www.pwc.com Vineyard Economic Symposium David Pardes, PwC Tax Partner
Agenda I. Business tax reform Domestic II. Individual tax reform III. Business tax reform International 2
Business tax reform Domestic 3
Corporate tax rate reduction What s the new law? The 2017 tax reform reconciliation act (the Act), also known as the Tax Cuts and Jobs Act : - Permanently reduces the corporate income tax rate from the current 35% to a flat 21% for tax years beginning after 2017 To the degree current-law Section 15 applies, fiscal-year taxpayers would have a blended rate for the tax year that includes the effective date of a rate change - Provides no special rate for personal service corporations - Reduces the 80% dividends received deduction (DRD) to 65% and the 70% DRD to 50% 4
Corporate tax rate reduction (continued) What does this mean for taxpayers? The reduction in the federal corporate tax rate will present an opportunity to generate significant permanent tax rate benefits and cash tax savings What actions should taxpayers consider taking and when? Accelerate deductions into higher tax rate year Defer revenue into lower tax rate year Accounting method changes - Automatics: due with extended tax return - Non-automatics: due by last day of tax year Business planning, e.g., board resolution to fix bonuses, RSUs, pension contributions, etc. Contractual planning, e.g., prepay liabilities at year-end 5
Corporate tax rate reduction (continued) Calendar-year taxpayers: File favorable 2017 automatic Form 3115s by extended due date of tax return File unfavorable 2018 Form 3115s to obtain audit protection for prior impermissible methods GHRS: pension contributions in 2018 deductible in 2017 Fiscal-year taxpayers considerations: Ending in 2017 = 35% rate year Ending in 2018 = blended rate between 21% and 35% Ending in 2019 = 21% rate Same planning as calendars All opportunities and options still available for years ending in January 2018 and beyond 6
Entity selection We have an opportunity to rethink entity selection criteria and revisit the business issues of our clients: Many tax reform provisions could impact business decisions, including entity selection. A comprehensive approach to the analysis of the impact of tax reform is required. The impact of each item needs to be considered individually and in combination with other items. There will be no easy answer, and one size will not fit all. 7
Scenario analysis C vs S-Corporation 0% Dividends S-Corp C - Corp Taxable EBITDA 11,350,000 11,350,000 Interest Deduction (2,000,000) (2,000,000) Depreciation Deduction (4,000,000) (4,000,000) Taxable Income 5,350,000 5,350,000 Entity Federal Tax Rate 0% 21% Entity Federal Tax - 1,123,500 Federal TI 5,350,000 5,350,000 CA Adjustments 2,000,000 2,000,000 CA TI 7,350,000 7,350,000 Apportionment 100% 100% CA Apportioned Income 7,350,000 7,350,000 Entity Level CA Tax Rate 1.50% 8.84% CA Entity Level Tax 110,250 649,740 Federal Benefit - (136,445) Entity Level State Tax NoFB 110,250 513,295 Total Entity Level Tax 110,250 1,636,795 Shareholder Federal Income 5,239,750 IRC 199A Deduction (20%) (1,047,950) Adjusted Federal TI 4,191,800 Federal Income Tax Rate 37% Federal Tax 1,550,966 CA Taxable Income 7,350,000 CA Tax Rate 13.3% CA Tax 977,550 Federal Benefit - 977,550 Dividend or Cap Gain Percentage 0% Amount of E&P Distributed - Federal LTCG / Qual Div Rate 23.8% Fed Tax on Sale or Dividend - Amount of E&P Distributed - CA Tax Rate 13.3% CA Tax - Federal Benefit - - Total Shareholder Tax 2,528,516 - Total Cash Tax 2,638,766 1,636,795 20% Dividends S-Corp C - Corp Taxable EBITDA 11,350,000 11,350,000 Interest Deduction (2,000,000) (2,000,000) Depreciation Deduction (4,000,000) (4,000,000) Taxable Income 5,350,000 5,350,000 Entity Federal Tax Rate 0% 21% Entity Federal Tax - 1,123,500 Federal TI 5,350,000 5,350,000 CA Adjustments 2,000,000 2,000,000 CA TI 7,350,000 7,350,000 Apportionment 100% 100% CA Apportioned Income 7,350,000 7,350,000 Entity Level CA Tax Rate 1.50% 8.84% CA Entity Level Tax 110,250 649,740 Federal Benefit - (136,445) Entity Level State Tax NoFB 110,250 513,295 Total Entity Level Tax 110,250 1,636,795 Shareholder Federal Income 5,239,750 IRC 199A Deduction (20%) (1,047,950) Adjusted Federal TI 4,191,800 Federal Income Tax Rate 37% Federal Tax 1,550,966 CA Taxable Income 7,350,000 CA Tax Rate 13.3% CA Tax 977,550 Federal Benefit - 977,550 Dividend or Cap Gain Percentage 20% Amount of E&P Distributed 742,641 Federal LTCG / Qual Div Rate 23.8% Fed Tax on Sale or Dividend 176,749 Amount of E&P Distributed 742,641 CA Tax Rate 13.3% CA Tax 98,771 Federal Benefit - 98,771 Total Shareholder Tax 2,528,516 275,520 Total Cash Tax 2,638,766 1,912,314 100% Dividends S-Corp C - Corp Taxable EBITDA 11,350,000 11,350,000 Interest Deduction (2,000,000) (2,000,000) Depreciation Deduction (4,000,000) (4,000,000) Taxable Income 5,350,000 5,350,000 Entity Federal Tax Rate 0% 21% Entity Federal Tax - 1,123,500 Federal TI 5,350,000 5,350,000 CA Adjustments 2,000,000 2,000,000 CA TI 7,350,000 7,350,000 Apportionment 100% 100% CA Apportioned Income 7,350,000 7,350,000 Entity Level CA Tax Rate 1.50% 8.84% CA Entity Level Tax 110,250 649,740 Federal Benefit - (136,445) Entity Level State Tax NoFB 110,250 513,295 Total Entity Level Tax 110,250 1,636,795 Shareholder Federal Income 5,239,750 IRC 199A Deduction (20%) (1,047,950) Adjusted Federal TI 4,191,800 Federal Income Tax Rate 37% Federal Tax 1,550,966 CA Taxable Income 7,350,000 CA Tax Rate 13.3% CA Tax 977,550 Federal Benefit - 977,550 Dividend or Cap Gain Percentage 100% Amount of E&P Distributed 3,713,205 Federal LTCG / Qual Div Rate 23.8% Fed Tax on Sale or Dividend 883,743 Amount of E&P Distributed 3,713,205 CA Tax Rate 13.3% CA Tax 493,856 Federal Benefit - 493,856 Total Shareholder Tax 2,528,516 1,377,599 Total Cash Tax 2,638,766 3,014,394 8
