the show would not be generally considered to constitute entertainment. However, if an appliance distributor conducts a fashion show for the [spouses] of his retailers, the fashion show would be generally considered to constitute entertainment. 32
What is directly related entertainment (no longer deductible)? Several tests apply including: entertainment occurring in a clear business setting directly in furtherance of the taxpayer's trade or business. Reg. 1.274-2(c)(4). 33 Examples of directly related entertainment that is no longer deductible: For example, entertainment of business representatives and civic leaders at the opening of a new hotel or theatrical production, where the clear purpose of the taxpayer is to obtain business publicity rather than to create or maintain the goodwill of the recipients of the entertainment, would generally be considered to be in a clear business setting. 34
Also, entertainment which has the principal effect of a price rebate in connection with the sale of the taxpayer's products generally will be considered to have occurred in a clear business setting. Such would be the case, for example, if a taxpayer owning a hotel were to provide occasional free dinners at the hotel for a customer who patronized the hotel. (clearly the meal is entertainment here.) 35 Entertainment Exceptions (not new) 36
Tasting room of a winery? 37 Should meet one or both of the following exceptions: Available to the general public: includes expenditures for distributing samples to the general public. (Reg. 1.274-2(f)(2)(viii)) Sold to customers in a bona fide transaction for an adequate and full consideration in money or money's worth. (Reg. 1.274-2(f)(2)(ix)) 38
Treatment of employer reimbursement of employee expenses of entertaining customers? (i.e, baseball game tickets, etc.)? 39 Regulatory Concession for Reimbursed Entertainment, and Food & Bev. Expenses In the case of any expenditure for entertainment, amusement, recreation, food, or beverages made by one person in performing services for another person under a reimbursement or other expense allowance arrangement, the limitations on deductions in paragraphs (a) through (e) of this section [now zero deduction for entertainment] apply either to the person who makes the expenditure or to the person who actually bears the expense, but not to both. (Reg. 1.274-2(f)(2)(iv)) 40
Employer Reimbursement of Entertainment Costs Employee excludes reimbursement as an accountable plan reimbursement (Sec. 62(a)(2)), effectively deducting 100% (sec. 274 regs. make it deductible) Employer deducts 0% of entertainment reimbursement. If unreimbursed, no deduction to employee beginning in 2018 because a misc. itemized deduction. 41 Deduction Denial for Club Dues (3) DENIAL OF DEDUCTION FOR CLUB DUES Notwithstanding the preceding provisions of this subsection, no deduction shall be allowed under this chapter for amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or other social purpose. Same as Prior Law 42
Club Dues Definition in Regs. Clubs organized for business, pleasure, recreation, or other social purpose include, but are not limited to, country clubs, golf and athletic clubs, airline clubs, hotel clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussion. (Reg. 1.274-2(a)(2)(ii)(a)) 43 Regulatory Dues Exception (100% Deductible): Unless a principal purpose of the organization is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities, business leagues, trade associations, chambers of commerce, boards of trade, real estate boards, professional organizations (such as bar associations and medical associations), and civic or public service organizations will not be treated as clubs organized for business, pleasure, recreation, or other social purpose. (Reg. 1.274-2(a)(2)(iii)(b)). 44
Are business meals entertainment thus zero deduction? 45 46
IRS Pub 463 Page 12 47 Section 274(k) (50% cut applies) (k) Business meals (1) In general No deduction shall be allowed under this chapter for the expense of any food or beverages unless (A) such expense is not lavish or extravagant under the circumstances, and (A) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages 48
