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Tax Reform: Impact on Corporate Tax Planning and Reporting THURSDAY, FEBRUARY 15, 2018 Brian T. Lovett, CPA, JD, Partner WithumSmith+Brown, East Brunswick, N.J. blovett@withum.com Darren J. Mills, Esq., CPA, ChFC, CLU Mills Elder Law, Red Bank, N.J. djmills1267@gmail.com
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5 2018 Tax Law Changes Tax Reform: Impact on Corporate Tax Planning
2018 Tax Law Changes 6 Effective Dates President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. Unless otherwise noted, the changes are effective for tax years beginning after December 31, 2017. Most of the corporate changes are permanent, but most individual tax changes expire December 31, 2025. Expect additional complications at the state and local level because many states automatically adopt federal changes and others may adopt them in part or in whole at some future date.
2018 Tax Law Changes 7 Corporate Tax Rates Old law: Graduated rates that resulted in a: 34% corporate rate for income over $335,000; and 35% corporate rate for income over $10 million New law: Flat rate of 21% Personal service corporations, which were taxed at a flat rate of 35% under prior law, are now taxed at 21% Withholding rates for dispositions of US real property interests are reduced from 35% to the highest corporate tax rate (currently 21%)
2018 Tax Law Changes 8 Dividend Received Deduction Old law: corporations were entitled to a 70% dividends received deduction (80% in the case of 20% or more owned corporations) Maximum rate on dividends qualifying for the 70% dividends received deduction was 10.5% (7% for 20% or more owned corporations) New law: Dividends received deduction is reduced as follows: The 70% dividends received deduction is reduced to 50%; and The 80% dividends received deduction is reduced to 65%. Under the new law, the maximum rate on dividends qualifying for the 50% dividends received deduction remains 10.5% (7.35% for 20% or more owned corporations)
2018 Tax Law Changes 9 Alternative Minimum Tax Alternative minimum tax ( AMT ) on corporations is repealed AMT is imposed only on taxpayers other than corporations (Code Sec. 55(a)) Corporate minimum tax credit ( MTC ) a taxpayer who paid the AMT in an earlier year may be entitled to carryforward a minimum tax credit against regular tax, credit was nonrefundable Under the new law, the MTC may offset regular tax liability for any tax year. Also, the MTC is refundable for any tax year beginning after 2017 and before 2022. The full amount of the corporation s MTC will be used in tax years beginning before 2022
2018 Tax Law Changes 10 Corporate Tax Rates A Case Study Under new law, should a business be a C corporation or an S corporation? Consider the following: H and W own a service business, but materially participate Business earns $2,000,000 in income annually before shareholder wages or distributions Corporation will pay $500,000 in total wages to H and W, remaining income of $1,500,000 will be distributed
2018 Tax Law Changes 11 Corporate Tax Rates A Case Study Current income C Corp S Corp Savings/(Cost) Assumed taxable income 1,500,000 1,500,000 State tax deduction (135,000) (134,550) Net federal taxable income 1,365,000 1,365,450 Federal corporate rate/maximum individual rate 34.00% 39.60% Total federal income 464,100 540,718 State tax rate 9.00% 8.97% State tax amount 135,000 134,550 Total federal and state tax $ 599,100 $ 675,268 $ 76,168 - Effective federal and state tax rate on current income 39.94% 45.02% Dividend/Distribution on Current Income Net cash available for distribution 900,900 824,732 Actual dividend/distribution amount 900,900 824,732 Federal qualified dividend rate plus NIIT 23.80% 0.00% Federal income tax on dividend 214,414 - State tax rate 8.97% 0.00% State tax amount 80,811 - Total federal and state tax on dividend 295,225 - $ (295,225) - Effective federal and state rate on dividend 32.77% 0.00% - Overall effective tax rate on current income and dividend 59.62% 45.02% Net C corporation savings/(cost) $ 894,325 $ 675,268 $ (219,057)
2018 Tax Law Changes 12 Corporate Tax Rates A Case Study Under current law, C corporation would have an annual tax cost/disadvantage of about $220,000 What would happen under the Tax Cuts and Jobs Act? Remember, as a service business with taxable income in excess of $415,000, H and W would not be eligible for any deduction under Sec. 199A