Interest deduction limitation What s the new law? The Act: - Limits deduction for business interest expense to sum of business interest income plus 30% of the adjusted taxable income (ATI) of a taxpayer for the tax year Adjusted taxable income is defined similar to EBITDA for tax years beginning after 2017 and before 2022, and similar to EBIT (computed without regard to any deduction for depreciation, amortization, or depletion, and without regard to Section 199) for tax years beginning after 2021 - Allows disallowed interest deductions to be carried forward indefinitely - Exempts taxpayers with average gross receipts for the three-year period ending with the prior taxable year that do not exceed $25 million - Provides that limitation applies to both related-party and unrelated-party debt -- does not apply to investment interest income - Excludes certain trades and businesses (Farming, Real Property) Farmers: Making Election is irrevocable and would required use of ADS on assets with 10-Year+ lives (Vines, Land Improvements) Significant cost: ADS use would result in disallowance of bonus depreciation 9
Interest deduction limitation Pass-through entities At the partnership level: In the case of a partnership and S corporation, Section 163(j) is applied at the entity level At the pass-through level: Any deduction for business interest is taken into account in determining the nonseparately stated income or loss of the entity - The pass-through determines its ATI - The pass-through may deduct business interest in an amount up to 30% of its ATI against non-separately stated income - Disallowed interest expense is retained at the S corporation while partnerships allocate disallowed interest expense to its partners 10
Full expensing What s the new law? The Act: - Allows businesses to write off (or expense ) immediately cost of qualified property (not including structures) acquired and placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024 for certain qualified property with longer production period) - Phases down full expensing by 20% annually in case of property placed in service after December 31, 2022, and before January 1, 2027 (after December 31, 2023, and before January 1, 2028 for certain qualified property with longer production period) - Excludes property used by regulated public utility, real property trade or business electing out of interest deduction limitation, and trade or business that has had floor plan financing - Eliminates requirement that original use of qualified property commence with taxpayer 11
Full expensing (continued) What s the new law? (continued) The Act: - Follows present-law phase-down of bonus depreciation to property acquired before September 27, 2017, and placed in service after September 27, 2017 - Repeals taxpayer s election to claim prior year AMT credits in lieu of bonus depreciation (effective for tax years beginning after 2017) - Allows taxpayers to elect 50% in lieu of 100% expensing for qualified property placed in service during first tax year ending after September 27, 2017 - Bonus Depreciation on Vines Elect in year planted or wait for vines to be placed in service 3 years later? 12
Full expensing (continued) Matters to consider Corporate tax departments may have difficulty managing fixed assets and tracking associated depreciation and gain/loss Full expensing may require manual changes to spreadsheets, updates to software, or new systems States may decouple from federal income tax treatment of full expensing, requiring that differences be tracked separately If clients are already struggling to manage and track fixed assets, full expensing will make doing so more difficult Failure to monitor and properly account for legislative and regulatory changes associated with full expensing may result in fixed asset depreciation and gain/loss inaccuracies, potentially subjecting companies to interest and penalties upon tax authority examination State & Local Tax Conformity Not all states adopt bonus depreciation 13
IRC Section 179 The tax reform bill: Increases the Section 179 dollar limitation to $1 million from $500,000 Increases the cost of property subject to the phase-out to $2.5 million from $2 million for property placed in service in tax years beginning after 2017. The new dollar limitations would be indexed for inflation for tax years beginning after 2018. Bonus depreciation vs IRC Section 179 When eligible, IRC Section 179 is more beneficial since depreciation is capitalized into inventory while IRC Section 179 expense is specifically precluded from being capitalized into inventory 14