Exceptions to 50% Cut in Sec. 274(k)(1): Treated as Compensation. ((e)(2)) Reimbursed Expenses. ((e)(3)) Recreational, etc. expenses for Employees. ((e)(4))) Items Available to Public. ((e)(7)) Entertainment sold to customers. ((e)(8)) In income of nonemployees. ((e)(9)) Sec. 274(k)(2) 49 TAM 9720005 (5/16/1997) distinguishes business meals from entertainment. 50
S Corporation Changes Relief for Converting From S to C 52
If S status is revoked within 2 years of enactment, and the S corp. is eligible then: Cash Distributions after the PTTP are characterized based upon the ratio of AAA/E&P. 53 Eligible if: (1) is an S corporation the day before the enactment; (2) during the two-year period beginning on the date of such enactment revokes its S corporation election under Section 1362(a); (3) all of the owners on the date the S corporation election is revoked are the same owners (and in identical proportions) as the owners on the date of such enactment. 54
Section 481 adjustment for accounting method changes: A 6 tax year period beginning in the year of change. 55 Changes To Electing Small Business Trusts 56
Allows nonresident alien individual to be a current beneficiary of an ESBT. The charitable contribution deduction of an ESBT is not determined by the rules for trusts but rather by the rules applicable to individuals. So percentage limitations and carryforward provisions applicable to individuals apply to the portion of an ESBT holding S corporation stock. 57 Effective Date: The nonresident alien beneficiary provision takes effect on January 1, 2018. The change to the charitable deduction applies to tax years beginning after December 31, 2017. 58
Partnership Changes Carried Interest Rule (New Sec. 1061) 60
Change the LTCG one-year holding period to a three-year holding period for certain capital gains of a taxpayer with respect to applicable partnership interests. LTCG under 3 years becomes STCG. An applicable partnership interest is one transferred to (or held by) a taxpayer in connection with the performance of services. 61 Sec. 1061 (a)(1) In General 62
Does LTCG with respect to such interests refer to LTCGs upon the transfer of the PSP interest or the partner s distributive share of partnership LTCGs? Regulatory guidance is needed for this and other aspects of sec. 1061. 63 (c)(1) Applicable Partnership Interest 64
(c)(2) Applicable Trade or Business 65 (c)(3) Specified Asset real estate held for rental or investment 66
(c)(4) Exceptions 67 The provision is effective for tax years beginning after December 31, 2017. 68
Charitable Contributions and Foreign Taxes are Limited to Outside Basis (Sec. 704(d)) 69 Mandatory 743(b) Adjustment (Deemed 754 Election) 70
Current Law: Mandatory if a substantial built-in loss : total adjusted basis of partnership assets exceed total FMV by >$250,000 71 Example -- 10% PSP Interest (no discount/no debt) $ 70,000 Inheritance (DOD FMV)* - 100,000 Inside Basis = <30,000> Sec. 743(b) Adj. *DOD FMV (10%) Asset Tax Basis 1,000,000 Asset FMV 700,000 A discount increases the downward adjustment 72
New Law: Also mandatory adjustment if a loss of over $250K would be allocated to the transferee partner, if all assets were sold for FMV 73 Sale by Alice to Connie Alice 1/3 O.B. $4 mil. Bart 1/3 O.B. $4 mil. Connie 1/3 O.B. $4 mil. Bldg. FMV $10 mil. Adj. Basis: $5 mil. Bldg. FMV $5 mil. Adj. Basis: $7 mil. ABC Partnership 74
No More Deemed Terminations Under Sec. 708 75 Gain Recognized on Sale by of PSP Interest by Foreign Partner 76
Background 77 Grecian Magnesite Mining (GMM), Industrial & Shipping Co., SA, 149 TC No. 3 8-10 (July 13, 2017) Foreign Corporation's Disposition Of Interest In U.S. Partnership (55 Page Opinion) 78
The new law reverses the impact of this judicial decision for sales after 12/31/2017 79 Redemption of FC by PSP GMM Other Partner s Greek Corporation 12.6% Other Assets Premier -- U.S. LLC/PSP 80
