Most of the provisions discussed below apply beginning in 2018, and many terminate after 2025.

January 26, 2018 To the Clients and Friends of Nathan Wechsler & Company Congress delivered the much-anticipated tax reform bill just before the end of the year. Just as they kept us in suspense as to whether it would ultimately receive the needed votes to pass, they also kept us in suspense on many of the significant final details of the legislation. Most of the provisions discussed below apply beginning in 2018, and many terminate after 2025. Our task, beginning now and continuing all year (and into the future) is to determine how this affects each of you, and what, if any, steps we should recommend for you to respond to the changes. It will be an interesting journey. There is something, or many things, for everyone in this legislation. Some items you will like, and some PROVISIONS AFFECTING INDIVIDUALS: Tax rates: The cornerstone of the Act is the reduction of individual and corporate (discussed later) tax rates. The following tables will illustrate the change made by the Act under the Married Filing Jointly tables. Bear in mind that the various levels would have changed slightly from 2017 to 2018 due to cost of living increases for the year. For example, the upper level of the 10% bracket in 2017 ($18,650) may well have become the $19,050 level used in the Act for 2018 anyway. 2017 Rates for Married, Filing Jointly 2018 Rates for Married, Filing Jointly $ - $ 18,650 10.0% $ - $ 19,050 10.0% $ 18,651 $ 75,900 15.0% $ 19,051 $ 77,400 12.0% $ 75,901 $ 153,100 25.0% $ 77,401 $ 165,000 22.0% $ 153,101 $ 233,350 28.0% $ 165,001 $ 315,000 24.0% $ 233,351 $ 416,700 33.0% $ 315,001 $ 400,000 32.0% $ 416,701 $ 470,700 35.0% $ 400,001 $ 600,000 35.0% over $470,700 39.6% over $600,000 37.0% 1

For illustration purposes, the following chart presents the amount of income tax computed at various levels of taxable income, applying the Married Filing Jointly rates for 2017 and for 2018, under the new law: Taxable 2017 2018 Income Rates Rates Savings 100,000 16,478 13,879 2,599 150,000 28,978 24,879 4,099 200,000 42,885 36,579 6,306 250,000 57,718 47,439 10,279 300,000 74,218 60,579 13,639 400,000 107,218 91,379 15,839 500,000 143,232 126,379 16,853 600,000 182,832 161,379 21,453 In addition, the Act makes a minor change in the index to be used for annual adjustments to be made to the rate brackets in future years. The Kiddie Tax, under which affected children s unearned income had been taxed at their parents rates of tax, has been modified. Such income will now be taxed at rates applicable to estates and trusts. This may mean lower taxes for some, and higher for others. Standard Deduction: The standard deduction has been almost doubled under the new rules. Married persons filing jointly will now be entitled to a standard deduction of $24,000, up from $12,700 under previous rules. This higher amount, coupled with more restrictions on deductions (to be discussed, below) will provide relief for many taxpayers, and will serve to reduce taxable income for many compared to 2017 provisions. Many more people will no longer be itemizing their deductions. Personal Exemptions: Taxpayers are entitled to a deduction of $4,050 (in 2017) for themselves, and for every dependent. This deduction has been subjected to phase out, or reduction, as income exceeds a certain level. This deduction provided no tax benefit to taxpayers that were subject to the Alternative Minimum Tax. The Act suspends this deduction for tax years 2018 through 2025. Miscellaneous Itemized Deductions: Miscellaneous deductions, reported near the bottom of Schedule A, include investment expenses, tax preparation fees and employee business expenses among other expenses. These expenses could only be deducted to the extent that they exceeded 2% of a taxpayer s Adjusted Gross Income, a threshold many taxpayers did not exceed. In addition, taxpayers subject to the Alternative Minimum Tax received no tax benefit from these. A tax deduction for such expenses has been suspended for tax years 2018 through 2025. Educator Expenses: Teachers deductions for work related expenses are above the line deductions, deducted on the front page of their tax return, and deducted whether or not the taxpayer itemizes. Such deductions have been limited to $250 per year. The Act increases this limit to $500 for tax years 2018-2025. 2