Net Operating Losses (NOLs) What s the new law? The Act: - Limits NOL deduction 80% of taxable income for NOLs arising in taxable years beginning after December 31, 2017 - Generally repeals carryback of all NOLs arising in a tax year ending after 2017 - Permits indefinite carryforward for all such NOLs to be carried forward indefinitely - Farmers are permitted a two-year carryback Example Tax Year 2017 2018 2019 2020 2021 Taxable Income -100* -200 ** 200 100 100 2017 NOL -100-80 -60 2018 NOL -60 Taxable Income after NOL -100-200 40 20 40 * May be carried back 2 years and carried forward 20; may offset 100% of taxable income. ** May be carried forward indefinitely; may offset 80% of taxable income. 15
20% deduction for domestic qualified business income What s the new law? The Act provides that: - Noncorporate taxpayers generally may deduct 20% of combined qualified business income from a partnership, S corporation, or sole proprietorship - In the case of a taxpayer who has qualified business income from a partnership or S corporation, the amount of the deduction is capped at the greater of 50% of the W-2 wages paid with respect to the qualified trade or business, or The sum of 25% of the W-2 wages with respect to the qualified trade or business plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property - W-2 wage limit phases in for taxpayers with taxable income less than $157,500 (single)/$315,000 (married filing jointly) Limit is fully phased in at $207,500/$415,000 respectively 16
20% deduction for domestic qualified business income (continued) What s the new law? (continued) Qualified business income - Effectively connected with a trade or business within the US Qualified income does not include: - Income from specified services trades or businesses (for taxpayers with income above the income thresholds) - Individuals share of S Corp reasonable compensation and partnership guaranteed payment income - Investment-type income (e.g., capital gains and dividends) REIT dividends, cooperative dividends, and qualified publicly traded partnership income are qualified income not subject to the wage limitations and are limited to 20% of such income 17
20% deduction for domestic qualified business income (continued) Example: 20% deduction Partnership allocates $100 of qualified business income to Partner A Partner A s allocable share of Partnership s W-2 wages is $50 A entitled to deduct $20 (50% of Partner A s allocable share of Partnership s W-2 wages is $25, which is greater than deduction) Section 199A deduction reduces effective rate of taxpayer taxed at top marginal rate to 29.6% ((100-20) x 37%) The deduction does not reduce net investment income (NII) The deduction is a partner/shareholder level deduction and does not decrease basis 18
20% deduction for domestic qualified business income (continued) Loss Carryover - Losses from a previous year are netted with current year income when determining qualified business income Applicability to electing small business trust (ESBT) - Congressional intent was to allow ESBT to participate in the benefit under Section 199A - Tax reform legislation leaves it open to interpretation on the applicability to ESBTs - Various groups have requested clarification Tiered Structures - Given the wage limitation, clients should consider restructuring to align employee bases with business income eligible for the passthrough deduction. State Tax Conformity - State impact will depend on whether the state automatically conforms or subsequently adopts new Section 199A, including the various limitations on wages and specified service businesses - For individuals, conformity issues arise since many states adopt adjusted gross income as their starting point for determining the tax base 19
Pass-through business losses The Act: Business losses in excess of business income plus $500,000 (married filing a joint return) not deductible for the current tax year. - Losses would be carried forward and treated as part of the taxpayer s section 172 NOL carryforward in subsequent taxable years. Limitation is applied after the application of the passive loss rules. Business losses covered by this provision include pass-through losses as well as sole proprietor and farm losses. In the case of partnership and S corporation losses, the limitation is applied at the partner or shareholder level. Effective for taxable years beginning after December 31, 2017 and before January 1, 2026. 20
Deductions for entertainment expenses and meals What s the new law? The Act: - Eliminates the deduction for entertainment, amusement, or recreation expenses, membership dues for clubs, and facilities in connection with these items 100% deduction still remains for internal social events such as holiday parties and team building activities - Caps at 50% the deductions for employee meals that are provided for the convenience of the employer and for employer-operated eating facilities that are de minimis fringe benefits, but only for tax years 2018 through 2025 Now includes meals for staff meetings, overtime meals, management meetings, internal training events (Under prior law, 21