2018 Tax Law Changes 13 Corporate Tax Rates A Case Study Current income C Corp S Corp Savings/(Cost) Assumed taxable income 1,500,000 1,500,000 State tax deduction (135,000) (10,000) Net federal taxable income 1,365,000 1,490,000 Federal corporate rate/maximum individual rate 21.00% 37.00% Total federal income 286,650 551,300 State tax rate 9.00% 8.97% State tax amount 135,000 134,550 Total federal and state tax $ 421,650 $ 685,850 $ 264,200 - Effective federal and state tax rate on current income 28.11% 45.72% Dividend/Distribution on Current Income Net cash available for distribution 1,078,350 814,150 Actual dividend/distribution amount 1,078,350 814,150 Federal qualified dividend rate plus NIIT 23.80% 0.00% Federal income tax on dividend 256,647 - State tax rate 8.97% 0.00% State tax amount 96,728 - Total federal and state tax on dividend 353,375 - $ (353,375) - Effective federal and state rate on dividend 32.77% 0.00% - Overall effective tax rate on current income and dividend 51.67% 45.72% Net C corporation savings/(cost) $ 775,025 $ 685,850 $ (89,175)
2018 Tax Law Changes 14 Corporate Tax Rates A Case Study Under current law, the tax cost/disadvantage of operating in a C corporation goes down to about $90,000 But, what if H and W don t need to distribute all their earnings and leave half of the net cash in the business?
2018 Tax Law Changes 15 Corporate Tax Rates A Case Study Current income C Corp S Corp Savings/(Cost) Assumed taxable income 1,500,000 1,500,000 State tax deduction (135,000) (10,000) Net federal taxable income 1,365,000 1,490,000 Federal corporate rate/maximum individual rate 21.00% 37.00% Total federal income 286,650 551,300 State tax rate 9.00% 8.97% State tax amount 135,000 134,550 Total federal and state tax $ 421,650 $ 685,850 $ 264,200 - Effective federal and state tax rate on current income 28.11% 45.72% Dividend/Distribution on Current Income Net cash available for distribution 1,078,350 814,150 Actual dividend/distribution amount 539,175 407,075 Federal qualified dividend rate plus NIIT 23.80% 0.00% Federal income tax on dividend 128,324 - State tax rate 8.97% 0.00% State tax amount 48,364 - Total federal and state tax on dividend 176,688 - $ (176,688) - Effective federal and state rate on dividend 16.39% 0.00% - Overall effective tax rate on current income and dividend 39.89% 45.72% Net C corporation savings/(cost) $ 598,338 $ 685,850 $ 87,512
2018 Tax Law Changes 16 Corporate Tax Rates A Case Study As shown, now it is more tax efficient to operate their business as a C corporation Also, remember that ONLY C corporations are eligible for the benefits of Sec. 1202 Gain from sale of qualified small business stock is eligible for 100% exclusion (subject to limitations) Must be a C corporation Must have assets less than $50M CAN NOT be a service business (accounting, health, law, consulting, etc.) Must acquire stock at original issuance
2018 Tax Law Changes 17 Revoking an S Election For the first year, the PTTP, any distributions as a C corporation will NOT be taxed as a dividend to the extent of the Accumulated Adjustments Account. (They will thus be tax-free to the extent of stock basis). For the second year after revocation, the distributions will be allocated pro-rata between the E&P of the corporation (and thus taxed as dividends) and the AAA of the former S corporation (and thus be tax-free to the extent of stock basis). In addition, any Section 481 adjustment resulting from revocation (for example, a required switch from the cash method to the accrual method) will be taken in over 6 years rather than 4 years. Two year period beginning Dec. 22, 2017 In order to use these rules, the same shareholders must own the former S corporation in the same percentages two years after the revocation. Question does this only apply to revocation of S corporation status? What about termination due to disqualification? Unclear
Tax Reform: Impact on Corporate Tax Planning and Reporting Darren J Mills, Esq., CPA, ChFC, CLU
Agenda Hybrid Territorial System Background Participation Exemption Mandatory Repatriation Other Items of Interest Base Erosion & Profit Shifting Background BEPS Action #2 BEPS Action #4 Other Items of Interest 20
Hybrid Territorial System 21