Overall Limitations on Itemized Deductions: Under prior law, if a taxpayer s Adjusted Gross Income exceeded certain thresholds, the allowable amount of Itemized Deductions was reduced by up to 80%. Beginning in 2018 and continuing through 2025, this limitation is suspended. Mortgage Interest Deduction: Under prior law, a taxpayer may deduct interest on up to $1 million (in total) of qualified acquisition debt incurred to purchase or improve a principal residence and one other residence. In addition, interest incurred on home equity debt of up to $100,000 is also deductible. This is for funds borrowed, subject to a mortgage on a qualified home, that otherwise does not qualify as acquisition indebtedness. It should be noted that interest on home equity debt was not deductible in the computing of the Alternative Minimum Tax, resulting in no tax benefit if the taxpayer paid AMT in the year. The maximum amount of acquisition debt that may be considered for interest deductions is now reduced to $750,000, for debt incurred after December 15, 2017. Refinancing of pre-existing debt of up to $1 million is still acceptable, as long as no new funds are borrowed. In 2026, the limitation reverts back to $1 million. For tax years 2018 through 2025, no interest may be deducted on home equity indebtedness no matter when it was borrowed. State and Local Tax Deductions: Under prior law, a taxpayer may claim a deduction for state income (or sales) tax, property tax and value based taxes on personal property, such as automobiles. Again, taxpayers that were subject to the Alternative Minimum Tax received limited or no net tax benefit from these expenses. The Act places a cap on these deductions at $10,000 for most taxpayers. Married persons filing separately are limited to $5,000. Charitable Contributions: The new law made several changes to individuals charitable deductions. On the positive side, a taxpayer s overall annual limit for charitable deductions has been increased from 50% to 60% of his/her Adjusted Gross Income for cash donations to public charities from 2018 until 2025. Amounts in excess of that may still be carried forward to be used in future years. The Act now requires all contributions of $250 or more to be substantiated by a contemporaneous written acknowledgement from the charity. Exceptions were permitted if the charity reported the donation to IRS. That exception has been removed. Finally, beginning in 2018, no charitable deduction will be permitted to taxpayers making donations to universities for athletic seating rights. Medical Expenses: Currently taxpayers may claim an itemized deduction for medical expenses (including qualified insurance premiums) if the total exceeded 10% of their Adjusted Gross Income. For tax years 2017 and 2018, the Act restores the 7.5% threshold, which had been the law before it was increased to 10% a number of years ago. 3

Alimony: Under current law, payers of alimony generally were able to deduct such amounts. This was reflected on page 1 of their tax return, as an above-the-line deduction. That meant that it did not matter whether the taxpayer itemized or not, and the deduction was not subject to any of the limitations imposed on Itemized Deductions. Recipients of alimony would report that as taxable income. Under certain circumstances (generally by agreement incorporated into the written divorce decree) the payments would not be deducted or reported as taxable income. For divorce decrees or separation agreements entered into after 2018, none of the payments would be deductible or reported as taxable income. Moving Expenses: Under prior law a taxpayer may deduct, as an above-the-line deduction, qualified moving expenses. If such expenses were reimbursed by the taxpayer s employer, the employer may deduct it, and it would not be treated as income by the employee. Except in the case of certain military personnel, this beneficial treatment is suspended for tax years 2018 through 2025. Child Tax Credit: Prior law allowed for a credit for qualified children in the household of up to $1,000 per child. The credit was reduced when Adjusted Gross Income exceeded $75,000 on a jointly filed return. In cases where the credit exceeded a taxpayer s tax for the year, a portion of the credit was still allowed to reimburse some of the Social Security and Medicare taxes paid by the taxpayer. This was known as the refundable portion of the credit. The Act increases the potential credit to $2,000 per child, increases the income level at which phase out begins to $400,000 for joint filers, provides a credit of up to $500 for certain dependents other than children, and increases the amount that may qualify as refundable for tax years 2018 through 2025. It also requires inclusion of qualified dependents Social Security Numbers on the tax return claiming the credit. Alternative Minimum Tax: The Alternative Minimum Tax has been a significant factor in computing the net tax due by many unsuspecting taxpayers. In brief, it is an alternative method by which a taxpayer s liability is recomputed for a year. Many of the items of income used in the normal computation of tax remains the same. Certain itemized deductions are not allowed for Alternative Minimum Tax purposes (state and local taxes, home equity interest and Miscellaneous Itemized Deductions, to name a few). In addition, and beyond the scope of this analysis, certain other items are added or deducted each year. Among those might be Private Activity Bond Interest, depreciation adjustments, adjustments for the accounting for income on long-term contracts, percentage depletions and many other items as defined in the Internal Revenue Code. An exemption amount is then deducted to arrive at a taxable amount. For 2017, the exemption for joint filers was scheduled to be $84,500. However, it was subject to phase out provisions when a taxpayer s income exceeded $160,900. 4