Miscellaneous tax reform matters IRC Section 263A - $25M Gross Receipts Exception - Capitalized Interest not required in 2018 and 2019 IRC Section 1031 Real Property only for 1031 exchanges IRC Section 199A and Cooperatives Excise Taxes Relief for Wine Industry 22
Individual tax reform 23
Individual provisions Provision Bill details Comments Individual tax rates/brackets 7 tax brackets with rates as follows: Rate Single Married 10% $0 - $9.525 $0 - $19,050 12% $9,526 - $38,700 $19,051 - $77,400 22% $38,701 82,500 $77,401 - $165,000 24% $82,501 157,500 $165,001 - $315,000 32% $157,501 - $200,000 $315,001 - $400,000 35% $200,001 - $500,000 $400,001 - $600,000 37% over $500,000 over $600,000 Kiddie tax is changed unearned income is taxed at Estate and Trust levels 37% bracket starts at $12,500. All individual rates are effective January 1, 2018 and expire after 2025. AMT Pass Through Deduction Increases exemption amount to $109,400 (MFJ) and $70,300(single). 20% deduction for qualified business income from a partnership, S corporation, or sole proprietorship and certain other income. Phase-out of exemption amount begins at $1m (M) and $500k (S). See section for Treatment of Business Income for Individuals, Trusts and Estates Pass Through Income Provisions 24
Individual provisions (continued) Provision Bill details Comments Child Tax Credit Estate/Gift/ GST Tax Indexing Combat Pay Extension Extension of Time Limit for Contesting IRS Levy $2,000 per qualified child with $1,400 being refundable and $500 non-refundable credit for qualifying dependents other than qualifying children. Doubles exemption amount from $5 million to $10 million. Many but not all of the indexed limits would now be indexed using Chained-CPI-U, which generally leads to slightly slower cost of living adjustments each year. Extends combat zone to include the Sinai Peninsula of Egypt. The period to bring an action for wrongful levy and returning the monetary proceeds from the sale of property wrongfully levied upon is extended from 9 months to 2 years $1,400 of the child credit is refundable. Phase out for AGI in excess of $400,000 MFJ and $110,000 (single). Effective for estates of decedents dying and gifts made after 12/31/17 and before 1/1/26. With indexing the current exemption is $11.2 Possibility for clawback at death if law is not changed. Effective 6/9/15 1/1/26. 25
Individual provisions (continued) Provision Bill details Comments 529 Plans Individual may receive a maximum of $10,000 in distributions from all accounts tax free. ABLE Accounts ABLE Accounts Exception to the 10% Penalty on Withdrawals Allows for amounts from a 529 plan to be rolled over into an ABLE account without penalty. Temporarily increases the amount a designated beneficiary may contribute above the base amount by the lesser of (a) the Federal poverty line or (b) the individual s compensation for the taxable year. Exception to 10% early withdrawal penalty for distributions up to $100,000 made between 1/1/16 12/31/17 related to 2016 and 2017 Presidential disaster declarations. Distributions are included rateable into income over a 3 year period. Also, modifications allow deduction of personal casualty loss without regard to 10% AGI limit or standard deduction. Applies to expenses of public, private or religious elementary or secondary school. The ABLE account must be owned by the beneficiary (or a family member) of the 529 account. Rollover amounts count towards the annual limitation on contribution to ABLE accounts. Expires after 12/31/25. 26
Individual provisions (continued) Provision Bill details Comments Personal Exemptions/ Standard Deduction SALT Deduction PEASE Limitation Miscellaneous Itemized deductions Repeal of personal exemptions but increased standard deduction: $24,000 (MFJ), $12,000 (single). Limits the deduction for state and local income, sales and use, real estate, personal property tax/excise tax to $10,000 in total. Eliminates overall limits on itemized deductions. Suspends all miscellaneous itemized deductions subject to the 2% floor. Expires after 2025 At the Secretary s discretion, wage withholding changes maybe delayed until 2019. SALT taxes at the partnership level would be deductible real estate, sales and use tax and partnership income taxes (e.g., NYC, NH) but not withholding that covers partner level taxes. No deduction for investment expenses, tax preparation expenses, unreimbursed expenses of a trade or business (among others). 27