Background Prior to TCJA, the US was the only G8 nation that didn t have a territorial system Most members of the OECD have a hybrid territorial system Over the past 30 years, the vast majority of America s largest trading partners have moved to territorial tax systems. Tax Foundation Lock-out effect: the tax inefficient effect of repatriating earnings. U.S. multinationals are currently holding $2.6 trillion in foreign earnings overseas. Joseph Lawler, Untaxed offshore earnings of US companies rises to $2.6 trillion, Washington Examiner, September 29, 2016. http://www.washingtonexaminer.com/untaxed-offshore-earningsof-us-companies-rises-to-26-trillion/article/2603249 22
Background cont d NL exempts 100% of the dividends and capital gains from Dutch taxation. The underlying principle for the Dutch participation exemption is the aspiration to avoid double taxation when profits of a subsidiary are distributed to the parent company. The exemption system is chose to achieve a level playing field for Dutch enterprises operating abroad Dutch Participation Exemption in 2012, Fisconti tax consulting. AJCA added IRC 965. Joint Committee on Taxation: The Committee observes that the residual US tax imposed on the repatriation of foreign earnings can serve as a disincentive to repatriate these earnings. The Committee believes that the temporary reduction in the U.S. tax on repatriated dividends will stimulate the U.S. domestic economy by triggering the repatriation of foreign earnings that otherwise would have remained abroad. The Committee emphasizes that this is a temporary stimulus measure. 23
Background cont d Inversion transactions IRC 367 Preservation of US right to tax income Notice 94-46: Issued after the inversion of Helen of Troy Corporation. The [IRS] and Treasury Department are concerned that [inversion] transactions, or related transactions undertaken pursuant to the restructurings, present opportunities for the avoidance of tax. IRC 7874 (2004) Attempt to disincentive companies to expatriate. US was ceding its tax base to other countries whose tax regimes provided lower tax rates and/or a hybrid territorial system. Notice 2014-52 [Treasury Department] and the [IRS] are concerned that certain recent inversion transactions are inconsistent with the purposes of section 7874 and 367 of the Internal Revenue Code. 24
Hybrid Territorial System What is a territorial system? Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax. Inland Revenue Department, Government of Hong Kong According to PwC Old 2017 US Combined Rate = 38.9% New 2018 US Combined Rate = 25.75% 2017 non-us OECD Average Combined Rate = 23.75% 25
Hybrid Territorial System US Participation Exemption ( PE ) IRC 245A Domestic C Corporation U.S. shareholder (IRC 951(b)) Specified 10% foreign corporation ( SFC ) Holding period requirement 100% DRD Dividend received to be interpreted broadly SFC A CFC or FC that has at least one (1) US shareholder IRC 951(b) revised to include any US person that owns at least 10% of the vote or value of a FC 26
Hybrid Territorial System cont d Holding Period Requirements Three (3) Must hold stock for more than 365 days during the 731-day period beginning on the date that is 365-days before the date on which the dividend is paid FC must be a specified 10%-owned FC at all times during the holding period TP must be a US shareholder with respect to such specified 10%-owned FC at all times during the period DRD foreign source dividend Equal to the same proportion of the dividend as the FC s undistributed foreign earnings bears to its total undistributed earning Undistributed earnings = All undistributed earnings (ECI + dividends from 80% domestic corporations) 27
Hybrid Territorial System cont d Exclusions REITs/RICs PFICs Hybrid Dividends FTCs Hybrid Dividend Example XYZ, Inc. is the sole shareholder of CFC 1, a Luxembourg company. CFC 1 issues contingent participating equity certificates ( CPECs ). In Luxembourg, the CPECs are treated as debt so that the distributions are tax deductible. For US tax purposes the CPECs are treated as equity; therefore, the CPECs are a hybrid instrument. XYZ is not entitled to a DRD with respect to the CPECs. 28
Hybrid Territorial System cont d IRC 1248 Domestic corporation Gain from the sale or exchange of stock of a FC >1year holding period 1248 amount, as well as IRC 964(e), eligible for DRD Non-1248 amount (i.e., capital gain) is not eligible for DRD C.f, Netherlands or Ireland 29
