Tax Reform Update Highlights as of March 2018 Reg Baker CPA LLC (808) 753-6026 reg@regbaker.com www.regbaker.com 1
DISCLAIMER The material appearing in this presentation is for informational purposes only and should not be construed as advice of any kind, including, without limitation, legal, accounting, or investment advice. 2
Today s Outline General Introduction Individual Update Business Update Closing Comments Questions 3
Reg Baker, CPA PFS E-mail: Reg@regbaker.com Phone: (808) 753-6026 Over 30 years experience as a SMB business advisor SBA s National Board of Directors for Regulatory Fairness & Chair of Region IX State of Hawaii Small Business Regulatory Review Board member Host of the weekly Business in Hawaii with Reg Baker show (120+ broadcasts) Co-chair of Chambers SBE & ED Committee & Founder of the FocusOn Series Former two term Chair of SBA s Pacific Advisory Council SBA Financial Advocate of the year for State of Hawaii in 1992 and 2017 CPA Credentials Two terms as Chair of HSCPA, one term as Chair of NSCPA and two terms on the AICPA Advisory Council. One of 13 CPA s that wrote the PFS exam Nationally recognized SMB expert (quoted in Hawaii Business Magazine, PBN, Star Advertiser, Fox News, Radio and TV)
Tax Reform Background First true reform in over 30 years Bill is over 500 pages with lots of margin notes Expecting 2,000+ pages of rules and regulations and another few thousand pages of interpretations. Plus instructions and forms Take years to fully understand and implement. Just getting started Tax Reform 2018 all temporary. Reverts back on Jan 1, 2026 Future legislation State conformity Issues 5
Reminder about due dates March 15 (Extend until Sept. 17) April 17 (Extend until Oct. 15) April 17 (Extend until Oct. 15) April 17 (Extend until Oct. 1) Form 1065 (Partnership) Form 1120S (S corporation) Form 1040 (Individual) FinCEN Form 114 (Foreign bank reporting) Form 1120 (C corporation) Form 1041 (Trust and estate) 6 6
The basics for Individuals Still seven tax brackets 10%, 12%, 22%, 24%, 32%, 35%, 37% No more dependent exemption Higher child tax credit ($2,000) New $500 non-child dependent credit Increase in standard deduction (70% use) Individual AMT not repealed But exemption amounts have increased 7
Individual Income Tax Rates Comparison $800,000 2017 2018 $700,000 37.0% $600,000 39.6% $500,000 35.0% 35.0% $400,000 32.0% $300,000 33.0% $200,000 28.0% 24.0% $100,000 25.0% 22.0% $- 15.0% 12.0% 10.0% 10.0% Personal Financial Planning Section Tax Retirement Estate Risk Management Investments
Individual Income Tax Rates Comparison - $250,000 & Lower 2017 $250,000 33.00% 2018 $200,000 28.00% 24.00% $150,000 $100,000 25.00% 22.00% $50,000 15.00% 12.00% $- 10.00% 10.00% Personal Financial Planning Section Tax Retirement Estate Risk Management Investments
Dividend and capital gains rates unchanged The top tax bracket for qualified dividends and capital gains is 20% (23.8% if the NII tax applies MFJ $250k). Here s the breakdown: 0% for MFJ taxpayers with < $77.2k taxable income 15% for MFJ taxpayers with between $77.2k and $479k taxable income 20% for MFJ taxpayers with taxable income greater than $479k 10
Itemized deductions changes Repeal of the overall limitation on itemized deductions Medical deduction threshold is 7.5% for 2017 & 2018 Reverts to 10% starting in 2019 Mortgage interest limited to $750k of debt Debt prior to 12/15/17 is grandfathered Home equity interest no longer deductible State and local tax deduction is limited to $10k ($5k if MFS) Misc. deductions subject to 2% threshold no longer deductible 11
Misc. itemized deductions subject to 2% AGI Unreimbursed employee expenses Tax prep fees Hobby expenses Investment fees/expenses Legal fees related to producing income Safe deposit fee Gambling losses (in excess of winnings) are no longer deductible 12
20% pass-through deduction Section 199A 20% of qualified business income Qualified business income definitions Qualified trade/business income Not a specified trade/business Trade/business involving performance of services Does not include investment income Does not include reasonable compensation paid from S corporation or guaranteed payments paid to a partner Phase-out limitation 13
IRC 199A Eligible Taxpayers TYPES OF TAXPAYERS THRESHOLD AMOUNT Married Persons $ 315,000 All others (not C-corps) $ 157,500 Personal Financial Planning Section Tax Retirement Estate Risk Management Investments
IRC 199A Eligible Taxpayers ALL QUALIFY BUT THE COMPUTATION DIFFERS Owners of: REITs & PTPs Sole proprietorships (Schedule C) Sole owners (or TIC owners) of rental real estate (Schedule E) S-Corporation owners (Form 1120S) Partnership owners (Form 1065) 15 Personal Financial Planning Section Tax Retirement Estate Risk Management Investments
Is it a Service Business per 1202(e)(3)(A), 475(c)(2), or 475(e)(2)? No Is taxable income over the threshold? 315/157.5 No Deduction = QBI x 20% Yes Yes Is taxable income over the threshold? 315/157.5 Yes No Deduction = QBI x 20% Over full Phase in? 415/207.5 Yes No Deduction Reduced Is taxable income over the full phase-in? 415/207.5 Yes No Deduction No Deduction Reduced Deduction equals lesser of: QBI x 20% or The greater of: - W-2 wages x 50% - W-2 wages x 25% + 2.5% of unadjusted basis Personal Financial Planning Section Tax Retirement Estate Risk Management Investments