Under the Act, many of the same provisions apply with two very significant changes. First, the exemption amount for joint filers has been increased to $109,400. Secondly, and perhaps more significantly for many, the phase-out provisions do not begin to apply until the income level of $1 million (for joint filers). This will remove many taxpayers from the ranks of those paying AMT. Other items affecting individuals include the following: 1. Casualty loss deductions for non-business property will only be allowed in the cases of federally declared disasters. This will apply to tax years 2018 through 2025. 2. Gambling loss rules are being modified for the years 2018 through 2025. Now all losses and related expenses are limited to the amount of reported winnings. 3. Elementary and secondary school expenses of up to $10,000 per year may qualify to be paid from Section 529 plans. 4. ABLE account contribution limitations have been increased, and contributions may now qualify for the Saver s Credit. 5. Student debt discharged due to disability or death will not be taxable. 6. Further restrictions have been imposed on employee achievement awards qualifying for exclusion from the employee s income. Besides cash, sporting and amusement event tickets, meal vouchers and similar items may no longer be used. ESTATE AND GIFT TAX: From 2018 through 2025, the Act increases the federal estate and gift unified credit exclusion and the generation skipping transfer exclusion to $10 million, adjusted forward for inflation from 2011, this results in an exemption of approximately $11,000,000 starting in 2018. PROVISIONS AFFECTING BUSINESS TRANSACTIONS: Like Kind Exchanges: Under current rules, property used in a business, or held for investment may be exchanged for similar property without tax consequence if no cash is received in the transaction. The Act limits this provision now only to exchanges involving real estate. This will affect many businesses that trade in older vehicles or equipment, when upgrading. Limitation on Business Interest Expense: For businesses averaging over $25 million in annual revenue, the Act will limit the amount of interest expense a business may deduct in a tax year. The maximum amount allowed is 30% of the business adjusted taxable income, computed before such interest; plus Business interest income; plus Floor plan interest expense Interest expense not allowed in a tax year due to this limitation may be carried forward indefinitely. The Act permits certain businesses involved in real estate and farming to escape this limitation by electing less favorable depreciation methods. Also exempt from this restriction are businesses averaging less than $25 million of annual receipts, certain regulated utilities and certain electric cooperatives. Domestic Production Activities Deduction: 5