Individual provisions (continued) Provision Bill details Comments Medical Expenses Alimony Moving Expenses Deduction and Reimbursement Mortgage Interest Deductions are limited to 7.5% of AGI Effective for tax years 2017 and 2018. No longer deductible by payer and not includible as income to recipient. Deduction Suspended for all except Armed Forces. Reimbursement is now taxable wages. For new mortgages after December 15, 2017, interest only deductible on loan of up to $750,000 for acquisition indebtedness and no deduction for interest paid on home equity loans. Divorce or separation instruments executed after 12/31/18 or any agreement amended after that date if the amendment states this rule applies. Does not apply after 2025. Old rules ($1m on acquisition indebtedness and $100,000 on LOC) applies again in 2026. Existing loans as of 12/17/17 are grandfather, but not beyond the original mortgage s term/amount (some exceptions apply for balloon payment mortgages). New Purchase money mortgages ay be grandfathered if the purchase contract is dated before 12/16/17 and other conditions are met. 28
Individual provisions (continued) Provision Bill details Comments Causality and Theft losses Charitable deductions Only applies to a disaster declared by the President. Does not apply after 2025. No deduction allowed for payments to schools in exchange for the right to purchase tickets or seating at athletic events. Overall cash deduction limit is raised from 50% to 60% of income. Prior rule for athletics seating rights was 80% was deductible. 29
Individual provisions (continued) Provision Bill details Comments Discharge of Certain Student Loan Indebtedness Characterizati on of IRA contributions Extended Rollover Period of plan loan offsets Section 1044 Rollovers Modifies the exclusion of student loan discharges from gross income to include certain discharges on account of death or disability and amounts received under the National Health Service Corps and certain State loan repayment programs. The special rule that allows for a contribution into one type of IRA to be characterized as a contribution to another type does not apply to a conversion contribution to a ROTH IRA. A loan offset amount from a qualified retirement plan, 403(b) or 457(b) plan that is solely by reason of the termination of the plan or failure to meet the repayment terms of the loan because of the employee s severance from employment may be contributed to another plan by the extended due date of the Federal income tax return for the year the amount is treated as distributed from the plan. Repeals the ability to rollover any capital gain on the sale of publicly traded securities into specialized business investment companies (partnerships or corporations). Characterization can no longer be used to unwind a Roth Conversion. 30
Business tax reform International 31
Deemed repatriation toll charge Summary of the new law Imposes a toll charge on a U.S. shareholder s pro rata share of certain foreign subsidiaries previously untaxed post-1986 E&P of a CFC or a foreign corporation that is at least 10% owned by a U.S. corporation determined as of November 2, 2017, or December 31, 2017, whichever is higher Allows a deduction to the extent necessary for the foreign E&P attributable to cash and other liquid assets to be taxed at an effective rate of 15.5% and all residual foreign E&P at an effective rate of 8% Treats the toll charge amount as additional subpart F income, which may be reduced by such U.S. shareholder s pro rata share of the deficits of certain foreign subsidiaries, including foreign subsidiaries of other U.S. shareholders within the same affiliated group Allows to offset the toll charge with FTCs for the portion of earnings subject to the tax Permits a U.S. shareholder to elect to pay the tax liability imposed under the toll charge over eight years ((First five years - 8%, Sixth year - 15%, Seventh year - 20%, Eighth year - 25%) Effective for the last tax year of a foreign corporation that begins before January 1, 2018, and with respect to U.S. shareholders, for the tax years in which or with which such tax years of the foreign corporation ends 32
Deemed repatriation toll charge (continued) Pass-through entities S corporation deferral S corporation shareholders may elect to defer payment of the toll charge liability until a triggering event occurs Triggering event includes: - S corporation ceases to be an S corporation - Liquidation or sale of substantially all the assets of the S corporation - A transfer of any shares of stock in such S corporation by the taxpayer 33
Global Intangible Low-Taxed Income (GILTI) The Act: - Subjects US corporate shareholders of CFCs to current US taxation on global intangible low-taxed income (GILTI) with a deduction of 50% (reduced to 37.5% for tax years beginning after 2025) of GILTI - Provides that GILTI is computed annually as the excess of each US corporate shareholder s net CFC tested income over the shareholder s net deemed tangible income return Net deemed tangible return is 10% of tax basis in depreciable assets Net deemed tangible return is reduced for interest deducted in the determination of a US shareholder s net CFC tested income - Permits a FTC for 80% of foreign taxes deemed paid by the US shareholder with respect to the GILTI inclusion 34