Affordable Care Act impact Penalty to maintain insurance coverage (individual mandate) is repealed for 2019 and forward HOWEVER, still in effect for 2017 and 2018 2017 penalty: Higher of 2.5% of yearly household income, or $695 per person ($347.50 per child under 18) 3.8% NII Tax and.9% MC Tax 17
Alternative minimum tax (AMT) changes Alternative tax system that parallels the regular federal tax (with different rates and rules for deductions) Increase in exemption amount Due to limit on state/local tax deduction and repeal of miscellaneous deductions, impact should be less 18
Changes to retirement planning Ability to recharacterize a Roth conversion to a traditional IRA is removed after 2017 Have until October 15, 2018 to recharacterize a 2017 conversion 19
Estate and gift taxes changes 2018 estate tax exemption: $11.2 million 2018 gift tax annual exclusion: $15,000 Estate planning is more than minimizing estate taxes. Updating documents Repurposing insurance Asset protection 20
Estate & GST Taxes Estate Tax Exemption - Past & Projected $12,000,000 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- Personal Financial Planning Section Tax Retirement Estate Risk Management Investments
Other individual changes to note Casualty losses: only from federally-declared disasters Alimony: deduction/inclusion repealed for divorces executed after 12/31/18 Moving expenses deduction repealed Kiddie tax now at trusts/estate tax rates 22
Charitable contribution changes AGI limitation increased to 60% for cash contributions (from 50%) Exception to contemporaneous written acknowledgement requirement is repealed (must be obtained now for any contribution of $250 or more) 23
State and local tax issues Total deduction limit of $10k ($5k if MFS) - Combination of income/sales and state/local property taxes Exceptions - Tax imposed at entity level - Property taxes for residential rental property/business property Prepayment of 2018 state income taxes in 2017 Prepayment of 2018 real estate taxes in 2017 24
Overview of business changes Corporate rate reduction to flat 21% Repeal of corporate AMT Special rules for pass-throughs (Sec. 199A) Expensing of assets increases to Sec.179 ($1 million and threshold $2.5 million) Bonus Depreciation Expanded accounting method exceptions for small businesses Changes to various fringe benefits including treatment of meals and entertainment paid by employer Limit on use of and carryback of NOL Limitation on interest expense deduction for non-small businesses (over $25 million receipts); limited exceptions Corporate shift from worldwide to territorial system Cash 15.5% and non-cash 8% 25
Corporate rate changes Flat rate of 21% Effective for years beginning after 12/31/17 Personal service corporations taxed at same rate (no more surtax) Corporate AMT has been repealed 26
Corporate Tax Rates 2018 Current 21% flat rate Personal Financial Planning Section Tax Retirement Estate Risk Management Investments
Tax Reform Delivered
Effect on Accounting for Income Taxes under FASB ASC 740 Effect on calculation of deferred tax liabilities/assets (due to change in rate) Additional complications related to fiscal year corporations 29
Partnership change Repeal of technical termination provisions - Greater than 50% ownership change (12 mos.) No longer an automatic termination No need to close the books No short year returns Effective for years after 12/31/17 30
Depreciation changes Additional first year/bonus depreciation- 100% for property acquired after 9/27/17 Phase down schedule for years after 2022 Now allowed for new and used property Increases to Sec. 179 ($1M and threshold $2.5M) SUV limitation remains at $25,000 Limits are indexed for inflation Allows residential rental property 31
Accounting methods for small taxpayers Expanded availability of cash method Inventory tracking requirements Sec. 263A threshold raised Expanded availability of completed contract method 32
Restrictions on interest deductions Deductible interest limited to - Interest income for year plus - 30% of taxable income plus Limitation at the taxpayer level Interest not deductible carries forward indefinitely Doesn t apply to taxpayers that meet $25M gross receipts test 33
Changes to fringe benefits/entertainment expense Repeal of business entertainment expenses Repeal of deduction for qualified transportation fringe benefits Repeal of exclusion for bicycle commuting reimbursement Repeal of exclusion for employee reimbursed moving expenses 34
Net operating loss provisions No longer allowed to carryback NOLs Carried forward indefinitely 80% of taxable income may be reduced by NOL 35
Other changes to note New limits on executive compensation deduction Changes for Sec. 1031 exchanges Expenses for employer operating eating facilities is now 50% (rather than fully deductible) Lobbying costs no longer deductible 36
Planning for 2018 and forward Guidance needed on Sec. 199A (pass-through deduction) Definitions: qualified business income; qualified trade/business; small business Effect of corporate rate reduction to 21% on choice of entity Entertainment expenses Changes to fringe benefits and effect on employees 37
International changes Move to a quasi-territorial system with a 100% dividends received deduction One-time tax on previously unrepatriated earnings Cash 15.5% & 8% non-cash Can be payable over 8 years without interest (Yrs. 1-5: 8%, Y6: 15%, Y7: 20% and Y8: 25%) 38
39 Questions
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