Mandatory Repatriation ( MR ) Subpart F of a SFC (deferred foreign income corporation ( DFIC )) is increased by the greater of its post-86 deferred foreign income determined as of November 2, 2017 and December 31, 2017 (the measurement date ). For purposes of section 965, a DFIC is, with respect to any United States shareholder, any specified foreign corporation of such United States shareholder that has accumulated post-1986 deferred foreign income (as of a measurement date) greater than zero. Emphasis added. Notice 2018-07 Excludes PTI & ECI that is actually taxed in the US Aggregate foreign cash position is taxed at 15.5%; remaining at 8% 30
MR cont d Can reduce pro-rata share of SFC s post-86 E&P by allocable portion of the US S/H s pro-rata share of the SFC s post-86 deficits - FTC permitted w/r/t the taxable portion of the MR Disallowed to the extent attributable to the portion of the MR excluded from taxable income due to 245A; not allowed as a deduction 55.7% disallowance attributable to the cash portion of the inclusion taxed at 15.5% 77.14% disallowance attributable to the non-cash portion of the inclusion taxed at 8% NOL election (IRC 965(n)) allows a TP to elect out of a NOL deduction Election is made no later than the extended due date for the return 31
Repeal of ATB Exception TCJA repeals IRC 367(a)(3) IRC 367, in general, turns-off certain non-recognition provisions such as IRC 351. An exception to recognition under IRC 367(a)(1) was subsection (a)(3), gain was not recognized with respect to a transfer of property to a FC for use in its active trade or business conducted outside the US. 32
Base Erosion & Profit Shifting 33
Background Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the inclusive framework, over 100 countries and jurisdictions are collaborating to implement the BEPS measures and tackle BEPS. OECD Alphabet s Google moved 15.9bn euros ( 14.1bn) to a Bermuda shell company in 2016, saving at least 3bn in taxes that year, regulatory filings in the Netherlands show. Google uses two structures, known as a "Double Irish" and a "Dutch Sandwich," to shield the majority of its international profits from taxation. The setup involves shifting revenue from one Irish subsidiary to a Dutch company with no employees, and then on to a Bermuda mailbox owned by another Ireland-registered company. Kahn, Google s 'Dutch Sandwich' shielded 16bn from tax, Independent (January 2018) 34
BEPS Action #2 BEPS - NEUTRALISING THE EFFECTS OF HYBRID MISMATCH ARRANGEMENTS Action 2 develops model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effects of hybrid instruments and entities (e.g. double non-taxation, double deduction, long-term deferral). 35
Hybrid Transactions/Entities No deduction shall be allowed under this chapter for any disqualified related party amount paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity. IRC 267A(a) Hybrid transaction payments are treated as interest or royalties for federal tax purposes but are not so treated for local country purposes. Hybrid entity fiscally transparent for federal tax purposes (i.e., DE or PNS) but not for local country purposes or vice versa Disqualified related party amount any interest or royalty paid/accrued to a related party where either 1. there is no corresponding income inclusion to the related party under local law; or 2. such related party is entitled to a deduction with respect to that payment under local law. 36
BEPS Action #4 BEPS - LIMITING BASE EROSION INVOLVING INTEREST DEDUCTIONS AND OTHER FINANCIAL PAYMENTS Action 4 outlines a common approach based on best practices for preventing base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income. 37
Earnings Stripping Capitalization debt v. equity IRC 385 Benefits Tax deduction Loan repayment tax free Corporate formalities TCJA modifies 163(j) so that it no longer applies to tax-exempt entities 38
GILTI A backstop to further curtail the potential to further erode the US tax base because shifted profits could be permanently exempt from US tax due to PE CFC earnings that are deemed non-routine are subject to some level of US tax Does GILTI curtail the theme of making the US a more competitive tax system? 39
GILTI cont d New IRC 951A Included in income whether distributed or not GILTI is the excess of a US S/H CFC s net income over a routine or ordinary return. Need to understand definitions in the statute More specifically, the excess (if any) of - (A) such shareholders net CFC tested income for such taxable year, over (B) such shareholders net deemed tangible income return for such taxable year. Tested income Net deemed tangible income return Qualified business asset investment 40