Foreign-Derived Intangible Income (FDII) What s the new law? A summary... The Act: - Applies to exports of property, licensing and services in which such property/services are used/performed outside the US with a third party - Allows a 37.5% deduction (reduced to 21.875% for tax years starting after 2025) for FDII produced in the United States - Provides several requirements that must be satisfied to constitute FDII subject to the preferential rate - A domestic corporation may deduct an amount which is the lesser of: The sum of 37.5% of its foreign-derived intangible income plus 50% of its GILTI that is included in its gross income, or Its taxable income, determined without regard to this proposal - This deduction is only available for domestic C corporations which are not RICs or REITs 35
Appendix 36
Corporate/Business provisions Provision Bill details Comments Corporate tax rates AMT 21% flat rate. Applies to tax years beginning after December 31, 2017. Repeal of AMT. Credit may offset taxable income in any year. For taxable years beginning after 2017 and before 2022, credit refundable at 50% (100% for tax years beginning in 2021) of excess of minimum tax credit over minimum tax credit allowable against regular tax. NOL deduction Limit NOL deduction to 80% of taxable income for losses arising in taxable years beginning after 12/31/17. NOL may be carried forward indefinitely. No carry back of losses. Dividend received deduction (DRD) The 80% DRD would be reduced to 65% and the 70% DRD would be reduced to 50%. Losses from 12/31/17 and before have no limit, can be carried back and still expire. Limit does not apply to property and casualty companies. Effective as of January 1, 2018. 37
Corporate/Business provisions (continued) Provision Bill details Comments Interest expense deduction Income test Business interest expenses limited to the sum of business interest income plus 30% of the adjusted taxable income. Adjusted taxable income is: 2017 2021 computed without regard to deductions allowable for depreciation, amortization, or depletion. 2022 computed with regard to deductions allowable for depreciation, amortization, or depletion. Would not apply to certain regulated public utilities and real property trades or businesses and other specified businesses. Would not apply to small businesses with average annual gross receipts for the prior 3 tax years of $25m or less. Limitation applies to both related party and unrelated party debt. Any disallowed interest carried forward indefinitely. Partnerships will report out unused limit to partners who may increase their limit. For example $100 of adjusted taxable income at partnership level. $10 of interest expense. Limit is 30% of $100= $30. Excess limit is $20. Partner may deduct $20 of interest expense. Excess interest expense is carried forward at the partner level and tracked by the partner. Special basis adjustments are required. 38
Corporate/Business provisions (continued) Provision Bill details Comments Bonus Depreciation Qualified Improvement Property Section 179 100% full expensing for investments made after September 27, 2017 and before January 1, 2023. Excludes property used by a regulated public utility. Qualified improvement property (described in Section 168(k)(3) includes qualified leasehold improvement, qualified restaurant and qualified retail improvement property) provides a 15-year MACRS recovery period. Increases maximum amount to $1 million and the phase out threshold to $2.5 million. Also, expands the definition of qualified real property eligible for expensing. Applies to new and used property. After December 31, 2022, the 100% bonus depreciation is reduced by 20% each year until phased out in 2027. Does not apply to certain taxpayers not subject to limitation on interest deduction. A NOL carry back from 2017 may not include the new bonus depreciation. New higher limits on luxury autos. Unclear if it applies to 743(b) adjustments. Maybe helpful for taxpayers electing out of bonus depreciation. 39
Corporate/Business provisions (continued) Provision Bill details Comments R&D credit Research or Experimental Expenditures Domestic Production Cash Method of Accounting S to C Corp Conversions Explicitly preserved in talking points. Required to be capitalized and amortized over: 5 years if conducted in US 15 years if conducted outside of US. Repeal for tax years beginning after 2017. Allows businesses with average annual gross receipts under $25 million that have inventory and certain farming C corporations to use the cash method of accounting. Also, for taxpayers under $25 million of average annual gross receipts may expense inventory currently, Section 263A will not apply and they are exempt from having to use the percentage-of-completion method on certain qualified contracts. A 481(a) adjustment for the required change from a cash to accrual method taxpayer is taken into account over a 6 year period instead of 4 years if certain conditions are met. Applies for tax years after 12/31/21. Once the taxpayer has average gross receipts over $25 million they will need to change their method of accounting for purposes of 481. 40