In 2004 Congress added a provision that enabled taxpayers conducting certain business activities a deduction that eventually rose to be up to 9% of its taxable income. This provision is repealed by the Act. Net Operating Loss Deduction: A taxpayer has been permitted to use the net loss of a tax year to reduce or eliminate taxable profit of a prior year. This is done by filing an Application for Tentative Refund form with IRS to recoup taxes paid in a prior year. For years beginning before 2018 they may carry losses back to the prior two years. Unused losses may be carried forward and deducted against future years profits. Such losses may be carried forward and used for up to 20 years. The Act eliminates this carry back provision for all businesses except farming and certain insurance companies. It still permits carry forwards but limits a taxpayer s use of the deduction to 80% of the future years income. Unused losses can be carried forward indefinitely. This applies for losses incurred in years beginning in 2018. Certain insurance companies are exempt from this restriction. Research and Experimental Expenditures: Many businesses incur research expenses and qualify for a tax credit for such endeavors. Today a taxpayer may elect to currently deduct such expenses, or capitalize and amortize them over 60, or more, months. The Act will require taxpayers to capitalize all such expenses, and amortize them over a five year period. In addition, if the underlying project is abandoned, the taxpayer may not currently deduct the unamortized balance. It will be required to continue on the amortization schedule. Fortunately, this provision will not take effect until 2022. Meal and Entertainment Expenses: Under prior law, meal and entertainment expenses were partially (50% of the amount incurred) deductible. Entertainment expenses had to meet a requirement that they be directly related to, or associated with, the taxpayer s business. The Act eliminates the deduction for entertainment expenses. This includes tickets to events, and recreational and amusement activities. The costs associated with an employer owned facility providing meals for employees is now subject to the general 50% limitation. Meals in connection with business activity (such as overnight travel) are still 50% deductible. Further limitations on meals provided for employees become effective in 2026. Meals provided for the employer s convenience will no longer be deductible at all. Inventory Accounting: The Act changes the rules requiring all businesses to account for inventories. Now certain businesses that qualify to use the cash method of accounting will also be able to use the cash method with respect to purchases of certain goods. Qualified businesses are those that report less than $25 million of annual income, treat purchased goods as non-incidental materials and supplies, and do not reflect inventory on their financial statements. 6

It also increased the threshold for requiring a business to apply the Uniform Capitalization rules. These rules require that for tax purposes, administrative and other applicable operating expenses must be included in a business end of year inventory calculation. Now businesses with average annual receipts under $25 million may apply for a change in accounting method and may no longer find themselves subject to this onerous and expensive (more taxes due under these rules) requirement. Long-Term Contracts: Under the bill, more businesses will be allowed to account for contracts under a method other than the percentage of completion method. It applies to contracts that will be completed within two years for businesses whose average annual gross receipts do not exceed $25 million. The prior threshold was $10 million. Coupled with changes in the Alternative Minimum Tax, this provision may permit a significant deferral of income in certain circumstances. In the past, deferral of long-term contract income using a method of accounting other than the percentage of completion often resulted in AMT being paid in that year. Deductions related to purchase of capital assets: A taxpayer is permitted to elect to write off, or expense, certain property that it places in service in a tax year. This generally applies to tangible personal property, such as a piece of machinery used in its manufacturing plant. But it also applies to something as small as a desk used in an office. The annual limitation for this benefit in 2017 was $510,000. However, if the taxpayer placed over $2,030,000 of such assets in service in 2017, the ability to take such a deduction was lost, and the item would have to be depreciated under the applicable depreciation rules. This Act increases the annual deduction limitation to $1,000,000 and increases the amount of equipment that a taxpayer can place in service without reducing this benefit to $2,500,000. It also allows certain real property improvements to qualify. For many years now, bonus depreciation, or expensing, has accelerated the timing of depreciation deductions by various provisions permitting taxpayers to write off a high percentage of the equipment s cost in the first year of a depreciation cycle. Obviously, this would not apply in the case where a taxpayer elected Section 179 treatment. But for taxpayers who did not, or could not, do so this might provide a significant benefit. Other than the limitations that apply to Section 179 elections, expensing provides a very similar benefit to taxpayers. The Act provides that for qualified equipment purchases of property between September 28, 2017 and December 31, 2022, a taxpayer may claim a 100% expensing deduction. The allowance decreases by 20% each year thereafter until the provision terminates in 2027. The Act extends this provision to plants bearing fruit and nuts, and certain entertainment productions. It excludes certain public utility property from qualification, as well as property used in a business that was financed by a floor plan. The Act increases annual limitations on deductions for passenger automobiles used in a business. It removes computer equipment from the listed property category, meaning that record keeping of usage will not be required. 7