GILTI cont d 41
GILTI cont d GILTI included in US shareholder s income. Corporate S/H entitled to a 50% deduction for 2018 2025; decreased to 37.5% beginning 2026 Deduction limited to taxable income; as such a NOL would be used against the gross GILTI first before the GILTI deduction. Any unused GILTI deduction is lost. 42
Expanded Definition of Intangibles TCJA expands the definition of intangible property under IRC 936(h)(3)(B) to include goodwill, going concern value, workforce in place and any other item the value or potential value of which is not attributable to tangible property or the services of an individual Makes it more difficult for a US person to transfer intangible property outside the US without a toll charge Authority of the Comm r to require certain valuation methods for both IRC 367(d) and IRC 482. 43
45 2018 Tax Law Changes Tax Reform: Impact on Corporate Tax Planning
46 2018 Tax Law Changes Other Business Provisions
2018 Tax Law Changes 47 Section 15 Straddle Rule The corporate rate change in Sec. 11 is not excluded from the Sec. 15 straddle rule This will complicate the calculation for fiscal year corporate taxpayers Must calculate two tentative tax rates for the straddle year Apply each tax rate to the income for the full year Multiply each tentative tax by the proportion of the year to which each rate applies and add the results
2018 Tax Law Changes 48 Section 15 Straddle Rule Example Assume a corporation has a 7/31 fiscal year end and $1,000,000 of taxable income Under the old law, corporate rate would be 34% $1,000,000 *.34 = $340,000 Under new law, corporate rate is 21% $1,000,000 *.21 = $210,000 Next, multiply by the portion of the year $340,000 * 5/12 = $142,800 $210,000 * 7/12 = $121,800 Add the result, which will be the tax for the straddle year $142,800 + $121,800 = $264,600
2018 Tax Law Changes 49 Net Operating Loss Limitation Under prior law, net operating losses ( NOL ) were permitted to offset income in future years without any limitation based on taxable income New law limits the NOL deduction to 80% of taxable income, specifically, a deduction will be allowed for a tax year equal to the lesser of: The aggregate NOL carryovers to that year, plus NOL carryback to that year; or 80% of taxable income, computed without regard to the NOL deduction Effective for losses arising in tax year beginning after 12/31/17
2018 Tax Law Changes 50 Net Operating Loss Limitation Example Corporation A generates a $150,000 NOL in year one, has no other NOL carryovers and shows taxable income of $100,000 in year two. How is NOL utilized? 2017/2018 2018/2019 NOL generated in Year one 150,000 150,000 Taxable income in year two, without regard to NOL deduction 100,000 100,000 Losses generated in tax years beginning before 12/31/2017 150,000 N/A Losses generated in tax years beginning after 12/31/2017 NOL deduction: Lesser of: - Aggregate NOL carryovers to tax year N/A 150,000-80% of taxable income without regard to NOL deduction N/A 80,000 NOL deduction available in year two (100,000) (80,000) Taxable income $ - $ 20,000
2018 Tax Law Changes 51 Net Operating Loss Carryovers Under prior law, NOLs could be carried back two years and forward twenty years New law repeals the carryback provisions This hurts profitable businesses that suffer a down year as it takes away the ability to apply for a quick carryback refund New law also removes the 20 limits on NOL carryovers, allows that to be carried forward indefinitely Applies to losses generated in tax years ending after 12/31/2017, so losses generated in years ending on or before 12/31/2017 would be subject to the old 2 years back/20 years forward rule
2018 Tax Law Changes 52 Business Interest Limitation Repeals the old earnings stripping rules for interest paid to related persons who pay no US tax on the corresponding income Now applies to all business and limits net interest expense deductions Interest may only be deducted the extent of 30% of adjusted taxable income. Doesn t include investment interest expense. Small taxpayer exception - doesn t apply to businesses with average receipts of less than $25M (Uses the test in Sec. 448(c), so must aggregate receipts) Excess interest expense is carried forward indefinitely.