Corporate/Business provisions (continued) Provision Bill details Comments Contributions to Capital of a Corporation Lobbying Expenses Employee Achievement Awards Self Created Property Any contribution in aid of construction or any other contribution as a customer or potential customer and any contribution by any governmental entity or civic group other than a contribution made by a shareholder for shares. Repeals the exception for amounts paid or incurred related to lobbying local councils or similar governing bodies. Current rule applies to tangible personal property. Bill excludes from tangible personal property: cash, cash equivalents, gift cards, gift coupons or gift certificates or vacations, meals, lodging, tickets to theatre or sporting events, stocks bonds, other securities, and other similar items. Employees may still select and receive tangible personal property from a limited array of items preselected to approved by the employer. Patents, inventions, models or design and a secret formula or process which is held by the taxpayer who created the property is excluded from the definition of a capital asset. Intended to treat as taxable states incentives to get companies to locate in their state (e.g., transfer of real estate). If award is qualified tangible personal property the current deduction limit to certain dollar amounts still applies and amounts are excludible from gross income and wages to employee. If not included in tangible personal property than it is deductible as wages and included in gross income and wages of employee. Final bill does not repeal section 1235 and only amends the definition of capital asset under section 1231. This leaves the treatment of patents under section 1235 unchanged. 41
Corporate/Business provisions (continued) Provision Bill details Comments Like Kind Exchanges Revenue Recognition Denial of Deduction for Certain Payments Sexual Harassment or Sexual Abuse Payments Limited to real property that is not held primarily for sale. Requires taxable income to be recognized when it is for financial statement purposes. Codifies the current exceptions for advanced payments (one year deferral). No deduction is allowed for amounts paid to or at the direction of a government entity in relation to the violation of any law. No deduction is allow for any settlement, payout or attorney fees if the payment is subject to a nondisclosure agreement. Does not apply to mark to market accounting, sale vs lease or other items where tax and financial reporting vary (i.e., if tax has a specific rule, that rule is still followed). 42
Corporate/Business provisions (continued) Provision Bill details Comments Equity Grants Aircraft Management Services Companies Credit for Paid Family and Medical Leave Allows employees to elect to defer the income inclusion on certain equity grants until the stock is disposed of. Exempts certain payments related to management of private aircraft from certain excise taxes. A credit of between 12.5% to 25% for pay (if the pay is 50% of the wages normally paid to employee) to non highly compensated employees. Limited benefit since 80% of all US employees must be granted stock options or restricted stock to qualify. Corporation s deduction is delayed until employee picks up income. Applies only to 2018 and 2019. 43
Corporate/Business provisions (continued) Provision Bill details Comments Meals & Entertainment No deduction allowed generally for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above. Repeals the exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer s trade or business (and the related rule applying a 50% limit). Deduction for 50% of food and beverage expenses associated with operating a trade or business generally would be retained. Would expand 50% limit to include employer expenses associated with providing food and beverages to employees through an eating facility meeting de minimis fringe requirements. Deduction disallowed for expenses associated with providing any qualified transportation fringe to employees, and except for ensuring the safety of employees, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee s residence and place of employment. Applicable to amounts paid or incurred after December 31, 2017. After December 31, 2025 the expenses of the employer associated with providing food and beverages to employees through an eating facility that meets the requirements for de minimis fringes and for the convenience of the employer are not deductible. 44
Corporate/Business provisions (continued) Provision Bill details Comments Deduction Limitations for Executive Compensation 163(m) Eliminates the exclusion for qualified performance-based compensation and the separate exclusion for commissions. Covered employee is amended to include the chief financial officer and a covered employee would include any individual who was either CEO or CFO at any time during the year. Also eliminates the last day of the tax year rule and makes covered employee status permanent; therefore, once an individual is treated as a covered employee, all future deductions with respect to that individual (or beneficiaries) would be subject to the $1 million limit. Covered employees would be identified under the new rules starting in 2017. Expands the group of public companies to include: (1) companies with securities registered under section 12 of the SEC Act of 1934 (not just equity securities), (2) companies required to file reports under section 15(d) of the SEC Act of 1934, (3) some large private C and S corporations may also be included in the future, according to the legislative history. (Changes will now include issuers of public debt and ADR s and may include MLP s.) Remuneration provided pursuant to a written binding contract that was in effect as of 11/2/17 and that is not modified in any material respect after that date is grandfathered under the existing rules. 45