GMM Greek Corporation 12.6% Other Partners Other Assets Premier -- U.S. LLC/PSP U.S. Real Property $10.6 Mil. 81 GMM realized $6.2 million of gain and $2.2 million was attributable to Premier s U.S. real estate. 82
GMM stipulated at trial that the gain attributed to the U.S. Real Property was U.S. ECI (taxable) per section 897(g) 83 Tax Court Holding #1 GMM s gain was foreign source based upon the default rule in section 865 that gain on the sale of personal property is sourced based upon residence of the seller. And not U.S. source under the U.S. Office rule. 84
As a result, the $4 mil. of remaining redemption gain was not taxable by the U.S. unless ECI 85 IRS Position IRS relied upon Rev. Rul. 91-32 which adopted a look-thru approach similar to section 751 but for ECI generating assets rather than hot assets. 86
Tax Court View of Ruling Rev. Rul. 91-32 is not simply an interpretation of the IRS's own ambiguous regulations, and we find that it lacks the power to persuade. Its treatment of the partnership provisions is cursory in the extreme, not even citing section 731 87 Tax Court Holding #2 GMM s proceeds from the redemption of the U.S. LLC/PSP was not effectively connected with a U.S. trade or business. 88
Sequence followed by the Tax Court: section 736(b)(1) leads to section 731, which in turn leads to section 741, but [IRS] evidently thinks such an analysis stops short. 89 Section 741 says that gain on the sale of a PSP interest shall be considered as gain or loss from the sale or exchange of a capital asset. Observation: Same reasoning should protect against SE tax on redemption a U.S. partner. 90
Conference Agreement Gain or loss from the sale or exchange of a partnership interest is effectively connected with a U.S. trade or business to the extent that the transferor would have had effectively connected gain or loss had the partnership sold all of its assets at fair market value as of the date of the sale or exchange. 91 The transferee of a partnership interest to withhold 10 percent of the amount realized on the sale or exchange of a partnership interest 92
The proposal is effective for sales and exchanges after December 31, 2017 93 Estate, Gift, and GSTT
Estate, Gift, and GSST relief by doubling basic exclusion amount (BEA) from $5 mil. to 10 mil. (inflation adjusted after 2011). So $11.2 Mil. BEA in 2018 (instead of $5.6 mil. Married couple, with portability or bypass trust, can shield $22.4 mil. For estates of decedents dying and gifts made between January 1, 2018 and December 31, 2025. 95 No change in ability to step-up (or down) income tax basis at death. No change in current rules for nonresident aliens ($60K exclusion from estate tax and no exemption from gift tax). 96
Treasury regulations will clarify how to address differences between the date of death BEA and the date of gift BEA (per the Conference Agreement). 97 International Tax
DISC s Terminated Current DISCs and IC DISCS in 2018 terminated. NO Change 99 100% Exemption (via DRD) for Foreign-Source Non-Subpart F Dividends (Sec. 245A) ( - $215.5 Bil. over 10 years) 100
C Corporations only 101 Exempt (via 100% DRD) 100% of the foreign-source portion of dividends received by a U.S. corporation from a foreign corporation in which the U.S. corp. owns at least 10%. Most hold foreign stock one year. 102
No exemption if the dividend is deductible by foreign corporation in computing foreign tax ( hybrid dividend). Sec. 245A DRD does not apply to S corporations (Sec. 1363). Effective TYBA Dec. 31, 2017 103 U.S. C Corporation Dividend 100% DRD 10% to 100% Foreign Corp Earning Foreign Source Non-Subpart F Income TYBA 12/31/2017 104
U.S. Corporation Deemed Dividend 10% to 100% Foreign Corp. Subpart F Income 105 U.S. Individual Deemed Dividend 10% to 100% Foreign Corp. Subpart F Income 106
Dividend Max Rate with NIIT 23.8% U.S. Individual U.S. Parent Corporation Dividend 100% DRD Foreign Subsidiary 107 What about a foreign branch? 108
U.S. Parent Corporation Foreign Income taxed at 21% Max. Rate offset by FTC Foreign Branch If foreign rate is lower than 20%, then U.S. tax on the difference, but also possible new deduction for Foreign-derived Intangible Income (FDII) 109 What about a U.S. pass-thru? 110