2018 Tax Law Changes 53 Business Interest Limitation Exceptions to this limitation On election, limitation does not apply to electing real property trades or businesses. These businesses then have to use the ADS depreciation method for nonresidential, residential, and qualified improvement property. Includes real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business Doesn t apply to car dealerships with floor-plan interest.
2018 Tax Law Changes 54 Business Interest Limitation Adjusted taxable income is taxable income BEFORE: Any income/deduction/gain/loss not properly allocable to a trade or business, Any business interest expense or income Any net operating loss deduction (Code Sec. 172) Any depreciation, amortization, or depletion deductions (for tax years beginning before Jan. 1, 2022). Any qualified business income deduction (Code Sec. 199A)
2018 Tax Law Changes 55 Business Interest Limitation The deduction allowed to a business subject to this limitation can not exceed the sum of: The taxpayer s business interest income for the tax year; 30% of the taxpayer s adjusted taxable income for the tea year; plus The taxpayer s floor plan financing interest (vehicle dealers) for the tax year As mentioned, disallowed interest carries forward and will be treated as business interest paid or accrued in the following tax year. May be carried forward indefinitely.
2018 Tax Law Changes 56 Business Interest Limitation Example 1 Corporation X is a calendar year corporation. In 2018, assume $100,000 in adjusted taxable income, $2,500 of business interest income and $18,000 in business interest expense. Deduction can not exceed $32,500: Business interest income - $2,500 30% of adjusted taxable income - $30,000 Floor plan interest - $0 Since business interest expense is less than limitation, all deductible
2018 Tax Law Changes 57 Business Interest Limitation Example 2 Corporation X is a calendar year corporation. In 2018, assume $10,000 in adjusted taxable income, $2,500 of business interest income and $18,000 in business interest expense. Deduction can not exceed $5,500: Business interest income - $2,500 30% of adjusted taxable income - $3,000 Floor plan interest - $0 Corporation X can deduct $5,500 of it s business interest expense and would carry $12,500 forward to 2019
2018 Tax Law Changes 58 Business Interest Limitation Example 3 In 2019, assume Corporation X shows $125,000 in adjusted taxable income, $2,500 of business interest income and $30,000 in current year business interest expense. Also, the $12,500 carryover of disallowed interest from 2018, making total business interest $42,500 Deduction can not exceed $40,000: Business interest income - $2,500 30% of adjusted taxable income - $37,500 Floor plan interest - $0 Corporation X can deduct $40,000 of it s business interest expense and would carry $2,500 forward to 2020
2018 Tax Law Changes Entertainment expenses disallowed, Meals limited 59 For year after 2017, generally, no deduction is allowed for: (1) an activity considered to be entertainment, amusement, or recreation, (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes, or (3) a facility used in connection with any of the above items. The deduction for business meals equal to 50% of the food and beverage expenses associated with operating a trade or business is retained. Meals provided for the convenience of the employer (on the premises) that are nontaxable to the employee as a de minimis fringe benefit are now only 50% deductible. Exceptions under 274(e) are unchanged (i.e. 100% deductible Holiday Party, etc.)
Tax Accounting-Cash Method; Inventory Capitalization, etc 60 Cash Method of Accounting for Corporations or Partnerships w/corp Partners Allowed Small Business Exception to UNICAP Rules Accounting for Inventories Percentage-of-completion for long term contracts Old Law: Gross Receipts <$5 million Resellers if Gross receipts <$10 million Not available for manufacturers Cash method if gross receipts <$10 million Not required if gross receipts <$10 million New Law: Gross Receipts <$25 million All companies with gross receipts <$25 million. Cash method if gross receipts <$25 million Not required if gross receipts <$25 million Accrual basis taxpayers may defer inclusion of advance payments in income to the end of year after year of receipt if so deferred for financial reporting Codified Rev. Proc. 2004-34 in new Section 461(c).