Corporate/Business provisions Alcohol related provisions Provision Bill details Comments UNICAP Interest Expense Beer Excise Tax Transfer of Beer Between Bonded Facilities Excise Tax on Certain Wine Excise Tax on Certain Distilled Spirits Excludes the aging periods for beer, wine, and distilled spirits from the production period for purposes of the UNICAP rules. Reduced to $3.50 for small producers (first 60,000 barrels domestically produced) and $16 per barrel on the first 6 million barrels brewed or imported. Anything in excess is taxed at $18. Beer transferred between related bonded facilities is not subject to excise tax until removed for consumption or sale. This amend relaxes the rules around who is related. Increases the amount of a credit allowed against the excise tax and allows the credit against sparkling wine. Also, reduces the excise tax based on alcohol content on certain wines Lowers the tax rate and establishes a tiered rate. Also, allows transfers in approved containers in bond without payment of tax. Only applies until December 31, 2019. 46
Pass-through entities provisions Provision Bill details Comments Pass-through entities Interest Expense Deduction Individual gets a deduction of 20% of Qualified Business Income. Business interest expense is limited to the sum of business interest income plus 30% of adjusted taxable income. Any excess interest expense carried forward is tracked at the partner/individual level. If income is above certain thresholds ($157,500 (S) and $315,000 (MFJ), the deduction is limited to the greater of: (a) 50% of the W-2 wages paid with respect to the business or (b) the sum of 25% of the W-2 wages plus 2.5% of the unadjusted basis, immediately after acquisition, of all qualified property. See Corporate/Business Provisions Interest Expense for more details. 47
Pass-through entity provisions Provision Bill details Comments Individual Net Business Losses Carried interest Technical termination of partnership Tax gain on sale of partnership interest on look-through basis Excess business losses are not allowed. They are carried forward like NOLs. After 2017, transfer of applicable partnership interests and assets sold by the partnership held for less than 3 years will be treated as short-term capital gain. After 2017, technical termination rule would be repealed. Gain or loss from sale or exchange of a partnership interest would be ECI to extent the transferor would have had ECI had the partnership sold all of its assets at FMV. 10% withholding of the amount realized on the sale of the partnership interest is required by the buyer and if not done, the partnership is required to withhold from future distributions to the buyer. New concept for individuals. Excess business losses may not offset non business income. The determination is made after applying the passive activity rules. Treating the sale of a partnership interest as ECI is effective as of November 27, 2017. Withholding provision under the bill is effective January 1, 2018; however, Notice 2018-08 suspends the rule for dispositions of certain publicly traded partnership interests. 48
Pass-through entities provisions Provision Bill details Comments Partnerships with Built in Losses Computation of Basis of Partnership interests S Corp electing small business trusts S Corporations - ESBT Currently rule is mandatory step down on a transfer as if a 754 election were in place if the partnership has an overall built in loss. New rule adds a second test if there is a net built in loss at the partner level. Requires the reduction of partnership basis when determining how much loss may be taken for charitable contributions and foreign taxes. Allows non resident aliens to be a beneficiary of an electing small business trust. S Corporation shareholders that are electing small business trusts were allowed to deduct 100% of charitable donations. The new rule applies the individual rules regarding charitable donations to these trusts. Addresses special allocations in partnership agreements were the items of gain and loss are allocated differently among partners. The electing small business trust must pay tax at the highest individual marginal rate. Effective December 31, 2017. Charitable contribution deductions limited to certain % of AGI generally with a five-year carry forward of amounts in excess of this limitations. 49
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