Property used in farming operations will now be allowed to use more favorable depreciation methods. Depreciation rules applicable to certain residential and nonresidential real estate have been mostly improved in the taxpayers favor. However, businesses that qualify to avoid the business interest limitation (see above) will be required to use a less favorable depreciation method on their property. Self- Created Property: Self-created assets will no longer be treated as capital assets. Gain or loss on the sale or disposal of these will be treated as ordinary gain or loss. This applies to patents, inventions, formula, etc. Music composition may still be treated as a capital asset. Life Insurance Policy Issues: The transfer of ownership of a life insurance policy to a third party under a life settlement contract must now be reported to IRS by the acquirer. More of the life insurance proceeds received by the third party may now be taxable income. The Act has made changes to the manner in which basis in a policy is computed by the insured. The basis will not be gross premiums paid. They must be reduced by a factor representing the benefit received from the policy. This would be based on mortality tables or some other reasonable charge. Denial of Deduction of Settlement of Certain Harassment Cases: The Act denies a tax deduction for costs incurred in settlement of sexual harassment cases that are subject to nondisclosure agreements. Credit for Paid Family Leave: The Act provides a tax credit of between 12.5% and 25% of the amounts paid in 2018 and 2019 to employees under family and medical leave programs. To qualify, all full-time employees must be allowed at least two weeks family and medical leave per year, providing paid time off for situations described in the Family and Medical Leave Act of 1993. Part time employees would be allowed pro rate amounts of time. To qualify, this employee benefit must be in addition to normal vacation and sick time policies. Other changes made that affect certain businesses include: 1. For rehabilitation of historic structures, the 20% rehabilitation tax credit will now be used over a five-year period instead of in the year the project is completed and placed in service. 2. Changes were made to inventory accounting for certain craft beverages. 3. Changes were made to the Original Issue Discount recognition rules. 4. Replanting of certain citrus crops may be expensed for minority co-owners. 5. Lobbying costs for issues before local governmental bodies will no longer be deductible. PROVISIONS AFFECTING C-CORPORATIONS: Tax rates: C-Corporations (corporations responsible for paying tax on its income) have been subject to tax at various rates between 15% and 35%. Corporations with taxable income over $335,000 have paid tax at a flat 34%. Those with income over $18.33 million have paid at 35%. Personal service corporations (accounting firms, law firms, and medical practices, among others) have also paid tax at a flat 35% rate. 8

For tax years beginning after December 31, 2017, all C-Corporations will pay tax at a flat 21% rate. For entities with taxable income below $90,400 this actually will cause their tax to increase. Entities having taxable income in excess of that amount, and all personal service corporations, will see a decrease in their taxes. Dividends Received Deductions: C-Corporations benefit from a deduction of 70%-80% of the amounts received from corporations in which it owns less than an 80% interest. The Act reduces this deduction to between 50%- 65%, and also reduces taxable income limits on its availability. Cash method of Accounting: The Act increases the annual revenue threshold for C-Corporations and partnerships having C- Corporations as owners that want to use the cash method of accounting to $25,000,000. It has also made it easier for such partnerships to qualify for this provision. Corporate Alternative Minimum Tax: Like individuals, C-Corporations are subject to the Alternative Minimum Tax. However, its impact on a significant portion of taxpayers is not as prevalent. For tax years beginning after December 31, 2017, the Act eliminates the corporate alternative minimum tax. In the case where the tax was imposed in earlier years, a credit was generated. The credit will remain in effect. It will be used to offset tax computed for the year and an additional portion will also be used as a refundable credit in tax years 2018 through 2021. PASS THROUGH ENTITIES: Qualified Business Income (QBI) Deduction: Besides rate reductions, another key component of the Act provides a deduction on certain business income earned by pass through entities and subject to tax at the individual or trust and estate level. This applies to income earned by partnerships, S-Corporations, sole proprietorships and Limited Liability Companies. The deduction is generally equal to the lesser of: 20% of a taxpayer s QBI; or 20% of the taxpayer s taxable income, excluding capital gains Income earned in certain personal service fields (health, law, accounting, consulting among others) are not eligible for the deduction if the taxpayer s taxable income exceeds $157,500 ($315,000 on a joint return). In addition, for taxpayers exceeding that taxable income level, the deduction is limited based on a function of the business entity s W-2 compensation paid to employees or investment in depreciable property. The rules for implementation are complex and include many limitations. Full discussion of this provision is beyond the scope of this analysis. This deduction is available for tax years beginning after December 31, 2017, and before January 1, 2026. 9