2018 Tax Law Changes 61 New Paid Family and Medical Leave Tax Credit 45S An eligible employer is allowed the credit equal to the applicable percentage of the wages paid to qualifying employees during any period in which those employees are on family and medical leave Credit is between 12.5% and 25%, as long as the amount paid to employees on leave is at least 50% of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019. The amount of family and medical leave taken into account for any employee for any tax year can't exceed 12 weeks. Eligible employer: any employer who has in place a written policy allowing (1) qualifying full - time employees at least two weeks of paid family and medical leave a year, and (2) less than full-time employees a pro-rated amount of leave. Qualifying employees: any employee who 1) has been employed by that employer for 1 year or more, and 2) was paid less than $72,000 in 2018. Paid leave cannot be vacation leave, personal leave, or medical or sick leave, as defined in FMLA section 102(d)(2). A taxpayer can't take both a credit and a deduction for amounts for which the paid family and medical leave credit is claimed.
2018 Tax Law Changes 62 On the horizon Research and development expenditures after 12/31/2021 must be amortized over 5 years Meals provided by employer for consumption on premises (currently a de minimis fringe benefit) will not be deductible after for amounts paid or incurred after 12/31/2025
63 2018 Tax Law Changes Depreciation Changes
64 Section 179 Deduction Expensing Limitation Phase-out Threshold Effective Date Old Law: $500,000 indexed for inflation ($510,000 in 2017) SUVs eligible up to $25,000 $2,000,000 indexed for inflation ($2,030,000 in 2017), dollar for dollar phase-out as property placed in service exceeds threshold Tax years beginning before 1/1/2018 New Law: $1,000,000 for tax years beginning after 12/31/17, indexed for inflation in tax years beginning in 2019, SUV s eligible for $25,000 deduction (inflation indexed) $2,500,000 for tax years beginning after 12/31/17, indexed for inflation in tax years beginning in 2019, dollar for dollar phase-out as property placed in service exceeds threshold Tax years beginning on or after 1/1/2018
65 Section 179 Deduction Eligible Property Old Law: Tangible personal property that is purchased for use in the active conduct of a trade or business, and includes off-theshelf computer software and qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property). New Law: Tangible personal property that is purchased for use in the active conduct of a trade or business, and includes off-the-shelf computer software and qualified real property. 179(f) For purposes of this section, the term qualified real property means (1) any qualified improvement property described in section 168(e)(6)*, and (2) any of the following improvements to nonresidential real property placed in service after the date such property was first placed in service: (A) Roofs. (B) Heating, ventilation, and air-conditioning property. (C) Fire protection and alarm systems. (D) Security systems. *168(e)(6) QIP: improvement to interior portion of nonresidential real property after it was placed in service. Does not include enlargement of building, elevator or escalator, internal structural framework of the building
66 Bonus Depreciation Section 168(k) Old Law: Eligible Assets Tangible property with regular depreciable life of 20 years or less. Also Includes: Computer software Water utility property Qualified improvement property (QIP) Not available for ADS assets New Law: Tangible property with regular depreciable life of 20 years or less. Also Includes: Computer software Water utility property Automatically applies to QIP which now is intended to have 15 year life Qualified film, TV, theater production Not available for ADS assets Percentage Deduction New or Used Property 50% bonus in 2017 40% bonus in 2018 30% bonus in 2019 No bonus in 2020 & forward Only available for new assets, no used property 100% bonus: 9/28/2017 12/31/2022 80% bonus in 2023 60% bonus in 2024 40% bonus in 2025 20% bonus in 2026 No bonus in 2027 & forward Removed requirement that asset be new, must be first use by taxpayer
2018 Tax Law Changes 67 Bonus Depreciation Depreciation of listed property: For passenger autos with a weight of less than 6,000 lbs $10,000 for year 1 $16,000 for year 2 $9,600 for year 3 $5,760 for all other years until fully depreciated If you claim 100% expensing, you can take an additional $8,000 for year 1 on listed property. If you purchase an SUV (weight > 6,000 lbs) the luxury auto rules don t apply. You can deduct the FULL COST in year 1 under the bonus depreciation rules.
68 2018 Tax Law Changes Opportunities Available
2018 Tax Law Changes 69 Planning Opportunities? Stuff investment income into C corporation Set up a C corporation to shield labor income Reduce salaries/wages and increase corporate profits Avoid the second layer of tax Hold until death Hold shares in a Roth retirement account Wait until retirement/lower income years to take distributions