U.S. Sole-Prop., Ptr., S shareholder Foreign Source Income Not Eligible for 20% deduction but FTC is available Foreign Branch 111 U.S. Individual Dividend (no DRD) No Indirect FTC 10% to 100% Foreign Corp Earning Foreign Source Non-Subpart F Income 112
Deduction For Foreign-derived Intangible Income (FDII) New Sec. 250 (-64.4 billion) 113 C Corporations only (not S or individuals) 114
A U.S. C corporation is allowed a deduction equal to 37.5 percent (i.e., a preferential tax rate of 12.5 percent) on its foreign-derived intangible income (FDII) earned in the United States. 115 Deemed intangible income is the excess of: (a) the corporation s gross income (excluding certain items) less allocable deductions ( deduction eligible income ) over (b) 10% of its adjusted basis (computed under ADS) in depreciable tangible property used in a trade or business. 116
Deduction eligible income is income derived in connection with property sold, leased, or licensed to, and services provided to foreign persons. Ultimate use of product sold must be foreign. 117 U.S. Parent Corporation Foreign Income taxed at 21% Max. Rate but FDII deduction Foreign Branch New Deduction for Foreign-derived Intangible Income (FDII) 118
U.S. Sole-Prop., Ptr., S shareholder No FDII Deduction Foreign Branch 119 Transition Tax On Deferred Foreign Income (Sec. 965) (+ $184.8 Bil.) 120
About two-thirds of the hit comes from the repatriation tax, while writing down U.S. deferred tax assets also contributed, the company said in a filing on Friday. 121 C Corporations and S Corps. and Individuals 122
One-time tax on a US shareholder owning at least 10% of a foreign corporation on the shareholder's pro rata share of the foreign corporation's post-1986 tax-deferred earnings. Rate is 15.5% (if accumulated earnings held in cash or cash equivalents) or 8% (if accumulated in illiquid assets). 123 The tax can be paid over 8 years and a portion of FTCs are available. Shareholder with 10%-or-greater stake in a corporation with post- 1986 accumulated deficits can offset accumulated earnings. 124
U.S. Parent Corporation Deemed Dividend (Via 10% to 100% Subpart F) Foreign Corp Post-1986 Deferred Accumulated Earnings in last tax year beginning before 1/1/2018 125 U.S. Individual Deemed Dividend (no undirect FTC) Foreign Corp. Subpart F Income 10% to 100% 126
S Corporations S Corporations are subject to the transition tax (but denied the benefit of the 100% DRD Deduction on CFC dividends) Should an S corp. owing 10% of a foreign corporation convert to C? 127 Special Rule for S Corporations Any shareholder of an S corporation can elect to defer the transition net tax liability until a triggering event occurs S status change, liquidation, termination, transfer of shares 128
U.S. S corporation Deemed Dividend 10% to 100% Foreign Corp Post-1986 Deferred Accumulated Earnings in last tax year beginning before 1/1/2018 129 Current Year Inclusion of Global Intangible Income (GILTI) income (+ $135.5 billion) In Effect: a new category of Subpart F income. 130
A U.S. shareholder of CFC must currently include in income (via deemed dividend) its global intangible low-taxed income (GILTI) in a manner similar to how it includes subpart F income. 131 (Includes Individuals) CFC income in excess of a 10% return on tangible property (less allocable interest) is deemed to be from intangibles and is subject to a minimum tax. 132
Only 80% of the foreign taxes paid on the income would be allowed as a foreign tax credit. Excluded from GILTI: effectively connected income, subpart F income, foreign oil and gas income, or certain related party payments. 133 Applies to C Corps, S Corps and Individuals BUT, only C corporations get the deduction for foreign-derived intangible income earned in the U.S. (discussed above) Incentive to convert S to C. 134
U.S. Individual Deemed GILTI Dividend 10% to 100% CFC 135 Inventory Sourcing 136
Sales of Inventory are sourced solely based upon production (outbound and inbound). TYBA 2017 137