S- Corporations converting to C-Corporations: S-Corporations that revoke their S election may continue to treat distributions to shareholders as being from their Accumulated Adjustments Account rather than from the C-Corporation s Earnings and Profits for a two-year period, beginning on the date of enactment. That means that recipients having sufficient basis remaining in their stock holdings, will not be taxed at the federal level on the distributions. Electing Small Business Trust: ESBTs are trusts which make a special election allowing it to be eligible to hold stock in an S-Corporation. Effective January 1, 2018, foreign persons may now qualify to be beneficiaries of an ESBT, without terminating the elections. The Act also makes a change in determining the deductible amount of charitable contributions that may be recognized by ESBTs. Other provisions affecting pass through entities include: 1. Treatment of sales of partnership interests by foreign persons are now treated as income effectively connected with a U.S. trade of business, making gains on the sale taxable for them, and subject to income tax withholding requirements. 2. Rules that caused a partnership to file two tax returns for a year in which 50% or more of its interests were sold have been repealed. Now one return is filed to cover the period. 3. Carried interest rules were modified to require a holding period of three years before beneficial capital gain treatment can be earned. 4. A partner s deductions for foreign taxes paid and charitable contributions are now subject to the same basis requirements as other deductions of the partnership. COMPENSATION AND BENEFITS: Qualified Bicycle Commuting: The Act suspends the provision allowing employers to provide tax free reimbursement to employees for bicycle commuting costs of up to $20 per month. The exemption is restored in 2026. Recharacterization of Roth Conversions: Beginning in 2018, a taxpayer will not be allowed to unwind Roth conversions. Previously, a taxpayer had until the due date of his/her tax return to revisit the transaction and undo it. Affordable Care Act Individual Mandate: One of the key components of the Affordable Care Act was a penalty imposed on individuals that did not obtain health insurance. The Act eliminates this penalty. Relief for 2016 Disaster Areas: The Act provides an exception to the 10% premature retirement plan withdrawal penalty, and related plan penalties, if made due to a qualified 2016 disaster. The Act also made changes to: 1. Retirement Plan loan rollover provisions, allowing additional time for loans to be repaid 2. Allowable deductions for compensation paid by publically held companies 3. Provide employees of startup entities a deferral period before recognizing income when receiving qualified equity grants 10

TAX EXEMPT ORGANIZATIONS: Compensation: Beginning in 2018, the Act imposes a 21% excise tax on an applicable organization s compensation paid to any of its highest five paid employees, if in excess of $1 million. Unrelated Business Taxable Income: Two changes were made in the computation of UBTI beginning in 2018. Certain employee fringe benefits must now be included in the computation. This may include transportation benefits, parking, and access to sporting events. Also, organizations now will not be permitted to net losses in one unelated business activity against profits in others. OTHER AREAS: Significant changes were made that will affect taxes paid by multinational corporations. Also, changes were made affecting excise taxes for various producers of alcoholic beverages. Both of these areas are beyond the scope of discussion in this document. We hope you have found this informative and helpful. We at Nathan Wechsler & Company will be working to implement the changes in the most favorable light for you. Please contact us with any questions. Nathan Wechsler & Company Professional Association 11